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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.
Benjamin Poh: Good morning, ladies and gentlemen. I'm Ben Poh, Head of Investor Relations. And today, I will be moderating the call. On behalf of ASMPT Limited, welcome to our First Quarter 2026 Investor Conference Call. Thank you all for your interest and continued support. [Operator Instructions] Before we start, let me go through our disclaimers. Please note that there may be forward-looking statements about the company's business and finances during this call. Such forward-looking statements could involve known and unknown uncertainties and risks that could cause actual results, performance and events to differ materially from those expressed or implied during this conference call. For your reference, the Investor Relations presentation on our recent results is available on our website. On today's call, we have the Group Chief Executive Officer, Mr. Robin Ng; and the Group Chief Financial Officer, Ms. Katie Xu. Robin will cover the group's key highlights for the first quarter 2026 and provide outlook and guidance for the following quarter. Katie will provide details on the financial performance for the quarter. Now I will hand the time over to our Group Chief Executive Officer, Robin. Cher Ng: Thank you, Ben. Good morning and good afternoon and good evening to all. Thank you for joining us today for our first quarter 2026 earnings conference call. Now let me start with the key business highlights for Q1. This quarter, I'm pleased to share that ASMPT achieved the highest quarterly bookings and billings in the last few years. We continue to see AI drive demand across multiple products as the rapid evolution of AI increases the value and complexity of back-end semiconductor manufacturing. New AI architectures demand heterogeneous integration, tighter interconnect pitch, higher bandwidth and power efficiency. And these requirements are driving higher precision, alignment and process control needs across packaging flows, benefiting a wide range of the group's product from TCB photonics, CPO, flip chip and mainstream volume and die bonding and pick-and-place solutions. Let me provide some color on these specific product areas. First, let's look at TCB. In Logic, we delivered sizable shipments for chip-to-substrate applications, reinforcing our leadership in chip-to-substrate TCB. We received bookings for 4 ultra-fine-pitch chip-to-wafer TCB tools, featuring our fluxless plasma-based AOR technology from a leading advanced logic customer. We are also actively engaging key logic players across multiple programs, and we are well positioned for more opportunities as the industry advances towards more complex logic chip architectures. In memory, our TCB tools remain at the forefront of technology development. A key memory player is using a flux-based TCB tool for assembly and this customer is also qualifying a Fluxless AOR solution for HBM4 16-high. Next, we'd like to share an update on Photonics. I'm pleased to report that our Photonics revenue grew nearly fivefold year-on-year, benefiting from strong demand for high-speed optical transceivers of 800G and above. In addition, our 1.6T transceiver solution received bulk orders from leading optics suppliers in the data center networking supply chain. This demonstrates strong traction for our optical transceiver solution as the market leader. I would like now to touch a bit on co-packaged optics or CPO before we move on to the next item. CPO represents a paradigm shift in AI system design, bringing optical engines closer to compute silicon to reduce electrical losses, lower power consumption and improved system efficiency. Our CPO solutions enable high precision bonding to integrate diverse components, including fiber array unit, microlens, electronic IC and photonic IC into a single high-performance optical engine. We have deepened our engagement with multiple leading global players and this positions the group well to gain market share as CPO adoption accelerates. Looking now at our flip-chip solutions. I'm pleased to update that they registered strong bookings growth, both Q-on-Q and year-on-year. This momentum is coming from two areas. First, there is an accelerated adoption of 2.5D packaging for larger AI package sizes that is driving a steady pipeline of opportunities for embedded bridge die-bonding solutions for both chip-on-wafer and chip-on-panel solutions. Second, we also gained traction in panel level fan-out for radio frequency and power devices. Both these areas are well solved by our flip chip solutions, which combine cost efficiency, scalability, high placement accuracy and strong throughput. And finally, in our mainstream business, we registered strong bookings for both SEMI and SMT. SEMI's mainstream business benefited from sustained utilization at leading global IDMs and OSATs alongside rising demand for AI data center power management solutions. In China, there was increased demand for wire and die bonding applications. For SMT, we achieved record booking gains in driven by strong customer demand across AI servers, optical transceivers and China EVs. In particular, SMT's high-flex high-force solutions for large format boards are a leading choice for AI server assembly. As we broaden our AI customer base, we are fully committed to delivering the highest quality of solutions and services. ASMPT was recently recognized with a prestigious Intel Epic Supplier Award for 2026, the highest supplier recognition award for excellence in business collaboration. This is a reflection of our strong technical capability and deep engagement with our customers. With these highlights, now let me hand over the time to Katie, who will walk you through our group and segment financial performance. Yifan Xu: Thank you, Robin. Good morning, and good evening, everyone. Before I start, I would like to say that unless otherwise specified, the numbers I'll be referring to today are for the group's continuing operations only, with adjustments made on the non-HKFRS measures. This slide covers our group financial results for Q1 2026. In Q1, the group delivered revenue of USD 507.9 million flat Q-on-Q, but up 32.0% year-on-year, driven by SMT and SEMI. Group revenue came in above market consensus and was the highest in the last 3 years. Group quarterly bookings exceeded expectations with SMT bookings at a record level. Group's booking reached USD 727.0 million, up 46.0% Q-on-Q and 71.6% year-on-year, the highest in the last 4 years. This strong growth came from multiple products, notably SMT products, wire bonders and die bonders and photonics. Group adjusted gross margin was 39.5% Q-on-Q, up 357 basis points due to higher gross margin and revenue contribution from SEMI. The year-on-year decline of 151 basis points was due to a higher revenue contribution from SMT. Group's adjusted OpEx declined 4.6% Q-on-Q but increased 12.4% year-on-year, largely due to unfavorable FX impact and from strategic infrastructure and R&D investments as we have guided for 2026 during our last earnings call. Both adjusted operating profit and adjusted net profit improved Q-on-Q and year-on-year due to higher revenue and operating leverage. Adjusted EPS was at HKD 0.81, up 118.9% Q-on-Q and 189.3% year-on-year, which was above market consensus. Moving on to the Semiconductor Solutions segment. In Q1, SEMI revenue delivered USD 274.5 million, up 12.2% Q-on-Q and 14.6% year-on-year. Q-on-Q, growth was driven by high-end die bonders and TCB, while year-on-year growth came in from multiple products, largely driven by AI-related applications. SEMI bookings were USD 309.6 million, up 22.6% Q-on-Q and 43.2% year-on-year due to higher demand for wire bonders and die bonders driven by China OSATs, high-end smartphone-related applications AI-related power management applications and optical transceivers. SEMI achieved a book-to-bill ratio of 1.13, which marks 3 consecutive quarters of improvement. SEMI adjusted gross margin reached 46.4%, achieving the guidance we set last quarter. Adjusted gross margin improved by 594 basis points Q-on-Q but declined slightly by 37 basis points year-on-year. The significant Q-on-Q improvement was mainly driven by high volume and favorable product mix. SEMI adjusted segment profit was HKD 309.4 million, up 165.9% Q-on-Q and 16.8% year-on-year. The strong Q-on-Q improvement was mainly driven by higher gross margins and operating leverage. Let me move to SMT. SMT Q1 revenue was USD 233.5 million, down 11.0% Q-on-Q but up 60.7% year-on-year. Q-on-Q decline was due to seasonality, while year-on-year increase was due to strong demand from AI servers and China EVs. As mentioned earlier, SMT achieved a record bookings of USD 417.4 million, up 70.0% Q-on-Q and 101.1% year-on-year. This was primarily driven by strong demand from AI servers, optical transceivers and China EVs together with robust China demand arising from global data center expansion. SMT adjusted segment profit was HKD 141.8 million, down 28.3% Q-on-Q due to lower volume, but it improved year-on-year. Now let me hand the time back to Robin for the outlook and the revenue guidance. Cher Ng: Let me present our Q2 2026 revenue guidance. The group expects Q2 2026 revenue to be in the range of USD 540 million and USD 600 million. At the midpoint of USD 570 million, this represents an increase of 12.2% Q-on-Q and 37.0% year-on-year. Notably, our midpoint revenue guidance exceeds current market consensus, and it will be mainly driven by SEMI. Group bookings in Q2 2026 are expected to remain elevated for both segments, though SMT will be down Q-on-Q due to the high base effect from Q1. The continued proliferation of AI expected to drive structural demand growth for both SEMI and SMT in 2026 across multiple products. This includes our flagship TCB and HP solutions, photonics and CPO to mainstream wire and die bonding and pick-and-place solutions that enable AI infrastructure deployment. Looking ahead, structural AI-driven demand is expected to support revenue growth across both SEMI and SMT in 2026. This concludes our first quarter 2026 presentation. Thank you, and we are now ready for Q&A. Let me pass the time back to Ben to facilitate. Benjamin Poh: [Operator Instructions] And I see a raised hand from Gokul of JPM. Gokul Hariharan: Great results, and also thanks, Robin, for your amazing leadership over the years. So first question is on memory TCB. What are we seeing in terms of bookings and potential for bulk orders for memory TCB given that we haven't really seen any big bulk orders in the last maybe couple of quarters now. And at the same time, the R&D progress seems to be quite good on both flux-based and fluxless. And in addition to that, could you also talk a little bit about your engagement with the bigger memory vendor that the market is talking about, which has largely been using internal TCB tools? Do you see that there is an opportunity opening up with this customer, which will definitely expand your addressable market? Cher Ng: Thank you, Gokul. I think there are a number of questions within your questions. Let me address I think the first one first. You're asking about memory TCB bookings and potential for bulk orders for TCB and in the last few quarters. The last bulk order that we received was in Q4 2025. We're still confident that we are well placed to -- well positioned to receive orders from memory makers as far as they are ready to dish out orders for equipment supply ourselves. Now I think your second question is on fluxless, R&D fluxless, how is it going. I think we are making good progress, especially on the logic side, as we have mentioned, we have won 4 tools in Q1 for CoW fluxless applications. We believe this is a start of this particularly exciting program. I think as the industry continue to migrate to more complicated GPU or even ASIC architecture, I think at some point, they may have to switch to a chiplet kind of configuration rather than using SoC, and that's where the opportunity to use our TCB fluxless tool for chip-on-wafer application will be there. So since now that we are already in that supply chain, I think, again, I think we are really well positioned to capture more opportunities for CoW fluxless application going forward. I believe your third question relates about the biggest memory player who is used to using internal TCB tools. Yes, I think we are unable to really name or confirm any specific collaboration with any customer, I hope you understand. What I can say that in the process of finalizing an evaluation program with a key memory player. We definitely see this as a positive step, possibly in the future, enabling our group's technology from memory as a process standard in the future. So we are excited about this potential collaboration going forward. Yifan Xu: Gokul, very quick. Just going back to the question on the memory TCB bulk order. I just want to -- probably to say that we want to reiterate, right? Our TAM forecast is actually of the $1.6 billion is intact. And you're probably reference into some of the recent adjustments for the next generation of GPU HBM4 road maps. They are leading to some -- maybe quarter-to-quarter, there might be some variability in the times of a customer's decision. But our activity level remains very healthy, but it could be uneven from quarter-to-quarter. Gokul Hariharan: Got it. That's very clear. Second question I have is on your photonics, obviously, very strong growth, 5x kind of growth. Could you help us size the like photonics business, I think you've said it long back that it was probably under $100 million annual run rate ballpark? Or is this still -- is now much bigger than that? Cher Ng: Yes. I think, Gokul, you... Gokul Hariharan: When we transitioned? Cher Ng: Yes. Maybe answer the photonics first, Gokul. Gokul Hariharan: Well, go ahead, Robin. I'll follow up later. Cher Ng: Yes. There's a little bit of feedback on this. Benjamin Poh: Yes. Your line is breaking up, actually, Gokul. Cher Ng: Okay. Anyway, I'll answer the Photonics question first Gokul. Yes, Indeed, when we look back in a deep dive into the photonics and the CPO market recently, actually, the TAM looks even more promising than before. right? So -- but we are not ready to disclose the TAM at this point in time. But I can tell you the TAM looks bigger than before. So when we combine the optical transceiver TAM and the CPO TAM, I must say that the TAM looks interesting. We are definitely paying a lot of attention in this area. And fortunately, I think for photonics, we are already a very strong player in the optical transceiver market. And I think for the CPO, you probably will follow up with your question on CPO as well. I think we're well positioned with some key players already. Our solutions, I would say, have been designed in with a number of key CPO players. So when the adoption takes place, I think we're in a good position to capitalize this opportunity for CPO. Maybe back to you for second question, please. Gokul Hariharan: Yes. So I think just to follow up on that CPO comment, Robin, the market understanding, obviously, is that hybrid bonding plays an important role in CPO for the EIC, PIC attach. And obviously, your hybrid bonder is still in qualification, especially the second generation. So could you talk a little bit about the progress there? And maybe also help clarify. I think there are multiple die attach steps, not just hybrid bonding, I think beyond that as well. So I just wanted to understand like what is the span of like SMT's involvement when it comes to CPO, just beyond the EIC, PIC attach? Cher Ng: That's right. I think we also said in the MD&A, we are participating in several key high-precision bonding areas for CPO, one of which is FAU attach on PIC. The other one is what you mentioned, stacking EIC on PIC. The third application we can think of is micro lens attached on PIC and also finally, the whole optical engine on the substrate. So we have solutions actually for all these key bonding solutions. That's why we feel particularly quite excited about the CPO market. And as I said earlier, I think the TAM looks interesting, maybe not in the initial years. But I think the CPO will accelerate probably from '28 onwards, and the TAM in fact, looks very interesting for CPO. So these are the areas we are participating. Now back to your question on EIC on PIC, hybrid bonding is one solution. I think CPO players are also exploring whether they can use TCB for the application as well. So if they use PCB, that will be also very an interesting market segment for us. Benjamin Poh: I'm seeing a next raised from Daisy. Daisy, could you please unmute yourself and raise question? Daisy Dai: Yes. And my first question is regarding the OSAT CapEx. So we saw that the OSAT CapEx is getting higher and higher for this year. So which area do you expect to record the highest growth for the year based on the current order visibility? And I mean the regions. And also, China is the largest revenue contributor last year around 41% of your total revenue. Within China, do you see that still advanced packaging, I mean your TCB and other hybrid bonding tools growth, outgrow the mainstream or mainstream for this year is also very strong. That's my first question. Cher Ng: Thank you, Daisy. In terms of -- I think your first question first in terms of OSAT CapEx yes, in fact, we are experiencing strong demand, I would say, on the OSAT front, mainly coming from wire bond die bond because of the AI demand for infrastructure. I think we have been talking about this for a few quarters already, but in Q1, the demand is particularly very strong. What is driving this is really power applications that go into data center. So this require new power devices and because of that new capacity is required. So that's driving a lot of our wire bond and die bond and also not forgetting SMT as well. We mentioned that SMT had a very fantastic booking in Q1 highest so far in history, largely also driven by AI server boards. And in there, there are a lot of power packages using tools from SiP, tools from SMT as well. So all this infrastructure deployment and spending are driving a lot of our mainstream tools, both in SEMI as well as in SMT. Now I think your second question is about China, whether China region, whether AP grow, is it faster than mainstream or mainstream is still very strong. I think typically, in China, say especially on the SEMI side, the mainstream side are definitely stronger than the AP side. However, on the SMT side, in the rest of the region, still stronger than the China side. So there's a mix in terms of China demand coming from SEMI and SMT segment. Daisy Dai: And my second question is also regarding the optics, photonics solution. So you mentioned that the revenue delivered fivefold increase year-on-year this quarter. And may I ask why we suddenly saw a very strong pickup in this segment. And I believe you mentioned that regarding the booking, the photonic solutions is both in your SEMI solutions segment and SMT segment. May I ask what tools for the SMT and what tools within the SEMI solution? Cher Ng: Yes. I think it's really all AI-driven, data center driven, as you can imagine, as the industry continued to increase the silicon compute, the transmission side has to match that capability as well. So that drives a lot of growth presently in terms of optical transceivers and the industry is moving from 400G to 800G to 1.6T, and we have a very, very good solution for optical transceivers. This segment has been seeing steady growth for a few quarters already. We have been reporting there. So it's nothing new to us. We have been saying that optical transceiver is a good market for us. We have been quite dominant in that space. We've been winning market share as well. So that's something that we are experiencing from many quarters already in terms of photonics. Now your second question is for -- both segments indeed are participating in this area. Now for SMT, mentioned in the optical transceiver there are many, many components, some require higher precision than others. So for those components that require higher precision bonding. They use our SEMI tools for that purpose. For those that do not require a lot of precision they use our SMT pick and place tool to bond those components. So both segment SMT and SEMI are actually benefiting from this surge in demand for optical transceivers. Benjamin Poh: Yes. Next, I will request Kevin from Citi to unmute. Kevin Chen: So I have two questions. Number one is that I would like to get some more detail on the booking guidance outlook. As you see right now, our booking is back to -- especially like SMT back to a record level. So can we get for the coming quarters, do we see -- have a rough sense of breakdown for booking into the, say, SEMI and SMT and specifically, which region are we seeing the most growth from. And also, last time we mentioned we're seeing some improving visibility. Is this still the case so that right now, approximately how many months of visibility do we have right now? . Cher Ng: Thanks, Kevin, for the question. Now I think you're referring to Q2 bookings. Now we -- as you know, we don't really guide but we can definitely give you some color we see bookings in Q2 this quarter to remain elevated. Booking may, however, moderate Q-on-Q but still expected to grow strongly on a year-on-year basis. We believe in large part, we continue to benefit from the secular demand for AI-related applications. And in the infrastructure spending, plus, of course, overall improving market condition as a whole. Giving a little bit of color as to the or the segment booking. Now for SEMI, Q2 SEMI bookings are expected to increase Q-on-Q and more significantly higher on a year-on-year basis. However, for SMT bookings are likely to decrease Q-on-Q due to high base effect as we have reported, Q1 booking for SMT was at a record high. So we don't expect the current level to continue on a Q-on-Q basis. However, having said that, SMT bookings are also expected to be higher on a year-on-year basis. Now you asked about visibility. Looking ahead, while we are definitely more optimistic about business compared to some quarters back, there is less visibility for the second half of 2026 for the whole group. I think this is pretty normal for a business that we can't really look too far away. So I hope I answered your question, Kevin. Yifan Xu: Yes. Maybe real quick, I think Kevin was asking about the booking by region. And Kevin, we actually sort of answered it already when we were talking about -- when Robin was addressing Daisy's question. Since overall, the regional mix will stay relatively stable. But like what Robin was mentioning about the strength of China OSATs. So there will be a little bit more booking from China. But overall, it's quite steady. Kevin Chen: Great. My second question is on the EMIB outlook. I think recently, there has been some demand pickup on this technology. I'm just wondering what type of or tools are addressing this kind of demand? And also our position to the share allocation in this type of technology. Do we need a special type of TCB and that require customization as well? Cher Ng: Yes. I think, Kevin, I can't hear you properly. I think you mentioned EMIB-T right? . Kevin Chen: Yes. Cher Ng: Okay. So A couple of layers we have to understand on the EMIB-T program. If you are talking about embedded die bonding, we believe this is on a large substrate, probably 510 x 500. Unfortunately, TCB, we are not ready for that yet in terms of that kind of panel size because it will take some time for us to deliver a tool of that size for TCB. But however, if this EMIB program takes off and we believe it will, we are already -- this particular customer is really using our tool for CoW application. So do you have to -- I mean, if this program proliferates, right? So they will probably need also more tools to place a lot more components on the EMIB-T substrate. So I think I think we will benefit from that particular area that means on the CoW tools, which we're already in. But if you're talking about embedded die bonding for the EMIB-T, we are not there yet. Benjamin Poh: Next, I will move to Sunny. Sunny, could you please unmute and raise your question? Sunny Lin: Hello. Could you hear me okay? Cher Ng: Yes. Very well. Sunny Lin: Congrats on the very good results and thank you, Robin, for all your leadership over the years. And so my first question is on your opportunity on the logic, especially on chip-on-wafer. And so Robin, earlier, you mentioned the chip-on-wafer migration for TCB could be somewhat related to chiplet. That was a bit surprising to me because I always think that the chip-on-wafer migration for TCB should be related to larger package. And so how should we think about from here? You just secured 4 tools from a leading-edge foundry customer. How aggressive are they in migrating to TCB for chip-on-wafer from here? How should we think about when you may get another bulk orders? Would that be in second half? Or will you need to wait until maybe 2027? Cher Ng: Okay. Thanks, Sunny, for your question. Now when we -- when I mentioned about chiplet, between chiplet and SoC, when the GPU architecture is using SoC, there is less need to use TCB to place the SOC onto the interposer because you don't need that kind of precision. But when you try to -- when you go into SOIC kind of packaging, you need more precision to put those chips onto an interposer. So that's why TCB will be needed going forward. So I think as the industry migrates from an SoC structure to an SOIC structure, we see increasing use of TCB for that application. So however, having said that, we have been telling you guys that for 2026, the number of tools for CoW will not be significant because it all depends on the migration to the next chip architecture. So we believe '26 will not be high for CoW. But going forward in the years to come, I think there's a meaningful TAM over there for CoW application for logic. Now how aggressive is this migrating to CoW? Yes, I think I already answered your second question as well. So '26 will not be high, but '27 would be meaningful. Sunny Lin: Also, if I may follow up on my first question. Also, these leading-edge logic customer, they are already working on the follow-up solution beyond CoWoS, meaning CoPoS. So yes, so from your perspective, for their CoPoS, they will start from smaller form factor, 310 x 310. And so from your perspective, are you seeing any signs of clients trying to pull forward the technology development. And for CoPoS, how should we think about your overall opportunity, especially around chip-on-panel. Cher Ng: Yes. I think we are -- as we speak, we are developing tools for CoP. So we deal to deliver demonstration tools sometime this year. So that part, we are already engaged with the key advanced logic customer. So that is another exciting area for TCB. So if you look at TCB in general, we have a wide customer base. We have a very diverse applications. We don't just depend on certain applications, but a very diverse application both on the logic side as well as on the HBM side. So certainly, panel packaging at CoP level is an interesting development for us as well. Sunny Lin: Also, if I may, I do want to ask a question on SMT. So any update on your strategic review for the division? And have you identified a specific option that you want to go for? And what would be the time line? Cher Ng: To answer your second question first, no. I think we are still in the progress of evaluating. But certainly, we have received some interest in the SMT business at this point in time. Benjamin Poh: Next, I would like to request Arthur. Arthur, please unmute. Yu Jang Lai: Robin, can you hear me? Cher Ng: Yes. Yu Jang Lai: Congrats on a strong result and guidance. So I will have two questions. Number one is on the CPO. You just mentioned that you have a deep dive into the process, right? And you mentioned the timing is '28. I want to confirm that that's the optical engine shipment or that's your equipment shipment timing? Cher Ng: Shipment TAM, we're referring to our equipment TAM for CPO, it wouldn't look interesting from '28 onwards. Yu Jang Lai: Okay. Interesting on '28. Because what we heard from the supply chains that actually some of the CPO equipment already kick off. So can you share more color on your target for example, is for the GPU side maker or is for the ASIC side maker? Cher Ng: I think the clientele that we have probably serving both Arthur. I think can really differentiate whether it's ASIC or GPU, yes. Yu Jang Lai: Okay. Okay. And my second question is about the HBM. So thanks for sharing this good progress. Do you think for the HBM4 and 4E and actually, you can continue to -- so my question is about HB progress, hybrid bonding progress and your tools, so do you think the visibility is getting longer and longer in the HBM side? Cher Ng: Not really. I think the road map from our customers are pretty clear, but like what Katie said, if there is adjustment to the road map, of course, the demand will vary from quarter-to-quarter. But however, in the long run, I think we are still sticking to a very significant TAM of $1.6 billion in 2028. And we intend and we have never wavered from our aim to target 35% to 40% market share for the whole TCB market. Yu Jang Lai: Got you. And finally, a question to Katie. On the modeling perspective, we know there is a strong booking, right? But how about your component supplier lead time? Is it getting longer? Or does that remain controllable? How should we think of the real billing seasonality of this year? Do we see any constraints? Yifan Xu: Yes. Arthur, thank you for the question. Maybe I'll answer it by segment. On the SMT front I'll do that first, though we have very, very strong bookings, as we've mentioned a few times now, the conversion -- the revenue conversion is somewhat impacted by the lead time of our suppliers. The team is actually actively addressing this, and we expect that in the second half, this kind of situation actually will get better. On the SEMI side, I mean, there's always the kind of tight supply chain, especially given all the uncertainties around the globe. But so far, we will say that we are managing the supply situation just fine. Benjamin Poh: Next, I would like to request Alex Chan to unmute. I think Alex have some technical problem. Maybe we'll go to the next one. Next, I would like to invite Donnie. Donnie, could you please unmute? Donnie Teng: Can you hear me? Cher Ng: Yes, Donnie. Go ahead. Donnie Teng: Robin, my first question is regarding to your NEXX business. So I'm wondering if that -- I mean, I remember in the past few years, the NEXX one of the NEXX major business was plating tool, and it can be sold to some PCB companies. And recently, I think PCB companies or substrate companies are expanding capacity due to their running out of the fab. So I think I just want to ask is like if NEXX can generate some revenue momentum recovery in the future? Are you still considering to sell this business? And also in terms of time line, when we expect that we can dispose SIPLACE and NEXX, these two businesses in the future? Would that be in second quarter? So this is the first question. Cher Ng: I think let me answer your second part of the question first. We don't have an exact timing for you. Whenever there is a deal we have we will announce it. But so far, we have nothing to mention here. Now you're talking about NEXX, yes, they are into deposition. When we make a decision to divest NEXX, we don't just look at financial alone. We look at strategic fit to our whole business, right? So we feel that we want to divest that because we're going to focus more on the SEMI back-end. NEXX is not exactly in the back end. NEXX is on the middle end. So that's the reason why we made the decision to divest NEXX, not purely on financial but because of strategy. Donnie Teng: Okay. Okay. Understood. Just one follow-up on this. So when you decide to divest NEXX, have you already seen the pickup of the orders from those PCB and substrate makers? Cher Ng: I would say, yes, as I said, but our decision is not based on financial alone. It's really more on strategy. Donnie Teng: Okay. And my second question is regarding to the CPO. So my understanding was that AMICRA for example, can be used for laser bonding or, as you s, maybe micro lens bonding on to IC. I guess that's the major business still today. But I'm also wondering if you can quantify a bit more on the 5x growth in the first quarter of this year. It's like what kind of base in the last year? And also in terms of the inspection, as you know, for CPO, the FAU alignment with optical engine is also very critical and it also requires inspection. So we have AOI tool. We have AOI tool. I'm wondering if we can explore some of the business opportunities there or we are mainly staying at the die bonding market? Cher Ng: Yes, very good question, Donnie. Actually, when we deep dive into the Photonics business, right? So we also think that may be we shouldn't just focus on just on the die bonding because there's indeed a lot of opportunities in the photonics in the CPO as well as the optical transceiver business. So too early. I don't have any concrete answer for you at this point in time. But coming back on the FAU, yes, I think AMICRA has a solution especially for FAU attached onto the PIC. So as I said earlier, I think as far as CPO is concerned, we feel good. We feel excited about this particular development. So we will probably have more of the share as we move throughout the quarters in the years to come. Donnie Teng: And in terms of 5x growth, can you elaborate a little more is like what kind of base we are growing from in capacity. Cher Ng: Yes. I would say Donnie, right now, it's still a small base. But again, in terms of growth, if it was a significant growth we thought it's worth to highlight to you guys as well that we are making good progress in terms of optical transceiver as well as CPO. Benjamin Poh: I'm afraid this is the time that we have. And now I'll pass the time back to Robin for his closing remarks. Cher Ng: Yes. So thank you for a very good discussion today. So let me take a step back and say that this quarter really marks an important point for ASMPT. We delivered one of the strongest quarters in recent years, not just in terms of revenue and bookings, but notably also how broadly AI is translating into more opportunity for ASMPT, from TCB and advanced packaging to photonics, CPO and mainstream platform, we are indeed seeing AI driving demand across multiple products and customer segments at the same time. Also this breadth matters because it reflects the increasing complexity of AI system architecture and the value of back-end manufacturing, an area where our range of solutions, our scale, our capabilities are allowing us to participate meaningfully across the technology space. We are indeed very encouraged by the operational leverage we have demonstrated this quarter. Our adjusted margins improved sequentially, supported by product mix and volume, and our results came in ahead of market expectations. So looking ahead, we continue to see AI as a multiyear structural driver of our business, with strong engagement across advanced logic and memory photonics and CPO and mainstream wire and die bonding and SMT pick-and-place solutions. We believe ASMPT is well positioned to support this next phase of industry growth across both SEMI and SMT. So once again, thank you for your interest and your continuous support. We look forward to updating you more in the next quarter. So this concludes our call. Thank you, and take care.
Operator: Welcome to the Corbion Q1 2026 Results Conference Call. [Operator Instructions] Please note that this call will be recorded. I would now like to hand over to Mr. Alex Sokolowski, Head of Investor Relations. Please go ahead, sir. Alex Sokolowski: Thank you, operator. Good morning, and welcome to Corbion's First Quarter 2026 Interim Management Statement Conference Call. This morning, we published our Q1 2026 results. The press release and presentation can be found on our website, www.corbion.com Investor Relations Financial Publications. Before we begin, please note that today's discussion will include forward-looking statements based on current expectations and assumptions. These statements involve risks and uncertainties that may cause actual results to differ materially from those expressed. Factors beyond our control, including market conditions, economic changes and regulatory actions can impact outcome. Corbion does not undertake any obligation to update statements made in this call or contained in today's press release and presentation. For more details on our assumptions and estimates, please refer to our annual reports. This is Alex Sokolowski, Head of IR. And with me on the call are Olivier Rigaud, Chief Executive Officer; and Peter Kazius, Chief Financial Officer. Now I would like to hand the call over to Olivier. Olivier? Olivier Rigaud: Thank you, Alex, and good morning, everyone, and thank you for joining us today for Corbion's First Quarter 2026 Earnings Call. Let me get straight to the point. As we outlined in February, the first quarter reflects phasing effects, primarily Nutrition, and the very strong comparison base in Functional Ingredients & Solutions. Against that backdrop, we delivered group sales of nearly EUR 294 million and an adjusted EBITDA of EUR 37.8 million with a margin of 12.9%. While this is below last year's exceptional start, it's fully in line with our expectations. And importantly, it doesn't change our confidence in the year end. In fact, what we are seeing now is encouraging. April trading confirms that momentum is building, and we expect a clear acceleration in both volume and earnings as we move through the year. Let me highlight what is driving that momentum. In Functional Ingredients & Solutions, we delivered stable sales of EUR 236 million against a very strong prior year. Underneath that, volume and mix were positive, supported by continued strong demand for natural preservation solutions and the solid growth in Biochemicals and Lactic Acid to PLA. While margins were temporarily impacted by mix, we expect a steady improvement from Q2 onwards. This will be supported by lower sugar costs and disciplined cost reduction execution. Growth will continue to be driven by structural demand for food safety solutions and increasing adoption of PLA, particularly in 3D printing and as dynamics in fossil-based plastics evolve. In Health & Nutrition, Q1 sales of nearly EUR 58 million reflects phasing into the remaining of the year. The fundamentals here are strong. Demand remained robust. Fish oil prices are going up. Our contract positions are intact, and we expect a normalization of sales and volume growth from the second quarter onwards. Our Biomaterials business continues to build momentum and delivered a second record quarter in a row delivering growth across orthopedics, drug delivery and aesthetics. On the TotalEnergies Corbion joint venture, we also achieved organic growth and our divestment process is progressing as planned. At the group level, margins were impacted by mix effects and temporarily lower operational leverage in Q1. These are timing-related factors, and we expect a clear improvement as volume ramp-up and cost measures take effect. This bring me to cost discipline. In a macroeconomic environment that remains volatile, particularly with well-known geopolitical tensions, we are acting decisively and have implemented a focused cost reduction program. Turning to cash flow. Q1 free cash flow was negative at EUR 15.7 million, and as expected, given seasonal patterns. We remain fully confident in delivering EUR 85 million to EUR 90 million for the full year. Looking ahead, we fully reaffirm our 2026 outlook. We continue to target 3% to 6% organic sales growth and adjusted EBITDA margin of around 17% and strong cash generation with performance weighted towards the second half. This will be driven by sustained demand in natural preservation, normalization in nutrition, improving PLA market conditions and disciplined execution of our cost reduction initiatives. While uncertainty in energy and input cost remains, we have robust mechanisms in place, and are actively managing volatility through pricing, hedging, sourcing and operational control. So let me close with this. Q1 reflects timing and conversion effects, not the strength of our underlying business. Our fundamentals are strong. Momentum is building, and we are executing with discipline and focus. We are confident in our ability to deliver on our commitment for 2026. With that, let us move now to questions. Alex Sokolowski: Thank you, Olivier. [Operator Instructions] Our first question this morning comes from Wim Hoste, KBC Securities. Wim Hoste: Yes. I have 3, please. The first one is on the raw materials versus pricing dynamics. I know there's significant hedging on sugar and energy and some of the other components. But can you maybe quantify or elaborate a little bit on the kind of headwinds you're seeing maybe also on transportation costs or logistics issues, et cetera? And then also, what kind of pricing initiatives you put against that? So that's the first question. The second one is on foods. Can you maybe elaborate on the contract wins that are mentioned in the press release? What kind of products, geographies are we talking about regarding these contract wins? And then third and last question would be on the progress with the PLA divestments. Can you maybe elaborate a little bit on the process, the number of interested parties, the alignment with Total on that? So those are the questions. Olivier Rigaud: Okay. Thank you, Wim. I will answer the food and the contract wins, and Peter, the points on the raw material pricing and the PLA. Let me start with your second question on contract wins. Basically, what we see in foods are twofold. One is related to our natural preservatives and primarily related to some specialties in there on clean label. You might remember, we discussed during our CMD about the new EU listeria regulation, that is getting implemented in July this year '26. So we've been actively working on this, and this is bringing very nice upside, primarily related to our natural vinegar systems. And we see that really already starting in Q1, but accelerating over Q2 as customers are preparing to switch to new preservation systems. Amongst others, we see strong momentum in seafood. That is one. The second one is more U.S.-related where back on the GLP-1 trend, we've had a couple of major wins on high-protein functional systems for our bakery business. And we have been able to build some inventory to prepare for the big launch in Q2 on that front as well. These are the -- amongst the two major drivers of these food ingredients contract wins, you know, that we discussed about in the press release. Now to you, Peter, for the 2 other questions. Peter Kazius: Yes. So if you look on a raw material perspective, Wim, then you are right that in sugar, we have kind of full visibility for the coming periods, and look fully hedged for this year and also hedged into 2027. I think the other key components, which I would like to call out, which relates to the Middle East is, of course, energy prices and therefore transport prices, as well as if you look to the Middle East, then sulfur is playing a role as well and we use sulfuric acid in the production of lactic acid. Now, if you look to the three components: energy, and you can find it in the annual report is around 7% of input cost, is well hedged. So for the remaining part of the year. So I would say minimal exposure on that one. In transport, we do see some exposure, and I think the exposure is mainly on the sulfuric acid part of the equation, which how we currently view and look to it, we were talking here on a number in this year of up to EUR 10 million. And we are indeed taking pricing actions and mechanisms in the market, and that's a combination of prices, surcharges and all the rest. So that's a bit the current outlook, Middle East impact, I would say, from a cost perspective. Then on your question on PLA, I would like to stay a bit higher level, but we are progressing nicely and on track. And I indicated in the Q4 call that we anticipate to bring more news by mid-2026 because I don't want to hamper or jeopardize the process itself. Alex Sokolowski: Our next call this morning comes from Robert Jan Vos from ABN AMRO. Robert Vos: I have a few questions as well. Based on what you said about pricing in FI&S in Q1, still slightly negative, but the mix plus phasing of input cost materials, should we anticipate positive pricing in the forthcoming quarters? That's first on FI&S. Second one is maybe elaborate a little bit on the softness in the North American market? Then moving to H&N. You say that you expect volume mix growth to return to positive in the next quarters compensating for Q1. So my question here is, do you expect -- because Q1 was pretty negative, do you expect positive volume mix growth for H&N in the full year? And related to this what about pricing in H&N in the coming quarters? And my final question, the cost savings. Can you elaborate a little bit on this? What is the amount that you expect for this year that you can take out of your model? How is it split per division? And are there upfront costs related to this? Olivier Rigaud: Thank you, Robert Jan. So I will discuss the answer on North American softness and the H&N. Whilst Peter, you can take pricing and cost savings, yes. So let me start over, Jan, with the softness on North American market. Indeed, we are exposed to some large categories as bakery and meat there. And we've seen, of course, the inflation impact and tariffs impact in the U.S. to some large customers, that impacted already Q4 last year. And we've seen some continuation of that in some of these categories. Although I have to say lately, when we look at retail numbers, you would say bakery is leveling off. So it's not declining anymore, whilst the meat sector is still declining in the U.S. Now as I said, it's unequal. We see, indeed some of these developments, as I just mentioned, in a very specific area being the natural preservation in the clean label. There is still underlying quite a lot going on related to MAHA on clean label development, primarily on preservation specialties. And nothing new, but the continuation of the fortified proteins compounds that we see. So yes, as you know, it's a big market for us. It's a mixed bag. On the meat side, it's more negative than in bakery where things are stabilizing. There is a new spot which is a bright spot for Corbion emerging in the U.S. being around culinary, where it was part of also our strategy to develop business in culinary. And I mentioned just before on the previous question that, indeed, we also spread around this Listeria antimicrobial systems now primarily based on vinegar. So we see really strong sales of vinegar-based preservatives across the board, not just in Europe, but also in North America. On the H&N expected return, there, as we said, indeed, we see already a much better momentum starting in Q2, and we have a very good visibility as we speak now on Q2. As you know, and we explained primarily going into aquaculture, this is a concentrated market with 5 large players, and it's really phasing to one of these customers that we knew upfront, that is now kicking in as from Q2 on one side. But the reason why -- I mean -- and to your question, we expect a positive volume mix growth for the year. And we see a few strong underlying drivers. First of all, as we said, we've been able to renew the expired longer-term contract. So we have a good contracted position for the year. That's one thing. We are developing nicely into adjacent market, being human nutrition, and also we have very nice development into the shrimp market as well as we speak in the Asian markets. So that's the second driver we see supporting our growth this year. And obviously, on pricing, we see also nice upcoming impact on -- later on this year, non-contracted part of our business, supported by a fish oil price increase. You might have seen now the final quota for Peru has been officialized and is 36% lower than last year. So that is obviously driving fish oil price up, which is a nice support going forward for a non-contracted part of the business. What also these lower quota do say, just to close that point, is basically that the famous fish oil gap we've discussed many times and also at CMD was anticipated to be around 50,000 tons shortfall for fish oil, is more likely going to be much higher than the 50,000 tons for this year. Again, we are tracking that every day, but so that -- what makes us feeling really comfortable on our H&N for this year. Peter? Peter Kazius: Yes. So your point on the pricing, Robert Jan, it was indeed negative in Q1, driven, by the way, by lactic acid pass-through mechanism to the joint venture, with a bit of positive even in some other areas. The price uptake, which I just discussed related to the Middle East, is not included in Q1 and will be only as of Q2, but mainly in the second part of the year. So I anticipate a mild negative in Q2 and then basically returning into positive. If you look in terms of the acceleration of our cost savings program and if I look a bit on the timing and the impact of that, then the saving program, together with the sugar basically, if I look to an impact Q2 already versus Q1, I anticipate an increase of around EUR 5 million. It will be mainly in Functional Ingredients & Solutions and a bit and Health & Nutrition. I want to make one additional comment because you did ask, sorry, I forgot. In terms of kind of additional costs, we did incur some additional costs in Q1 in anticipation basically of this program. Robert Vos: Okay. That's very helpful. One follow-up maybe. Now that you mentioned that there were some costs taken in Q1. I also saw that depreciation and amortization was EUR 23 million in the quarter, which appeared a bit high. Is that a proxy for the remaining quarters? Or did it include some impairments in Q1? Peter Kazius: No, it includes some small adjusted items related to two different elements. One is the divestment process of PLA, as you can imagine. And the other one, which is good news, which you will not see basically in our numbers, but only in -- sorry, H1 is that we had a positive tax outcome in a discussion with the Spanish authorities, which would have a positive impact of around EUR 5 million in terms of tax this year, and we incurred some costs, which are also included in that part. So if you look from a depreciation element specifically, it's around just above EUR 22 million, which is in line basically with kind of the trend in Q2, Q3, Q1 and Q4. Alex Sokolowski: Our next question this morning comes from Fernand de Boer from the Degroof Petercam. Fernand de Boer: Fernand de Boer, Degroof Petercam. Actually I had one question. If I look to the drop in EBITDA in FI&S, you can say, okay, part is because of ForEx, maybe the mix was negative, but still, there is an absolute decline of EUR 10 million. So could you help me out a little bit on the bridge because I can understand maybe that food sales were quite negative in that respect. Peter Kazius: So if you look to the absolute EBITDA, indeed, it is a drop. There indeed currency in it, as you know, because it was $1.05 basically in last year, and it is $1.17 in the U.S. dollar in the average of this year. Then if you look to the delta, there is indeed a kind of negative impact in the equation of mix, price and volume. There is, if you compare to last year, of course, a bit of inflation in that one. We did have some additional costs as I indicated. And the other one is, and it's maybe a bit technical accounting wise, but we do share the kind of bill of SG&A, across the different segments. So that means if you have a reduction of your overall sales, it's also impacting basically the absolute number in... Alex Sokolowski: Our next question this morning comes from Setu Sharda of Barclays. Setu Sharda: Yes. So one question on the volumes, given the soft Q1 start and the ongoing inflationary pressure on end market, on customers, has your base case assumption for the volume growth changed in either division and how sensitive is your FY '26 guidance to a slower-than-expected volume ramp-up in Health & Nutrition? And my second question is on the fish oil contracts. Could you clarify how much of your Nutrition business is currently sold on a spot basis versus under contracts? And when do the existing contracts typically come up for renegotiation? And could you provide like more color on how you are approaching contracting in context of volatile fish oil prices? And my third question is on if you can give more info on the trading, how has been the Q2 trading till date in both in FI&S and Health & Nutrition? And are you already seeing some sort of recovery that you are expecting? Olivier Rigaud: Yes. Thank you, Setu. So on taking your question on H&N and fish oil, basically, if you look to the way we are ramping up the H&N volume and primarily the omega-3, which is the large chunk there, what we see is that, again, across the year -- last year, if you remember, on customer phasing, we had a kind of U-curve and this year it's more a V-curve in terms of the contract. And this is, of course, the pattern -- the ordering pattern of this business, which is volatile quarter from a quarter to another, although we have this now firm contract position for the year, but we have a great visibility on this contracted part. And then, as you know, we are adding more stable sales and predictable sales in both pet nutrition and human nutrition that is now nicely ramping up. So we have -- and there, we have also very good visibility. So if I look to the fully contracted position, this year is very similar in H&N than last year, where we have around about 2/3 of our business and their longer-term contract and 1/3 that is open. To your pricing question, obviously, what is open going forward, we have already proof of evidence that we can pass on already some price increases over the next 3 quarters. And these are roughly double-digit price increase on the open contract related to fish oil. Now, where fish oil is going, as you know, we've seen fish oil prices going from the low $3,000 per ton, now around $4,500, $4,600 sometime. And this is what we are translating. On the long-term agreement, to your second question, we are really not looking to align our pricing on fish oil only. The aim of the game during this 2 to 3 years deal is to have visibility on margin because then we are hedging our sugar. And we do not want to play the commodity game that fish oil is about. So it's about giving really visibility and security of supply to fuel the supply gap to our key customers. And some of them, of course, do share that view, others less, but this is the way we approach it. Now, on the renewal, to your question, we had a contract that was ending by end '25 that we have renewed, and the others we are ending in '26. So it means that we would probably start next multiyear negotiation for the next years in the course of the summer to renew these type of contracts because they're all ending now by end of '26. So that's, I mean, again, what I could say on that. On the inflationary pressure, this is, I mean, a difficult one because, of course, I mean, we see our customers trying to push also price to retail and to their consumers. Now, with what Peter explained and what we are facing with the Middle East crisis and how we're going to push also our sulfuric cost and extra freight costs, these are really pricing we are implemented wherever now we have open contracts, but the vast majority will be implemented as from early H2. So this is what we have and what we are planning. But quite a lot of conversations are going on. I have to say that, on freight, it's different from FI&S than H&N. In H&N, on this large aquaculture contract, we have freight clause in all these contracts where we pass immediately any freight surcharge. It's a lot more limited in FI&S where you have this lag. There's going to be a 3-month lag to push these prices as from the end of July, early August. Setu Sharda: That was helpful. Just one question, like because -- do you see any -- like how is the trading update until now, like have you seen the recovery in Health & Nutrition? Olivier Rigaud: No, it's a pretty good. We have very good visibility on Q2, very good, and it's really a very strong start of Q2 there. So I'm feeling really good, feeling really confident what we see in both divisions actually already in April. Alex Sokolowski: Okay. Our next question this morning comes from Karel Zoete from Kepler Cheuvreux. Karel Zoete: I've had two questions actually in relation to the FI&S business unit because the margin has been, of course, a bit lower than expected in the quarter. But if we zoom out, it's been a couple of quarters in which profit margins are declining instead of going up towards the 14% to 15% ambition level. So in relation to that, what are the incremental savings efficiencies, et cetera, you try to capture now? And the more longer-term question then is the positioning of the business. Where are you losing market share? Or is it simply the exposure to more mature categories in the U.S. that have been under pressure? Peter Kazius: Okay. Let me do the first one in terms of the longer-term trajectory and then Olivier can take the market one from that perspective. And you are right, that you see basically a kind of negative momentum if you look quarter after quarter. And I don't want to be -- but there is always a bit of volatility around it, frankly speaking, a bit of phasing. And I don't want to basically go to all these details. But if you look to Q2, and let's start with that. Then I did mention we anticipate a kind of EUR 5 million impact of sugar and cost reduction savings, of which the majority will be in FI&S, and that will lead to a kind of sizable margin improvement as of Q2, following actually an improvement into Q3, Q4. So with that one, I think that in terms of Q1, we reached the bottom, Karel, from a longer term perspective. If you then say the ambition level is still there, I anticipate for the full year to be higher in terms of FI&S margin than last year, but not to the 15%. Olivier Rigaud: Karel, so on the cost positioning of the business, this is a very valid question. So if you look to the entire FI&S, basically, I'm taking it outside the lactic to PLA that is a longer-term formula contract to the other pieces, basically there is this natural preservation specialty that is where we invest in growth, which is high margin, high growth. And we see even a lot more options around the lactic derivatives, but also the vinegar, the antioxidant and a lot of food ferments that are growing the mold inhibitors. So this is the part we really want to grow and focus on. And this is where we are investing in resources, as well. There is the functional systems that basically is transitioning right now from a pure bakery-only play, where we want to specialize in something that has close synergies with preservation, meaning enzyme cocktail shelf-life extension, and this is a business we are now really simplifying as part of the cost program as well to really simplify SKUs and focus on the high end. So this is really one of the big angle of our cost optimization program that Peter mentioned. And then you have what I call the basic derivatives, lactic -- plain lactic acid that is commoditizing where we basically changed the governance, where we run this business now since January with a new team in a very lean base. And that's the business we also are looking to now restructure, leveraging basically where we have the lowest cost plant in Thailand and primarily the new lactic gypsum-free plant. And this is not where we're going to invest going forward. So the aim is really to have this gradual shift in portfolio to the preservation specialties and restructure the functional systems into the shelf life extension and less exposure to bakery-only business going forward. So that's, I mean, our mission there. Now, as you know, there is still a large chunk of these commoditized lactic acid or less differentiated, if I would say, which is where I think pricing discipline is important, but also cost management. And back a minute to the FI&S margin, as Peter alluded before, we started this program. We presented our new Chief Operating Officer ambition in the CMD as well, where as part of also the new ExCo governance, he kicked off a major program that we embarked on. And of course, in Q1, you see the cost of that program is not a benefit yet. But that's fine, we are planning to develop more around that during our H1 results. So that is to come. Alex Sokolowski: Our next call this morning comes from Sebastian Bray at Berenberg. Sebastian Bray: I have two, please. You have talked about, Olivier, the pieces of movement in terms of last expiry of long-term contracts in '26 for algal oils. If everything were to remain the same as it is today and spot prices for fish oil were to remain the same, assuming that the contracts expire and are then re-struck, is the pricing effect from algal oils for 2027, roughly flat? Or is it different to that? My second question is on the ongoing negotiations regarding PLA divestment. Are there any dissynergies to think of here? Because the current setup of contracting is that there is almost an over-the-fence style cost-plus agreement. Is a buyer interested in, let's say, renegotiating that? Or do the economics in all likelihood remain intact as they are for supply of lactic acid to the PLA JV post divestment? Olivier Rigaud: Thanks, Sebastian. So your H&N question is very relevant. Now, you know, what we said publicly in the past is that these long-term contracts were at that time negotiated between $4,000 and $5,000 equivalent, yes. So obviously, we need to understand the fish oil price dynamic in the coming months when we're going to be at the table of negotiation in the summertime. Now, having said that, if you compare the fish oil price volatility, we know it has been picking up to $8,000 or $9,000 and going down as low as $2,000 in the past. We believe this type of price level are the longer-term sustainable price at the margin we have and we need going forward, and you know this level. So I mean, again, it's a difficult answer because, indeed, obviously, as we are growing volume, we have better and better operational leverage and we should get better margin as we go at this price level between $4,000 and $5,000. And we believe these are the longer-term right level of prices. Now let's see where the fish oil price development going to be over the next month, but again, for these contracts, we want to disconnect from fish oil volatility. On the PLA dissynergies, obviously, you know, and this is not -- I'm not pitching that, of course, the sale of that business, but the combination of this PLA factory next to the largest lactic acid plant in the world and the lowest cost one is very powerful for any new owner of that business. Now, obviously, there is a long-term agreement to supply lactic acid that is in place until 2035 and that would survive any change of control of the PLA JV. And for Corbion, whether we own part of the JV or not, it's a very nice plant filler because this business is, as you know, in these huge lactic acid factories, operational leverage is very important and you really make -- and start to make a lot of money when you run above 80% to 85% capacity. And for us, this plant is a guarantee that we run at really very high capacity rate. So it's quite critical. We remain the supplier, and it's the way also to buffer our two lactic plant on sites, yes. So we see it as, I think, a very nice addition. And actually, it's a deal and a contract with very little, if any, cost. It's a pipeline. So yes, on the front face, the margin might look low, but it has such a huge operational leverage impact on the rest of the lactic that we sell to the preservation and other categories that it's very important. So there are no specific dissynergies that we see from that deal. Alex Sokolowski: Our next question this morning comes from Reg Watson at ING. Reginald Watson: I'd like to come back to the cost cutting, if I may, Peter. Thank you for giving us the EUR 5 million delta between sort of Q1 and Q2. Could you break that down a bit, please? How much of that is the absence of the costs you had to take in Q1? And how much of that is the cost saving? And how much of that is the sugar? And a follow-on question from that is, how do you expect this to build through the quarters in the year? Is this a one-off cost-saving exercise? Or do you see further benefits to come in the coming quarters? Peter Kazius: Yes. No, thanks. So the EUR 5 million, by the way, relates to sugar and cost reduction activities. So it's not even reversing the other basically element. This is a kind of recurring benefit, and I actually think it will increase over the second half of the year as well. Reginald Watson: Okay. And then to that, in terms of the language and Olivier, Peter, feel free either of you to answer this. You mentioned that the sales strength in Q2 is expected to "more than compensate for Q1." As analysts, we're too hung up on quarterly volatility, if we look at first half in the round, do you expect them to deliver positive volume for -- sorry, positive sales with particular volume mix for the business as a whole? Peter Kazius: So if I look for, let's say, the business as a whole in terms of volume mix, then for the first half, I do anticipate indeed a kind of positive elements. If I look in the combination a bit, then Health & Nutrition, I see a recovery, but that is around kind of the same. If you look in terms of price, I think I alluded in terms of FI&S, I anticipate in Q2, still a mild year-on-year price reduction, driven by lactic acid to PLA and then basically reversing of that trend in the second half of the year, driven by the growth which we made on Middle East and partly pricing that's true. In terms of Health & Nutrition, if I pick pricing, then we had a kind of 4% pricing delta. I anticipate a mild kind of price erosion during the remainder part of the year. Reginald Watson: And then final question from me. How is the ramp-up of the gypsum-free lactic acid plant going? Where are you at on continuous capacity utilization? Olivier Rigaud: So Reg, so where we are, as you know, the plant is designed on 125,000 tons of lactic acid. We are now approaching really the 100,000 tons type of level on that plant, yes. And it's also important that -- because we've discussed that in the past as well. It's also because these are significant additional volume we put in the market that we -- it's important we also put that in the market wisely, also making sure that, yes, we do not come with large volume that would necessarily impact our margin anywhere. So there is a conscious ramp-up that we have as well on this. Obviously, the sooner we can fill it, the better, but we see a very nice upside on the remaining part of the year on basically PLA that is requiring a lot more globally. And that's, I would say, to me, quite an important statement because, as you know, the conversion ratio usually between lactic and PLA is 1.4. So you need 1.4x lactic to PLA. So when PLA grows, it's really accelerating massively the need of lactic acid. And we see that for our JV, but we see that also for Chinese players right now. And that's something that when we look to the whole balance of lactic market, it would be really helpful to see how Corbion can leverage on one side, the fact that we have a competitive position because we are gypsum-free. And we know our main competition is Chinese. The second is, if you look over the last 6 months, there is quite a positive trend in the favor of Corbion when we look to the carb cost, the sugar -- the Thai sugar cost versus Chinese cost and all our competitors in China are on corn. So the ratio is again back in favor of Thai sugar since September last year. So it's already 2 quarters. And that, I think, going to support also Corbion margin going forward. Reginald Watson: Okay. So I'm really pleased to view that you're running that plant at 80% capacity utilization because that must be driving efficiencies in terms of variable cost of production, et cetera. So that must make it probably the most cost-efficient plant in the world for lactic acid, Am I wrong with that? Olivier Rigaud: No. You're right. But primarily right now with the Middle East, this is the only plant in the world with no sulfuric acid because this -- the whole story about, of course, as you know, conventional lactic process is that you are using lime and then you need sulfuric to precipitate into gypsum. Reginald Watson: Yes. Olivier Rigaud: And the reason why we developed that process over the years is to have no gypsum, hence, you don't need sulfuric. So that's a big competitive advantage, primarily these days with what's happening in the Middle East. Reginald Watson: And then does that mean then that the cost benefit of the ramp-up is now already included in the numbers? Or should we continue to see more benefit to come from any further utilization, any further ramping of this, through the year? Olivier Rigaud: We have already factored in, in our outlook what we think we're going to achieve in terms of capacity this year. So the rest, we keep for '27. Alex Sokolowski: Very good. And our last question this morning comes from Eric Wilmer at Van Lanschot Kempen. Eric Wilmer: Yes, two remaining questions, brief questions, actually. Given that sugar prices or sugar costs actually have come down year-on-year, might this actually result in market dynamics and forcing lower product pricing for functional ingredients during the remainder of this year? And maybe on customer behavior, are there any signs of -- given the current disruptions, customers stocking up your product, you mentioned sulfuric acid supply chain issues. And maybe actually also a third one then on transportation costs. You talked about obviously increasing them. I was wondering to what extent are customers receptive, different from what they may read. Energy costs have actually started to come down a bit again. And I've been hearing that this is not always a very straightforward discussion. Olivier Rigaud: No, I think, Eric, so good point. So basically, I think, we have -- except -- I mean, again, in a few large U.S. contracts, and of course, the joint venture of PLA and sugar-related costs is not something we have really widely spread. So obviously, key customers do track, of course, input cost. But in terms of competitive dynamic, today, it's getting really about, as you know, our critical competitors in lactic are in China, and they are based on corn. So the important is to look to the Chinese corn versus New York 11, Thai sugar or Brazilian sugar. So that's one. And this is what plays in the competitive dynamic. On stocking, we -- I mean, we don't see that because -- of course, the situation has been heavily complexified with tariffs and still is. And what we see is that the advantage of Corbion being the only lucky producer having a plant in each geography is really helpful for us. So there are different dynamics if you look to the U.S., where we have our plant in Blair, Nebraska, in Brazil, in Campos dos Goytacazes, in Thailand. So we do not anticipate any extra customer stocking. On the opposite, we see people being so tight on working capital that we have a lot of rush orders, a lot of last minute which are creating other issues. So that's what we see. And on freight cost, yes, of course, as I said, Health & Nutrition is very different than FI&S. In Health & Nutrition, all the large contracts do have a freight clause that we review on a quarterly basis. So if freight costs are, let's say, improving or declining in the next quarter, we would apply it and vice versa. In FI&S, it's very different. And as you know, we have a big route that is impacting Corbion, where most of the European lactic acid is freight from Thailand to Europe. And this is a very large volume because this is the feedstock for all the derivatives we are making into our Spanish and Dutch operations. So that's an important one for us, where basically, we have more choices than to push these extra freight cost to the market. And this is what Peter explained what we are busy doing and what we have to do. Alex Sokolowski: Okay. This concludes our conference call this morning. Thank you all for your attendance and questions, and we look forward to discussions at upcoming conferences in the next weeks. Please note that we will hold our Annual General Shareholders Meeting on May 13, 2026, in Amsterdam, and our Q2 half year '26 results on July 31. Information on both meetings is available on the Investor Relations page of our website, and we look forward to engaging with you again. Operator, you may close the call. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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: Good day, and thank you for standing by. Welcome to the Tele2 Q1 Interim Report 2026 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jean-Marc Harion, President and Group CEO. Please go ahead. Jean-Marc Harion: Thank you, and good morning, and welcome to Tele2's report call for the first quarter of 2026. With me here in Stockholm, I have Peter Landgren, our Group CFO; Nicholas Hogberg, our Chief B2C Officer and Deputy CEO; and Stefan Trampus, our Chief B2B. Please turn to Slide 2 for some highlights from the first quarter. In Q1, group end-user service revenue grew by 3%, whereas underlying EBITDA grew by 11%, marking the fourth consecutive quarter of double-digit growth. We also continue to generate strong equity free cash flow with SEK 2.2 billion in Q1, plus 7% versus last year. Our Baltic Tower transaction was completed by the end of February, generating cash proceeds of SEK 4.7 billion to Tele2. And we also opened 5 new stores in Sweden in Q1 and upgraded our fixed network to 2.5 gigabit per second, a record internet speed, which are already available across many of the largest cities, including in Stockholm. With our 5G already recognized as the fastest in Sweden, we now operate the fastest networks in the country. Please move to Page 3 for more details on our results. Our 3% growth in end-user service revenue was driven across all our operations and core services. Our 11% growth in underlying EBITDAaL was driven by both transformation and revenue growth. Our strong equity cash flow or free cash flow, which grew by 7% year-on-year was largely driven by the increase in our operating cash flow. Peter will go through the details. CapEx to sales declined seasonally, partly due to lower 5G rollout speed in Q1. Leverage fell to 1.5x due to the Baltic Tower transaction and organic cash generation. In Sweden Consumer, end-user service revenue grew by 1% with contribution from all main services. In Sweden Business, end-user service revenue grew by 5%, driven by mobile and IoT. Our Baltic operations grew end-user service revenue by 7% and underlying EBITDAaL by 15%. Let's move to Slide 5 for more details on Swedish Consumer. As commented in the CEO letter this quarter, we combined store expansion with rapid progress in AI and automation, improving customer experience, operational efficiency and our ability to anticipate customer needs. Mobile postpaid end-user service revenue grew by 3%. Total mobile revenue grew by 2%, partly offset by continued decline in prepaid and some temporary issues due to the move to our new logistics platform. Fixed broadband grew end-user service revenue by 1% due to ASPU growth. Digital TV once again improved sequentially, driven by healthy high single-digit growth in Tele2 TV end-user service revenue, more than offsetting the latest impact of Boxer TV switch off. Let's look at consumer KPI on Slide 6. Mobile postpaid RGUs remained unchanged in Q1 despite temporary negative impact related to 2G, 3G shutdowns. Mobile ASPU increased by 1% year-on-year, driven by price adjustments, while still negatively impacted by IFRS 15 fair value adjustments, which will gradually abate during the year. Fixed broadband RGU declined slightly in Q1, while ASPU grew by 1% due to price adjustments. As in previous quarter, we have remained selective in parts of the market due to continued aggressive competition, which hampered volume growth. TV RGUs increased by 4,000 in Q1 as the good growth momentum in Tele2 TV has continued. ASPU grew by 5% year-on-year, driven by pricing and cross-selling of sports content improving the success of our flexible offer. Please move to Slide 7 for Sweden business. Sweden business continued to deliver strong end-user service revenue growth, reaching 5% in Q1 despite strong competition. Mobile grew by 8%, largely driven by our IoT business, which is expanding in new industries such as the automotive sector and geographies, for example, in Latin America. Mobile RGUs increased by 3,000 in Q1, ASPU continued to be impacted by change in customer mix. B2B solutions grew by 3% in Q1, reflecting our decision to focus on a more targeted portfolio of services. Please move to Slide 8 for Sweden financials. In total, Sweden end-user service revenue grew by 2% in Q1, driven by both business and consumer. Underlying EBITDA grew by a solid 9%, driven by the end-user service revenue, workforce reduction, stricter prioritization and cost control. The cash conversion has improved to 73% over the last 12 months. Let's move to the Baltics financials on Slide 10. Baltics once again maintained strong top and bottom line growth in Q1. Total end-user service revenue grew by 7%, partly supported by previous price adjustments. Q1 was the fifth consecutive quarter in which all Baltic markets delivered double-digit organic growth in underlying EBITDAaL, delivering a total growth of 15% pro forma the Baltic Tower transaction. It is worth commenting that our Baltic operations started accounting the cost of Baltic Tower company in March 2026. Cash conversion based on the last 12 months stands at 80% despite the impact of the Tower transaction. As you know, a spectrum auction has already been announced and will take place in Lithuania in 2026. Let's move to Slide 11 for Baltic's operating KPIs. The total postpaid base in the Baltics increased by 17,000 RGUs in Q1, driven by all markets. Prepaid decline was due to regulation and migration to postpaid. Blended organic ASPU grew by a strong 10%, driven by price adjustments and continued prepaid to postpaid migration. With that, I hand over to Peter, who will go through the financial overview. Peter Landgren: Thank you, Jean-Marc, and good morning, everyone. Please turn to Page 13 and the group income statement for the quarter. Total revenue grew, thanks to organic service revenue growth of 3% with contribution from all operations. Underlying EBITDA grew by 10% organically or 11% after lease, thanks to the sharp cost control across the group and the contribution from service revenue. Items affecting comparability were mainly impacted by redundancy costs related to workforce reductions. Last year, the corresponding redundancy provisions were more significant as you might recall. The gain from sale of operations of SEK 5.1 billion refers to the capital gain from the Baltic Tower transaction completed at the end of February. Net financial items decreased year-on-year, mainly thanks to higher interest income and positive currency effects. In Q1, our average interest rate was 2.7% with a debt mix of 73% fixed rates and 27% floating rates. Income tax increased year-on-year due to higher taxable profits. Let's move to the cash flow on Slide 14. CapEx paid, excluding spectrum decreased compared to last year, mainly due to lower intensity in the Swedish 5G rollout and reduced workforce. The decline was also impacted by delayed hardware supply with an expected catch-up later in the year. Spectrum CapEx paid increased due to the first out of 2 payments for the Swedish spectrum secured in 2025. Changes in working capital contributed to the cash flow with around SEK 450 million, largely driven by seasonal decrease in equipment receivables. Taxes paid increased since last year included a tax refund of around SEK 280 million, while the corresponding tax refund this year was around SEK 50 million. In summary, Q1 equity free cash flow reached SEK 2.2 billion, which implies a 7% growth compared to last year, and this translates to around SEK 9 per share over the last 12 months. Please turn to Slide 15 for our capital structure. End of Q1, economic net debt was SEK 17.4 billion, a reduction of SEK 6.9 billion compared to end of 2025. This was driven by 2 things: the cash proceeds of SEK 4.7 billion from the Baltic Tower transaction as well as the SEK 2.2 billion generated in the business. And this brings down leverage to 1.5x underlying EBITDA after lease ahead of the proposed dividend distribution. And with that, I hand over to Jean-Marc for some comments on our 2026 guidance. Jean-Marc Harion: Thank you, Peter. Please turn to Slide 16 for 2026 guidance. As highlighted last quarter, we concluded 2025 by setting a high standard and establishing a new reference point for Tele2 profitability. Building on that momentum, we remain focused on consolidating the company's transformation further strengthening profitability and safeguarding revenue growth in the face of continued geopolitical uncertainty. We, therefore, maintain our full year guidance for 2026 with low single-digit organic growth of end-user service revenue, low to mid-single-digit organic growth of underlying EBITDAaL, CapEx to sales in the range of 10% to 11%. Note that the organic growth rates include the impact of the Baltic Tower transaction on a pro forma basis. And I hand back to Peter for some additional comments regarding 2026 before we open up for Q&A. Peter Landgren: Thank you. First, a reminder about the Baltic Tower transaction. As previously stated, the transaction is expected to have a negative impact on underlying EBITDAaL of around EUR 35 million on a 12-month basis. And in Q1, this only impacted March, while we'll see the full impact onwards. And then a few reminders on the cash flow for the full year 2026. On spectrum, we noticed that an auction has been announced in Lithuania expected to take place during 2026. On financial items, excluding leasing, we still estimate full year net payments of around SEK 650 million with a similar quarterly phasing to last year. And finally, on taxes, we still estimate full year payments of around SEK 1.4 billion. And with that, I hand over to the operator for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Ondrej Cabejsek from UBS. Ondrej Cabejšek: I had a few questions on Sweden and specifically mobile, I guess, please. So I am looking at the mobile trends specifically in postpaid. And if you could please talk about -- I guess, you mentioned previously that you put through price rises this year about a month earlier than last year that the market has been kind of improving. So I think we would have maybe expected a bit more of an acceleration. You mentioned also that there has been some kind of legacy negative impacts on mobile. So if you can talk about the growth rates for postpaid Sweden specifically and how you see those throughout 2026. And second question, if I may, also related to this, but maybe from a different angle. You've obviously put with the new portfolio on mobile, you seem to have a very stable base in the quarter on postpaid against some price rises specifically on like family plans, which I think are very important. So how is the reception then and again, tied to how we should think about the service revenue kind of profile for the rest of the year? Jean-Marc Harion: Slight technical issue, but we continue the Q&A session. Just to answer your first question first, and then I will hand over to Nicholas to develop on the portfolio and the new pricing. But of course, the price adjustment that we implemented a little bit earlier this year, of course, has a progressive impact, and it's as always, mitigated by the BTL discount, the different segment that -- where these price adjustments are adjusted for. I believe that the second question is more relevant to be answered by Nicholas about the postpaid portfolio now and the positioning and how we see the competition, not only, I would say, with the other operators, but with the sales distributors as well. Nicholas Hogberg: So thank you, Jean-Marc. This is Nicholas. Yes, the new portfolio has been very well received. We have simplified the portfolio radically, which is good, and we have also continued to build Frank. And of course, as you know, we have started somewhat a repositioning of Comviq with Jattebra, very good, and it's actually working very good so far. So what we can see is that it's still a fierce competition and a challenging market. We have been restricted to engage in the price war, especially when it comes to the no-frills brands. They are pushing the market really hard. But we see that our new portfolio is working well and that we -- our position in the market becomes clearer and clearer. Then when it comes to our distribution, we have launched 5 new stores during the quarter, and they are working very well, and we think that, that's the way forward for us. And we also see that we are less dependent on third-party distribution. Ondrej Cabejšek: If I may maybe follow up on the last point. So is it a case of maybe you are -- as you kind of reposition the distribution channels, is it a case of maybe there will be slightly weaker volumes this year, but profitability will benefit as a result? Jean-Marc Harion: Yes. Let me -- Jean-Marc here again. To complete what Nicholas was commenting, of course, we are operating in a very competitive environment in Sweden on the consumer market. We like this kind of competition. We have 2 strong brands to compete with the others. One of the specifics, and this is a comment that I already made several times, one of the specifics of the Swedish market is that the competition is distorted by the behaviors of some sales channels, which are too important, overwhelming on the volumes, for instance, telemarketing. So that's probably what you were referring to. We made a very clear statement last week supporting stricter rules for telemarketing operators. But we believe that this stricter rules should apply as well to other channels, third-party retailers where we have as well received a lot of complaints from our customers. So this, in my view, is one of the focus -- one of the priorities for the industry in Sweden and, of course, for Tele2 in the coming few months. Operator: Our next question for today comes from the line of Fredrik Lithell from Handelsbanken. Fredrik Lithell: I would like to come back to your cost profile and the good cost control you are driving the company with. A little bit more on the sort of the software stacks. You alluded to that in the report that you're working your way through with automating the software stacks and all that stuff. How much of that upgrade, modernizing, automating your software environment will sort of trickle through in improved cost profile over time as well? Or is this that sort of you get into a modern state with your software and the cost will be pretty much the same to drive it. It would be interesting to hear a little bit more color on that. Jean-Marc Harion: Okay. Thank you for your question. It's a very complicated exercise to answer your question in a few minutes in this Q&A session because, of course, now, for one simple reason because it's an ongoing transformation process. We have a huge potential ahead. And I believe that Tele2 is leading the pack in the AI and automation initiatives. We received recently an international award for the automation of our processes. We have built -- in parallel, we were optimizing the organization in the company. We have created a dedicated data and AI team. Of course, one of the purpose is to help us better understand the customer behavior, anticipate their issues and make the support to these customers smoother and more faster and more transparent. But we have engaged into a huge transformation of all our processes. So we have a series of initiatives, internal initiatives that empower the managers and the employees to automate their own processes. So we have created a kind of library of tools and small internal academy to support automation and AI initiatives. And furthermore, and I believe that, that is more relevant with the content of your question. We started applying agentic coding in our development. And this, of course, is a huge opportunity because it accelerates the delivery and lower the cost of the development. We haven't seen all the potential of this initiative yet, but I'm personally very impressed by the first results that we are delivering. So far, we don't have any number to share with you. We are just trying to unleash the potential of agentic coding internally to accelerate our transformation. Fredrik Lithell: Very clear. Can I have a follow-up on that, Jean-Marc? Do you expect that you will see the biggest effect or maybe the earliest effects within your production. Or will you see it within your support systems or support functions, I should say. Where do you see the early signs? Jean-Marc Harion: No, we -- I believe that we already see it in the customer interaction because that's where, of course, we put our priorities. We want to improve our knowledge in order to better understand the needs and the issues faced by every single customer segment. But the automation and the development is evolving fast as well, including in the support of our B2B customers. And that's because, of course, I should have mentioned that the automation of our processes started in the B2B area last year when we started trying to automate the processes that we have in place in order to support our large accounts. And this is from there that we have developed this automation academy and so on. Operator: Our next question comes from the line of Andreas Joelsson from DNB Carnegie. Andreas Joelsson: Two questions from my side. First of all, Jean-Marc, your comment about the macro situation currently, how does that impact your growth plans and growth ambitions for the year. Has there been any changes to that given what you see around you? And does it also make you more eager to look further to the cost side and CapEx side? And secondly, just curious, given a quite strong start to the year with 11% EBITDA growth, how did you reason when you decided to keep the EBITDA outlook unchanged? Jean-Marc Harion: Okay. Thank you, Andreas. I believe that the 2 questions are linked. First, so far, the telecom industry has not been the one most impacted by the international situation. So that's good news. But in the meantime, we see a sharp increase in the price of the component of IT equipment. So this may impact our cost, CapEx and OpEx in the coming months. But so far, we can deal with the situation, but this price increase in the component is a concern for our industry, not only for the telecom industry. But of course, the major focus we have is about the consumer behavior. So far, the Swedish economy was recovering, but still lagging behind in terms of consumer consumption. The international situation will probably create some tension as well in the customer behavior and appetite to spend. We will see. We are just careful. And so far, so good. But if the situation lasts, then we will need to adjust. And this is why we are very happy to have transformed the company last year so that we are agile and reactive again. So we can react very fast. We have a much leaner cost structure that help us adjust if necessary. And that explains as well why for the time being, we are careful with our guidance. Operator: Our next question moment comes from the line of Derek Laliberte from ABG Sundal Collier. Derek Laliberte: Just a follow-up there on the guidance and given the strong Q1, what would you say needs to happen or not happen for you to reach the upper end of this EBITDAaL guidance or even beat it? Jean-Marc Harion: Just -- okay, Peter? Peter Landgren: Derek, thanks for the question. I think it will be a little bit of a repetition of what Jean-Marc is saying because I think we have elaborated on it. We have the geopolitical uncertainty, which is both on the component side, but also on things like energy costs and FX and things like that, but most of all, the customer sentiment. And to add to the customer sentiment, it's also about the competitive situation, which is, of course, we know where we stand now in April, but it's a long year and it's early days and how that evolves is, of course, critical for our top line evolvement. So that's something to add and that can bring things to upper or lower end, I would say. So that's what I would add. Derek Laliberte: Okay. Got it. And on competition there, has anything changed in terms of the Swedish competitive intensity in the consumer segment? Jean-Marc Harion: Nicholas? Nicholas Hogberg: Yes. We can see that it's a bit of an increased competition, and it has to do with all the product segments. So we can see it both on Voice, but also on broadband and entertainment TV. So we see that there is clearly higher competition in the market during Q1. Derek Laliberte: Got it. And finally, on TV in Sweden, how do you see the growth prospects from here on? Nicholas Hogberg: We have a positive view on the growth prospects for TV, and we feel that we have a strong offer, and we see a continuous growth in TV. Jean-Marc Harion: And the Swedish football team is qualified for the World Cup. So that's good for the business. Operator: Our next question for today comes from the line of Felix Henriksson from Nordea. Felix Henriksson: I have 2, both relating to capital allocation. Just want to hear your thoughts about why not distribute some proceeds from the Baltic Tower transaction given that your balance sheet is in an extremely healthy state at the moment? And secondly, in the report, you mentioned this proposal to regulate the Villafiber market by PTS. So I just wanted to pick your brain if that has changed your mind in either way about making M&A in fiber assets in the future in Sweden. Jean-Marc Harion: Peter will answer the first question. I will try to answer the second. Peter Landgren: On the capital allocation then, I would put it this way that there was a proposal then from the Board, as you know, along with the Q4 release of a quite appealing shareholder return of SEK 10.5 per share, which we assume will be approved by the AGM now in May. So it's sizable and it fits well into our updated financial policy stating that we want to secure appealing shareholder return while retaining our flexibility. On the Baltic Tower transaction, That's, of course, a sizable cash proceed we received now, SEK 4.7 billion. But as we have said before, that's not really turning the needle in terms of dividend capacity because it also affects which leverage we can allow based on our rating. But we, of course, fully agree. We have a strong balance sheet. We see that as something very positive and something that enables appealing shareholder return also in the future. And on top of that financial flexibility and, of course, good interest rates. So we see that we are in a quite good spot. And then, of course, it's up to the Board to conclude how to pay it going forward. Jean-Marc Harion: And as a reminder, the proposal from the Board to the general assembly consists in distributing 118% of 2025 equity free cash flow, which is partly an answer to your question. And regarding the -- your question about M&A and fiber infrastructure. I would say the comment we make is about the -- we made -- is about the progresses made by PTS, the Swedish regulator in the regulation of the SDUs. So this is, of course, a good news for the Swedish consumers. Let's remember that in Sweden, 1 out of 2 households is a villa, meaning that 1 of 2 villa owner today doesn't have access to competitive offer for the fixed Internet. So this will be a big opening and a big opportunity. And of course, we expect to play a key role in the opening of the market. We are waiting for the regulation to materialize, but at least the first publication by the PTS are a good sign, and we expect the regulation to materialize in the coming few months. Of course, the sooner the better. Regarding the M&A, we will see. I already commented that we don't exclude anything. But of course, the assets have to be available at a reasonable price. So far, we haven't any opportunity on the table. We are looking -- we are observing and scrutinizing the market, but nothing tangible, nothing concrete at this stage. Maybe it's interesting to comment that to remind ourselves that the Swedish market is very fragmented at this stage. Maybe some consolidation will happen in the coming few years. It's not the time yet. So let's wait and see. Operator: Our next question for today comes from the line of Keval Khiroya from Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So last year, you made strong progress on renegotiated supply contracts and on the workforce reduction savings. Can you elaborate a bit more on how you think about the source and scope of additional OpEx cuts in 2026? I appreciate you did speak a bit about automation. And then secondly, in B2B, you've again shown strong revenue growth. Last year, you also talked about wanting to focus a bit more on profitability of some B2B contracts or segments. Are you now happy with the B2B profitability? And how do we think about the B2B revenue to EBITDA growth translation? Jean-Marc Harion: Peter will answer on the contract side. Peter Landgren: Yes. Thanks for the question, Keval. On the workforce and also the contracts, starting with the workforce, we had this big transformation last year, as you obviously recall with a reduction of 650 positions or 15% across the group. And that was completed, as you know, in last year. This year, we're moving rather from this transformation phase to more of an optimization where we will continue to stay disciplined in the workforce number and, of course, use the opportunities created by automation and AI, but it's a different phase than last year. And on the supplier contracts, the work continues. Of course, we had a strong start last year when a lot of contracts were reopened with a lot of potential. There is still a lot of potential, but it's not as obvious as last year. But the ambition is the same, the intensity in the supplier renegotiation is the same, and we reap benefit from it. But at the same time, we should, of course, also remind the inflationary pressure that we see in some pockets, especially around hardware, which Jean-Marc has called out. So we keep on working on this just like before, the discipline continues. Jean-Marc Harion: And maybe a short comment about the constant optimization of the organization. So once again, it's a never-ending exercise if we want to keep the company at the best of its efficiency. So we are moving pieces of the organization, [ permanent ] -- because of the -- we are close from the end of the rollout in Sweden. We reshuffled some team in the network organization. In the meantime, we are reinforcing our skills and capacities in AI and data analytics, but it's an investment in order to create more synergies, thanks to the automation. So that's why it's a permanent exercise. To answer your question about B2B, I will hand over to Stefan. But in a nutshell, yes, no, we are happy with the profitability of our B2B activities, Stefan? Stefan Trampus: Thank you, Keval, for the question and also Jean-Marc. Well, the efforts that we've taken in the B2B during last year, but also coming into this year is really broad-based in order to create a better profitability, which trickles down to bottom line, but we're not revealing in the numbers, but we see a significant improvement during last year, but also in this quarter. We have addressed vendor partner negotiations. We addressed organization where we changed the structure. We have done rightsizing of the organization, and it also continued into Q1. We've done some near-shoring of some resources as well during this quarter. We have outsourced some of our production of some of our platforms. We are working on IT modernization, automation, which Jean-Marc was alluding to earlier, which we kick started early last year. We're creating a center of excellence. And we are, as you know, working on the channel optimization in order to drive versus our internal challenge with one of the highlights during the autumn where we closed 60% of our external resellers. So it's really a broad-based approach on improving efficiency. Of course, one part of this is also addressing individual customers and customer profitability. That is something that we're scrutinizing and have a program in place to drive, and it has also yielded results. So hope that gives you some color, Keval, to what we're doing and it's paying off. Operator: [Operator Instructions] Our next question comes from the line of Andrew Lee from Goldman Sachs. Andrew Lee: I had just a couple of questions around some temporary drags on your customer numbers at the moment in Sweden. Just if you could give us a better sense of scale of those drags and what your service revenue growth might be anticipated to be excluding those. So first off, in Swedish mobile, I think you had a drag on postpaid customer numbers from the 2G, 3G switch off this quarter. What scale of drag is that? When should we anticipate that drag disappearing or dissipating? And where do you think your service revenue growth could be without that? And then similarly, you've talked a lot on the fixed broadband side about the drag from not competing in open networks areas at the moment. Your broadband net add number is negative at the moment. If you were competing in the open networks area with a viable wholesale price as you should achieve or at least hope to achieve post regulation, where would you expect your broadband net add number to be? Should it be still negative? Or would it be flat? And what kind of drag do you think that's placing on your Swedish service revenue growth? Those are the 2 questions, I mean, overarching is if you didn't have those temporary drags, where do you think your Swedish service revenue growth would be this quarter as an insight for how we should think about things going forward given that even with those drags, your Swedish service revenue growth was 2.4%. Jean-Marc Harion: Thank you, Andrew. I will try to answer the question together with Nicholas. But to make it clear, the 2G, 3G switch-off took place in December. It impacted some prepaid and low ASPU customers in January. So it was a temporary hiccup. We came with a number of solutions and proposals to support the customers who have the -- who were using noncompatible phone for VoLTE, 4G and so on. Unfortunately, we couldn't reach all the customers for obvious reasons, but it was a temporary hiccup. So it's behind us now. Maybe Nicholas want to complete and elaborate on FBB and competition in the open networks. Nicholas Hogberg: Yes, absolutely. Thank you, Jean-Marc. So what we see is that some of our competitors is actually quite aggressive now in the broadband space and in the open networks. We even see competitors are selling right now at below cost, which we are not participating in. So when the regulations come in place, we, of course, see an opportunity to expand more and hopefully take market shares. But we are waiting for the regulations to come in place, and then we can get back more on that matter. Andrew Lee: Okay. Can you give us a sense of how many customers you ended up losing from that 2G, 3G switch off? And I get your point on broadband that there's also intensified competition in the space that's also dragging on customers. But is there any sense of giving us -- is there any scope for you to give us a sense of the scale of drag from not being able to compete in the -- or not being able to compete in the open networks there at the moment? Jean-Marc Harion: No. But allow us not to answer the first question about the 2G, 3G drag because, of course, it's an information that we keep for ourselves. But once again, it's a temporary hiccup. It's behind us now. And regarding the FBB, we don't have any I would say, forecast or estimation to share either. Operator: Our next question comes from the line of Nick Lyall from Berenberg. Nicholas Lyall: Just coming back to the cost question, please, for 2026. I mean you mentioned about staff costs and procurement, I think in Keval's question there. But could you give us an idea of the scale of savings available to you? You've got roughly 3/4 of your staff savings done before the end of the first half in 2025. So it feels like the pull-through effect for 2026 is going to be minor. But also how far are you through the procurement process itself. Could you help us on that, please? Because some of the comments about inflation from maybe the geopolitical effects and others suggest there's not a lot to go. So could you help us with the absolute amount of savings you might see in '26 versus '25, please, so we can start to sort out the forecast. Jean-Marc Harion: Peter, can you take this one? Peter Landgren: Yes. Nick, we are not calling out specific numbers, but the flavor around 2025 and '26, of course, as we have said and the main impact or a larger impact was seen in 2025 when we kickstarted this exercise and had some quick wins as well. So we had sizable savings last year. We will see benefits from it this year as well. So it is a contributor, of course, partly flow-through effects, some of it from last year and additional efforts that are doing this year. But the magnitude is lower simply because it's getting tougher and tougher and because we have some cost avoidance to take care of as well. But we're not calling out specific numbers, but it's a high priority also in 2026. Nicholas Lyall: That's great. And the timing of any AI contributions. It sounds like maybe it's a benefit possibly to service revenue, predictability of consumers and things like that. There's nothing we need to think about sort of the AI contribution immediately is there? Peter Landgren: I think it's -- we have benefits from this in different places, obviously, on how we meet our customers and how we approach them. On the cost side, we have, of course, efficiencies to reap the benefits from on how we're working, and we will get savings from that. But it's gradual. We have seen some of it, and we keep working on extracting more savings there. Operator: Our next question comes from the line of Ajay Soni from JPMorgan. Ajay Soni: I've got 2. The first is around business growth, which was very strong, and you mentioned IoT. So I was just wondering, can this growth continue around this mid-single-digit level because obviously, B2B revenues can be somewhat lumpy. And if it is going to continue at that level, what is driving that growth? And then my second question is just back to the costs. So you still had pretty sizable redundancy costs in Q1. So could you tell us what your FTE reductions were in Q1? And I can understand maybe you don't want to give a number, but do you have a target for your FTE reductions for 2026? Jean-Marc Harion: Okay. So let's start with IoT. Stefan, do you want to answer it? Stefan Trampus: Yes. Ajay, thank you for the question. I think I'm going to answer it in a general perspective. And I mean, you're correct, and we talked about it before. We time to time have quarters with some swings due to larger wins, customer wins or larger rollout projects. So that can happen. Overall, I'm really happy that we have a well-diversified portfolio and that over time takes turns in driving the growth. We have a focused portfolio with some decisions that we did last year, but it's still a well-diversified portfolio, which gives us this ability to have growth from different sources. And this quarter, we basically have growth on all product lines and then the stabilization of the fixed part and the fixed connectivity that we saw some quarters ago has continued, driven by deals that we're doing in that domain. And also that we see that there's a need of modernization of networks, indoor networks, et cetera, for the customers. There's modernization in regards to cloud, more capacity that customer needs to bring to their businesses. So this is driving continuous, I would say, need of modernization for our customers, and that helps our growth overall. This quarter, IoT stands out. It's the highest growth driver, which we're happy to see. And it's driven by increased usage, which is a very positive sign. So not directly RGU. We have good RGU development as we've had before, but very much the usage part, which is good to see. And as I communicated before, I think we expect IoT to continue to grow on the basis of more deployments of IoT-enabled devices throughout the world. So that's overall what we see at the moment. Looking forward, I think I commented the profile for the year. I wouldn't say that you should take into account Q4 or Q1 as the level of growth for B2B. You should rather look at the full profile for 2024 when you look at the profile for the full year. You know that we had a really good ending of last year. It's going to be hard and the comps in end of this year will be high. So it's going to be hard to see the same growth rate that we've seen in the last couple of quarters. So look at it from a full perspective of 2025, I would say, going forward for this year. I hope that gives you some color, Ajay. Peter Landgren: And maybe I should -- Peter, I can continue with the second question around redundancies. Yes, you have probably noticed it in our notes that we have redundancy costs of around SEK 40 million in Q1. It corresponds -- to answer your question, that corresponds to roughly 45 people. We don't have any specific targets on downsizing this year. As we have said, last year, we had a big transformation with the 650 people reduction. This year, it's more about optimization. So it will be more of a gradual optimization never ending that will continue. And that's how you should probably look at the workforce side. Operator: Our next question comes from the line of Viktor Hogberg from Danske Bank. Viktor Högberg: Just a continuation on the Tower commitments and the rating agencies. Could you say anything if you got something new on the kind of leverage cap you're looking at following the Tower deal? Is it still 2.6, 2.7? And then another question on the cash flow. Just working capital, do you expect it to be neutral this year. And the CapEx, how much was the delayed hardware CapEx now in Q1 that is going to be caught up during the rest of the year? Jean-Marc Harion: Okay. Peter? Peter Landgren: Thanks for the questions. My favorite questions. Let's start with the leverage or the rating view on this. As you point out or as we've said before, we believe that the cap for our BBB rating is, as you said, around 2.6, 2.7, something like that based on the present context. On working capital, it's clear that this -- we have a clear seasonal effect. We have seen it before. We are, of course, in the holiday season in Q4 with Black Friday and Christmas, we -- and also sometimes also on Apple launch, we're selling a lot of equipment and then it's a bit of time lag before we can get it financed by our financing partner. And that's a very big piece of the working capital upside we see in Q1 and that one, all else equal, will, of course, normalize or bounce back for the remainder of the year. And yes, we see some delays on the CapEx side. I can debate exactly which number, let's call it around SEK 50 million that delay, but it's, of course, a matter of definition. Operator: Our next question comes from the line of Siyi He from Citi. Siyi He: I have 2 questions relating to your fixed business. The first question is really a follow-up on your answers to Andrew's question earlier that you mentioned the pricing competition is particularly intense in the SDU market. Could you just let us have a visibility who are the operators that you see being aggressive on pricing? Are they MNOs or they are more like the ISPs? And the second question is that I wonder if you can tell us if you have seen any changes on the cable trends after you have done the speed upgrades. I saw that landlord revenue are still declining by 4%. Just wondering why you are still seeing all these kind of rental revenues from MTU landlords are still coming down? Jean-Marc Harion: Okay. Thank you for the question. Nicholas is going to answer those. I'm not sure that we want to share information about competition, but Nicholas? Nicholas Hogberg: No, exactly. No. But we can see an overall competition in the market from all the players. So I won't comment that more. When it comes to our upgrade of the network, we see very positive reaction from our customers. And we see also that we have a strong offer in the market with the highest speed in Sweden in our network and with a very good footprint. So we, of course, are very optimistic about that going forward. So that's about it that I can comment right now. Operator: We will now take our final question. And this question comes from the line of Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: Maybe just one on the Baltics. We've seen you continue to deliver very strong organic end-user service revenue growth in these markets. I think there was a perception that maybe the sort of price increases led revenue growth might slow in the future. So maybe just -- it would be helpful to hear your latest thoughts on the potential to use -- continue using pricing as a source for growth in these markets? And then secondly, just any color there on your sort of thoughts heading into the spectrum auction that you mentioned in Lithuania. Just any thoughts around the potential size or any context that you can give us there would be very helpful. Jean-Marc Harion: Okay. Thank you for your question. I would say that the way price adjustments are applied in each Baltic country takes, of course, into account the positioning of Tele2 in this country, meaning that we are not doing anything crazy. We are just adjusting when we see an opportunity. We remain very well positioning in terms of price points. And of course, in these markets, the largest part of the sales are done in our own stores. So based on conversation and in discussion with the customers. So I would say it's a kind of very smooth and more and more sophisticated price adjustment that we apply in the Baltic countries. So no risk that Tele2 loses clear position as the best value for money in these countries. Regarding the auction, the spectrum auction in Lithuania, I believe that the message that we wanted to convey here is that please don't forget about this auction in your computations. But so far, we don't have any indication of the price, and we cannot, of course, comment on the details of the auction. Operator: That was our final question for today. This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.
Hakon Volldal: Good morning from Oslo. Welcome to Nel's First Quarter 2026 Results Presentation. My name is Hakon Volldal, I am the CEO. With me today, I have our CFO, Kjell Christian Bjornsen; and our Head of IR, Marketing, Communications and Miscellaneous functions, Wilhelm Flinder. We have the following agenda. I'll skip the Nel in brief and jump straight to the highlights for Q1. We have a short commercial update covering the most important commercial events in the first quarter and one subsequent event, a short technology update and then we will, as usual, end with questions and answers. Quarterly highlights. Revenues came in at NOK 148 million. We had a negative EBITDA of NOK 100 million. Order intake at NOK 85 million. Order backlog ended at NOK 1.1 billion, and our cash balance ended at NOK 1.4 billion. A pretty quiet start to the year. First quarter is always a bit slow. What we are focusing on is the launch of the new pressurized alkaline platform that will happen at Heroya on May 6 this year. In connection with that, we have been busy in the first quarter testing out new pressurized alkaline production line technology that is progressing according to plan. We also opened Korea's first off-grid green hydrogen production facility. That was commissioned in late March. And in April, we received a $7 million purchase order for containerized PEM equipment. Looking at more detailed numbers. Revenue from contracts with customers down 5% year-on-year. Revenues from alkaline division increased by 6%, but we had a decline in the PEM division of 14%. The NOK 100 million negative EBITDA was a NOK 15 million improvement year-on-year, and it's, of course, driven by the fact that we continue to invest in next-generation technologies, and we need higher revenues in order to become profitable. Solid cash balance at the end of the quarter, and that does not include EUR 11 million in the EU grant linked to our pressurized alkaline industrialization, which we expect to receive in the next quarter or in this quarter, second quarter '26. Alkaline financials limited revenue recognition in the quarter. Despite that, revenue was up 6% year-on-year. EBITDA improved by NOK 35 million versus corresponding quarter last year due to positive impact of project deliveries. We have adjusted our cost base and capacity utilization to reflect lower market demand, but lower fixed costs will continue to negatively influence results until volumes pick up. As you can see from the chart, we do generate profits when we have good revenues. Turning to PEM. Revenue were down 14% year-on-year due to limited megawatt project deliveries in the quarter. We had mostly sales of industrial products. EBITDA was down NOK 16 million year-on-year, largely driven by delayed or canceled research grants in the U.S. We have historically received money from the Department of Energy to fund several research programs, and that has been under review and parts of the grants have not been paid out since late last year, and that reflects performance so far this year. We have a good hope that the grants will be reinstated and that money will continue to be paid out or resume -- we will resume paying money to Nel, but can't say exactly when that will happen again. We are also in the PEM division spending money on product development for next-generation PEM electrolyser with significantly lower levelized cost of hydrogen, and that development is progressing well. Order intake was NOK 85 million, was down year-on-year versus a strong quarter in '25. We expect the order intake to improve and have already booked the first order in the second quarter of roughly NOK 70 million. So the first quarter you see here did not reflect any big project wins, just, I would say, normal course of business related to aftersales and some industrial products. The order backlog at the end of the quarter ended at NOK 1.1 billion. Due to a declining order backlog and limited demand over the past few quarters, we have reduced our employee base. We will try to adjust our cost to change market expectations. We are down in terms of number of employees by 26% versus the peak and 19% versus the end of first quarter 2025. And we can see that this also then translates into a 21% reduction in personnel expenses in the first quarter of '26. We have done these adjustments to make sure that we spend our money responsibly, but it has largely affected our ability to manufacture at scale and deliver projects at scale. So that variable or that muscle has been reduced. We have kept more or less our R&D organization to make sure that we can progress and deliver the new technology needed to bring additional volumes back. And once we get new orders and we see that the market is coming back, we can add back the manufacturing and project execution capacity. But for now, we have reduced our staffing down to roughly 300 employees. On the commercial side, we do want to highlight this. Korea's first off-grid green hydrogen production facility has been commissioned, happened in late March. It's a 10-megawatt alkaline system from Nel supplied by a solar power plant, as you can see on the picture. There is no reliance on the power grid. And this project more or less validates large-scale off-grid hydrogen production as a model for future domestic and international projects. It's been a very interesting project together with Samsung C&T, where, of course, Samsung C&T acted as the EPC and Nel provided electrolysers and gas separation modules. In April, we received another order from -- for containerized PEM equipment from Measure Process. It's a second purchase order from this client. And we're quite proud to see that whenever we get an order now, very often, we can say that it's a repeat purchase. That means the quality we deliver is solid. Customers have good experience with the first products they have purchased and they come back for more when they need it. This equipment will supply hydrogen for refueling stations and industrial applications. And I think it's sort of confirms the story that the MC platform, the containerized PEM solutions, has strong momentum across a wide range of applications. It's a fully modular design and that enables rapid project execution. It's also a good way to build out capacity over time. You could add more modules if you need more capacity. That also fits nicely with the market perspective. We continue to see several of these promising smaller projects, 2.5 megawatt, 5 megawatt, 10 megawatt projects that are ideal for containerized PEM, but we also see some larger projects in the 50 megawatt to 150 megawatt range, and these are expected to take final investment decisions over the next quarters. Containerized PEM has strong momentum, as I said, and to elaborate a little bit on that. The reason is that projects have become smaller than we saw a couple of years ago than customers spoke about 100 megawatt, 200 megawatt, 300 megawatt, 400 megawatt. They now plan for something smaller, at least initially. They want a gradual approach to this where they build out capacity over time when an offtake materializes. If they start with the first step, that's usually in the 10 megawatt to 50-megawatt range, and that fits nicely with Nel's containerized PEM systems. Multiple containerized PEM systems offer a proven, efficient and standardized alternative to customized and tailored solutions. We have achieved significant CapEx reductions over the past few years, both on the stack itself and on the system design. And combined with the growing list of references that we have around the world, this has increased Nel's competitiveness in this market segment. Europe is currently the most active and promising region, but we also have projects and deliveries in North America and interesting prospects in the Middle East and Asia. Then I want to end the quarter with a comment on the energy resilience. We continue to see fossil energy shocks and we continue to see that we repeatedly subsidize fossil energy to manage these shocks, while investments into renewables face higher scepticism. Renewable energy can reduce exposure to certain price spikes and definitely help mitigate geopolitical dependency and vulnerabilities. The intermittency that we see from wind and solar, the wind doesn't blow all the time. The radiation from the sun is not constant, and that is a known challenge with the renewable energy systems. But electrolytic hydrogen enables long-term energy storage and system flexibility beyond what batteries can provide. As one example, a 200-megawatt plant in the United States has larger capacity than all the batteries currently linked to the electric grids in the United States, including the batteries from Tesla. So hydrogen is at another level when it comes to what kind of -- how the amounts of energy that we can store. Investing in renewable energy and green hydrogen is cheaper than repeat short-term subsidy programs for fossil energy. And it also, by the way, reduces emissions. So when we have debate about energy resilience and security of supply, I think hydrogen should increasingly be part of that. And we see an increasing interest among defense contractors and politicians to look at the role that hydrogen can play in distributed energy supply. To give you one example of how hydrogen can help basically flatten out the demand curve for electricity, we have a 20-megawatt Nel plant in Denmark. It's run and owned by Everfuel. They run this plant when there is excess energy in the system. So instead of then bringing prices down to a very low level, Everfuel will help prices stay more or less stable because they can also shut down the equipment when demand for electrodes is high. So this facility, the 20-megawatt facility helps balance out these peaks and low points that we see in electricity demand. Implementing this on a larger scale will, of course, help avoid periods where operators and generators get absolutely nothing for the electricity they produce, but also help consumers avoid periods when demand is high and electricity prices go through the roof. It basically helps flatten out the price curve for electricity. Shortly on the technology update. We have shown this slide before. And I just want to remind you that when we talk about pressurized alkaline in Nel, it's not that we haven't looked at that before. We used to have pressurized alkaline technology 20 years ago, but it did nothing that the atmospheric solution didn't do. We do, however, see benefits of having pressurized gas. And that's why we started back in 2018 to sort of reinvent our pressurized alkaline technology. In 2026, after years of testing this new technology, we are ready to commercialize it. It has taken 8 years. But now we're getting ready for the commercial launch. It will happen on May 6. We have invited customers, potential customers, partners, employees and a lot of people that might find this interesting to Heroya to take a look at a real physical installation, proving that this concept is more than a PowerPoint concept. It actually works. It's a physical thing and talk about the benefits that this solution brings to the world of hydrogen. We are truly excited to show the world what this technology can do. We will offer market perspectives by external speakers and of course, also dissect the solution and talk about the value proposition that we believe this solution has. Therefore, we will not go into a lot of details today on the technology. We will share our presentations with the public on May 6. Just want to give you a sneak peek of what is happening in parallel because we are truly proud of the solution that we have. And of course, we have to be able to deliver it at scale. And that's why we, in December, decided to invest in a production line for pressurized alkaline manufacturing capacity at Heroya. This is funded by the European Union. As I mentioned, the first milestone payment will happen shortly. CapEx per megawatt is significantly lower for this concept compared to the atmospheric alkaline or PEM. Ongoing tests confirm product quality and exceed prototype production results. We have clear improvements in yield and fewer critical defects and cycle times are coming down to support increased annual capacity and improved efficiency. We have a strong process understanding already, piggybacking on a century of experience producing alkaline systems, but there are new processes and new techniques that have to be mastered, and we're well into that. The goal is to have the first 500 megawatts of production capacity installed by the end of 2026. And that's why we commercially launched it now to have time to build the order backlog and for customers to understand the benefits of the concept and together with Nel start to work out the exact concrete and specific projects where we can apply this beautiful technology. And that brings me to the final page. This has been our value proposition for quite some time. I think Nel has an unrivaled track record. We have a century of experience. We have sold more than 7,000 electrolyzers globally, and we have a tonne of prestigious references. But to stay a leader in this industry, you have to demonstrate technology leadership. We do that by having multiple technology platforms. We have both PEM and alkaline. We have proven solutions for today, but we need new solutions for tomorrow. We need solutions that can bring the total cost of hydrogen down, and we don't develop that only here in Nel. We do it through a big network of world-class partners. What we will show in May is an example of cost and scale leadership. This concept will be an enabler for customers to realize projects that they could not previously realize because costs were too high. But Nel is a frontrunner in cost reductions. We take -- we make big leaps in terms of innovation and how we look at cost down opportunities and we combine that with market-leading production capabilities. So we will revert in May with more information about the new technology. And bear in mind, couple of years later, we will have the next-generation PEM platform also available. That concludes the presentation, and I will be joined by our CFO, Kjell Christian Bjornsen, to answer questions that you might have. Kjell Bjørnsen: Very good. Thank you, Hakon. Before we start the Q&A session, just a few practical points here. [Operator Instructions ]. If we don't get your questions, feel free to reach out to us at ir@nelhydrogen.com And as a reminder, we will not comment on outlook-specific targets, detailed terms and conditions for individual contracts, or questions about specific markets. Modeling questions are also best handled offline. And with that, I think we can get started. Kjell Bjørnsen: First question comes from [ Martin Klebert ]. Unknown Analyst: I'd just like you to give us some explanation of how long you can store the hydrogen for and what method you're using to store this? And then when it is released, do you turn it back into electricity through the use of fuel cells? Hakon Volldal: Yes. that's correct. There are different ways of storing hydrogen. You can store it in a buffer tank for large quantities of energy to be stored. You can even use a pipeline or you can use salt caverns. So there are different examples of how to do that. There are salt caverns used in Sweden for storage, there are pipelines being used with compressed hydrogen. You can liquefy it and store it in a tank. So there are different ways of storing the energy. And you're right, if you want to turn it back into electricity, you have to run the hydrogen through a fuel cell again to generate that electricity, which you can use on site or you can send it back to the grid. Unknown Analyst: And just before I let you go, how long can you store that hydrogen for? You have the normal storage at the moment of electricity, you can't store it for that long. Are you able to store it for a longer period? And what is the advantage of that? Hakon Volldal: Yes. So that's the big thing about hydrogen. You turn it into a molecule that you can store for a very long period of time, we're talking years, if necessary. There is always a little bit of a loss, what we call a boiloff, but that's a mickey mouse figure compared to the total amount of energy that you store. So whereas batteries can help you smoothen out short-term swings, it's very difficult with batteries to store large amounts of energy and use that to sort of, let's say, you need more energy during the winter, then it's difficult to store that in the summer and release it in the winter. Hydrogen, you can do that and you can even use it for long-term storage for multiple years. So that's where batteries and hydrogen serve different purposes, but I think both are needed to have an energy system that we can depend on. Unknown Analyst: And quickly, can you use existing infrastructure, existing tanks or do you have to get special new tanks? Hakon Volldal: So it depends on where you are. In some places, you have the infrastructure in place that you can leverage. In other places, you have to build that storage capacity. Kjell Bjørnsen: Next question comes from Elliott Geoffrey Peter Jones, [indiscernible]. Elliott Geoffrey Jones: Just -- I think just more on the macro side, just thinking about the -- obviously, the escalations in the Middle East and what's happened to like you mentioned, energy prices, we're seeing metals prices go through the roof as well. Are you seeing or hearing kind of any change in customer activity with regards to the potential for another bout of cost inflation when it comes to projects? Or have you not really seen any change in attitude from customers? Any color on that would be very helpful. Kjell Bjørnsen: So what we do see is that some of the projects that are in the Middle East are delayed or that further execution of those are somewhat hindered by the current circumstances. We do see some material price movements, but it's too early to see if that is a sustained movement or not. I would say with the beauty of what we are launching with the next-generation technology and also the next-generation PEM platform that we're working on is that we take down the labor cost on site, we take out down the engineering hours. So we take down a lot of these cost adders that would typically be influenced heavily by inflation. Hakon Volldal: And we reduce our dependence on platinum group metals significantly. Elliott Geoffrey Jones: That's a good point. That's helpful. And then just kind of follow up on that quickly. Just kind of putting it all together, looking at last year versus this year, obviously, we've talked about this year a lot of the pipeline being more kind of sensible and real. If you kind of add on the Middle East escalation, would you say the current market is more tricky than where you were last year? Or would you say given the maturity of the customers you're working with, actually, it's still -- you're still expecting more activity this year than last year? Hakon Volldal: I think we expect to see more FIDs this year than we saw in 2025. And then in a healthy market, there will be projects that are canceled and projects that are added. And I think that's what we see now. We don't see a big jump in our pipeline capacity. It's fairly constant, which I think is a good thing because then all the dreamers are gone and projects that don't make sense are stopped before we get too deep into the execution phase. So I would say we are slightly more optimistic about '26 than '25. And then we believe momentum will continue to build into '27 and '28. But we talk internally about a turning point that we've been down in the valley and slowly starting to climb back up the ladder. Kjell Bjørnsen: Next question comes from Arthur Sitbon. Arthur Sitbon: So I have two questions. The first one is we've seen some of your competitors announce large framework agreements with the defense sector. I was wondering -- I mean, you refer a bit more to energy security, the need of energy resilience in your presentation today. I was wondering if you're working on such type of framework agreements with that sector. And if we could see anything announced, anything meaningful announced on that in 2026? The second question, is just on the sequence of events for coming quarters and coming years. Your backlog is -- has been coming down. I was wondering how fast do you need order -- do you need to see orders come through in order to kind of bridge the gap between where your backlog is and maybe where consensus expectations are for revenues in 2027 and always with the idea that, well, I know you have that cash balance at the moment at a given level. I imagine that covers you for 2026. But for 2027, I suspect you need orders at a certain level for the cash to be enough. So any color on that would be helpful? Hakon Volldal: If I can take the first and maybe you will take the second question, Christian? We have a number of collaborations also with companies in the defense sector, but we don't announce these partnerships publicly because what we have been told is that the capital markets only appreciate hard purchase orders. And anything else, whether it's a FEED study or a frame agreement or this and that just creates noise. So I do see there's a lot of noise out in the market. A lot of agreements are presented as firm commitments, but they're not. So we are in the same type of discussions and with the same companies as you have seen announced recently, if that answers your question. Kjell Bjørnsen: Yes. And then just to add to that, we've been for years having grants from Department of Defense in the U.S. to work on hydrogen as part of an energy resilient infrastructure, and we're a defense subcontractor in the U.S. So yes, defense and resilience is definitely on the agenda. On the outlook, when Hakon talks about us seeing momentum in the market, it's obvious that with that, we see order intake coming near in time. And currently, we do not have enough to really fill meaningful utilization in 2027. But we have good reasons to believe that we will see order intake this year that will help us have meaningful activity levels in 2027. When it comes to cash balance, and we touched upon this in the presentation, we have taken quite some actions in addition to the personnel expenses that we talked about. We have worked a lot on other external spending. And I do believe that we can stretch that cash balance fairly long if it takes even longer to get orders. So we're not stressed with the size of our cash balance. Hakon Volldal: And I think we also said that the momentum for containerized PEM solutions is picking up. And the good thing about that solution is that we have a fairly short delivery time on that. We can deliver systems in less than 12 months. The order we booked in April will be delivered in '27. If we get orders now until year-end, I think we have an opportunity to deliver all of those or close to all of those in '27. So we are hopeful that we can book more containerized PEM solutions, and that will keep us float until we get the larger alkaline orders. Kjell Bjørnsen: I see we have a follow-up question from [ Martin ]. After that, I see no more questions in the queue. [Operator Instructions]. Unknown Analyst: My question is just when do you expect to launch the next-generation PEM? When is that likely? And what advantages will it bring? Hakon Volldal: If I could give you an exact date, I would. But if there's one thing we have learned is that technology development is uncertain. It takes time. I mean look at pressurized alkaline, we have worked on that for 8 years. The one -- you have a pretty good idea of what you want to do, and then there are always tricky things that you need to overcome. It could be pertaining to the concept design itself, could be pertaining to availability of materials or you end up with a cost that you don't like. So you have to reengineer it. With PEM, we have the ambition to build a full prototype stack this year. Then that has to be tested, and then we need to spend some time to get partners to help us industrialize it. So it will take, as I said, a couple of years. Whether that means we can launch it end of or mid-'28 or if we will launch it late '28 or in '29, I'm not able to say at the moment. When it comes to the benefits, the benefits of the new PEM platform is that our goal is to take the cost down by 70% on a stack level. And in the PEM system, the stack is the most expensive component. So that means we can significantly reduce CapEx. It will be a low CapEx, low OpEx solution. So that's the sort of the holy grail. You get the cake and you can eat it. It's compared to pressurized alkaline, it might have even better energy efficiency, and it has -- could have a smaller footprint at a lower cost. So it's -- and the response is, as always, with PEM, fantastic. So it's more dynamic than pressurized alkaline. Even though I have to say for larger pressurized alkaline systems, we also have a fantastic dynamic capabilities. But we believe that this is something that will be even more competitive than what we will launch now in May. And that's why we continue to work on it. If it's not, we will not launch it. Unknown Analyst: I'm from South Africa, I always promote platinum, platinum, platinum of platinum, but will it also contain platinum to read PEM equals PGM? Hakon Volldal: Yes, but it's the iridium loading and the platinum loading is very limited. So to all those who want to sell all of that platinum and iridium, I have to disappoint you because the reason we can get the prices or the cost down is because we will utilize much less iridium and platinum. It's on a very different level compared to what we see today. Unknown Analyst: I'm very happy with that, just go for volume. We don't worry about value, give us volume. Kjell Bjørnsen: Thank you, [ Martin]. It seems we're out of questions. So we'll end the Q&A session here. If anything comes up after the call, you're always welcome to reach us at ir@nelhydrogen.com and I'll hand the word back to management for any final remarks. Hakon Volldal: And no further comments. I think we look forward to the launch event on May 6. And as I said, we will release some material on May 6 that I think explains the new solution and the benefits that we see with that solution in more detail than what we have presented to the market so far. So I hope you take a good look at that material in just a couple of weeks. Thank you for voting.
Operator: Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2026 Second Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded on April 22, 2026. And I would like to turn the conference over to Sharon Kadoche, Director, Investor Relations and Corporate Finance. Please go ahead. Sharon Kadoche: [Foreign Language] Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our second quarter, which ended on March 14. With me today is Mr. Eric La Fleche, President and CEO; Nicolas Amyot, Executive VP and CFO; Marc Giroux, Chief Operating Officer; and Jean-Michel Coutu, President of the Pharmacy division. During the call, we will present our second quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be deemed a forward-looking statement. Words or expressions such as expect, intend, are confident that, will and other similar words or expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget and our 2026 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown as well as uncertainties that could cause the outcome to differ materially. Risk factors that could cause actual results or events to differ materially from our expectations as expressed in or implied by our forward-looking statements are described under the Risk Management section in our 2025 annual report. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements, except as required by applicable law. I will now turn the call over to Nicolas. Nicolas Amyot: All right. Thank you, Sharon, and good morning, everyone. I will go directly to our Q2 results as Eric will comment on the status of the current strike in our Quebec operations. Q2 sales reached $5.1 billion, an increase of 4.1% versus the second quarter last year. Sales were positively impacted by new store openings, same-store sales growth as well as the transfer of one significant pre-Christmas shopping day to the second quarter this year. Front store sales -- or food same-store sales grew by 1.8% in the quarter, up 1.5% when adjusting for the Christmas shift. On the pharmacy side, same-store sales grew by 5.1%, supported by a 6.1% growth in prescription sales and a 2.8% growth in front store sales. Similar to food, when adjusting for the Christmas shift, front store sales were up 2.3%. Our gross margin reached $1.03 billion or 20.1% of sales in the quarter. This compares to 20% in Q2 last year. Part of the increase is attributable to productivity gains recorded in our distribution centers. As mentioned on the last call, our operations are back to normal in our Toronto distribution center. Operating expenses were $538.9 million in the quarter, up 3.4% year-over-year. As a percentage of sales, operating expenses were 10.5% versus 10.6% in the second quarter last year, reflected continued cost discipline. The asset disposals recognized in the second quarter of 2026 generated net gains of $20.4 million, of which $20.1 million was attributable to the disposal of out-of-service warehouses. EBITDA for the quarter amounted to $508.6 million. That's up 10.3% year-over-year and represented 9.9% of sales. Excluding the gain on sale from the disposal of out-of-service warehouses of $20.1 million, adjusted EBITDA stood at $488.5 million, up 6% year-over-year, reaching 9.6% of sales, an increase of 16 basis points over the second quarter of 2025. Depreciation and amortization expense for the quarter was $144.3 million, up $8.2 million. The increase in depreciation and amortization is mainly due to the increase in retail network investments, including right-of-use assets as well as ongoing investments in technology. Net financial costs for the quarter were $37.3 million compared to $33.4 million last year. The increase is mainly due to higher interest expense on net debt. On February 25 this quarter, the company tapped the bond market and issued a 5-year $350 million note bearing interest at a rate of 3.469%. We used the proceeds of the offering to repay debt under our revolving credit facility and for general corporate purposes. Including this financing, our debt-to-EBITDA ratio stands at about 2.2x. Our effective tax rate of 24.6%, which continues to benefit from the Terrebonne DC tax holiday is similar to the effective tax rate of 24.5% in the second quarter last year. Adjusted net earnings were $236.5 million in the quarter compared to $226.6 million last year, an increase of 4.4%, while adjusted fully diluted net earnings per share amounted to $1.11 versus $1.02 last year, up 8.8% year-over-year. Our capital expenditures in Q2 totaled $85.3 million, consistent with last year. After 24 weeks on the food retail side, we opened or converted 6 stores and carried out 4 major renovation projects for a net increase of 141,000 square feet or 0.6% of our food retail network square footage. Under our normal course issuer bid program, as of April 2, we have repurchased 2.9 million shares for a total consideration of $279.8 million at an average share price of $96.47. In closing, we delivered solid Q2 results, supported by strong sales growth and good expense control. On this, I will now turn it over to Eric for additional color on our Q2 results. Thank you. Eric La Flèche: Thank you, Nicolas, and good morning, everyone. Before turning to the results, I will provide an update on the strike that started on March 30 in our Quebec operations and which is impacting produce distribution to our stores in Quebec. We are obviously disappointed by the strike now in its fourth week. We have been back at the bargaining table since April 8 and remain determined to reach an agreement that takes into account the needs of our employees and those of our customers while ensuring the long-term competitiveness of our company. As in any situation of this kind, the first days of the labor dispute required adjustments while our contingency plan was being fully implemented. Our contingency plan is now in place and our stores, although not in perfect condition, are generally well stocked. The strike has impacted our sales, especially given that it happened the week before Easter. We will be able to specify the financial impact once the dispute is settled. Turning to our second quarter results. We delivered solid results driven by strong revenue growth and good expense control as our teams continue to offer the best value possible to our customers in all of our banners. We are very pleased with our discount store expansion plan that is fueling our food sales growth and with the continued strong momentum in our pharmacy business. In Q2, sales grew by 4.1%, adjusted EBITDA by 6% and adjusted earnings per share by 8.8%. Total food sales were up 3.6% and food same-store sales were up 1.8%. In pharmacy, we had another strong quarter with 5.1% total same-store sales growth on top of 7% last year. Our discount banners continue to perform well with same-store sales growth exceeding that of Metro, together with the continued contribution of new store openings and conversions. Our internal food basket inflation was in line with the reported food CPI of 4.3%. We continue to see inflationary pressures on certain commodity prices, namely in the meat category, in addition to higher-than-usual CPG vendor cost increases. Our teams remain highly focused on cost mitigation initiatives through supplier negotiations and pricing discipline with the objective of offering the best value possible to our customers. During the quarter, comparable store customer traffic was slightly lower, offset by growth in the average basket. Absolute traffic across the network increased, supported by new store openings. Promotional activity remains elevated and private label sales continued to outperform national brand, contributing to our gross margin performance. Competitive environment remains intense but rational. Online sales grew by 19.8% in the quarter. Growth is being driven by third-party marketplaces, the ramp-up of click and collect services and delivery within our discount banners. We are pleased with the sales performance of our own services and third-party marketplaces, which are recording similar growth rates compared to last year. Turning to pharmacy. Prescription sales were up 6.1%, driven by continued organic growth, specialty medications and GLP-1s. Commercial sales grew by 2.8%, led by cosmetics and health and beauty categories, partly offset by a softer performance in OTC. The cough and cold season was compressed this year. It peaked earlier and was shorter in duration. Our retail CapEx plan is on track as we successfully opened 3 new stores in Q2, including 2 discount stores. Halfway through F '26, our food retail network square footage growth increased by 0.6%. And over the last 12 months, it increased by 1.9% as we execute our new store opening plan, mostly in discount and mostly in Ontario. On the pharmacy side, after 2 quarters, we have completed 15 out of the 35 renovation projects planned for F '26, including 7 pharmacies with our new concept. So to conclude, we're confident that our effective merchandising programs, strong private label offering, our Moi program, consistent execution at store level as well as our ongoing collaboration with our supply chain partners will allow us to continue to grow and deliver long-term shareholder value. Thank you, and we'll now be happy to take your questions. Operator: [Operator Instructions] And your first question will be from Mark Carden at UBS. Mark Carden: So to start, your food inflation was essentially in line with the 4% plus purchase from store CPI. Just as inflationary pressures persist, have you seen any sequential changes in customer behavior? Are they leaning even more heavily into discount? You called out the strength there in your release. Are you seeing any incremental uptick on trade down within your stores? Just any changes on that front? Eric La Flèche: No real changes, very consistent customer behavior as we've been reporting over the last several quarters that I tried to outline in my opening remarks. Yes, discount is growing faster. People are searching for value in all of our banners, not just discount. Private label is up, penetration remains elevated. So it's very consistent. Food inflation is driven a lot by the meat category. And as I said, CPG cost increases. I would sum it up that way. Mark Carden: Great. That's helpful. And then as a follow-up, just given where fuel prices are today, historically, have you guys seen any demand destruction or consumers taking units out of their baskets when prices at the pump cross a certain threshold or any broader shifts in food shopping behavior at your stores? Eric La Flèche: We don't have a specific number to report to you, but energy prices pressures, fuel price pressures contribute to affordability crisis and contributes to customers searching for value in everything that they buy, including food. So it's just one more element that puts pressure on the customer, and we're well positioned with our multiple store formats and growing discount formats to address those customer needs. Operator: The next question will be from Michael Van Aelst at TD Cowen. Michael Van Aelst: I just wanted to start by following up on the competitive question. So last quarter, you pointed to competitive -- the competitive nature of the industry has seemed to spook the stock a little bit. But you suggested that it's intense but rational. So that doesn't seem like anything different than what you've said in the past. But do you feel that the moderating trend of normalized same-store sales growth from Q1 to Q2 reflects an increasing competition or a consumer that's under more pressure and therefore, trending down more or cutting back on tonnage? Eric La Flèche: Tonnage in the whole market is flat to down. So clearly, there's pressure on the consumer side. So I think it's a general market dynamic of lower low consumption and people being careful. The competitive environment, as I said, it's intense. We are competing with large players. Everybody is looking for market share, and it's competitive out there, the way it's always been. Last quarter, I was perhaps referring more to the square footage growth and people opening stores. That creates some noise in the market, but nothing abnormal and nothing that we've not seen before. And we're, like I said, well positioned to compete. Michael Van Aelst: Okay. And then just on the fuel cost increases. I know you mentioned your comments relative to the consumer impact. But as far as your cost impact, I know you have a lot of third-party distribution. So are you seeing fuel cost surcharges already? And if so, are you able to pass those on? Or should we expect that to have some pressure on margins? Nicolas Amyot: Yes. Maybe I'll take this one, Michael. I would say that from a fuel cost increase perspective, two sides to the story. On the products that we buy from the supply chain, so far, we have not received that many price increase requests, only a few actually. And we're negotiating the conditions and trying to delay the impact that this might have on food pricing. Obviously, the situation, as everybody knows, is very volatile, and we don't know how long it's going to last and how it's going to unfold. So -- but at this point, nothing to say per se on cost of product. In terms on our own distribution side, the cost of fuel is impacting our activity to distribute food and drugs to stores and pharmacies, and that's pretty direct. So we've started feeling it, and that the current elevated pricing of fuel you could imagine a $5 million-ish per quarter impact if everything was to hold as the situation is today. So that's obviously, everything else being equal, more pressure that we need to manage. Michael Van Aelst: So in the past, I think you said you typically pass on these higher fuel costs in your distribution system. Is that something you're already working for? Or you're looking for other ways to offset? Eric La Flèche: Well, it's part of our cost structure, and we have to manage and keep our prices competitive in the market. Over time, we expect that higher costs like that will be reflected, but it hasn't started to happen yet. Operator: Next question will be from Mark Petrie at CIBC. Mark Petrie: I know you're not going to give specific numbers, but obviously, the strike impact is on people's minds. So hoping you can give us some qualitative comments just with regards to how Quebec or Ontario might be tracking differently in Q2 so far? And if you can give us some sense of the incremental costs that are incurred as a result of your mitigation strategies? Eric La Flèche: Like I said in my opening remarks, we're going to keep the impact for a later date in due course when we have the full tally. Like I said, we lost some sales. When you lose sales, you lose the bottom line. So clearly, it has had an impact. There are direct costs to set up a contingency plan. So we will communicate in full transparency when we're in a position to do so, but I don't want to give at this time any color. This is a strike that's affecting our Quebec business, not our Ontario business. So let's be clear on that. But it is having an impact. The contingency plan is better every day. Stores are looking better every day. And we are, I think, decent -- we're not perfect, like I said. There's maybe some small varieties missing from one store to another or from time to time. But generally, our stores are looking okay, looking good, and we can answer most of the customer needs in our Quebec stores. So hopefully, we'll settle the strike. But like I said, we need to be competitive. The demands at the table are not reasonable and can't be accepted. So we will we are patient, and we will preserve our long-term competitiveness. Nicolas Amyot: Maybe, Mark, just a quick comment. I think in your question, you referred to Q2, but it's really Q3 for us, right? The strike started on March 30. So it's going to be no impact in Q2. It's going to be impacting us in Q2. Eric La Flèche: In Q3. Mark Petrie: Yes. Yes. Understood. totally understand. I guess one other question. I'm just curious if you can share any trends or data with regards to the impact of buy Canadian and how some of the most affected products and categories last year have been performing as you lap sort of the biggest impact last year. Marc Giroux: Mark, it's Marc here. We said in the last few quarters that buying Canadian, there was still elevated sales on Canadian product, but it has softened over the last few quarters. So buying Canadian continues to be of interest for consumers, but we have not seen a significant increase of sales year-over-year on Canadian product right now. Mark Petrie: Yes. Okay. But as you're lapping the big sort of initial surge last year, are you seeing outright declines in any of those sort of most affected categories? Marc Giroux: No, I would say that it's pretty stable, Mark. Operator: Next question will be from John Zamparo at Scotiabank. John Zamparo: I wanted to ask about the pharmacy side of the business and prescriptions in particular, that saw same-store sales accelerate this quarter. I wonder if you could add more color on what you're seeing from your GLP-1 sales. I think you listed that third among the drivers of growth. Is that to say it was less of a driver this quarter against prior quarters? And does Coutu capture a similar level of market share on GLP-1s as it does on the rest of its pharmacy business? Nicolas Amyot: I'm sorry, I missed the last part around market share. John Zamparo: Yes. The second part of it is, is the market share on GLP-1 similar to the rest of the pharmacy business? Nicolas Amyot: Yes. Perfect. You are correct in saying when we listed it as organic specialty and GLP-1s. GLP-1s is a slightly less strong contributor to same-store sales growth as the other 2. Despite that, it is considerable and it's continuing to grow at a very strong pace, especially as new generations of GLP-1s are coming to market, and that's driving a lot of the growth right now in the GLP-1 sector. In terms of share, we are definitely holding our normal share and even for some molecules outperforming, I'd say. John Zamparo: Okay. Understood. And then back to the grocery business, the growth from e-commerce continues to be robust. I wonder if this sustains at or around these levels and if the e-commerce business continues to grow, does that eventually create a drag on gross margins? Or is profitability from these sales roughly in line with the overall consolidated number? Marc Giroux: That's a good question. We believe that e-com growth will normalize at some point as the market matures. But as you're pointing out, we continue to see strong growth on both food and pharma. E-com has a lower contribution -- e-com sales has a lower contribution as brick-and-mortar sales. However, we've been able with our e-com model to mitigate those -- that profitability gap with efficiency and multiple efficiency strategies, and we will continue to do so. That's what allowed us to continue to deliver the type of EBIT growth as a business as a total. So we'll continue to leverage our flexible model to meet customers where they are. More and more customers are moving to same-day delivery and our model and fulfillment model allows us to meet that demand from customers, and we'll continue to be focused on, as I say, efficiency, not only in e-com, but in our overall business. Hopefully, I've answered your question. Operator: [Operator Instructions] Next is Chris Li at Desjardins. Christopher Li: I was wondering if you can provide some sort of very high-level colors on how the food gross margin performed during the quarter. I know in the opening remarks, you referenced private label and some DC efficiency as being positive. But just at the overall level, like did the gross margin in food, was it largely stable? Or did it improve slightly? Eric La Flèche: We don't segregate between food and pharma on the gross margin. But like I said, private label contributes, lower shrink contributes, better forecasting contributes. So I think the teams did a good job to protect and slightly grow gross margin, and we're pleased with that performance. Christopher Li: Okay. That's helpful, Eric. And then maybe a follow-up just on the Moi loyalty program in Ontario. It's been, I think, in the market for 1.5 years now. Just where are you on your journey to leverage the enhanced data analytics to deliver more personalization and effective promotions in Ontario through the new program? Marc Giroux: Thanks for your question, Chris. It's Marc here. Moi continues to perform well and sales penetration continues to increase and digital customer engagement continues to increase as well. So we're satisfied with the progress we're making on Moi in Ontario and in Quebec, in food and pharma in Quebec. We've been leveraging data for a number of years even before the launch of Moi in Ontario with our partner, dunnhumby. We use that data in our merchandising team to optimize promotion, to optimize assortment and make sure that we have the right commercial strategy to meet the customers. We've been doing that before Moi and now are continuing to do it with Moi. On personalization, since our launch, as more and more customers engage digitally, we can have direct digital contact with them and deliver personalization directly to different channel. So as Moi progresses, our reach in terms of personalization increases. As for Quebec, the program has been in market now for a few years in both food and pharma. And with our multiple banners and high penetration of Quebec household, the extent of our reach and personalization is greater in Quebec and the cross-shopping and the impact of cross-shopping in Quebec is greater as well. While we see cross-shopping and the benefit of cross-shopping in Ontario as well, to give you an example, in Quebec, as consumers shop food and pharma, they spend 100% more with our business as a whole through all of our stores and different channels. So we'll continue to focus on increasing reach, increasing digital reach so we can continue to drive personalization. There's still opportunity for us in both markets, more in Ontario as the program continues to grow. Operator: And at this time, gentlemen, it appears we have no other questions registered. Please proceed. Sharon Kadoche: Thank you all for your interest in Metro, and please mark your calendars for our third quarter results on August 12. Thank you. Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Enjoy the rest of your day.
Per Brilioth: Okay. Hey, welcome, everybody. This is our -- as in we are VNV Global. This is our Q1 investor call. And I'll kick things off. We have like this usual summary page, which is the next one. Yes, NAV $462 million, which is down a bunch since the end of last year. And as we tried to sort of highlight in the narrative in the report, it's because of market and the peer group, the public sort of peer group from which we take multiples, they're down a lot. In some cases, there are names that we use that are down like 30%. And that's the main driver because the portfolio at large is doing really well. And as I wrote sort of -- if that sort of peer group multiple that we download and multiply with what we see at our companies, if that would have been flat this quarter, the NAV would have been up since the end of last year. So -- but this is how we value the portfolio. And it's no -- can sort of change that from quarter-to-quarter even if we don't think it sort of reflects the reality of the value here. And so we're subject to that volatility. And sort of if we -- if the second quarter were closed today, it would have been up. We'll see where it closes. But we're basically subject to that volatility. That volatility has taken the NAV down, but it's not reflective of what's going on in our portfolio. And I don't know if one sort of just has a go at trying to put the big sort of high-level reasons for why this peer group is down. I think it sort of falls into 2 main buckets. One is this fear, uncertainty, combination of those and what AI will do to a bunch of software companies. And as we've been on and on about before, we really don't see that as relevant even sort of -- it's the other way around for our portfolio companies is that we feel that these companies in our portfolio, they benefit from the emergence of AI platforms, models, that whole new toolbox in so many ways. I mean, the combination of hardware sort of proprietary data sets and sort of a customer base that sort of goes directly onto the platforms without any intermediaries. And just the ability sort of these sort of new ways of writing code and software, et cetera, is so beneficial basically for these companies. So -- and then the other one, of course, is I think you'll agree with me is this sort of are we heading to a recession, energy prices are up, inflation is up, interest rates are high because of inflation, that whole thing. And the point there is that we have sort of strong elements of countercyclicality in our portfolio. So in tough times, you use these products more. It's most intuitive around BlaBlaCar. We'll come back to that, but it's there basically. So yes, so with that sort of long-winding intro, I thought we'd sort of kick off this -- we'll take you through the numbers and touch a little bit upon the different names. So Bjorn, do you want to run us through the numbers? Björn von Sivers: Sure. So starting off sort of the overall portfolio. Here is a simplified sort of breakdown of the balance sheet. So as Per mentioned, NAV down to $462 million, down 15% over the quarter in dollars to $3.61 per share. In SEK, that's SEK 34.25 per share or down 12% over the quarter. Total investment portfolio amounted to $503 million, consisting of sort of $486 million of investments and $17 million worth of cash. Important to note that sort of we have an additional $30 million of cash and cash equivalents, but in liquidity management investments. So all in all, we're looking at sort of cash, cash equivalents and liquidity placings in the range of $47 million, borrowings down to $45.7 million as per quarter end. Continue to trade as a significant discount to NAV as of today, sort of 49% discount. And moving down to the sort of big drivers over this quarter is, of course, the larger constituents of the portfolio and just going through sort of the few largest ones here. So BlaBlaCar, obviously, the largest driver, down 27% or $44 million to $120 million for the holding, primarily driven by depreciating multiples over the quarter, both driven sort of from the overall rapid developments and uncertainty coming from the AI space, but then also, of course, from the geopolitical tension, whereas BlaBla sort of part of that peer group is in the OTA travel-related marketplaces that's been hit a lot. Same goes for Voi, that's also down over the quarter based on multiples. It's the order of sort of 16% or $20 million. HousingAnywhere here actually valued on a new transaction, we participated with EUR 1 million and then another sort of $1.5 million sort of converted from earlier convertible investments we held. Numan and Breadfast based value on transactions were relatively flat, a little bit of FX on Numan. And then Bokadirekt down roughly 10%, also driven by contracting multiples. All in all, these 6 names represent SEK 26 per share or sort of on an aggregate basis, 77% of the NAV. And again, sort of ended the quarter with $70 million of cash and cash equivalents and $30 million in liquidity management investments. Also sort of during the quarter, we bought back another close to 500,000 VNV shares and also a small amount of the outstanding bonds, which I'll come to now, which we also sort of announced today that we announced a partial buyback offer of the outstanding bond up to a transaction cap of SEK 275 million. This is to sort of effectively take down the gross debt and also lower the interest expense going forward. We launched this today and we'll hopefully have sort of the outcome sometime next week. With that, I thought I hand back to Per and we'll touch a little bit more deep in the larger portfolio holdings. Thanks. Per Brilioth: Yes. And yes, the structure of the portfolio looks very similar to what you've seen before. And so nothing really to comment here. But if we flip to the next page, this portfolio, as we've been on and on about, trades at sort of roughly half of the reported NAV. And as we -- as I think it's clear, we think it's -- we think that NAV is attractive, cheap. And hence, we've been buying back stock as we think that, that's the absolute best thing one can do with shareholder money. Our sort of aim is absolutely to continue doing that. And the reason being, as the next slide shows, as you've seen before, is that this is a portfolio that at large is positive, is earnings positive, is profitable. The slight downtick from a year ago is because of the absence of Gett, which is a profitable company. But at large, this company -- this portfolio is profitable and not sort of craving a lot of money to stay alive. And so that's not a reason for saving money to sort of put back into the portfolio names. We can use the money we have to buyback stock. And this profitability does not come at the expense of growth. We've made a new slide, which is the next one, just to -- which sort of you'll recognize it from earlier that this portfolio continues to grow over the past sort of is it 3 years, you've got a CAGR of nearly 30% across these 6 top names in terms of revenue growth, and it's turned from being slightly negative profitability to positive. So big change there. And as we try to highlight here also just as a reminder of how markets move around, these 6 names are -- those 6 names back in '23, this quarter, first quarter of '23, we had them in our NAV at $446 million and total NAV was like $800 million back then. And we now value them at $358 million. And so despite that sort of big shift in loss-making to profitable and very, very sort of steady growth. This last quarter, that portfolio grew by some 25%, still but marked lower. The overall NAV is, of course, lower also because we've sold some stuff to pay down debt. So I think that's a useful reminder of where we've come from and where we are today, both in terms of sort of quality of the portfolio, but also how we market. Yes. If we then go into the bulk of the portfolio, there's nothing really new around BlaBlaCar. This is a good summary, I think, around how they sort of closed 2025. EUR 2 billion of GMV is a sizable number. I know GMV is not revenue, but it's -- and as you remember, a bunch of their markets are unmonetized yet and some of them are really coming strong into monetization like Brazil now, but others remain unmonetized, waiting for liquidity to sort of further improve. But still GMV, that's a tool that many people use to sort of value these kind of sort of platforms, et cetera. And if you use that number and to where we're marking it today, it's 0.4x GMV, which I think is fair to sort of categorize as attractive. Certainly, in my mind, that is. And if you go to the next page, we also have a BlaBlaCar that's doing really well at the start of 2026. They have had a strong start. And -- and also of late, we've really seen this element of countercyclicality in the business model where oil prices go up, it's -- energy prices go up at large, driven by oil prices now. The activity of BlaBlaCar goes up because it's more expensive to drive a car and you're more prone to get other people into fill those seats. You do that through the BlaBla platform. So BlaBla gets more business and the graph on the right sort of highlights that. I think that's sort of all for BlaBlaCar. If we -- let's go and talk about Voi. Dennis, do you want to run us through Voi? Dennis Mohammad: So Voi closed a record 2025 with EUR 178 million of net revenue. This is up 34% year-over-year and adjusted EBITDA of EUR 29.3 million, which is up 70% year-over-year and adjusted EBIT of around EUR 3.2 million, up from essentially breakeven in 2024. So a very significant improvement across the board in the P&L. As we alluded to earlier, the company during the year also did a tap of EUR 40 million on the existing bond framework to fund the growth CapEx for 2026. And they also secured an RCF with Danske Bank and Swedbank here in the Nordics for EUR 25 million, which is still untapped, but provides additional financing flexibility should they need it. In Q1 of 2026, we've written down the value of our stake in Voi by 16%. This is primarily driven by peer multiples trading down as Per has already talked about earlier, but in part also driven by FX as the dollar has depreciated against the euro during the quarter. Operationally, Voi has had a strong start to the year. It continues to win tenders in Q1 alone. They won tenders in the Netherlands, in France, in Germany and in Norway. And they've started to roll out their new fleet of e-scooters, the V9 scooter and e-bikes, the E5 and EL2 across the streets of Europe. So putting to use the bond money that they raised at the end of last year. The company will issue their Q1 report on Monday next week, that's on April 27. So more information will be available then. I see we already jump to the next slide, which is good. As Per wrote about in the intro to the report, when Voi issued its bond in 2024, it pioneered the financing model that industry peers have since either replicated or attempted to replicate. We have now received the first public financials from one of those peers and the comparison truly reinforces our conviction in Voi's strategy and in their execution. As you can see in the numbers here on the graph, while Voi grew revenues by 34% year-over-year and generated reported EBITDA, different from adjusted EBITDA, but reported EBITDA of EUR 19 million and EUR 24 million of cash flow from operations, the European peer here saw a revenue decline of 16% year-over-year and on essentially the same revenue base generated negative EUR 13 million of EBITDA and negative EUR 20 million of cash flow from operations. We've excluded EBIT here as the peer change methodology on this metric during the year, so making a like-for-like comparison difficult, but that number was heavily negative as well for the peer. As I said, we are convinced that Voi strategy and execution is the best in the industry. And I think one additional data point that supports that is when looking at the revenue generation per vehicle end day on the right-hand side of this slide. So Voi generating EUR 3.94 per vehicle in a day in 2025 and the peer down at EUR 2.88 in revenue per vehicle per day. We can see here that, that's a 37% more revenue generation per vehicle at Voi. And I think this really shows how Voi's investments across the full platform, everything from hardware, where they have their own proprietary IT module, high-capacity swappable batteries to software where they use machine learning for fleet optimization. They have a very strong fleet and inventory tracking system. And lastly, operations where they have best-in-class fleet sourcing, fleet management, maintenance and eventually resell is truly paying off. With that, we go to the final slide, where there's really nothing new to report. They've seen continued growth on top line and improvements on profitability across the board, as I alluded to earlier. As also mentioned, their Q1 report is out on Monday. So we encourage you to keep an eye out on their IR website then. If we then jump to the next company being HousingAnywhere, HousingAnywhere has had a good first year under Antonio Intini, who joined as a CEO roughly a year ago after having senior roles at both Immobilare and before that, Amazon. Looking at their 2025 financials, the company closed the year with continued growth on top line and positive adjusted EBITDA, which is a big improvement on the year before. In Q1, as Bjorn mentioned, HousingAnywhere closed a financing round where VNV participated with EUR 1 million and where previously held convertible loan notes were converted to equity. With this new funding, we think that the conditions are in place to push growth harder from here, and we look forward to following that transaction, which was done around the VNV mark at year-end last year. If we then finally go to Numan. Numan closed a very strong 2025 with north of 125% growth on revenues and positive adjusted EBITDA. As we've spoken about in the past, their weight loss vertical has been a key driver of this growth over the past couple of years and 2025 was no exception. In Q1 2026, the company has continued to grow, albeit we have seen growth come down from the levels it's seen in past years, primarily driven by some price changes in the market for GLP-1 in the U.K. which initially led to some stockpiling behavior ahead of the increases and then some slightly lower activity following. But as I said, they're still growing year-over-year in Q1, and we value Numan on the back of a transaction that they closed last summer. However, should we have valued it on the back of a peer group model this quarter, it would have been roughly in line with the mark we currently carried at. Finally, this company continues to invest in its unified Numan 2.0 platform, which we believe is a key driver to long-term LTV growth and patient retention, and we look forward to seeing the results from those investments in the quarters to come. That's it on Numan. Handing it back to you, Bjorn. Björn von Sivers: Thank you. I'll finish off with sort of a short comment on Breadfast here, who continue to see strong growth in its core e-commerce business and also sort of initial promising dynamics in its fintech offering. During Q1, the company announced sort of the final tranche of their $50 million funding round, which they completed sort of majority of last year, but the final tranche sort of closed in Q1. So company is funded and continues to grow well, hence, sort of flat valuation still based on this transaction. And then finally, on the top 6 here, we have Bokadirekt, who is also sort of down during the quarter, primarily driven by multiples, but on sort of that side, continued strong performance, strong profitability. Bokadirekt also announced a small acquisition during the first quarter. They bought a company called Zoezi, which is sort of a niche SaaS player for gyms and personal trainers, which will add both sort of top line and profitability to the company. And with that, I think we're through the top 6 names, and we'll head to a Q&A. Björn von Sivers: And as a reminder here on the Zoom, please use the chat function or the Q&A function in Zoom and we'll try to address them. And I believe we have a few questions. We could start with this one for you, Per. Perhaps, once you do the partial bond redemption, what do you think is the remaining headroom to repurchase shares? Or put it differently, how do you weigh sort of the bond redemption versus share buybacks going forward? Per Brilioth: Yes. We -- our target is to sort of -- our goal for a long, long time, as you know, and which we sort of achieved now with the sale of Gett, this has sort of become debt-free and not to sort of be burdened by paying a coupon to -- because of the debt we have. So this is just a continuation of that. But at the same time, we absolutely aim to have liquidity to make use of this sort of gift that the market is giving us of valuing us where we are and put shareholder money to work at that. So -- and we've been active around that, and we do it in the way we do it, as I think you've all sort of seen, we try to -- or we do sort of highlight in press release what we bought the previous week. So I think it's fair to expect us to continue doing that and to sort of and also to fund that. Now this partial bond redemption sort of leaves a little bit of cash. We're still net cash, but -- or yes, barely, but we are -- but it leaves liquidity to continue to do that. So that's good. And when we get to the sort of the end of the duration of this bond, then we -- during that sort of period, we see that we will have completed several more exits. There's an ongoing sort of process, some driven by us, some driven by sort of things at large that will provide us with liquidity. So it's too early to talk about that because nothing is done until it's done. But I feel sort of assured that we will have sort of ample liquidity both to sort of retire this bond at full and then and to buy back stock. But nothing is done, unless it's done, but this redemption leaves us with, I think, a good balance of liquidity to sort of make use of what we want to do here in the market. Björn von Sivers: Another question here on BlaBlaCar. You mentioned profitability at BlaBla briefly. Could you give us some color on how this would scale if the higher activity levels from March were to persist during the year? Does the increased activity sort of translate into higher profitability as well? Per Brilioth: For sure, it does. And we're unfortunately not at liberty to share sort of any further details as much as we would like. We're not at liberty to do that. So -- but for sure, this drives sort of revenue -- business revenue and higher sort of earnings. So it is a positive for sure. Dennis Mohammad: Maybe I can add there, Per, without saying too much to your point, we're not at the liberty to do so. But the core carpooling business that they run operates at north of 90% gross margin. So any kind of revenue coming outside of what you have anticipated covers the fixed cost is already covered, so you get a pretty high contribution on the bottom line from that. So to Per's point, the answer is yes. Per Brilioth: Yes. No, well described, Dennis. So yes, I hope that answers that question. Björn von Sivers: And then sort of a follow-up question sort of on buybacks of shares and bonds sort of given the volatility in the markets and contracting multiples, aren't you sort of more eager to increase buyback levels of the share? And/or if not, are there other plans for sort of additional investments in the existing portfolio companies or new funding rounds? Per Brilioth: There's sort of just having a go at that question, the different parts of it. So there's nothing major. None of the large ones sort of have any large rounds going on. There's small bits and pieces that we have been -- where we've been active in the portfolio, but they're really sort of on the marginal side of things. So not a big sort of draw on liquidity. And yes, no, I mean, if we -- if we had liquidity to do more now, we -- I absolutely would be a strong advocate of doing more in terms of buybacks. I think it's very attractive. I really, really believe that our NAV will be able to deliver serious returns over these coming years. And so if we have sort of liquidity to do more, we'll do that. But sort of obviously need to balance that liquidity, but very eager to sort of participate in the way we're doing now. So it's that balance that you may feel is keeps us doing this at a frustratingly timid kind of level. But it's -- yes, it's necessary to do it that way. If we can accelerate some exits that are at NAV or around NAV, then of course, it makes a lot of sense to do those and then sell. But it's -- nothing is done unless it is done. I feel very strongly that we will be able to sort of complete some further exits and hence, we'll have liquidity to do more, but got to keep an eye on that balance. Björn von Sivers: Another question here, specifically sort of on the Voi valuation, maybe for you, Dennis, other than sort of contracting multiples, what has sort of -- what levers have been moving around on that in the model? Dennis Mohammad: So the multiples are the -- is the primary driver. As you know, we value in the next 12 months. So we've moved 1 quarter forward. So the NTM outlook is obviously higher than it was in the previous quarter since the company is growing. But you also have FX, as I alluded to earlier, the dollar has depreciated against euro. So that's one negative contributor. And also net debt. And in the case of Voi, we don't simply take cash minus debt. We look at what obligations the company has with the existing cash. In this case, it's CapEx investments for 2026, where they've improved the kind of -- they've improved payment terms significantly over the past couple of years. So cash outflows happen during the year to a larger degree than everything going out when you place orders. So it's a combination of FX, net debt, but primarily, as said, multiples. Björn von Sivers: Thank you. With that, I don't think we have any further questions at this point in time. But as always, feel free to reach out over e-mail, and we'll try to be helpful. And other than that, I'll leave it to you, Per, for any final words. Per Brilioth: Nothing more to add, frustrating quarter because of all the stuff that we've talked about, but we feel really positive about the portfolio and the opportunities that we have here. . So yes, when is our next report Bjorn, it's -- we're looking at July 14, the National Day in France. So that's when we will speak next. Thank you, everyone. Dennis Mohammad: Thank you. Björn von Sivers: Thank you.
Operator: Good morning, and welcome to the First BanCorp Q1 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ramon Rodriguez, Corporate Strategy and Investor Relations. Thank you. Please go ahead. Ramon Rodriguez: Thank you, Julian. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the first quarter of 2026. I'm here with Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio Alemán-Bermúdez: Thank you, Ramon. Good morning. Good morning, everyone, and thanks for joining our call today. We started 2026 with very strong momentum, generating $89 million in net income or $0.57 per share. That is actually up 21% when compared to same quarter last year. Core operating trends remain also very strong during the quarter with pretax pre-provision income reaching all-time high of $131 million. That is up 5% from a year ago. This performance resulted in a 1.9% return on average assets. This marks our 17th consecutive ROA above 1.5%, definitely demonstrating our commitment to sustain profitability. Moving to the balance sheet. Total loans declined slightly to $13.1 billion. That is actually consistent to prior year seasonality and accounts for the expected softening in credit demand within the consumer lending segment that we mentioned before. That said, still better than pre-pandemic levels when we look at consumer demand. On the other hand, core deposits for the quarter were strong other than brokered and public funds, which we don't call core, were up by 4.9% on a linked quarter annual basis, reinforcing the strength of the relationship-driven franchise while allowing us to actively manage funding costs. Driving core client deposit growth is a key priority for us, and we're very encouraged by the execution during the quarter in terms of new clients and accounts. Credit performance remained a key strength for the franchise during the quarter with charge-offs very stable, record low levels of nonperforming assets and very encouraging early stage delinquency trends, which actually declined 24% from the prior quarter. And finally, our consistent approach to capital deployment resulted in a net payout of 92% during the quarter achieved through buybacks and dividends. Even after this action, the quarter, we ended the quarter with a 16.9% CET1 ratio. Let's turn to Slide 5 to talk about the environment and highlight of the franchise. We're pleased to say that business activity and economic conditions across the markets continue stable and progressing in line with our expectation. The labor market continued to show resilience. Other economic indicators in the main markets such as economic activity index continue to be stabilized and recent credit delinquency indicates consumer stability. We are encouraged by what we see around in addition to the restructuring -- sorry, reconstruction activities, reshoring activity and expanded U.S. military presence in the island while the disaster recovery efforts remain in place. Expanding on a consumer first quarter industry auto sales declined 19% when compared to the third quarter last year. Definitely evidence in the expected reduction in consumer credit demand for auto. That said, it's important to note that retail auto sales continue to be 6.5% above the pre-pandemic 10-year average. So were still better than the prior cycle. We're definitely prepared to serve our customers in this environment, very, very many, many, many parts moving regarding potential impact of oil cost, which we are monitoring, which could be rising energy costs and other potential impact on inflation, which could impact consumer activity and commercial activity more broadly in the future, hopefully, that is soon. And while the macroeconomic environment continues to be dynamic, we remain focused on managing what we can control, enhancing the service delivery platform, technology investments to be more high and efficient and focusing on providing the best quality of service that we could. When we look at business highlights, total loan originations were up by 6% when compared to prior year seasonally adjusted. Commercial loan pilots actually remained healthy. Actually, if I compare pipelines today with the same time prior year, we are actually in a better position. So we sustains our loan growth guidance of 3% to 5% that we initiated that we mentioned in the last call. In terms of omnichannel strategy, active digital users continue to grow year-over-year. Digital transaction volumes continue to grow, self-service payment continued to increase. A sustaining -- demonstrating sustained engagement of clients in the platforms. We are spending time and effort on AI, understanding what we can do to improve internal processes and also improve the way we service our clients. We continue to also do franchise investment in our brand channels to continue to optimize how we service our clients. We believe that AI will definitely play a key role in the execution of this strategy, providing clients with faster, more personalized service offers and enabling our colleagues to spend more time in value-added customer interaction rather than dealing with routine transactions and processes. We're working very close to our key vendors to ensure that we adopt what's coming in all this new venture. Overall, capital allocation priority remain unchanged also include -- this includes supporting organic growth, which is a priority and paying a competitive common stock dividend and returning excess capital through share repurchase. As always, we thank you for your interest in First BanCorp and your support. And with that, I'll turn the call to Orlando and we'll come back for questions later. Thank you. Orlando Berges-González: Good morning, everyone. So Aurelio mentioned this quarter, we earned $88.8 million at $0.57 per share, which compares to $87.1 million or $0.55 a share last quarter. Adjusted pre-tax pre-provision income reached an all-time high of $131 million, which is almost 2% higher than last quarter and about 5% higher than the first quarter of last year. The return on average assets for the quarter was 1.89%. That compares to 1.81% last quarter. So we had an improvement there. The provision for the quarter was lower. We had some macroeconomic indicators, such as the unemployment rate and the CRE price index continue to show better trends and that leads to some of the reduction. Also, we had a reduction in delinquency, as Aurelio mentioned, and some of the consumer portfolios, the size of some of the consumer portfolios was down. On the other hand, we had an increase in qualitative reserves to account for the current geopolitical uncertainty in the Middle East. Income tax expense for the quarter was $25 million, which is $5 million higher than prior quarter, mostly related to the higher pretax income but also at the end of the last year, in the fourth quarter, we booked an adjustment to the effective tax rate for the final results for 2025. The estimated effective tax rate as of now, it's just slightly higher. It's 21.9% compares to 21.6% we had in 2025. In terms of net interest income, we had a reduction of $1.8 million in the quarter. Net interest income amounted to $221 million, that's $2.7 million related to 2 less days in the quarter, but net interest income compared to same quarter last year is 4% higher. Interest income on loans is $6.5 million lower than last quarter, which $3.8 million. It's due to 2 less days in the quarter and $2.8 million relates to the market interest rate reductions that affected the commercial portfolio pricing, specifically the floating rate components, yields on the commercial portfolio declined 18 basis points. On the other hand, interest income on investment securities increased $2.8 million, mostly due to a 22 basis points improvement in yields as we have continued to reinvest cash flows from maturing securities into higher-yielding instruments. On the expense side, overall funding cost was $3.5 million which is $1.3 million related -- $1.3 million of that reduction relates to the 2 less days in the quarter and $1.2 million related to rate reductions. The cost of interest-bearing checking and savings accounts came down 4 basis points for the quarter to 1.21%, which is mostly driven by government deposit cost reductions. But also the cost of time deposits came down 5 basis points, and the cost of broker deposits came down 7 basis points. broker the size of the broker deposit portfolio was also down in the quarter. Net interest margin expanded 7 basis points for the quarter to 4.75%, which is slightly higher than our original guidance of 2 to 3 basis points per quarter. Yes. Even though the interest rate environment remains uncertain, particularly in terms of the timing and magnitude of future rate adjustments. Our balance sheet continues to be well positioned for additional expansion in line with our original guidance. In terms of noninterest income, we reached $37.7 million, which is $3.3 million higher than last quarter. Most of the change was related to a $3.6 million collected on seasonal contingent commissions that we usually get in the first quarter of each year. Operating expenses for the quarter were $127.1 million, very much in line on only an increase of $200,000 from last quarter, if we exclude the gains from OREO operation expenses for the quarter were $128 million, which is about the same kind of adjustment of an increase of $300,000, which compared to the $127.7 million we had last quarter. Expenses were on the lower end of our guidance. Payroll expenses for this quarter were $1 million higher. That relates to the seasonal increase in payroll taxes. And also, we had an increase in share-based compensation expense for stock grants that were issued during the quarter. The portion of these grants that are attributable to retirement eligible employees is charged to expense in the quarter. This increase in payroll expenses was offset by a decrease in business promotion. Typically, business promotion efforts are lower during the first quarter and pick up on the second and fourth quarter of the year. The efficiency ratio for the quarter was 49.1%, which is slightly below the 49.3% we had in the fourth quarter. As we have mentioned before, based on our projected expense trends for ongoing technology projects and the pickup on business promotion efforts that happened later in the year, we reiterate our quarterly expense base for '26 will be in that range of $128 million to $130 million as we had previously mentioned. This is excluding OREO gains or losses. Our efficiency ratio, we estimate that we'll still be in that range of 50% to 52% considering the changes in expense and income components for the year. In terms of asset quality, credit quality continued to improve in the quarter. Nonperforming assets came down by $5.3 million, that includes $4.8 million reduction in nonaccrual loans, and that was across all business lines. OREO balances also decreased by $1.2 million but we did have a $700,000 increase in repossessed autos in the quarter. Inflows to nonaccrual were $34.3 million, which is $12 million lower than last quarter, and that's mostly related to a $10 million commercial loan inflow that was booked was recorded last quarter, fourth quarter of '25. Most importantly, loans in early delinquency decreased by $34.5 million or 24% during the quarter, which is mostly a $31 million decrease in consumer loans delinquency specifically auto loans, most of it. We have seen some stability in the consumer delinquencies, and we continue to monitor closely the behavior of the different vintages that were issued over the last few years. In terms of the allowance for credit losses, the allowance is $3.9 million lower. We reached $245 million, which represents 1.87% of loans. This is slightly down from the 1.9% of loans we had at the end of last quarter. Similarly to what I mentioned regarding the reduction in the provision for credit losses, the decrease in the allowance was mostly related to the improvements in some of the projected macroeconomic variables, specifically the unemployment rate and the CRE price index combined with a reduction in delinquencies and the size of the consumer loan portfolios. However, the ACL includes a higher qualitative loan loss reserve, as I mentioned, in order to account for this wider range of potential macroeconomic outcomes that could come out of the unrest in the Middle East. Net charge-offs for the quarter were $21.1 million or 65 basis points of average loans, slightly higher than its 63 basis points we had in the prior quarter. Mostly -- this is mostly related to reduced appraised value of the collateral of a commercial nonperforming loan that led to a $600,000 charge-off for the quarter on the commercial side. On the capital front, Aurelio mentioned, strong profitability has allowed us to repurchase $50 million in shares this quarter and declared the $31.5 million in dividends. Regulatory capital ratios continue to grow a little bit as the capital actions were offset by the earnings generated in the quarter. Tangible book value per share grew to $12.45 a and the tangible common equity ratio expanded to 10.11%. Again, we still have approximately $2.28 intangible book value per share and about 160 basis points in tangible common equity ratio, which is related to the other comprehensive loss adjustments that are related to the investment portfolio. Aurelio mentioned already, but we remain focused on supporting our clients and growing our business while delivering close to 100% of earnings to shareholders in the form of buybacks and dividends. With this, I would like to open the call for questions. Operator? Operator: [Operator Instructions] our first question comes from Brett Rabatin from StoneX. Brett Rabatin: Wanted to start on loan growth. And I know that auto sales are still strong, but they've obviously come back in a little bit. The guidance for the 3% to 5% loan growth is unchanged. What needs to happen for you guys to get to that 3% to 5% number? And then are you expecting consumer payoffs to slow from here? Just any thoughts on the pipeline relative to payoffs and how you see the balance sheet getting to that number? Aurelio Alemán-Bermúdez: Well, it's going to take til the end of the year to consumer payoff and originations to settle. So some of that additional contraction in the consumer portfolio is a reality. On the other hand, we expect additional commercial growth both in Puerto Rico and Florida based on what we have at hand in the pipelines today, and we do expect some additional growth in the mortgage portfolio, which demand continues strong. So that's how it's playing. Obviously, if we go back to how many years we grew the consumer book, mostly driven by auto sales and demand. We're still performing pretty well in terms of our market share in that sector, but it's just sales are lower, still better than pre pandemic. I believe, stabilizing compared to last year is a little bit of fair too because the first quarter of last year in auto, March was a very strong month. Because it was a pre-tariff people knowing that prices were going to increase. So that number is a little bit -- the 19% that we saw in the quarter on an adjusted basis, it should be about 10%. So that -- we're assuming about 95,000 new units which is still better than many years back. So again, it's just a price. We understand it's a price issue. I think there are still distributors considering lowering prices and adjusting and that could flow through the economy and change that number, but that is how what we're assuming right now. Brett Rabatin: Okay. That's helpful. And then your securities portfolio has been a source of strength in terms of improving yields as you've had cash flow to reinvest 2.69% yield in the first quarter. Can you just refresh me on what you guys have coming up and how big of an opportunity that is maybe relative to the margin? And then just any thoughts on the margin pace that's in the rest of the year? Orlando Berges-González: So the -- we still -- on the lower-yielding securities, we still have about $600 million in cash flows coming from maturities of securities yielding on average, 1.65%. That changes a little bit per quarter, but it's about $250 million, it's in the second quarter. And then we have the other $350 million, it's in the second half of the year. The average yield is fairly consistent. It's a little bit lower on the third quarter, a little bit higher in the fourth quarter, but overall, it's at 1.65%. that's what we're looking at. We had an additional about $236 million or so that mature during the first quarter. We did take advantage of a little bit of the second half of March where rates change behavior change a bit and increased. So we try to advance a little bit of cash flows into that. So that should help on the numbers going forward. But think about that $600 million plus a little bit of the $200 million that we had in the first quarter. that clearly is being replaced with things going from 250 to about 380 basis points higher. I'm sorry, 280 basis points higher, that's what I meant. Brett Rabatin: Okay. That's really helpful. And then just lastly, you guys commented some on the economic backdrop and oil prices being higher. Puerto Rico economy seems pretty stable. I was just curious here in the past, month or so how you're seeing the commercial pipeline in terms of people maybe making decisions or not, just given some uncertainty. And then just as you guys see it, the health of the consumer, if there's been any impact from the inflationary stuff. Aurelio Alemán-Bermúdez: Definitely, we're watchful on the impact on oil. Latest numbers that the government published energy in Puerto Rico now is -- it's below 20% dependent on oil. So that's good. They have been converting generation to LNG, and they still have a carbon facility and then some renewables. So less than 20% is less impact in terms of in terms of the final bill on the electricity side. On the other hand, the gas stations is immediately. So that impacts more the consumer, I will say, which is what we've been seeing, and we've been commenting about it. On the other hand, we've been proactively managing our risk in that segment. So we feel pretty good on the asset quality trends and how we have proactively managed that. Commercial activity remains strong. Tourism is strong. Puerto Rico is very attractive for U.S. visitors they're probably not going to Europe or Mexico at this time and coming more here, when we look at hotel occupancy airport, we feel pretty good about that. There's still a few projects on hotels that are moving through the pipeline. In terms of overall activity, construction continues very active and the supply chain that relates to that. So we haven't seen any softening on that piece. And distribution, expansion of distribution and other infrastructure projects are moving. So we feel pretty good about the commercial pipeline and obviously, looking forward to faster closing of what we have at hand, so we can deliver the growth that we promised. Operator: Our next question comes from Arren Cyganovich from Truist Securities. Arren Cyganovich: Credit quality, obviously, quite solid this quarter, and you commented on the early-stage delinquencies improving. What's the expectation credit for the rest of the year? Is it still more stability? Or do you think that the early stage delinquencies may help lower some of the credit losses in later part of the year? Orlando Berges-González: Well, yes, we're expecting stability. You always have a little bit of benefits on the first quarter from tax refunds. But when -- as we have mentioned in the past, we monitor vintages. And based on adjustments we did on credit policies way back in '23 and '24. And we have seen how the behavior of the vintages since are much better than what they used to be. We -- at this point, based on expectations on the market, we don't see any factors that could change dramatically always could be a little bit up a little bit down here and there. But overall, we expect stability on the delinquency side. Arren Cyganovich: Okay. Got it. And then on capital return, I appreciate the keeping a steady amount of capital return buybacks have definitely helped over the past several quarters. You're still operating with quite a high level of CET1. I know that, that's your intention. But are you giving any thought, particularly with seeing peers in the mainland, talk about lower capital and some of your competitors on the island also having a bit lower capital than you do in terms of increasing some of that capital return? Aurelio Alemán-Bermúdez: Well, that is a discussion that we constantly have as we move the pieces -- the moving parts are obviously the macro things that we don't control, obviously, other opportunities that we could we would like to have the power to execute if come to play, obviously, competitive dividend, and obviously, the component of the buyback. So it's a constant discussion that we will continue to have and we -- with the Board, with the management and we try to be opportunistic and consistent. That's what we try to achieve. So taking all those other pieces into consideration. Operator: Our next question comes from Kelly Motta from KBW. Kelly Motta: Maybe circling back to capital. I think a couple of quarters ago, you mentioned potentially looking in Florida for transactions that would make sense. Just wondering where that appetite stands today? And any kind of additional thoughts here on M&A given your high levels of capital and multiple? Aurelio Alemán-Bermúdez: Well, I think the answer is it's always part of the optionality that we keep to be something that makes sense. And so in that yield the returns that are -- that we -- our threshold of returns. So not necessarily easy to find something that qualifies for all of it, but we cannot discard if a good opportunity comes to the table, we will not discard. That's really the way we look at it. Not aggressive about it, balance and realistic, which obviously in mind, what is the bottom line from both a strategic perspective and financial perspective, both really go together. Kelly Motta: Got it. That's helpful. Maybe on expenses. I appreciate you reiterated the guide here with the expectation that there might be some increase later on in the year for, I believe, some marketing and technology initiatives and your commentary hit on some work you're doing on AI. I'm wondering if you could share additional color as to the use cases you see today and what you're looking at? Aurelio Alemán-Bermúdez: Well, I'd say we're working together, definitely, AI is here to stay. And I think the industry is in a learning stage of make sure that you have the size and the scale to make sure the use cases are financially justifiable. In the back of our size, obviously, you have internal processes related to education and other analytics that are the use cases that come to play fraud management and those. But also, we're working with our key vendors we don't have any developed applications. So it's all vendor-driven and they have a road map, and we are getting into the train in the early stages so we can benefit out of it. But I think there is a common understanding of scale. It's not only how you move, you have to move with the right governance and the right oversight as any other technology bring risk that you have to have commensurate policies and processes to cover. So I think at the end, we will all benefit of it. I think the larger the institution is the more the benefit and the more easy to justify the use cases because of the investment. On the other hand, very an important investment this year, which is the foundation is really data where the data resides, data analytics, everything. All the efforts are really moving to be fully cloud-based, which is halfway through already in our infrastructure and including the main applications already there. So it's a journey, and it will require investments that we are and obviously are an important component of the expense guidance that Orlando has been mentioning. Kelly Motta: Got it. That's really helpful. Last question for me, if I can sneak one last nitty-gritty one in, I appreciate -- I believe you reiterated your expectations around margin, which last quarter was about 2 to 3 basis points of expansion per quarter, but off this higher base. One thing, looking at your average balance sheet that stuck out was residential mortgage yields were a bit higher linked quarter. Wondering if you could provide any color around that, if there was any sort of onetime loan fees or anything that may have impacted that. Wondering if that's run ratable. Orlando Berges-González: Not any large ones. We typically get some movements on what's in and out of nonperforming. And so we collect some things that were there, but nothing major. I mean, remember that for quite a while, we -- when rates were low, we were originating almost all or substantially all of the originations were conforming paper. So we didn't have a lot of lower-yielding things on the portfolio, and we were not putting too much in the portfolio. We've been putting things into nonconforming kind of paper now for the last couple of years, 1.5 years, and those are higher yielding. So as you get repayments on some of the lower-yielding ones, you're going to get some pickup. This quarter was a bit higher. Also, it's a function of the 360 kind of component. But other than that, it's -- we expect that portfolio to -- as long as rates stay here, new originations will continue to come in a bit higher than what's going out of the portfolio with repayments. Operator: Our next question comes from Steve Moss from Raymond James. Stephen Moss: Maybe just starting Orlando on the 5% margin here. Curious on your funding cost expectations going forward. I noticed that your public funds have continued to head lower. Just kind of curious maybe if there's a little bit more give on your liability side for the margin here? Orlando Berges-González: I mean, you have to divide it by components. The clear ones are the like the time deposits new time deposits on the books are at lower rates than some of the older ones that are maturing. So that's where you saw the 5 basis point pickup on the time deposits. Broker deposits, even though it's not a large portfolio, it's also being repriced at lower rates. So we had that 7 basis points that we'll continue to see some small reductions. At the end, the deposits, you have to divide it the typical checking -- interest-bearing checking account or savings account with the limited movement in rates the same way it only went up 14% kind of beta when rates were going up, we won't see significant rate reductions on those accounts. Some of the reductions are seen on the government deposit accounts that are part of the interest-bearing component because some of them are indexed. And as some of the market rates have come down, they will come down. But it all depends on what happens with the market rates. I would say that with current expectations, we would see some reductions on time deposits, not so much in some of the other deposit accounts. Stephen Moss: Okay. Maybe we should phrase it this way. So in other words, just fair to assume like your public funds will be roughly stable around the $3 billion-ish or close to $3 billion level is your expectation? Orlando Berges-González: Yes. We don't expect major changes on those numbers. Stephen Moss: Okay. Appreciate that color. And then in terms of -- the one other thing that I was just wondering about here, the Puerto Rican -- originations in Puerto Rico were very strong year-over-year up almost 11%. Just curious, are you guys thinking that's market share gains or just overall economic activity that you're seeing on the market here? Aurelio Alemán-Bermúdez: Yes, I think it's a little bit of both, but I think overall economic activity and deal timing is really the primary. Some of these deals are being a couple of years in the making, especially related to infrastructure or construction or permits, things like that. So it's also the timing of economic activity. Stephen Moss: Okay. Got it. And then just in terms of Florida, I realize it tends to be seasonal, but just kind of any -- you've had some expansion there in the Florida market. Just any updated thoughts as to where. Aurelio Alemán-Bermúdez: We continue that Yes. Yes, it's an important piece of the franchise. It's an important strategy, a very healthy portfolio. We opened in the last quarter of last year, as we mentioned, new office in Boca. We just announced repositioning of a branch in Miami, Kendall we are looking to close and move to some other areas. It really we're really focused on repositioning to where commercial activity is more active. Definitely going north is showing additional opportunities. Meaning northeast, which is of the corridor of Broward County, and we're taking those. We already have the teams engaged in executing and producing. So it's an important piece of our franchise. Obviously, we all know that deposit gathering in Florida, it's somewhat more challenging than other markets. Operator: Our next question comes from Manuel Navas from Piper Sandler. Manuel Navas: I wanted to dive back into the NIM for a moment. I just want to confirm, you're feeling for that 2 to 3 basis points per quarter increase from here? Orlando Berges-González: Yes. That's what we're shooting based on expectation of rate movements and portfolio movements. Manuel Navas: Okay. Could funding costs improve if your core deposits continue to grow? Orlando Berges-González: Yes, assuming -- because if our core deposits grow on a typical mix, that would mean that those are more on the savings and interest-bearing checking accounts. And that assumes that as we mentioned -- you just mentioned that would be a stability on the government side. So that would mean that those deposits are lower cost deposits. And definitely, that mix could improve. Manuel Navas: And what initiatives are in that area that are helping kind of drive? Because there was some nice core deposit growth this quarter. Aurelio Alemán-Bermúdez: Well, I have to say, a lot of coordination, sales efforts, products, marketing across both retail, small business is an important piece of the puzzle, which we continue to penetrate. We also have in the year, as we announced before, a couple of branch expansions in the West Coast of the island, which are opening midyear. 4,000 new clients between retail and small business. So that -- it's really a sales focus and execution. It requires a lot of coordination and efforts. Manuel Navas: Okay. So that kind of means to summarize like loan yields are generally stable, securities could reprice higher as you laid out and deposit costs hard to decline them, but if there's good mix and growth in the right areas, that's where you get this steady increase in NIM that could have an upside if the deposit cost if deposit growth exceeds expectations. Orlando Berges-González: Yes. The only -- that's correct. The only thing I would add, keep in mind that one of the things we are considering we have included in our assumption is that the market -- the consumer market in Puerto Rico is still going to come down a bit in size, and those are higher yielding assets. So that's part of the assumption here that some higher-yielding assets might come down a bit. The commercial side, it's very good. But the average yield on our consumer portfolio is above 10%. Obviously, that's not the kind of yield on the commercial side. Manuel Navas: Perfect. I appreciate that. And how would rate cuts impact this kind of forward guidance, if there were any. There's none in forward curve at the moment, but if there was a rate cut, how would that shift your kind of expectations? Orlando Berges-González: We -- the 2, 3 basis points included some rate cut starts at the end of the year. The impact, depending on the size is obviously the investment portfolio reinvestment component, rate cuts are more. It's going to be a smaller rate. But on the other hand, we also get some repricing on some of the deposit side. So that assumption includes some expectation of reduction towards the latter part of 2026. Remember the floating rate component of the commercial side, it's about 50% just under that. And obviously, if rates are not cut, then we wouldn't have repricing on those. That's part of the assumption also that there is going to be some repricing if rates out cuts do happen. Manuel Navas: Broadening out for a moment, in the economic commentary, you discussed the potential -- and we've discussed about this that of military activity on the island and how it could impact the economy not that it increases activity, but could you kind of talk about how that makes Puerto Rico perhaps a increase of the floor of economic activity or reconstruction funds safety? Can you just speak to that military activity that you are seeing in the island? Aurelio Alemán-Bermúdez: What we're seeing is active use of some of the facilities with more people coming in more actually military personnel. There's also expansions in capacity to where they live in the facilities within actually hotels. This is outside the metro area primarily. This is in the east side of the island, the south part of the island and the airport in Aguadilla, which is the Northwest of the island. So it's outside the metro area. So hotels that are being fully occupied small hotels fully occupied by military personnel for long-term contracts. Obviously, they buy and consume merchandise and they go to places. And so we see more of that. There is some construction in the sale area. This is being kept fairly confidential. So we -- in terms of how much more is coming. But we're seeing it and we're getting commentary from our clients on this happening in our branch representatives in the areas that this is happening. Manuel Navas: And this strategic importance increase also makes the reconstruction funds a little bit safer to the deployment of them as well. This was my last question. Aurelio Alemán-Bermúdez: And definitely, and that's been also the contribution in the energy transformation of production because the Department of Energy has also been very involved working with the local authorities on this. Because it's part of safety. Operator: Our last question will come from Robert Rutschow from Wells Fargo. Robert Rutschow: I just wanted to follow up on the tech commentary. We can see relatively high growth rates in the outsourced tech spend and the professional expense. How much of the expense base would you consider to be tech spend? Is the growth rate of, say, the outsourced services indicative of the overall tech spend? And is it possible to segment your tech spend between like back office maintenance efficiency initiatives and anything that's geared towards revenue growth. Orlando Berges-González: At this point, there is a lot that has to do. As we have mentioned, we started a migration of our centers, our data centers from a managed facility structure we had within our facilities to a service provider structure, we use FIS as a service provider. We've also been migrating with we have in other cloud applications where they are managing -- they're going to -- they are managing and will fully manage some of those applications, some of those cloud applications for us. So we continue to see a lot of investments, which is part of the -- of that migration process, which is included in the professional service and both -- and the outsourcing cost. Aurelio Alemán-Bermúdez: Yes, I think just to add everything that is coming new is coming into cloud, it's coming as software and service, rather than in-house developed applications or more physical servers in our facility. So we don't have -- we cannot answer specifically the distribution of the expenses, something to look into. But we haven't made that data public. So we can -- we'll consider your questions for a much more detail we can provide in future presentations here. Robert Rutschow: Okay. Great. If I could just follow up on that. Do you think your tech spend growth rate is sort of at a peak level? Or is it possible it can decline? Or should we think about it sort of staying at these levels? Aurelio Alemán-Bermúdez: I think it will sustain for probably another 18 to 24 months and then should decline. Operator: We have no further questions. I would like to turn the call back over to Ramon Rodriguez for closing remarks. Ramon Rodriguez: Thanks to everyone for participating in today's call. We will be attending Wells Fargo Financial Services Conference in Chicago on May 13 and Truist Financial Services Conference in New York on May 19. We look forward to seeing a number of you at these events, and we greatly appreciate your continued support. Have a great day. Thank you. Operator: Thank you. 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 Bank OZK First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead. Jay Staley: Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments, financial supplement and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO; Brandon Hamlin, President. Cindy Wolfe, Chief Operating Officer; Tim Hicks, Chief Financial Officer; and Jake Munn, President, Corporate and Institutional Banking. We will now open up the lines for your questions. Let me now ask our operator, Tanya, to remind our listeners how to queue in for questions. Operator: [Operator Instructions] And 1 moment for our first question, which will come from Manan Gosalia of Morgan Stanley. Manan Gosalia: Hi, good morning. The first 1 is just around the CIB, strong growth again this quarter. And I guess -- appreciate that you guys are growing in attractive markets. You're building teams. But at the same time, we continue to hear across the board that competition is growing. I guess the question is, how do you assess risk in that business? And I guess, what, if anything, would cause you to pull back there? George Gleason: All right. Jake, do you want to take that? Thank you for the question, Manan. Jake Munn: Great to catch up with you and hear you. Good question. We continue to grow at a steady clip, as you mentioned, within CIB. Across all of our major business lines this quarter, we had really some nice success in generating over or nearly 2 dozen new relationships, upsizing nearly a dozen legacy relationships. And so we continue to see some nice growth across all of those. . You have a good point there. What we're really building here, and you need to remember is it's a diversified C&I. And so it is not a CIB business that's focused in on niche These verticals encompass over 42 different industry niches in particular. And so it's allowing us, whether that's through ABLG,/CBSF, EFG, fund finance, LFG, NRG our franchise capital solutions that we mentioned, we launched this last quarter. We're creating a really diversified book within CIB that allows us to take advantage of opportunities within those specific industries and push into them. So if we see a slowdown or increased competition, or increase or decrease pricing, let's say, in ABLG, it affords us the opportunity to push more into our CBSF or NRG business lines. And so that diversification that we're building within CIB is allowing us to continue to grow at a nice clip. -- in a way where we're not taking on any undue credit risk. Manan Gosalia: And are you seeing any spread compression in certain businesses that has caused to pivot into others? George Gleason: We are exactly, yes. So in our ABL G are some of our large corporate opportunities there, we have seen some pricing compression. And so we've switched that and moved downstream a little bit more towards the middle market, single lender opportunities, in particular, -- if we look at our fund finance business line, we've had to pull back a little bit in our capital call subscription facilities just due to increased pressure there. specifically from nonbank lenders and then insurance companies who have really entered that market and pushed down a little bit on pricing. And then if we're looking at our lender finance group, too, in our lender finance group. We've seen some pricing and structure compression there, too. So again, there's been some competition in those business lines. But as a result, it's allowed us to push in a little bit more within our CBSF,ourEG in our NRG business lines. And so again, the diversification and the nature of which we're building, CIB is affording us the opportunity to continue to grow without giving up yield and without sacrificing credit quality. Manan Gosalia: And then just in terms of helping us model out NIM. We saw the material securities growth Q-on-Q. Any color you can provide there on what you're putting on -- and I guess, how should we be modeling yields in that portfolio beyond the $460 million to $470 million that you've guided to for next quarter? . George Gleason: Tim, do you want to jump in there? Jim, go ahead. . Tim Hicks: Yes, sure. Mannes, we -- early in the quarter, took the opportunity to use some of our excess liquidity and buy a decent amount of investments during the quarter and enhance our yield. About 40% of those are in muni housing bonds and 60% are in mortgage-backed securities. Those have both have favorable yields. The muni housing bonds or a tax equivalent yield of around 6% and the mortgage-backed securities are somewhere around the 460 range or better. So these are agency mortgage backed. Agency mortgage backed. So we saw good growth there. We gave you some guidance on where we thought the range would be for yields for that portfolio. We had a nice pickup in Q1, and we'll see another nice pickup in Q2 and then from there, we'll see what the market brings to us on opportunities. But the team did a great job of finding good yielding attractive high-quality investments, and that's going to certainly help us on NII during the quarter and will help continue to help us throughout the year. Operator: And our next question will be coming from the line of Stephen Scouten of Piper Sandler. . Stephen Scouten: I guess the first question would be around commentary within the management - the common document around 2027. You guys seem pretty upbeat about the potential for the bank in 2027, both in terms of growth and maybe even resolution progress within RESG and the resumption of growth within that book. So I'm wondering if you could give any additional color as to what kind of driving that confidence, whether anecdotal or more concrete that would kind of give us a view into that progression? George Gleason: Yes, Stephen, happy to address that. Obviously, Jake's already spoken about CIB and diversification, the new areas we're pushing into their CIB will be the predominant growth engine we would expect in 2027 as it has been last year and will be this year. So we expect that leadership to continue from the CIB group. We're continuing to add people. We're continuing to push into other verticals there. . RESG may not be a great source of growth in 2027, but we're looking for a slowing of the headwinds from RESG repayments in 2027. It may be 2028 before we actually see significant growth there. We would expect our indirect lending group to continue to grow nicely. It stayed steady at 12% and sort of pushed up to about 13% of our portfolio. That portfolio is a very high-end prime, high prime, super prime consumer portfolio, and it has continued to just perform very well and very consistently And we expect to get some more growth out of our commercial banking, community banking group next year. So we think the headwinds from RESG repayments ease quite a bit in '27. We expect these other business lines to actually accelerate a touch more in '27 contributing to that. better incremental growth we're seeing that year. The other thing that I think is important is we're building a number of other and investing to build a number of other fee-generating businesses. We're putting increased emphasis on trust and wealth. We've got a mortgage group that we've been building for a couple of years now that continues to gain scale. Although the mortgage business is not a hot business right now. We think it will improve, and that unit will gain more scale. We're continuing to grow our fee income through treasury management and improving what we're doing there a lot and probably the biggest source of fee income opportunity just as far as growth is in our CIB group, where there are a number of fee-based businesses and opportunities we're tapping into. And I think you'll begin to see that incrementally add some noninterest income in subsequent quarters this year and really hit a good pace in 2027. So we're fairly optimistic about 2027. Stephen Scouten: Got it. Really helpful color, George. And then I guess my other question would be maybe similar to Manan's question in a way, but thinking about CIB, I mean, with RESG, we've all known you guys to have a best-in-class platform for the last 20 years or so you've shown a differentiated model. How do you give investors confidence around the pace of growth within CIB and that there is a more differentiated model there as well that we should have the same level of confidence as you grow that this rapidly similar to the results you've delivered in RESG over the life of that business? George Gleason: Yes. Great question. Thank you for that. I'm going to let Jayse answer part of that question. But before he does, I'm going to tell you a couple of things. Number 1 is talent and leadership are critically important in our company. And Jake will talk a little bit about talent as he answers your question. And the other thing is we've really built CIB aligned with the way we have built and approached RESG, and that is you're going to look at a whole universe of opportunities all over the country. You're going to focus on a very narrow subset of that universe that meets your criteria for quality of credit, profitability and relationship building, and then you're going to close those transactions with very intentional bank protective documentation, you're going to service and manage those assets in a very engaged way so that you see early warning signs you're able to influence behaviors and move those transactions in a way that is conducive with bank standards and objectives. So Jake, I'm going to let you talk about your team and why, given the growth you're experiencing and projecting to experience you're comfortable with what we're doing. . Jake Munn: Yes. George, I appreciate that. And Steve, good question as usual. It's really about building an infrastructure that's scalable to George's point. So when we got over here and we started to develop CIB in a very similar form in fashion, RESG has started with building out a really strong portfolio management and operations team. And so our portfolio management our underwriting, our quarterly status reporting on every single credit we do within this book of business. Our 4 operations teams that sit within PMO that ensure from beginning to end. It's a clean and crisp process for our clients as they're onboarded and service through the life of their relationship with us. And then it's also building out something that's scalable from a cross-sell and a products and capability standpoint. George mentioned that answering your last question about fee income. But if you go back a couple of years ago, to where we are now. We've really developed some nice additional business lines that support the needs of our clients and our communities, but also will assist in generating some really nice noninterest income. So whether that's our syndications desk that's afforded us and blessed us with the opportunity to now lead more deals as admin agent. whether that's our interest rate hedging capabilities, our foreign exchange capabilities, whether that's our capital markets program that we have that allows companies to access the capital markets with our partnership that we have there for whether that's our great treasury management platform that Cindy and Chad continue to develop and build out, we really have the products and the capabilities now to grow with the company and scale with the company over the long-term horizon within the C&I space. And then to top it all off and really the most important part that George hit on, it's all about talent. At the end of the day, we're in the business of people. We're banking people, we're banking communities, we're banking businesses. And so attracting the right talent who has a like mind for credit who has the fire in their bellies to say, to get in here and roll up their sleeves and make a difference. That talent is really what's been differentiating us. And so put it all together, we've developed all the products and capabilities that are needed to scale this business. We have a great foundation with our portfolio management and operations team. And then we've sat here and developed and bolted on complementary business lines. So whether it's our asset-based lending or corporate banking and sponsor finance our equipment finance, our lender finance, our fund finance, our Natural Resources Group and now our franchise capital solutions. We're just getting started. There's a great market out there. We're being highly selective in what we're doing to George's point, our pull-through rate on our more mature businesses is still around 14%, 15%. And so we are passing on 80%, 85% of the deals we see in the market, whether it's a credit or a pricing-driven path but being highly selective in who we bring on, being highly selective in the products and services that we're launching into the market to ensure that they're best in class. It's all really working out well for us, and we're seeing nice continued growth and true franchise growth, really built 1 relationship at a time. Stephen Scouten: That's extremely helpful color. And positioning it like RSG was built is something I wasn't fully aware of. So thank you for going into that detail. I appreciate you. Thank you. . Operator: And our next question will be coming from the line of Brian Martin of Bain Capital. . Brian Martin: Sam, maybe just 1 on the margin. I know you gave a little commentary in the management comments, but just thinking about if we don't see a change any changes in rates here in the near term, just thinking about kind of the comments in the in the release about the pressure that you may be upward pressure you may be seeing on the deposit side? And then secondly, just trying to understand with the growth in CIB, how much of that is variable rate versus fixed rate? Just kind of how to think about the margin in the stable environment, given kind of the changes here on the loan mix and then just maybe what funding pressure you're seeing? George Gleason: Cindy, you want to talk about deposit pricing, and then we'll jump to Jake on his CIB pricing. . Cynthia Wolfe: Sure. Thanks, Brian. Well, we did see competition increase last quarter. We've seen that before. So I'm just really proud of Audi Curley, our Chief Banking Officer and his team for actually reducing rates by 18 basis points in spite of that and growing we have an incredibly talented machine that manages to synchronize our deposit growth right along with our loan growth, which you can see remains a good kind of challenge with CIB and their success. So we're poised to continue to do that. And we also have a veteran leader of government and institutional banking, Drew Harbor. So we have a great mix of very large depositors and yet we remain average balances of our depositors of $52,000, which really, when you do the math of just under $2 billion in growth over the last year, it just represents an incredible amount of hard work every day by our retail bankers and our commercial bankers in our 255 offices. So we're going to continue to do that. And we're cheering RESG and CIB and our other bankers on in their growth, and we'll continue to perform really well. . George Gleason: Jake, do you want to talk about CIB pricing? . Jake Munn: Yes, sir. So on the CIB side, it's predominantly a variable floating rate book. Very rarely do we balance fix outside of our equipment finance group. -- if a client has a desire to fix rate, we offer them through our interest rate hedging solutions desk, the opportunity to swap their loan. And then artificially fixed as a result, which would generate additional noninterest income for the bank. It continues to be a bit of hand-to-hand combat out there on these deals as it relates to pricing. I know Manan had a question earlier about pricing and any compression we're seeing in specific business lines. Again, the beauty of what we're building is the nature of the diversification though, so we can pull on the levers and push into the business lines where we can get a little bit better yield. If we look at our legacy book versus the new deals generated this last quarter, there was actually about, call it, a 12 bp uptick on the average spread and so we're actually leaning into the market and pushing on pricing. I know I'm actively challenging the teams. The business line heads are challenging the teams. For sure, George and Brandon are challenging the teams to go out there and try to really get the best yield possible for the bank. And then the final thing I'll say there, aside from the rough spread on these opportunities that we're looking at, if we go back to the comments earlier about our loan syndications and corporate services, in the various business lines and noninterest fee income that they can generate. If we go back to our treasury management platform and all the hard work and time that Cindy and Chad are putting into that. We talked about our trust and wealth it goes on and on the products and services that we're building to be best-in-class out there that will allow us to continue to drive and really ramp up that noninterest income over the long term, which makes us even more competitive in the market. And then lastly, I'll just say it's important to remember that this is true relationship lending that we're doing within CIB. If we look across the CIB book of business, over 97% of those relationships or either single under direct deals where we get 100% of the wallet. So everything from deposit accounts to treasury management to interest rate hedging, et cetera, or it's club deals, 2 bank club deals, where we're splitting that wallet or in the case of broad syndications, over 95% of all the syndications we're in, we're either in the driver seat or the passenger meaning we're an admin agent or a JLA or like title We really have no interest in going out there. We're not buying books of business within CIB. We're not going in as participants. We really want to be a thought partner for these relationships. We want an opportunity to provide additional products and services beyond just a loan. So as a result, we're starting to see some really nice movement there with fee income, but also the opportunity to augment and impact the structure and the actual pricing of these loans long term. George Gleason: Brian, I would close up with this thought. Our long history is to be very profitable and that profitability is driven by margin. And while it's a very competitive deposit environment now, a very competitive loan environment. if you look around our peers in the industry, that 420 net interest margin we have is really strong. And that focus as Jake described, and as Cindy described on both sides of the balance sheet on really, really trying to get every basis point of yield or reduce every basis point of cost is just inherent in our culture and that drives our profitability metrics well above the industry. . Brian Martin: No, that's helpful. So yes, I think I've got your message there. So thank you for the insight there. And then maybe just my follow-up just would be in terms of credit quality, just looking at the reserve maybe coming down a touch this quarter, but just your NPAs and criticized were up a touch in the quarter. But I guess, more importantly, the commentary seems to suggest that you're a bit more optimistic on just the environment. So just kind of trying to think about how you're thinking about credit here as you go over the next couple of quarters if we see a bit more resolutions and just given it seems the tender is a bit more positive. George Gleason: Brian, what I would tell you is that the economy in which we're operating has been surprisingly resilient in my view, given all the noise. I mean there's a lot going on in the world today. And yet the U.S. economy continues to chug along at a pretty decent rate. And I've already mentioned our indirect lending business, which is 13% of our business, but that's a consumer business now granted, it's at the higher end of the consumer space. But I mean we're seeing very, very stable and favorable credit results from that business. Jake in his business is -- and of course, he's very carefully selecting what we do, but we're seeing very favorable results on credit and looking through to the customers in that, the trends of those customers, by and large, very favorable trends on their net income, EBITDA, cash flow coverages and so forth. Our RESG book, if you look at multifamily, if you look at industrial, you look at condos, wherever you are in the country and those categories of business they are very solid, and we're experiencing some really good results on that. Where you run into some issues and where we've had some issues is in the land, the office and the life science parts of the portfolio. And that is very transaction-specific and region specific. If you go to the parts of the country, that are pro-business and low tax and having significant in-migration and we're in a lot of those markets, a lot of our franchise risk in those markets. Those assets, office, whatever land are doing very well in those markets. It's the markets where you've had increasing tax burden and developing less friendly business, pro-business environment and out-migration of population or churn in population that's kind of kept the population neutral and eliminated the prospects for growth. That's where those transactions are struggling. So the economy, generally, in our view, is pretty solid. And the challenges are basically limited to a couple of property types in more adversely affected regions of the country. And I think we're doing a good job working through those. We've got 5 RESG loans that we talked about in detail that the sponsors are working on 2 of them. Recapitalization opportunities. One of those is Rich's point, they've got a signed letter of intent to recap the deal. We've got 2 of those 5 that are actively engaged in a sale process. And the fifth 1 of those 5 is a transaction that has a lot of activity from multiple partial or full buyers of the land that secures that credit. So those 5 assets account for the vast majority of our past due loans and the vast majority of our nonaccrual loans and do all 5 of those deals that are working get closed, probably not, do 0 of them get closed, probably not, but some combination of those transactions probably get closed this quarter or next quarter. And if the transaction doesn't close, they're -- you're on to the next opportunity to get those closed. So at the basis we're in those assets, there seems to be a pretty good interest and ability for us to put together exits from those. So yes, I would tell you, we know there are going to be a few more of those bumps in the road on asset quality in that office life science space, and we'll work through those. But we're feeling like we're late in this stage of the cycle. We're working through what is going to have to be worked through, and we're doing it in a very constructive way. Jake Munn: Brandon, do you want to add anything on that or -- you might want to talk about what we're seeing on leasing and so forth? Paschall Hamblen: Yes. No, I would just throw in there the great summary of how we view the world, what we're seeing we are in the property types, George mentioned condo, multifamily, industrial. We've got a lot of industrial and boy, a lot of industrial leasing is coming through our projects. Really happy to see that. But I would I would even say on the office side, we're -- and again, a great summary there of how market-specific this activity is but we're really encouraged on the office leasing side as well. So we're starting to see some green shoots there. Life science, as you noted, is that is challenges, but even on a market-specific basis, and we've mentioned this before in the Bay Area, the AI with is generating opportunities for our life science product, which as we've noted, is flexible to go life science or go more traditional office and . We've got 2 projects that are in serious contention for more of your tech AI-type users just as examples of how that's playing out, not just generally, but in our portfolio. But yes, great summary, George. We're a lot of noise, a lot of headwinds in various shapes and forms, but we're seeing some good resilience in our portfolio. And and I would say, office in particular, I'm just glad to see it starting to pick up and move. We're getting some progress there. That's the detail I would add, George. Operator: Our next question will be coming from the line of Michael Rose of Raymond James. . Michael Rose: Maybe just a bigger picture question just on a lot of the efforts that you guys have ongoing, specifically in CIB. You noticed in the management comments that the head count is up from 18 to 97 new vertical this quarter, you're building out some of the fee income verticals. Certainly, I understand the expense guide. But George, I just wanted you to frame this kind of longer term. At some point, the significant buildout will probably begin to slow. It seems like that could be in 2028, which could be at the same time that RESG balances begin to inflect higher after heavy paydowns. So I guess my question is, when do you expect to see the higher levels of expense build decelerate? And then it seems like 2028 could be a pretty significant year for operating leverage from just thinking about it conceptually. So would just love some longer-reaching thoughts on all the efforts that you guys have done to date and as we look forward? George Gleason: I appreciate the question, Michael. I'm reluctant to give a lot of guidance on 2028. That seems like a long time into the future. But I think your premise is correct that we will reach a point with CIB where the percentage increase in their head count and the percentage increase in their expense base will decline. Now Jake mentioned, we've got right now access into 42 different business and industry groups with CIB. If you look at the broad breadth of CIB that number of business and industry groups could be 100 or 200. I mean there are a lot of places we're not in. And I think the expectation is that, that business is going to continue to grow, continue to grow and continue to grow. But if we had 3 verticals in a year, or 2 verticals in a year. And 3 years from now, we had the same 2 or 3 verticals every year. The percentage increase from that subsequent addition is going to be less. There are also a lot of geographies that we're not in that we would like to be in with the CIB platform in the markets that we already serve on our commercial community banking business. So there's a lot of room to build out. And CIB is designed so that the speed of that build-out is geared to their volume of business and the profit margins generated by that business. In the early conversations that Brandon and I had with Jake understood that we didn't want to go out and spend of expense and have a dead start on that, that we needed to take the teams that we had incorporate them into CIB and get them really lined up with the CIB vision, and we needed to add people incrementally as the business was growing, and we were paying for those and creating more profits in CIB. And that will continue to be the approach going forward. So if I overhead grows 20% per annum. That's going to mean that their revenue is growing more than 20% per annum. So there's going to be a positive operating leverage from the continued growth an expansion of CIB. I would hope and our goal is that is we're building out more infrastructure and treasury management, more infrastructure and trust and wealth, more infrastructure and mortgage that you're going to see the same things. Now we're earlier in the real build-out and expansion of those. But I would expect you would see those gain positive operating leverage as we go forward. And to the earlier question of where does our efficiency ratio go I hate to apologize for a 39% efficiency ratio, that's a pretty good number. But we would like to see that in future years. Begin to work back down to our more custom ratio over the last decade. But it will stay in that high 30s range this year and maybe into next year, while we're building out some of these businesses. But they are designed long term to achieve positive operating leverage. Now there's no way we're going to run a much expanded trust and wealth business that doesn't have a 50-something percent efficiency ratio or mortgage business that doesn't have a 60% or 70% efficiency ratio. But the operating leverage that we will get in other businesses, I think we'll even those things out and let us get to a longer-term slightly improving efficiency ratio. Jake Munn: And George, real quick, just to run off of your thought there on CIB. I think it's important to note, too, as we continue to grow and expand CIB, again, the beauty of what we've built. We've got a credit analyst training program as an example in there. So over the long term, you'll see us hiring less portfolio managers as we have analysts and associates coming out of our in-house training. And so when you kind of put all that together, we ran this analysis at the end of last year, the folks on average we're hiring in this year have a lower average base salary and expense carried than the year before, and we can make the assumption that next year, that will continue to reduce in theory, right, as we're building CIB will need less cheaps and more Indians for lack of a better term. And so we'll continue to staff in that way in a very thoughtful and strategic fashion where we hope to continue to improve the efficiency ratio within CIB itself. George Gleason: Good comment. Thank you. . Michael Rose: No, that's helpful color. I wasn't looking for specific guidance, just trying to frame the narrative, but it seems like based on the answer that you guys have many years to come of kind of continuing to build out the business. So maybe the best way to characterize it. I don't want to put words in your mouth, but are we -- would you characterize the build-out is still kind of in the earlier to mid-innings versus the later innings? It seems like based on the commentary that's where we'd be. George Gleason: Well, Jake made the comment in his earlier remarks that we were just beginning. I've written enough checks to our expensive people that I don't feel like we're at the beginning. But yes, we're in the early stages of achieving CIB's potential. And we've commented I think we commented in the management comments in me, Tim, that we expected in 2027 that CIB would pull up even with RESG as far as portfolio size. And given the momentum it has it's expected here that it's going to pull ahead of RESG, at least until RESG gets that next wave and wind of origination opportunities that come from a more stable commercial real estate, more balanced commercial real estate market. Jake Munn: In mind or 2, that head count in CIB includes services that are enterprise-wide. So the syndications desk, interest rate hedging, et cetera, we're adding people that don't just benefit the growth of CIB but are going to benefit the growth of the institution as a whole in our noninterest income in future periods. Operator: And our next question will be coming from the line of Matt Olney . Matt Olney: I want to go back to the discussion around credit trends at RESG. And I think investors are looking for this inflow of newly identified substandard loans that to slow? I counted 3 new loans identified in the first quarter from your management commentary. Thank the 2 in Seattle University, 1 in Boston Life As you look at the Regie portfolio and recent upcoming appraisals and considering the conversations with sponsors, what are your expectations for the incremental inflow of new RESG loans into that substandard bucket? . George Gleason: That's a great question. What I would tell you, Matt, and I want Brandon to weigh in on this is we as we've said multiple times, we will probably have a few more sponsors who just reach a point they cannot or will not continue to support their transaction. So I would expect there will be some further inflow we've done a real good job of liquidating. Last year, we had 4 properties in foreclosed assets at some point during the year from RESG, we sold 3 of those last year. . So we've done a good job of liquidating. We've had several substandard loans that we liquidated out with the collaboration of our sponsors. So I think you'll see assets come in and assets go out of that. The other thing I would tell you is, and you mentioned appraisals, we are at a low leverage point on these loans. And for us to take a loss on the loans, all of the common equity, all of the prep equity, all of the mess that you got to burn through all of that to get to a point that we take a loss on these loans. So a lot of the assets that we've had resolution on, we've had no loss and the losses have been fairly well contained given the size of credits on the ones that we have had losses on. So I think you'll see assets come in and assets go out of that group. We'll do a lot of very collaborative work with our sponsors to help them work through this environment. I think our guidance we've given on net charge-offs and so forth is good guidance, given the loss content in those loans that are likely to pop in and out of classified status. Brandon, you might want to add color on that. Unknown Executive: Again, great summary, George. I mean I would also point out that we've been very diligent in our reappraisal process within the portfolio. We pointed that out in our comments. We've kept those appraisals current. You may note that there were fewer appraisals that resulted in LTV increases that were most within that plus or minus 10%. So the market -- as we said in our comments, we feel like we're in the later stages of the cycle. There's always an interesting new element to consider as we go from quarter-to-quarter with our conflict in the Mid East being the most recent add to that and uncertainty. But as George noted, the underlying economy seems to be really resilient. We're seeing good leasing, as I noted before. We will have projects where ultimately the sponsor does gets to the point that they're not able or willing to continue to support the deal. But we're -- our team does a great job of being on top of where these projects are and making sure we're on top of a making sure we're on top of ratings. So George's comments are spot on with respect to how we see the future. George Gleason: Brenda, I'm glad you pointed out the appraisal and for those on the call that didn't focus on a figure 28 and the narrative around Figure 28 in our management comments, 50% of the total RESG commitments have been appraised within the last 4 quarters and 92% have been appraised in the last 8 quarters. So the only appraisal is a loan that has a $1,500 nominal balance on a project that is sort of stalled and we'll never fund beyond $1,500. So that's the only pre 2023 appraisal on the book. So we're very current on the appraisals and continue to recycle those and renew those, keep them up. So we feel pretty good about that. Matt Olney: I appreciate the commentary on that. And just as a follow-up, kind of a similar question, but more on the Oro foreclosed asset bucket. I think that balance is $150 million, mostly 3 Reggie properties. I get these properties are all unique, but it feels like there could be additional foreclosures this year. So trying to anticipate if we should see that balance move up throughout the year? Or do you expect those existing 3 properties to move off the balance sheet? . George Gleason: We're working on all of those and there are discussions going on regarding all of those particularly a lot of discussions around the oldest 1 of those and several discussions going around the Chicago property. So I would hope that we'll over the course of this year, move some or all of those assets off the books. I repeat what I said earlier last year, we had 4 in that category. We moved 3 of them off during the year. 1 we didn't move off is that Los Angeles land. We've got a lot of activity on that right now. I would point out that we did make $12 million in contract extension fees and for a earnest money off the last contract we had on that, that never closed. So we'll work those things actively. It's premature to try to project what the outcome will be on that. But I would be surprised if over the course of the year, we didn't move some of those assets. Operator: And our next question will be coming from the line of Catherine Mealor of KBW. Catherine Mealor: We've spent a lot of time talking about the Life Science book and the office book. I wanted to see if we could get specific picture update on your multifamily book, maybe in 2 pieces. First, on just level of prepayments you're expecting in that book. It feels like that was the sector that was leading a lot of your prepayments over the past few quarters. And so our view on that moving forward, especially given the new rate environment. and then also in just credit and appraisal activities. To your point, the appraisals feel like they're coming in better than we've seen in some past quarters. So just kind of an update on the to health of the multifamily book? George Gleason: Yes. I'm going to let Brendan take the multifamily. And yes, the degree the rate of change in the appraisals is less significant than some of the earlier appraisals were in the last couple of years. And that just reflects the fact that the market has moved over a number of years. a lot of these assets are getting reappraised on an annual basis. And as a result, the LTVs on those assets are moving less significantly with the newer appraisals than they might have moved as the market was adjusting 2 years ago or 3 years ago. . So Brandon, do you want to take the multifamily story and talk about that? Unknown Executive: Absolutely, Catherine, good to hear from you. You are correct. We a lot of the payoff story that we're seeing in our portfolio is a direct answer to your question, both the health of the multifamily product in terms of its lease-up to the point of being attractive, obviously, for refi or sale or other takeout. And so what we see there is that -- and part of it that -- that's our largest property type by concentration. So by definition, they're going to have a outsized ratio of the repayments. But that's absolutely been the case. And some of the headwinds that we've talked about and our RESG repayments are driven in large part by the multifamily projects. And you'll continue to see that as we go forward. That was the case in the quarter just ended. It's been the case, and you can look back 6, 12 months, that's going to be the case. They're the heaviest part of our payoff. It's a healthy portfolio. And as the valuations, those this cap rates, that product type probably started out lower and moved as much as anything. But again, going back to our tried-and-true rules of having a lot of equity in these deals and being on a low basis even with those cap rate moves that, again, talking about appraisals, they've sort of the changes have slowed and everything seems to be sort of landing where it's going to be. It's a healthy portfolio, but it will, as you noted, result in a number of payoffs as we move forward. Catherine Mealor: And then 1 other has this question last quarter, but just to get an update on the IQHQ San Diego life science credit. And then last quarter, you talked about new leadership that came in that you were excited about. I know there was a lawsuit that's too press recently. So just any update on that project that you can provide for us would be helpful? Unknown Executive: Yes. Yes, I appreciate the question. And litigation, Catherine, that's really can't provide any meaningful commentary there on that. I mean that's for IQHQ to address. But -- to your point, we were excited. We are excited. We continue to be engaged with the new leadership there, very very excited about the energy that they're bringing and the traffic they're driving, the strategy that they're taking with respect to the different sort of segments of tenants that they're pursuing. It's not just the life science end market life science and office use, but clinical research, big pharma, tech, AI, even defense. So there -- the demand that they're tracking for the projects is -- it was good. In December, it's better as we sit here today in terms of the tours they're giving, the RFPs, LOIs and lease negotiations that they're having I would tell you the office demand, office user, the non-life science user is the bigger part of that traffic and demand that they're tracking, but they're seeing material demand there. And then they continue to work on the retail with some large block retail opportunities that they started to really get the project activated at the street level, and they're working some exciting opportunities that will continue to add to that energy and activation around the project. So yes, we're where we continue to be pleased with their focus and the demand they're generating. And we've noted in the past the material financial commitments they've made and and that was in '24, early '25. Some of this new leadership came in after that, and we really take their engagement with this project at that point in time. as a clear sign of their belief in the opportunity there. So yes, we're continuing to track the project and excited they're in the driver's seat and working hard on it. Catherine Mealor: I know that credit matures in August of this year. Is there anything that you think you need to see in terms of leasing or equity payments or anything that would present this loan from negatively migrating at maturity if you don't see a meaningful improvement in the leasing trends? George Gleason: Let me comment on that, and then Brandon, you can add some additional color. Sponsor support for a transaction is a key element in the migration or not migration of these assets. So based on our dialogue with the sponsor, I think, at this point in time, we expect sponsor support to continue for that asset. We'll see August is in some respects, not too far away. But in the world we live in today, August is an alternate from now. So we will see if that realization and expectation of sponsors continued support contribution of reserves as needed for this project is there, and that's our current expectation that that's going to be the case. I will I agree with Brandon, we're not going to comment on their litigation with one of their investors. But it's well known and been widely publicized in the media that QHCs had multiple tranches of capitalization and recapitalization come into that project. And in regard to the litigation, I'll just note that a lot of times when you have 1, 2, 3 or 4 different capital raises in a transaction, and there are different rights and preferences between the investors that come in at different points in the transaction. there's room for disagreement and hurt feelings between earlier investors who may get diluted out in subsequent capital raises. So that's a matter fran their investor to deal with. I don't think that has any significant bearing on our project with IQHQ or any other project with IQHQ, -- that's an interfamily squabble between the different tiers of investors in this transaction. Brandon, do you want to add anything to that? Unknown Executive: No. You covered it well, George. Operator: Our next question will be coming from the line of Janet Lee of TD Co. . Sun Young Lee: Good morning I would expect that the prospect of rate cuts is incrementally benefit benefiting for your net interest margin, generally speaking, given your variable rate loan rate component. But if the rates were to be relatively stable from here, is there any reason why your net interest margin would decrease further from here, whether that's because of the asset mix shift or the deposit competition? Or could we do stable NIM or potentially increasing from here? George Gleason: Yes. Janet, our view on that at this point is we're relatively agnostic as to whether rates go up 25 basis points or 50 basis points, or rates go down 25 basis points or 50 basis points are stay the same. Obviously, if rates go up, given our highly variable rate loan portfolio, we will get a couple of quarters probably of improved margin, but increasing rates would adversely affect a few of our customers on the bubble. And that increased margin would probably be more or less offset with incremental provision expense and credit costs. Conversely, if rates go down 25 basis points or 50 basis points, we -- that's going to be a bit of relief to a handful of customers that are on the margin there and probably lower some credit cost, but cut into our margin for a couple of quarters as our loan book reprices faster than deposits. So we've sort of reached the point with our balance sheet that we're agnostic about which way rates go, which is probably a good place to be today since nobody can really develop a firm thesis about which way they are going to go. Our margin will move around a little bit. We've talked about the competition on the loan side. We talked about the competition on the deposit side. We've talked about the a little bit of lift we're going to get from the securities book. So we'll just see where that plays out on the net interest margin in coming quarters. Sun Young Lee: And really appreciate the new guidance around your net charge-off expectations for the full year, which looks like it's pointing to around 50 basis point-ish. You already gave us a lot of color on credit. And given your commentary around inflows on the classified and criticized assets earlier. Is it fair to say that does NCO expectation assumes bakes in an assumption that classified and criticized assets will increase further from here? Or is there any other color you could provide on what kind of underlying assumptions are being used in this NCO expectations whether that you're assuming more losses than others and certain 5 RESG credits that you called out at the management commentary, et cetera? George Gleason: Janet, I think we've probably touched on all that to put a little more definition around it again as we've said it a couple of times on this call in the management comments and in prior quarters, we expect that there will be a small number of our customers that in this economy with these interest rates will just become unable or unwilling to continue with their project. So I think there will be some inflows of assets, small numbers into that special asset, substandard asset, foreclosed asset category over the course of the year. . We've had a good history of resolution. We've got some pretty meaningful activity toward resolving 5 of those assets as we've discussed, not all 5 probably make, but some portion of those do. So our -- whether that number goes up or down I think our guidance is good guidance. It's the best we can give you right now. And I think we'll have things come in and things go out of classification categories as the year goes on, and we'll just have to see how that unfolds. Operator: And I would now like to turn the conference back to George Gleason for closing remarks. George Gleason: All right. Guys, I think we're out of questions. So thank you so much for your time and attention today. We appreciate that we've used all of our time. So have a great day. We look forward to talking with you in about 90 days. Thanks so much. . Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Good afternoon, and welcome to Grupo Aeroméxico, S.A.B. de C.V.'s First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session at the end with instructions given at that time using the Ask a Question section on the webcast. As a reminder, today's conference call is being recorded. Now I would like to turn the call over to Ms. Lucero Medina, Head of Investor Relations. Ms. Medina, you may begin. Lucero Medina: Thank you, and good afternoon, everyone. Joining me today to discuss our results are Andrés Conesa Labastida, chief executive officer; Aaron Murray, chief commercial officer; and Ricardo Sánchez Baker, our chief financial officer. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we will present results that are based on our unaudited consolidated financials. Accordingly, financial results discussed today are based on information available to us as of the date of this call and not the comprehensive final statement of our financial results for any period presented. We may make forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act regarding future events and our company's future performance. We caution you that several important factors could cause actual results to differ materially from any plans and expectations expressed in this call, including the risk factors disclosed in our SEC filings. During this call, we will present certain non-IFRS financial measures. We have included a reconciliation and explanation of adjustments and other considerations of our non-IFRS measures to the most comparable IFRS measures. Our call and the earnings release are available on our website. Now it is my great pleasure to turn the call over to Andrés. Thank you, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2026 results. Andrés Conesa Labastida: As the situation in the Middle East continues to evolve, we remain hopeful for a prompt and peaceful resolution. Our results this quarter underscore the resilience of our business model. Despite several external headwinds, including temporary demand disruptions in certain regions of Mexico and a significant surge in fuel prices, we delivered results generally in line with our original guidance, reflecting the strength and adaptability of our platform. We are fully equipped to navigate these challenging times. Our brand is strong, and our ability to achieve higher premium revenue reflects our appeal to passengers who are less sensitive to price fluctuations. Above all, our team is widely regarded as one of the best in the industry. Thanks to this strong team, we have continued to lead the industry. We were once again recognized by Serium as the most on-time airline in the world in 2026, building on our number one global ranking in both 2024 and 2025. We have been acknowledged as a top employer in Mexico for four consecutive years, ranked twelfth on Forbes Mexico's best employer list, and achieved first place in the MERCO Palento ranking for passenger transport. The expertise and dedication of our team represent a distinctive strength that differentiates us from others in our industry. Aaron and Ricardo will give you a more detailed overview of revenue and financial performance. I want to point out several aspects that demonstrate the strength of our business model. Our unit revenues increased by 15% year-over-year, and we achieved an operating margin of 11%, which falls within the guidance range that we shared for the quarter. Also, we closed March with a robust financial position, liquidity exceeding $1.2 billion. Liquidity improved compared to the same period of 2025 and compared to the fourth quarter of last year, which is notable given that the first quarter of the year is typically weak on cash flow generation due to the seasonality of our business. With low leverage and a strong cash position, we have significant flexibility to respond confidently to current challenges. From a structural perspective, fuel accounted for approximately 21% of our total revenues in 2025, which is lower than the levels observed in other full-service carriers and ULCCs within the region. This positioning gives us meaningful advantage in managing periods of elevated fuel prices. Building on this position, we will continue to actively manage capacity and implement fuel recapture initiatives, including targeted fare adjustments. We are encouraged by the market's response, particularly in international markets where demand has remained strong and our fuel recapture strategies have proven to be materially effective. Approximately 70% of our revenues are generated in these markets. We plan to continue to take advantage of the adaptability of our network, enabling swift capacity adjustments as conditions evolve. As the environment stabilizes, we expect to capture meaningful operational leverage from the aircraft added over the past year, driving improved performance. We do not have any material additional fleet commitments this year, which limits incremental cost pressure and enhances our flexibility. This positions us favorably relative to other carriers with sizable committed deliveries in the following months. Simultaneously, we are strengthening our commitment to cost discipline across the organization to protect margins and sustain strong cash generation. This balanced approach on revenue and costs positions us well to navigate the current climate, just as we have proven in previous years. Looking ahead, we expect the second quarter to remain challenging and anticipate it will represent the weakest period of the year, reflecting the full impact of recent fuel price increases. For the second quarter, we expect to recover approximately 50% of the incremental fuel costs, with a clear path to higher levels of recapture as the year progresses, reaching around 70% in the third quarter and 100% in the fourth quarter, as our pricing and network initiatives are fully reflected in the market. In parallel, the benefits of our revenue initiatives, capacity adjustments, and cost measures will continue to build, supporting a sequential improvement in both margins and profitability. In this context, we expect low- to mid-double-digit revenue growth in the second quarter, translating into an operating margin in the range of 4% to 7%. Ricardo will provide additional detail on our second quarter guidance. Given recent market volatility, it is premature to revise our full-year outlook at this time. As conditions stabilize and visibility for the remainder of the year improves, we intend to provide updated full-year guidance. In the meantime, our structural advantages, strong market position, and disciplined execution are expected to reinforce our leadership in both financial performance and operational excellence. With that, I will turn it over to Aaron to discuss our commercial performance in more detail. Thank you very much. Aaron Murray: Thank you, Andrés, and good morning, everyone. I want to thank the entire Grupo Aeroméxico, S.A.B. de C.V. team for delivering industry-leading service and reliability to our customers in what has been a very challenging environment. We delivered revenue above our guidance for the first quarter, with total revenue of $1.34 billion, up 13.3% year-over-year. This record-setting first quarter performance was achieved despite the material impact from isolated disruptions in late February in Mexico. The impact of those disruptions, which affected both operations and transborder U.S. demand for a few weeks, has since recovered. Across our regions, we experienced strong revenue performance with particular strength in our international portfolio. International revenue increased 13.6% year-over-year, led by our long-haul markets in Europe, Asia, and South America. In domestic markets, revenue grew 12.7% year-over-year, supported by improvements with respect to last year's immigration-related impact on border markets and improved performance in beach markets. On the loyalty front, Aeromexico Rewards continues to build strong momentum, driving increased revenue and customer value. In the first quarter, we reached a new record with 38% of our passengers participating in the program, up 10 points year-over-year and 15 points since the program's reacquisition in 2023. Redemption revenue also grew 22% year-over-year, reflecting higher engagement and perceived program value. We continue to see significant runway for loyalty-driven revenue growth as participation expands. We are also seeing the benefits of the successful rollout of our new app, along with continued enhancements in retailing and merchandising which are strengthening our direct online channels. In the first quarter, direct online share reached a record 48%, up three points year-over-year and 23 points versus 2019. Our latest evolution of branded fares is also contributing to improved premium mix, with premium revenue mix reaching 42%, up one point year-over-year and 18 points versus 2019. These commercial efforts are delivering solid results, supporting revenue performance while strengthening the durability of our business. Turning to second quarter outlook, Ricardo will provide the details of our guidance, but overall demand has remained strong across the network despite continued volatility. March cash sales grew in the low teens year-over-year, with the week ending March 15 marking the highest first-quarter weekly revenue sales performance in the company's history, surpassing the previous record set in January. In response to higher fuel costs, we have been focused on implementing fuel recapture initiatives, which are showing encouraging results while also reducing noncore, lower-margin flying. These capacity actions resulted in the removal of approximately half a percentage point of capacity in the second quarter. Based on the success of the fuel recapture actions and continued demand strength, we expect to recover around 50% of fuel headwinds during the quarter. Beyond the second quarter, the impact of our fuel recapture initiatives will increase as a larger share of our bookings reflect these changes and additional initiatives are implemented. In closing, as we enter the second quarter in a more volatile environment, we are confident in our relative positioning in the industry. We have built a strong and durable airline with a robust commercial strategy that will allow us to navigate these conditions and emerge even stronger. I will now turn the call over to Ricardo. Ricardo Sánchez Baker: Thank you, Aaron, and good afternoon, everyone. I would like to echo Andrés and Aaron in acknowledging our team's dedication and significant contributions to the strong results achieved in the first quarter. We maintained best-in-class results in a complex operating environment, highlighting the robustness of our business model and our ability to achieve strong outcomes in challenging geopolitical circumstances. In the first quarter, total revenue reached $1.3 billion, marking a 13% increase from the previous year and aligning with the upper end of our guidance. This result demonstrates ongoing demand and healthy unit revenue trends. Our total unit revenue, or PRASM, grew 15% compared to 2025. From a cost perspective, total operating expenses increased 16% year-over-year, with higher fuel prices as the primary driver of the increase. Costs were also pressured by the impact of a stronger peso on our cost base, which appreciated 14%. Adjusted EBITDA for the first quarter reached €36 million with a 25% margin. This result represents a 5% increase compared to the first quarter EBITDA level of 2025, notwithstanding an estimated adverse effect of €36 million due to higher fuel prices and demand disruptions affecting revenue in specific regions in Mexico. First quarter operating income totaled $142 million with a margin of 11%, in line with the figures reported in the same period of 2025. These results correspond with the lower end of the guidance range issued in the previous quarter. Our cash position continued to improve. We closed the first quarter with over $1 billion in cash, complemented by a $200 million undrawn revolving credit facility, bringing total liquidity to €1.2 billion, or 23% of last twelve months' revenue. This represents an increase of $578 million compared to the same quarter last year, and is $21 million higher than year-end 2025, despite the quarter's typical seasonal weakness. During the quarter, we generated over $200 million in net operating cash flow and reduced financial debt by close to €10 million. At quarter end, our adjusted net debt to EBITDA ratio stood at 1.7 times, representing an improvement compared to the level reported at year end. Our leverage profile continues to strengthen, underpinned by consistent earnings generation and prudent capital allocation. With volatility continuing to shape the current environment, we remain focused on driving efficiency across the operation. As Aaron has highlighted, our emphasis on revenue management initiatives and network optimization is essential for maintaining consistent performance. At the same time, we are reinforcing cost discipline across the organization to protect margins and cash flow. Key actions include implementing a hiring freeze with backfill limited to critical operational roles, reducing discretionary spending including consulting and travel, prioritizing MAX fleet deployment to optimize fuel efficiency per ASM, leveraging operational flexibility to adjust engine maintenance programs and optimize capital expenditures, executing strategic capacity adjustments to avoid cash-negative flying, and reprioritizing investments and component management to reduce working capital requirements. Given the current level of fuel prices, our strategic investments in fleet modernization have become increasingly significant. Specifically, the enhanced efficiency of our 737 MAX aircraft has contributed to a reduction in fuel burn per ASM. During 2026, fuel consumption per ASM was 1.4% lower compared to the same period in 2025, resulting in estimated cash savings of approximately $5 million. In this context, the second quarter is expected to reflect peak pressure from elevated fuel prices, with the benefits of our mitigation actions not yet fully realized. As these measures are progressively implemented and reflected in our results, we expect a gradual normalization of margins and a stronger profitability profile into the second half of the year. For the second quarter, capacity is projected to increase by approximately 1.5% to 2.5% year-over-year. Total revenue is estimated to increase between 12.5% and 15.5% year-over-year. Adjusted EBITDA margin is expected to be between 17% and 20%, and operating margin is expected to be between 4% and 7%. We remain firmly committed to protecting margins, optimizing cash flow, and maintaining a strong balance sheet while preserving the flexibility to adapt quickly. Challenging environments like this often separate the leaders from the rest, and we are confident in our ability to capitalize on these conditions and strengthen our competitive position. We will now open the call for questions. Operator: Thank you. And as a reminder, to ask a question, press 11 on your telephone and wait for your name to be announced. To remove yourself, press 11 again, or use the Ask a Question section on the webcast. One moment while we compile the Q&A roster. Our first question comes from Pablo Monsivais with Barclays. Please proceed. Pablo Monsivais: Thank you. I would like to have more information on your recapture ability. You made some comments on the progress that you have done already, but I would love to know how much of the jet fuel increase can be offset by the prices that you have already reflected, how you are seeing clients, and when we are going to see this taking place, I guess more in the third and fourth quarter. Ideally, any color on the markets—how domestic is behaving to the fare increases versus international, which I guess is more on the long haul rather than the U.S.—would be great. Thank you very much. Andrés Conesa Labastida: Let me provide a brief comment, and then I will ask Aaron to go in detail. As you mentioned, Pablo, it has been much more efficient to translate these jet fuel price increases in international markets than in the domestic market, and I want to stress that 70% of our revenue is associated with the international market. That positions us in a great spot. Although we have not seen the same level of response in the domestic market in terms of yields, we have seen some capacity reductions, which is also positive going forward. Not necessarily affecting prices today, but in the future the domestic market, because of these capacity reductions, could be supportive of better yields. Aaron? Aaron Murray: Thanks, Andrés, and thanks for the question, Pablo. As it pertains to fuel recapture, in the international space we have great recapture across the board, particularly in our long-haul widebody network, and that is about 40% of our capacity. The fuel recapture initiatives were implemented swiftly and in large chunks and have been in place for the last few weeks. With the increase in fares for fuel recapture, we have been watching demand very closely. After a couple of weeks of sales at these new levels, we have not seen any cracks in demand in any of the international markets where we have sustained fuel increases. On the U.S. transborder, about 22% of our capacity, we did have some disruptions in the quarter that impacted U.S. point-of-sale demand. We have gotten through that, and from a recapture perspective we have had quite strong recapture, and demand is holding up. There is probably some long-term softness in U.S. point of sale, but we have made up for that in Mexico point of sale, so transborder U.S. is also holding strong. On the 50% fuel recapture target for the second quarter, with initiatives already in place, we probably need a little bit more to get all the way there, but the lion's share of increases that have stuck will get us to those targets, subject to fuel volatility. Two additional data points: when the conflict in the Middle East started in late February, early March, we had about 80% of the quarter's tickets already sold, given Easter fell in March 2026 versus April in 2025. That reduced our ability to pass through for the quarter. And our ATL on average is 35 days, so once you get to the new cycle, that is when you can translate higher jet fuel prices to ticket prices as you renew your air traffic liability. Operator: One moment for our next question, please. Our next question comes from Duane Pfennigwerth with Evercore ISI. Please proceed. Duane Pfennigwerth: Maybe just a follow-up: can you comment on the amount of 2Q that was already sold before the fuel spike? I assume as you move forward, you will have a better ability to raise yields. And then from a network planning perspective, as you are flexing down, what are the types of markets that are easiest to cut in this backdrop? And maybe you can speak a little bit about the likelihood and timing of slot waivers in Mexico City, if you even want them. Thank you. Aaron Murray: Yes, Duane. That is absolutely correct. We kind of picked around mid-March as when the fuel recapture initiatives really took hold. For the quarter, we were booked about 40%. At present, we are closer to 60% booked for the quarter. So you are right—about half the quarter was booked before the fuel recapture initiatives were in place. That is part of the staggered recovery of fuel recapture; into the third and fourth quarters, even with initiatives that have stuck and as long as demand continues to hold up, our recapture will grow as a larger percentage of bookings come at the new levels. On the network, Mexico City is the easiest place to target. We have some point-to-point flying not part of our hub, and that was the easiest to pare down, with a focus on driving a return on cash cost. In our hub at AICM, we also have some opportunity to cut, and we have, focusing on markets where we can get some recapture. If the markets are not covering cash and returning on cash, we can pull those back. Andrés Conesa Labastida: On slot waivers, let me stress that our top priority—and we will never put that at risk—is to keep our slot portfolio in AICM. We are in a great position to navigate uncertainty in the industry, so that will not be put at risk. If we are able to get some waivers and certain flights do not cover cash if the conflict continues, we will adjust, but we will never put at risk our slot portfolio in AICM. One example of what we have reduced that contributes to this half-point reduction in capacity is that we will not be flying Atlantas and Ixtapa-Zihuatanejo, which was not contributing to cash and is outside Mexico City. We continue to monitor those types of flights and we will not hesitate to cut and not fly them, with the top priority of keeping our slot portfolio in Mexico City. Operator: Thank you. Our next question comes from Michael Linenberg with Deutsche Bank. Please proceed. Michael Linenberg: As we start thinking about your supply plan for the year, you were down in March; you are up only slightly in June; we are already starting to see some cuts on routes in the third quarter—we can see them in the schedules. You have cut some from Guadalajara, etcetera, some non-AICM markets. How should we think about the capacity plan this year? Are we going to be closer to zero, or where are we with respect to planning? And then second, there was a proposal floated to potentially cap domestic fares in exchange for reduced airport costs. Is there any substance to that? Aaron Murray: For the full year, Michael, our original guide was 3% to 5%. What we are looking at right now is closer to probably 2% to 3%. The driver of our growth for the year is in our widebody network. We are taking deliveries this year, and widebodies for us are incredibly profitable. The capacity is coming in Barcelona, which is a new market for us, and other flying we are going to do in Europe. Even at current fuel levels, the profitability is extremely high for us. If market conditions prove that is not economical, we always have the ability to pull that back, but at this point, even at these fuel levels, canceling that flying would hurt our P&L. Andrés Conesa Labastida: To complement what Aaron was saying, as we have stressed in the past, we have huge operational leverage going forward. To fund the growth we originally planned between now and March, we are relying on the planes that we received, particularly in 2025. If we reduce our growth from 3%–5% to, say, 2%–4%, we are not bringing any additional shells to fund that, so we are in a better position. Given this was early in the year, obviously we needed to hire the crews for that growth in the second half. If we do not grow, we will not hire those crews. We are adjusting; we will not put pressure on the P&L. Regarding domestic fare caps, there is nothing that we see as a threat. As you know, in many countries, congress is always active and looking at potential legislation. We, like other airlines, are very active explaining how such measures, rather than helping the consumer, end up being worse for them. As we stressed in our initial remarks, the pass-through has been reflected more in the international than in the domestic market. You have not seen pressures on yields in Mexico’s domestic market because of oil prices, despite the fact that jet fuel is the only fuel that is not subsidized in Mexico—gasoline and diesel have ceilings—but in the case of jet fuel, it is a free market and we pay international prices. Operator: Thank you. Our next question comes from Filipe Ferreira Nielsen with Citi. Please proceed. Filipe Ferreira Nielsen: Hi everyone. On SEO—especially SEO availability—you discussed the strategy behind capacity and how you are seeing international long haul being very profitable. Are you seeing any constraints in terms of availability or shortage anywhere, especially in long haul? We have been hearing about constraints in Europe and Asia. Any high-level views on how this could impact your plans there? And a second question on the fleet plan: as you adjust capacity, are you primarily reducing aircraft utilization, and how should redeliveries and utilization play out as you adjust capacity? Andrés Conesa Labastida: We are monitoring the situation very closely. In the domestic market, Pemex has the ability to refine jet fuel, so we source a significant share of our domestic fuel consumption locally, and we do not see any risks there. In Europe and Asia, we are hearing about potential shortages. One advantage of working very closely with Delta, being a global airline flying everywhere, is that we are working together to make sure that we have the necessary fuel going forward. With the information we have today, for the airports that we fly to in Europe—which are the main airports in the region—we are not seeing potential fuel shortages in at least the next eight weeks, the remainder of the quarter. If the conflict continues, maybe it is another story, but in the short term we are fine. Ricardo Sánchez Baker: As Andrés mentioned, we source our fuel together with Delta in international stations, and suppliers have confirmed to us the availability of fuel for the next couple of months. If conditions continue to be complicated, then we will keep this space under our radar, but right now we think we have enough fuel to be operative in the next couple of months. On the fleet plan, we had a handful of deliveries coming this year. We are expecting another two 787s that will be delivered in the next few months, which will bring increased capacity in international long-haul markets, and we have three 737 MAXs that will be delivered during the year. We are planning to redeliver one NG this year, and we are evaluating if we will redeliver more aircraft next year. We would not have additional redeliveries this year, given the extensions that we executed last year. We plan to end the year with around 170 aircraft, from 165 at the start. As we have stressed, the bulk of our fleet expansion came in 2025 when we received close to 20 new shells. Operator: Thank you. Our next question is from Jens Spiess with Morgan Stanley. Please proceed. Jens Spiess: Thank you. Based on the 2Q guidance, what jet fuel price are you assuming to reach that guidance, so we can play around with different assumptions? Ricardo Sánchez Baker: Hi, Jens. We use a range, roughly around $4 per gallon, between $3.80 and $4.20. The midpoint would be around $4. Operator: Thank you so much. I will turn the call back to management to see if they have any questions online. Ricardo Sánchez Baker: We will take a couple of questions from the webcast. The first question is regarding free cash flow in the second quarter—what would be our expectation? We talked about the guidance in terms of profitability for the second quarter, but in terms of cash flow, we are coming from a first quarter that was very positive in terms of cash flow generation. Traditionally, the first quarter is the weakest of the year, and we were able to increase our cash balances in the first quarter. Going into the second quarter, we see a couple of forces at play. On one side, we expect peak pressure coming from the increase in fuel prices, and this pressure will have an impact on P&L and cash flow. On the other side, the second quarter is traditionally the strongest for us in terms of cash flow generation, as our passengers tend to purchase their summer travel in May and June. We are anticipating that these two forces will kind of cancel each other out, and we do not expect any material variation in our cash balances at the end of the second quarter—basically a flattish outcome. If conditions normalize in line with, for example, the forward curve that we are seeing, the third quarter should be closer to the normal seasonality that is basically flattish, and the fourth quarter would be a positive quarter in terms of cash flow generation. Operator: Thank you so much. I will now turn the call back to Andrés Conesa Labastida for closing comments. Andrés Conesa Labastida: Thanks again for joining the call. Rest assured that we will be working every day to improve the resilience and profitability of our business model. We are on the right track; we are going to do well. As soon as we have more clarity on the full year, we will not wait for the next earnings release—once we have clarity, we will release full-year guidance. For now, we will stay with the second quarter, but as we have it, we will let you know. Thank you again. I am looking forward to seeing you soon. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Good day, everyone, and thank you all for joining us to discuss Equity Lifestyle Properties First Quarter 2026 results. Our featured speakers today are Marguerite Nader, our Vice Chairman and CEO; And Patrick Waite, our President and COO; and Paul Seavey, our Executive Vice President and CFO. In advance of today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the company's earnings release. [Operator Instructions]. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainty. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader, our Vice Chairman and CEO. Marguerite Nader: Good morning, and thank you for joining us today. I am pleased to report the results for the first quarter of 2026. We continued our long-term record of strong core operations and have maintained our full year normalized FFO guidance of $3.17 per share. Our manufactured housing portfolio represents approximately 60% of our total revenue, and these properties are currently 94% occupied. Our communities distinguish themselves by their ability to sustain high occupancy levels over extended periods. This resilience is driven by the composition of our resident base as homeowners represent 97% of our MH portfolio. Homeownership promotes long-term residency and supports our strong operating performance. The high concentration of homeowners is a key driver of our predictable recurring cash flow Residents are invested in their communities, which encourages stability, long tenure and strong neighborhood engagement. Within our RV portfolio, the increase in annual revenue reflects continued strength across our customer base. Our annual customers stay in park models, resort cottages, and RVs with many families viewing our properties as an integral part of their traditions and family history. This loyal -- this loyalty supports sustained long-term revenue. Turning to demand. Our offerings across our portfolio are unique. We offer great long-term experiences in sought-after locations at a fraction of the cost of alternatives. We are engaging with our customers through traditional e-mail campaigns, social media outreach and digital advertising. For the quarter, our websites attracted a combined 1.3 million unique visitors and generated 94,000 online leads, reflecting strong engagement. The drivers of the lead generation are from our RV annual lease campaign and trip planning lead generation. Our social media strategy seeks to engage both customers and prospects in a wide variety of platforms. We have over 2.4 million fans and followers across several social media networks. Over the past 10 years, we have grown our social media fans and followers by an average of 25% annually. During periods of uncertainty, it's important to recognize the stability of our business and the fundamentals that support continued growth. I will highlight 3 of the key components of our success. First, our unique business model drives sustained long-term outperformance. Over the past 25 years, ELS has outperformed the REIT industry NOI growth by 150 basis points. The stability through economic cycles is a hallmark of our success. Second, the demand drivers are the support for continued long-term outperformance. Our core customers are baby boomers and 10,000 people per day turn 65 through 2030. Thereafter, the Gen X generation maintains the demographic tailwind for the 15-year period following the baby boomers. The runway remains long supported by favorable migration patterns. And finally, our capital structure is an advantage for us. Our balance sheet is in terrific shape with an average term to maturity of more than 7 years. Our debt is fully amortizing and not subject to refinance risk, and our debt maturity schedule through 2028 shows only 14% of our debt coming due compared to the REIT average of 35%. We have delivered an 18% compounded annual dividend growth rate over a 20-year period. ELS offers a rare combination of strong income growth, stability and demographic tailwinds backed by a well-managed balance sheet. I want to thank our team for a great start of the year. They've done an excellent job supporting our snowbird guests and will soon welcome our customers for the upcoming summer season. I will now turn it over to Patrick to provide more details about property operations. Patrick Waite: Thanks, Margarite. We're in the middle of our seasonal shift with our snowbird customers heading back to Northern climates and our northern properties gearing up for the summer season. As we wrap up the busy season in the Sunbelt, I'd like to provide an update on our key Sunbelt MH markets and the value found in our communities. Florida is our largest market, accounting for about 50% of our core MH revenue. In our top markets of Tampa St. Pete and Fort Ladders. Pound Beach, the average single-family home price ranges from 350,000 to over $500,000. Our communities in these markets offer a compelling value with average new home prices of $100,000 and resale home prices averaging about $50,000. We continue our strategy to expand existing communities in areas of high demand and have added more than 1,100 MH sites in Florida since 2020. In our core Arizona market of Phoenix, Mesa, single-family homes averaged more than $400,000, while new homes in our communities averaged $100,000 and resale homes averaged $70,000. We are actively selling homes in our expansion projects in Arizona or new inventory is selling at prices typically ranging from 110,000 to $180,000. And we have 500 completed expansion sites to support further occupancy growth. In our Northern California markets around San Francisco and San Jose, homes averaged over $1.3 million. All the Southern California markets of Los Angeles and San Diego are about $900,000 to $1 million. Given high demand and the strong value proposition for our California properties, the portfolio is 99% occupied and home sales are typically resales of resident homes in the range of $100,000 and higher. In each of these markets, residents received an exceptional housing value along with desirable amenities, including swimming pools, clubhouses, pickleball courts and more. The active lifestyle and social engagement offered our communities as why homeowners stay with us for an average of 10 years. Leveraging feedback from our customers, our property operations team establishes comprehensive budget plans for each property. Our on-site team members prioritize occupancy and revenue growth while thoughtfully managing expenses such as seasonal staffing, overtime and discretionary spending. We're able to adjust to changes in the business to meet high customer expectations while managing expenses scaled to property operations. At the same time, we are investing in new technology across our business. customer touch points like online payments, customer surveys and follow-up and operational efficiencies like online check-in, staffing plans and expense management. This continued innovation allows us to increase operational capacity while improving the customer experience. Importantly, these efficiencies give our on-site team members more time to make connections with our customers and create memorable experiences. In our RV business, the long-term annual are the core stable occupancy -- core of our stable occupancy. Through April, we have seen improvements in attrition trends compared to last year, and we are looking forward to the summer sales season. Annual sites account for 75% of our core RV revenue, and most of our annual RV customers on a park model or our view of site improvements and sell their unit in place when they choose to leave the can grow. Annual Marina revenues experienced occupancy headwinds year-over-year from delays for permits and longer construction time lines for projects related to previous storms. We expect these construction projects to be completed late in 2016 and into 27, which will then contribute to occupancy gains as we build back that business. We're looking forward to launching the 12th annual 100 days of camping social media campaign this summer, which runs from Memorial Day weekend through Labor Day weekend. We see strong engagement with this campaign year after year, earning over 45 million views across social media last summer. Our teams will be following along as customers post photos online, helping each guest make memories and reinforcing the legacy of our brand. Now I'll turn it over to Paul. Paul Seavey: Thanks, Patrick, and good morning, everyone. I will review our first quarter 2026 results and provide an overview of our second quarter and full year 2026 guidance. First quarter normalized FFO was $0.84 per share, in line with our guidance. Core portfolio NOI growth of 4.9% compared to prior year was slightly ahead of our expectations for the quarter. Core community-based rental income increased 5.7% for the quarter compared to the first quarter of 2025. The increase in rental income is primarily the result of noticed increases to renewing residents and market rent paid by new residents. Occupied sites increased 54% during the first quarter, resulting in occupancy of 93.9%. During the first quarter, we sold 228 new and used homes. The occupancy comparison to first quarter 2025 is impacted by expansion sites added during the past 12 months. Adjusted for expansion sites, occupancy would be 94.4%, in line with first quarter 2025. First quarter core resort and marina based rental income outperformed our budget by 10 basis points in the quarter. Rent growth from RV and Marine annuals increased 4.2% for the quarter compared to prior year. slightly below expectations for the quarter. Marina performance was impacted by delays in slip restoration efforts. Seasonal and transient ramp was 70 basis points higher than guidance as a result of higher-than-expected seasonal rent in the quarter. For the first quarter, the net contribution from our total membership business, which consists of annual subscription and upgrade revenues, offset by sales and marketing expenses was $17.6 million. an increase of 13.7% compared to the prior year. Membership dues revenue growth is primarily rate driven. Approximately 1,200 upgrade subscriptions were originated in the quarter from new and existing members. Core utility and other income increased 5.4% compared to first quarter 2025. Our utility income recovery percentage was 50.4%, about 280 basis points higher than first quarter 2025. First quarter core operating expenses increased 1.8% compared to the same period in 2025. We renewed our property and casualty insurance programs, April 1 and the premium decrease year-over-year was approximately 18%. We are pleased with the results, which reflects no change in our property insurance program coverage. Core property operating revenues increased 3.7%, while core property operating expenses increased 1.8%, resulting in growth in core NOI before property management of 4.9%. Our noncore properties contributed $3 million in the quarter, slightly higher than our expectations. Property management and corporate expenses were $28.6 million in the first quarter of 2026, and 3.4% lower than 2025. The press release and supplemental package provide an overview of 20,262nd quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2026 full year normalized FFO was $3.17 per share at the midpoint of our guidance range of $3.12 to $3.22. We project core property operating income growth of 5.7% at the midpoint of our range of 5.2% to 6.2%, we project the noncore properties will generate between $5.7 million and $9.7 million of NOI during 2026. Our property management and G&A expense guidance range is $119 million to $125 million. In the core portfolio, we project the following full year growth rate ranges, 4% to 5% for core revenues, 2.2% to 3.2% for core expenses and 5.2% to 6.2% for core NOI. Full year guidance assumes core MH rent growth in the range of 5.1% to 6.1% and Full year guidance for combined RV and Marina rent growth is 2% to 3%. Annual RV and Marina rent represents approximately 75% of the full year RV and Marina rent and we expect 4.8% growth in rental income from annuals at the midpoint of our guidance range. As I mentioned, the change in expectations for full year growth in annuals compared to our prior guidance is attributed to our Marina portfolio, which is experiencing longer-than-anticipated delays in restoration of slips. Our full year expense growth assumption includes the impact of our April 1 insurance renewal for the rest of 2026. Our second quarter guidance assumes normalized FFO per share in the range of $0.69 to $0.75. Core property operating income growth is projected to be in the range of 4.8% to 5.4% for the second quarter. Second quarter growth in MH rent is 5.6% at the midpoint of our guidance range. We project second quarter annual RV and Marina rent growth to be approximately 5.1% at the midpoint of our guidance range. Our guidance assumes second quarter seasonal and transient RV revenues performed in line with our current reservation pacing. We've made no changes to prior guidance for seasonal and transient rent in the third and fourth quarters. Second quarter growth in core property operating expenses is projected to be in the range of 3.9% to 4.5% and includes the impact of our April 1 insurance renewal. I'll now provide some comments on our balance sheet and the financing market. Our balance sheet is insulated from refinance and rate risk and is well positioned to execute on capital allocation opportunities. Our floating rate exposure is limited to balances on our line of credit. Our debt-to-EBITDAre is 4.5x and interest coverage is 5.6x. We have excess to approximately $1.2 billion of capital from our combined line of credit and ATM programs. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Current secured debt terms vary depending on many factors, including lender, borrower sponsor asset type and quality. The current 10-year loans are quoted between 5.25% and 6.25% 60% to 75% loan-to-value and 1.4 to 1.6x debt service coverage. We continue to see solid interest from life companies and GSEs to lend for 10-year terms. High-quality, age-qualified MH assets continue to command best financing terms. Now we would like to open it up for questions. Operator: [Operator Instructions]. And our first question comes from Jamie Feldman of Wells Fargo. James Feldman: Great. I wanted to dig a little deeper into the insurance renewal and then just the impact on the expense savings and the new guidance. Can you talk about what you had in the original guidance for the insurance renewal, how that compares to the down 18%? And then just maybe some of the moving pieces around the expense savings and the guidance going forward? Paul Seavey: Sure, Jamie. I think that we've guided to full year core expense growth. I think I mentioned this in the January call. It includes a premium to CPI. That is offset by some anticipated savings in a few line items. And just as a refresher for everybody, roughly 2/3 of our expenses are comprised of utilities, payroll and repairs and maintenance. And those three line items, we expect year-over-year growth for the remainder of 2026 to be approximately 4.7%. The CPI reported in April was almost 100 basis points higher than the prior month, and we've made some expense adjustments, including utility expenses and R&M both in anticipation of potential energy and supply cost increases. And with respect to the insurance we had an assumption in our budget, which was informed based on what we understood what's happening in the market at the time that we finalized our budget in January. And so we've made the adjustment to reflect the 18% reduction in premium and all of that is rolled into the guidance that we provided. James Feldman: But are you able to say like what was in the initial number for the insurer? I'm just trying to figure out how much better it was than what you thought. Paul Seavey: Yes. Generally, we don't go into that level of detail, Jamie. Operator: And our next question comes from Jana Galan of Bank of America Securities. Jana Galan: Following up on the revised seasonal and transient top line guide, can you just talk a little bit more about like booking visibility and kind of reservation pacing. And I don't know any impacts with kind of the weather. Paul Seavey: Sure. I mean, with respect to the seasonal business and just as we think about advanced reservation pacing, certainly, we talked a lot in the past about our transient business and not great visibility beyond the coming 90 days as our first point of kind of visibility. So as I mentioned, we've updated our guidance for transient to reflect what we're seeing in the system right now in terms of reservation pacing. But just a reminder, roughly 60% of the revenue comes from bookings that are within 7 to 10 days of arrival. Jana Galan: And also very much appreciate the update on the financing environment. I was just wondering if you can maybe comment on any changes in the transaction environment or any more product coming to market potentially on the RV side. Marguerite Nader: Sure. Thanks, Jana. Yes, as you know, our assets are really in demand from an investor standpoint. It's not a secret that the model that we have is compelling. But we find times in our history that we have limited amount of quality assets for sale, and we're in that time right now. As an industry, we're experiencing a low volume of activity. The ownership remains highly fragmented, but our team is very engaged with owners as they consider their next step in the future. I think that with your -- with respect to your question on whether on the RV side, I think there probably is more opportunities to buy transient RV parks than there were previously. But that's necessarily something we are interested in. Operator: And our next question comes from Eric Wolfe from Citi. Eric Wolfe: For the Northeast annual RV sites, can you just talk through the trends that you're seeing there? I think last year, around this time, you started to see some higher turnover like 20 properties or so. Does that seem to be normalizing? Is occupancy head behind? Maybe just talk through sort of for those Northeast properties, the annual trends you're seeing thus far? Patrick Waite: Yes. Sure, it's Patrick. We are seeing trends that are more consistent with our historical experience as opposed to the elevated attrition that we saw at the same time last year. And as we made our way through the quarter, sequentially month after month, we were able to achieve a higher level of sales. We feel like we have consistent demand in the RV annual space. And just as a reminder, in the back half, of 2025, we added 500 annual. So we kind of rolled out of that period into a period of steady demand, and we're past that elevated attrition that you referenced from last year. Eric Wolfe: Got it. That's helpful. And then maybe just going back to the marina restoration. I guess it sounds like based on your original guidance, you expected maybe some slips to come back, I guess, this quarter, but now it's sort of getting pushed to late 2026 or even early 2027. I guess, first, I just want to confirm, that was right. And then maybe just discuss, I guess, it sounds like maybe over the last 2 months, you've seen construction delays or permitting delays. Just sort of what happened and what the magnitude of it is. I guess I calculated like $1.5 million, but maybe just let us know if that's incorrect. Patrick Waite: Yes. So I'll -- let me speak to what's actually going on at the property. So it's 3 properties. They were impacted by the hurricane season in I think your time line is pretty close to our thinking. I would have expected that we would have been on coming into this year and starting to build occupancy as projects were completed through the current year. The reality is the delays are, call it, in the neighborhood of 9 to 12 months. And the expectation of progress being completed and building back occupancy late in 2026 and into 2027, I think is a good way to think about it. Operator: And our next question comes from John Kim of BMO Capital Markets. John Kim: Many teasing occupancy, it continued to trend down. It did end the quarter on a high note, but I'm wondering how you see that playing out for the rest of the year, excluding the impact of expansions. Paul Seavey: Yes. As I mentioned in the call, occupancy ended the quarter at 93.9%. That's up 10 basis points from year-end on the 54 sites that we filled during the quarter with no expansion sites added. We have a -- we essentially have an assumption in the budget for a modest uptick in occupancy for the rest of the year. not quite the volume of growth that we saw in the first quarter in the future 3 quarters, and so anticipate a slight increase during the rest of the year. John Kim: Okay. Can I ask a second question? Paul Seavey: Sure, you can. John Kim: The 1,000 trails, you talked about a new -- I think a new rate strategy. just given that it's gone up 12% year-over-year despite fewer members. Is this something that you're going to carry on through for the near future and potentially increase rates further at the expense of memberships? Marguerite Nader: Yes. I mean I think if you look at the supplemental, as you point out, you see that increase in revenue. I think all -- if you add all the line items together, you get to about an 8% growth. And that is primarily because we changed that product. And we have a higher annual dues rate. The term is, I think, 2 to 4 years and with costs ranging from $2,000 to $4,000 a and the members want to have that extra time at the properties, take advantage of discounts on cabins, et cetera. So right now, that price is, I think, is properly priced. And as we head into '27, we would look to what increases we would think that we should do in terms of that product. But the product as a whole has been very successful for our customers, our members wanting to get that upgrade and pay the additional does. Operator: And our next question comes from Haendel St. Juste of Mizuho Securities. Haendel St. Juste: I wanted to go back to the OpEx guide for a bit. Again, I guess I understand that you don't want to get into the specific pieces of how much things like insurance or causing an adjustment for the guide. But I guess I was more curious on the oil side. Obviously, the cost of oil has picked up quite a bit this year. And I'm curious how you can hedge the future volatility in the price of oil? Or how -- what's contemplated in the guide and potentially how that can be hedged. So any color on what's being contemplated, how it can be offset and how to think about that in the broader context of the prior guidance versus the new guide Paul Seavey: Sure. So our process to update guidance considered the impact of the roughly increase in oil price since December. We reviewed the pricing structure used by the utility providers in states where we operate. These include regulated, frankly, primarily regulated and some deregulated markets. utility providers in certain states like Florida do have pricing structures with variability clauses that allow them to recapture some portion of their costs if the regulated rates limit their ability to recapture price increases. So as we looked at all of that, we increased our utility expense assumptions for the remainder of 2026. Haendel St. Juste: Okay. Fair enough. I appreciate that, I suppose. And then if I could squeeze in one just on the revised guide for the noncore portfolio income, maybe some color on what's driving that and how to be thinking about modeling that? Is that fair just to perhaps ratably grow that through the model the rest of the year? Paul Seavey: Yes. I think it relates to just improved expectations, a couple of the properties in that portfolio. primarily RV locations. You may recall that there are a number of properties that are in the noncore portfolio that were previously impacted by storms that were not operational. And so as they're recovering, we noticed some upside in the performance and the expected contribution and that was the basis for the adjustment. Operator: And our next question comes from Brad Heffern of RBC. Brad Heffern: Historically, you've talked about weather being the primary swing factor on RV transient and there hasn't really been an obvious impact from gas price movements. Obviously, with the or we're seeing a much more dramatic and quick change in prices. Is there anything in your data that suggests that it might be having a negative impact on transient demand? Marguerite Nader: Yes. We've looked certainly over many years at gas prices and the effect on RV transient. And certainly, gas prices have made headline news over the past several weeks. Year-over-year, I think we've seen a $0.90 increase in the price of gas, not unlike what we saw during the pandemic during times in the pandemic. But we kind of think of it in terms of just what is it -- what's the incremental cost to our customer. And if you consider a 3-night trip. Our average customer is going about 90 miles to our locations. That higher gas price results in an increase of about $25, $30 for the trip -- and if that's three nights, you're talking about kind of $10 per night. So if you think about other vacation alternatives, the overall cost of our vein is really significantly lower and offers the flexibility of really being able to control your spend and also be able to control your environment. So I think at the current rates, net-net, I think it can be a positive certainly, if you're talking about rates that are significantly higher or you're talking about supply issues, then you get into kind of maybe different conversations. But I think where we're at right now, our customers are excited to get out there and use their RB. Haendel St. Juste: Okay. Got it. And then the Canadian tariffs kind of went into effect more than a year ago. So we should be starting to lap some of the comps on the boycotts. Are you seeing any evidence that those Canadian customers might be coming back or any other color that you can give around that? Patrick Waite: Yes. The we're just out of the summer season and the impact of the Canadians rolled through those results. I think it's early to call what we're going to see for the summer season. And certainly, we're in some unpredictable times. But we'll provide updates as we start to get greater visibility into the next couple of quarters. Operator: And our next question comes from Michael Goldsmith of UBS. Michael Goldsmith: Maybe just a follow-up on the seasonal and transient seems like the first quarter number was in line with the initial guidance. You're kind of guiding to second quarter of down 9%, but then it kind of -- it implied that the back half is up about 3%. So I was just wondering how you're thinking about that 3% growth in seasonal and transient in the back half? And if that split is that more fourth quarter weighted than third quarter? And then are you expecting in the guidance, are you baking in kind of an acceleration in the fourth quarter as you lap some of that disruption from the Canadian customer. Paul Seavey: Sure. Broadly, Michael, as you said, the base rental income growth rate, it does reflect a 50 basis point decline to prior guidance. half of that, as we talked about as the marina. The remainder is heavily weighted to our seasonal expectation for the second quarter. That's mainly in April. Just to provide that color. And then as we think about the remainder of the year, as I said during my opening remarks, we've left the assumptions for third and fourth quarters in place as they were budgeted as we don't have great visibility into that activity. Michael Goldsmith: So as they were originally budgeted, was that does that bake in an assumption that you'd get back some of the Canadian customers that didn't come in fourth quarter. Paul Seavey: We have an assumption in the fourth quarter of a recovery of some of that. I wouldn't qualify it to Canadian customers. I think that, as we've talked, the impact on the seasonal business, provides an opportunity for us to backfill occupancy from customers, whether they're Canadian or domestic customers. Michael Goldsmith: Got it. And then just as my follow-up question, on the home sale volumes on price, it looks like new sale volumes were down and the rate and the price per home was down and then similarly on the used homes. I think they were also -- at least the price was down. So presumably that's a mix shift, but can you provide a little bit more color in what's going on in the home film. Patrick Waite: Yes, sure. I mean we continue to see steady demand. The beginning of the quarter was -- it was impacted by weather, it was winter and that even bled down through many of the Southeast markets. And as we work our way through the quarter, we saw steady demand and feel good about the demand profile. Just with respect to the new and used sales the one, I wouldn't read too much into in any particular quarter, the home sale price because to your point, it has a lot to do with mix. I mean, directionally, the price per on the new was up and the price per on the used was down. But all of that is with the backdrop of -- we feel like we have steady demand in the MH portfolio. Operator: And our next question comes from Wesley Golladay of Bard. Wesley Golladay: Can you unpack the seasonal and domestic transient guests for the first quarter? Was that positive growth ex Canadian? Paul Seavey: Yes, it was primarily overall, it was growth. It did included the Canadian customer in the revenue, of course, but just to be clear, the marginal improvement was from customers that we saw booking seasonal stays during. Wesley Golladay: I guess the -- I mean, if you were -- could you unpack the domestic traveler? Was that positive? Is that customer segment bottomed? And do you have a positive outlook for that segment going forward. Paul Seavey: The domestic seasonal customer is what [indiscernible] sorry, sorry. Wesley Golladay: Domestic seasonal and transit segment. So I'm trying to figure out how much of that was weighed down or the outlook this year is maybe Canadian negative, but U.S. domestic and transit gas positive? Just trying to unpack if that is if that segment is bottoming out at the moment. Paul Seavey: Well, I guess. I'll say two things. One, as we -- as Patrick mentioned, we've ended our winter season and we're heading into our northern season. So that's a very different customer and different potential there. And maybe with respect to the seasonal as we just think about the future, the coming winter season next year, maybe it'd be helpful to walk through some historical context on the reservation patterns for the winter season revenue. I mean in the past, we would end our winter season with approximately 50% of the anticipated future winter season revenues booked those advanced reservations allowed customers to reserve the site that they wanted at the property and didn't carry penalties for cancellation. Then following a fair amount of booking and cancellation activity after the first quarter and into the summer months. By the end of any winter season, roughly 1/3 of the revenue that was generated during the winter season came from those advanced bookings. So start the season with 50% of the revenue booked to end with about 1/3 after all the cancellations -- and so as we think about it now, there's been a meaningful disruption to the seasonal business, we think that we've talked about as a result of the domestic and the Canadian relations, and so we look at it in terms of engagement. And as we sit here right now, 50% of the in-place guests have reserved space for next year, and that compares to 47% of the in-place guests last year. Wesley Golladay: And then one more, I guess, bigger picture question. With the rise of artificial intelligence and the way people are searching for product these days, are you noticing any change in the way you source your residents or a seasonal and transient guys? Marguerite Nader: Certainly, our marketing department is very focused on using artificial intelligence inside of our search options, understanding and appreciating customers are searching for our offerings. It is no longer kind of a simple camp grounds in Maine. It's a much more robust search and we're focused on making certain that once that search is put in place and once the person indicates what exactly they're looking for, we are able to have our communities and our resorts come up at the top of the list. And a lot of that is a function of our websites have been around for a really long time, and they have a really high number of reviews, which is very helpful for that algorithm. Operator: Our next question comes from Jason Lane of Barclays. Jason Wayne: Just on the RV and Marina. Looking at the RV and Marina. annual guidance cut, so that was driven primarily by transient and marinas. So can you just give any color on how rent growth and occupancy trended in RV annual specifically in the first quarter and what your assumptions are for the rest of the year, RV annual, specifically. Paul Seavey: The RV annual, when we reported in October, we provided our guide for rate growth that was 5.1%, and that's been consistent. And we anticipate that to be consistent for 2026. We're seeing no change from that. And in terms of occupancy, we had roughly 100 sites that we were down in the first quarter, and we anticipate, as Patrick was talking recovery of those sites and addition of annual sites throughout the year. Jason Wayne: it. And then it looks like there were some other sites added this quarter. Just curious where those new sites were added, if that was all in kind of the markets you mentioned earlier. And if there's any that are expected to come online this year in those markets and maybe outside the. Paul Seavey: We didn't add sites in the quarter. We did have some shifting in our reporting. So a couple of things in terms of just the presentation of sites in our earnings release, if that's what you're referring to provide greater visibility and clarity on the composition of sites in our JV portfolio. We reported those a bit differently and showed those in the categories with footnote disclosure that they relate to the JVs. And then we also annually at the end of the first quarter, we true up our seasonal site count for the number of seasonal customers that we had during the winter season. So that adjustment was made. And with that adjustment, the transient site count was offset or adjusted accordingly. Operator: And our next question comes from David SegaLoggerhead of Green Street. David Segall: Just a follow up on the site count changes. What do you think are the prospects for reclassifying those sites that were converted from or classified from seasonal transient back to seasonal later this year? Or is that more of a 2027 event? Paul Seavey: Yes. Our practice is to update that at the end of the first quarter based on what we saw during the winter season. So we would anticipate doing that a year from now. David Segall: Great. And I appreciate the color on local home prices that you gave earlier in the call. I'm curious what your thoughts are on the impact of stagnating or lowering prices and the local for sale market would be on the MH values and the ability to increase rents and just kind of implicitly what do you expect the spread between stick built homes in your markets to MH home values to remain stable? Or do you think it would narrow Patrick Waite: Yes. Let me -- I guess, first, I'd put in the context the value proposition that I addressed in my prepared remarks is very attractive and is a wide band to the next mark on single family. So we have a strong value proposition even if there was some moderation in single-family home pricing, and we've seen that historically that we've had consistent occupancy and consistent home sales, even in up cycles and more moderate cycles. So I think that's our reasonable expectation as we look forward to 2026. And I'd also highlight that those key markets that I highlighted have a very consistent demand profile, including in single family in the mid-tier across each one of those submarkets. Operator: And our next question comes from Peter Abramowitz of Deutsche Bank. Peter Abramowitz: Yes. Just wondering, could you give us kind of a refresher on general demographics of your transient customer base I think age average income levels would be helpful. And I know you talked about the impact of oil prices on decisions around train and travel. But just generally, kind of what are the democrats of that customer base? And then also maybe some of the broader macro factors like job growth, anything we should be watching for thinking about as it relates to results through the rest of the year? Marguerite Nader: I guess, the demographics of our transient customer really varies by region. So in the northern part of the country, the Northeast and the Midwest is really family camping. So you're talking about a couple. 40-, 50-year-old couple with a couple of children, and they come out on a weekend basis, and they're generally employed full-time workers and just have the time when they have time off from their jobs to be able to camp and then very differently in the South and Southwest in Florida, Arizona, et cetera. We have -- our transient camper tends to be a retired couple who tends to go and stay in a few different locations and has just more time on their hands to be able to work their way through our properties and through our system. Peter Abramowitz: Okay. That's helpful. I appreciate that. And then just one more on the scope of the work of the Marinas I think you mentioned it was three properties specifically. Can you share where they are? And then is there any sort of kind of offsetting revenue pickup in 2017? Or is this just work to kind of get the properties back online? And kind of back on the trajectory that you previously expected? Marguerite Nader: Yes. The properties are all in Florida, three properties are in Florida. And yes, certainly, there is a revenue pickup in 2017. There's upside in 2017 for these assets. because there is a high demand for these slips to be brought online, they'll be filled and then we'll be recognizing that revenue in 2017. Operator: And our next question comes from Adam Kramer of Morgan Stanley. Adam Kramer: Just want to ask about capital allocation priorities here. I think, in particular, right, development seems like a really interesting opportunity. Given I think what you talked about for yields historically versus what acquisition yields would be today. So just wondering, again, general capital allocation priorities sort of stack ranking them. And then I think with development in particular, is there an ability or an interest in sort of that beyond, I think, the sort of 700 to 1,000 sites you've talked about on an annual basis? Patrick Waite: Yes, sure. So on the development front, over the last 3 years, we've brought online a little over 2,000 sites, that's been a mix of MH and RV, highly focused on our core markets in the Sunbelt. This year, looks to be in the range of 200 to 400 sites that deceleration is not is not an indication of our desire to continue developing our expansion sites, but it's just the cadence of projects as they're working their way through an approval process and then getting a shovel in the ground. Those yields, we continue to expect to be in the high single digits. Those properties that we're focused on for the upcoming year in Florida, and then we have another 1 out on the West Coast. Adam Kramer: Great. And then maybe switching gears a little bit more of a bigger picture question. Just on the policy side of things. I think the -- so Roto Housing Act has a number of elements related to manufactured housing in it. I think the permanent chassis requirement getting removed sort of a big one, but also some financing elements pushed for factory-built housing a number of others. So I was just wondering, again, sort of open any question here. Sort of maybe the company's thoughts just on the act and what it might mean for the industry and the potential read-throughs to DLS specifically? Paul Seavey: I mean, overall, I would say that it would be helpful to the industry for the points that you just highlighted, specifically to ELS some variability in manufactured housing setup may provide an opportunity for us. I think there's broader opportunities for the manufacturers. We are close to tracking what is the progress on that legislation. And just given the current state of affairs in DC, that bill has stalled for all practical purposes. I think there's still a desire to move it forward, but we'll have to we'll continue to monitor. We can provide updates on future calls as we get some more insight. Operator: And our next question comes from Steve Sakwa of Evercore ISI. Steve Sakwa: A lot of questions have been asked and answered. I just wanted to kind of circle back on the MH occupancy point. I guess whether you kind of look at the data on Page 9 or the data on Page 7, slightly different numbers, but kind of paints the same sort of broad picture, which is the site count has gone up year-over-year. but the number of occupied sites is actually down when you kind of look at the ending March 31, '26 versus March 31, '25, and I think Patrick mentioned that you guys added about 500 expansion sites maybe over the course of the past year. So maybe just talk about that lease-up process? And are you still doing expansions at the same pace, given that the occupancy has kind of been trailing down? Or how do you sort of think about that development lease-up pace and future builds? Patrick Waite: Yes. Well, just high level on the occupancy front, just a reminder that as we made our way through '24 and '25 the hurricane impact from the '24 season was basically 300 occupied sites. So we're working through building that back. With respect to our expansions. We've completed some very solid recent expansions in particular, in Florida and Arizona. The lease-up rates there, I would expect to be anywhere in the range of 20 to 30 sites potentially as high as 40. And that's really going to depend on macro factors and then what's going on in the individual submarkets. But if you're leasing up in this space somewhere between the neighborhood of 20 and 40 sites on an annual basis. That's a good run rate. These properties are -- the expansions are part of very solid core properties and solid submarkets. So they'll continue to contribute to occupancy over the next couple of years to reach stabilization. And then as I mentioned a little earlier, we have a desire to continue those types of projects. We have others in the pipeline, and we can talk about those more as we approach 2027 and 2028. Steve Sakwa: So just as a quick follow-up, Patrick. Is it your expectation that occupancy, given the hurricanes and the expansions, would you expect occupancy, whether it's an average or a spot to be bottoming in '26 and then moving higher in '27 or '28? Or could you envision where occupancy is even down next year as you're kind of working through the pace of that and then it kind of starts to take off in '28? Patrick Waite: I would expect that we're going to increase occupancy in the MH portfolio on a consistent basis over time. That doesn't mean that we're not going to have an external catalyst that's a disruption to the business model temporarily, but we have a long history of continuing to increase the occupancy. And even backfilling the impacts of the hurricanes that I referenced show a very steady demand profile. Operator: And we have a follow-up from Eric Wolfe from Citi. Eric Wolfe: Another questions. If I look at your guidance changes, in the supplemental, it adds up to almost $0.02 positive benefit. I was just wondering what's offsetting that? Paul Seavey: Sure. Eric, we have maintained full year normalized FFO per share guidance though there are a lot of changes, as you mentioned. You can see the items that increased. The main offset in the updated guidance relates to assumptions for our income from home sales and ancillary operations. Eric Wolfe: Got it. That's helpful. And then you mentioned some adjustments to April seasonal. Was that just, I guess, the number of customers that typically extend their stays. So you just saw a little bit less extending their stays this year. And do you think that was perhaps due to sort of the greater shift towards domestic customers versus Canadian? Or is there some other factor around that? Marguerite Nader: A lot of what we see, Eric, in April, is really weather-related where people are saying, okay, it's nice enough up north, we can head up north. And No longer need to seek refuge in the cold or in Florida from the cold. So that's kind of what we saw. And you see that same effect in October, where -- some people stay longer, if you have a longer summer in September and October. And if you just saw people returning back north quicker than anticipated. Operator: And we have a follow-up from Brad Heffern of RBC. Brad Heffern: Yes. On the RV site count, what is the financial impact of a seasonal site moving to transient? I'm sure, obviously, it could just get booked again is the seasonal next winter. But if it stays a transient sight, is there a meaningful negative financial impact from that? Marguerite Nader: I mean it really depends on what -- how that site was performing. I guess just think -- if you just think about the annual conversions to transient our average annual is about $7,000 or $8,000 and your average transient customer is about $81 per night. So it depends how many nights and both the same with the seasonal, how many nights are occupied as to whether or not you have a financial impact to that conversion. Brad Heffern: Okay. But the like shift of those, whatever it was 12 1,400 sites, is that meaningful in some way? Or is it really just moving change from one back to the other? Paul Seavey: Well, it's -- I mean it's already embedded in our guidance because it's simply a reflection of what we experienced during the winter season in terms of the occupancy of those sites. Operator: And we have a follow-up from Jamie Feldman of Wells Fargo. James Feldman: I had a very strict instructions from Adam to ask one question. It's still hard. So I've had a couple of people ask me to clarify. So I apologize if you guys already answered this or provided it. But the 50 basis point cut to RV and Marina based rental income, was that all from the slips. And if it wasn't all the slips, how do you break it out between RV and Marina? Paul Seavey: Well, the -- it's interesting because there's a 50 basis point decline in RV and Marine in total. And there's a 50 basis point decline in RV and Marine annual. So to be clear, the RV and Marina annual 50 basis point decline is attributed to the Marina portfolio. It's not the RV portfolio. It's the Marina portfolio. And I think somebody earlier in the call said they calculated roughly $1.5 million, and that's correct. James Feldman: Okay. All right. And then last, the 300 sites lost in the hurricane, how many of those are back online. Because it seems like it comes up every quarter the occupancy change or fewer lease sites, fewer I should say. Patrick Waite: Yes, we're in the process of putting homes on those sites in I put it in the context of this. It's an additional 300 vacant sites in a portfolio of 70,000 sites where we have a run rate practice of purchasing new homes and these occupancy it's not like the 300 go down, then we fill them 1 through 300 and the move on. They're part of the ongoing investment in inventory in those -- in the broader market. Obviously, they were hurricane impacted, so they're in Florida. I don't have the exact number, but we've filled a substantial number with new homes, and we'll continue through that process to reach full occupancy. The properties that were impacted by those hurricanes are Pinnacle assets where the demand profile is very solid and I would expect the occupancy to rebuild consistently. James Feldman: Okay. And then finally, I think I know the answer, but you do have some portfolios out there for sale internationally. What are your latest thoughts on sticking to your knitting and keeping the type of assets you have? Or is there any yield IRR that would be compelling enough to go international at this point or into new property types or something outside of your core business? Marguerite Nader: I think you were right with how you started, which is you know what the answer is going to be. We are focused on growing our business inside the United States, and we will continue to do that. James Feldman: And in terms of new property types? Marguerite Nader: Well, certainly, more MH, more RBS to new property types, nothing that we're looking at right now. Operator: Since we have no further questions on the line, I'd like to turn it back over to Marguerite Nader for closing remarks. Marguerite Nader: Thanks for taking the time today to listen to our call. We look forward to updating you on our second quarter earnings. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neptune Insurance Holdings First Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Jon Carlon, Director of Corporate Development. You may begin. Jonathan Carlon: Thank you, and good afternoon. With me here today is Trevor Burgess, Chairman and CEO; Matt Duffy, President and Chief Risk Officer; and Jim Steiner, CFO and COO. Before we begin, I'd like to remind everyone that today's discussion will include forward-looking statements, including, among others, statements about our expectations for our future financial performance growth opportunities, business strategy, market trends and capital allocation plans. These statements are based on our current views and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. We direct you to our recent SEC filings for a full description of these risks. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We will also reference certain non-GAAP financial measures. These measures should be considered only as supplements to their comparable GAAP measures. Additional information, including reconciliations of the non-GAAP measures to their most comparable GAAP measures can be found in our earnings release at investors.neptuneflood.com and in our current report on Form 8-K that was publicly filed with the SEC on April 22, 2026. And now I'd like to turn the call over to Trevor. Trevor Burgess: Good evening, and thank you for joining us for Neptune's first quarter earnings call. Before we review the quarter, I wanted to talk about how excited I am by this moment in the history of technology. I was an investment banker during the first dotcom boom. I built one of the first technology first banks and now I'm leading when first AI native public companies. What AI has enabled in the last few months has far surpassed anything I've seen before. This is the power of the exponential. The Neptune team has the horse by the rains and is building something very special. People often ask how we think about AI at Neptune. The answer goes back to the very beginning. In 2018, when we hired our first engineers, I put a sign on the wall that said, "No Humans," not because we don't value people, but because we wanted to build a system where technology could do what humans cannot faster, more consistently and at scale. What is now being described as AI native, we simply view it as the right way to build from day 1. That mindset continues to guide us today. We don't start with today's constraints and optimize around them. We start with where the world is going and build towards that future. And as the technology continues to evolve, the gap between Neptune and traditional insurance platforms is not narrowing it is widening. AI also creates a significant opportunity to expand the market. Tens of millions of properties in the United States remain uninsured for flood risk. By using AI to improve risk awareness, simplify the buying process and support agents with better tools, we believe we can meaningfully grow the insured base over time. That brings me to what we are seeing in the business today. Last quarter I spoke about turning agents into what we call super agents. We are now seeing that come to life. Following quarter end, we launched in a beta release, Atlas+, are a genetic assistant for insurance agents. Atlas+ can answer questions, generate sales materials and interact directly with quotes in real time. Early feedback has been extremely strong, including examples of policies being sold directly as a result of these interactions. Over time, we expect Atlas+ to become a core part of the sales workflow. Importantly, these capabilities are built on top of what we believe is one of our most important advantages, our proprietary data. Our platform has processed tens of millions of quotes and over 1 million policies, generating real-world underwriting, pricing and behavioral data that continuously improves our models. We believe that data advantage will continue to compound over time and create a structural barrier to entry in an AI-driven market. From a financial perspective, the implications are equally important. In 2025, we operated at a 60% adjusted EBITDA margin. As AI continues to reduce friction in distribution and automate workflows, we believe our current level is a floor and not a ceiling. Turning to the quarter. The first quarter of 2026 was a record first quarter for Neptune and reflected continued strength across the business. Highlights from Q1 include: revenue of $37.8 million, a 29% increase year-over-year; net income of $7.3 million with adjusted net income of $13.4 million; adjusted EBITDA was $21.6 million, that's growth of 26%; written premium was $86.7 million, driving 32% year-over-year premium in force growth, and we had record first quarter new business sales. As a reminder, the first quarter is typically our lowest margin quarter due to seasonality. And this year, that effect is more pronounced as public company audit and compliance costs are front-end loaded in Q1. As a result, adjusted EBITDA margin in the quarter was approximately 57.1%. Importantly, this is a timing dynamic, not a structural change in the business. and we continue to expect full year margins in the 60% to 61% range. Premium in force reached approximately $389 million at quarter end, and we look forward to celebrating our $400 million threshold shortly. As a reminder, Neptune operates as an asset-light MGA and takes no balance sheet risk. This allows us to scale efficiently while maintaining strong profitability. On a trailing 12-month basis, revenue per employee reached $2.8 million and adjusted EBITDA per employee reached $1.7 million, both record levels. To put our revenue per employee in context, do this calculation for other companies. This is how you can tell if a company is really AI native. In addition to our earnings results, today, we announced that our Board has approved a $100 million stock repurchase program. We expect to fund this program through free cash flow over the next 2 years. This is incremental to our previously announced plan to retire shares associated with RSU tax settlements. We view share repurchases as a high return use of capital given the strength of our cash generation and scalability of our model. Stepping back, we believe our competitive position is defined by 3 core advantages: proprietary data and AI-driven underwriting, deep and expanding capacity relationships and flexible technology-enabled distribution. Together, these create a durable and widening moat. I'll now turn things over to Matt to walk through the business in more detail. Matthew Duffy: Thank you, Trevor. Q1 was a very strong quarter for our system and our team of 62 exceptional employees. Across our 3 core pillars, we continue to adapt, innovate and perform with the results able to speak for themselves. Starting with technology. Trevor touched on the pace of change we're seeing in technology. Inside Neptune, that's showing up in a very tangible way. And I'll be honest, it's hard to capture in an earnings call, just how fast things are moving internally. Our team is building with tools that didn't exist a matter of months ago. and they're using them to rethink how we build, how we operate and how we serve our agents and customers. You can see that directly in the pace of product development coming out of the company, during and immediately following the first quarter, we rolled out 3 major technology advancements, all of which lay the groundwork for a continued redefinition of how our system is utilized, accessed and built. The first is Atlas+, which is the AI layer we're building across the Neptune platform and which we introduced in April through an initial beta experience for a small group of agents. This beta is a conversational interface embedded directly into the quoting workflow. Agents can ask questions, adjust coverage and move through the quote to bind process using natural language. In the first couple of weeks, we've seen thousands of agent interactions, which tells us this fits naturally into how agents already work. And this is just the starting point. Over the coming quarters, we expect Atlas+ to expand beyond this initial interface and become a core part of how users interact with Neptune across our platform. The second is our Neptune application inside ChatGPT, which gives property owners a new way to interact with our platform. Instead of navigating a traditional quoting flow, users can ask questions about flood risk in plain language and receive a real-time Neptune quote directly within the interface. What's important here is less the interface itself and more what it represents as conversational AI continues to evolve, we expect experiences like this to play an increasing role in how people access information and make decisions. And the third is Proteus, an internally developed AI software developer. The way we think about this is pretty simple. Our engineers are exceptionally talented and their highest value comes from problem solving system design and building new capabilities, not from spending time on execution that can be automated. So we've built Proteus as a set of agentic tools and skills that can take on the execution work. Proteus writes code reviews it, completes development tasks and monitors the system in real time. It allows our engineers to stay focused on the critical thinking and design work that actually moves the platform forward. In March alone, Proteus was responsible for over 30% of the engineering tickets completed. Put differently, that's nearly a 50% increase in the amount of work the team is shipping, and you can feel that inside the company, things that used to take weeks are getting done in hours and ideas we've had for years are now becoming feasible projects. Each of these changes I've discussed is powered by the data running through our system, tens of millions of quotes, over 1 million bound policies and constant interaction from tens of thousands of agents. And as they evolve, these changes will continue to represent a fundamental shift in how Neptune's platform is accessed, how it's used and how it's built. Turning to capacity. During the quarter, we renewed one of our 8 programs, increasing the size of that program for the '26, '27 treaty period and adding 2 new reinsurers, bringing our total panel to 42 capacity providers. Program renewals are important milestones for the business. They reflect long-term relationships and a track record of consistent underwriting performance. In this case, we saw the program grow and terms update in a way that reflect the results we've delivered. That's been a consistent pattern for us as the platform scales and the data continues to improve our capacity partners are growing alongside us. And finally, distribution. Our growth continues to be supported by the strength of our agent network, which remains an important part of how we reach and serve property owners across the country. During the first quarter, we delivered record first quarter new business production, driven by strong agent engagement and continued deepening of distribution relationships. One of the clearest indicators of that momentum is user-based activity. Since launching our new user-based log-in system in December, more than 45,000 individual agents have signed up for direct access to Neptune, and that number continues to grow daily. To be clear, this is not the total number of agents we work with, but rather the number of individual users who create direct accounts using their e-mail and phone number and verified that access by a multifactor authentication on the platform between December and March. And nearly 11,000 of those users have already bound new business policies in that same time frame. Those stats show the real scale of how the platform is being used and the associated data allows us to build better tools and experiences around how agents actually work. We continue to invest heavily in our agents through building tools and products that are driving adoption and helping us to help insurance agents become increasingly effective. I'll summarize with this. What you're seeing here is a system, an ecosystem that gets better in real time. faster to build, easier to use and more valuable to the agents, customers and capacity providers that are a part of it. And that's really how this business can continue to compound over time. As we head into hurricane season, which is typically our busiest period, that level of performance really matters. With that, I'll turn it over to Jim. James Steiner: Thanks, Matt. The first quarter reflects another strong period of execution with a continued growth in revenue, strong retention across the portfolio and sustained profitability. Revenue for the quarter increased 28.8% year-over-year to $37.8 million driven by record first quarter new business production and the continued expansion of our premium in force. Adjusted EBITDA increased 26% to $21.6 million, which demonstrates that revenue growth didn't come at the expense of operating discipline. We continue to see strong performance on renewals. Premium retention remains high, reflecting both the value of our product and the consistency of our pricing approach. The Q1 adjusted EBITDA margin was 57.1%, even though substantially, all of our public company accounting costs hit the P&L during the first quarter. Again, this is a timing dynamic, not a structural change in the business and we continue to expect full year adjusted EBITDA margins in the 60% to 61% range. Stepping back, the underlying economics of the model remain very strong. A reminder on the model: we don't carry any of the underwriting risk, the carriers do. What we carry is the technology that decides which risk to bind, who to bind them with and at what price. That means we grow by adding policies, not by adding capital. and we scale by writing more code, not by hiring underwriters. We track our employee metrics as key indicators of our performance. Revenue per employee was $2.8 million on a trailing 12-month basis. Adjusted EBITDA per employee was $1.7 million. Both metrics are up double digits year-over-year. These head count ratios hold the roof up on the whole margin story. If we had to add 1 employee for every few hundred thousand of revenue, we look like every other insurance company. These metrics highlight the efficiency and scalability of the platform as we grow. Turning to the balance sheet. During the quarter, we continued to strengthen our capital structure. Last year, we refinanced our existing term debt into a $260 million revolving credit facility, which lowered our cost of capital, removed to acquired amortization and has provided greater flexibility as we manage the business. We ended the quarter at $227 million of total debt outstanding on the revolver, which is 2.2x trailing adjusted EBITDA. Yesterday, we paid another $5 million down, bringing our current balance to $222 million. Neptune's earnings mean that leverage comes down on its own. And to date, we've repaid debt with excess cash. From a capital allocation perspective, our framework is pretty simple going forward. The first dollar goes into the platform because that's where the compounding happens. The second dollar shows up in the share buyback program Trevor just announced and the RSU net settlement program we announced last year. Both of these tools return capital to shareholders. Overall, the financial results of the quarter reinforced the strength of the model. We continue to deliver strong growth, high margins and increasing operating efficiency while maintaining a disciplined approach to capital management. With that, I'll turn it back to Trevor. Trevor Burgess: Neptune remains focused on long-term shareholder value creation. Despite the inherent variability of government policy and weather-related activity, the strength of our performance in the first quarter has increased our confidence in the outlook for 2026. Based on that performance, we are increasing our full year expectations. For the full year 2026, we now expect revenue of $195 million and an adjusted EBITDA margin between 60% and 61%. These targets reflect our continued commitment to profitable growth, operational efficiency and disciplined capital allocation. Where appropriate, we intend to deploy capital to grow the business while returning excess capital to shareholders. To date, that has included a strong emphasis on debt reduction as a straightforward and efficient way to enhance equity value. As part of this approach, our newly authorized stock repurchase program, together with our ongoing RSU related stock retirement gives us multiple levers to return capital in a disciplined and opportunistic way. We view these actions as a natural extension of a strong cash generation and high margin profile of this business. As we move towards the 2026 hurricane season, there are always unknowns around storm activity and weather patterns. What our customers and agents can count on is that our team shows up when it matters most. We are constantly improving the systems that help people protect their homes and businesses, and we take that responsibility seriously. And for our investors, our focus remains the same. We'll continue to push the boundaries of what an AI-native insurance platform can do. Every quarter, we are doubling down on our technological lead, strengthening our distribution network and deepening our capacity relationships. We believe the combination of those 3 things will continue to have a power law effect around this business. We'll now turn things over for questions. Operator: [Operator Instructions] And your first question comes from the line of Rob Cox with Goldman Sachs. Robert Cox: Yes, just the Atlas -- Atlas sounds very interesting. I was just hoping you could give us some more color around what exactly Atlas is doing, how near-term impactful this is? Of the 3 items you mentioned, where you've been leveraging AI, do you expect to see this today and in 2026 or how near term is this? Trevor Burgess: Yes. Thanks, Rob. We are very excited about Atlas+. The original Atlas was launched about 1.5 years ago as we've looked for ways to use AI available at that time to help educate our independent insurance agents about things like incoming storm activity or how many claims have there been in a particular neighborhood to give them facts and figures to help them become better at selling flood insurance. What agentic AI has allowed us to do now is to turn every agent into a super agent, and that's what we've really been focused on building with Atlas+. What's currently available is a chat interface that allows an agent to ask things such as generate an e-mail script for me that I can send out to a consumer or help me explain why temporary living expense cover is a really important add-on, or tell me the 3 main reasons why this customer should buy flood insurance, or go ahead and show me the price at all the different deductibles that are available. And Atlas+ can interact with the quote. We really view this as the very beginning of a long line of upgrades that we will make to the agent experience. We've mentioned for the past or 9 years as we built this business that our biggest barrier to growth is how do we change agents behavior, how do we get agents to offer flood insurance every time they're selling a home or a business owner's policy, how do we get them educated to be amazingly knowledgeable about flood insurance, its risks and why people need to be protected. Agentic AI is allowing us to do that, and we're excited to roll this out. We are already seeing the impact of what is live today, and we're very excited by the things that we'll be shipping in the coming months. I would have said a year or 2 ago that everything that we're trying to build take us years to build, but it's now down to weeks or months. And so the other things, the other uses of AI, creating a Proteus system that allows our internal software developers, engineers and data scientists to move at least twice as fast if you're 3x as fast, really means that Atlas+ can be -- we're trying to follow in Anthropic's footprints is constantly putting out amazing, new functionality and product very, very quickly. Robert Cox: That's very helpful and exciting. If I could just follow up on the guidance. The revenue guidance is increasing. Just curious if that was due to this quarter or if you're feeling better about later on in the year? And on the margin guidance maintained, I realize the first quarter here, we have some timing-related items but should we be thinking about this as Neptune is trending towards the lower end of the margin range for the year? Or is that premature? Trevor Burgess: Well, first, let's talk about the revenue side. What we saw in the first quarter was just continued really good trends. We obviously have great revenue in the first quarter, record sales in the first quarter. And we got a really good sense because remember, our policies go into effect as a 10-day waiting period. So by the 22nd of the month like we are today, we've got a really good sense of what April looks like and the general momentum that we have so far this year. So we're quite bullish on the top line revenue trends, which is why we increased the guidance. This is not some hope and prayer that things get better later on. This is looking at the trajectory that's here and now. On the margin side, no, we certainly hope to do as well as possible on the margin for the full year. You can look at our first quarter margin every single year, it's the lowest, and that's because we have all 62 employees the whole year long, but it only makes up about 18% of our revenue, right, because of the seasonality in the business. So it's just inherently a lower margin quarter and then you build in 100% of the 2025 audit expense with PwC in the first quarter, well, that's going to impact that. But no, we're feeling quite good about the margin profile of the business and are excited about really 60% being a floor rather than a ceiling to what this business can become. Operator: Your next question comes from the line of Josh Shanker with Bank of America. Joshua Shanker: Yes. Thank you, everyone. Great quarter. we talked about fourth quarter and into first quarter about the [ Milton-Helene ] opportunity back over a year ago and why that was a headwind on comparisons this year. As we enter 2Q, is that done? Or are there people who 6 months after Milton and Helene were still nervous and brought in 2Q 25 were the comparisons there, not in the number of going forward? Trevor Burgess: Yes, Josh, I don't think that's an impact going forward. That's really a do people renew the next year. And the most extreme example of that is Utah had this amazing snow season a couple of years ago. And the next year, it didn't snow and so people didn't renew their policies. That's the really extreme side of it. But in hurricane prone zones such as Florida, we will see a little bit of lower renewal when people are buying after a really scary storm. But that's now passed us, that wouldn't impact the first or second quarter. Joshua Shanker: And then switching gears to opportunity. Obviously, your data flow continues to increase and get smarter. I don't know if you're any more about earthquakes to or other events happening in California per se, what is your data learning right now about how Neptune can possibly be a meaningful player in market other than flood? Trevor Burgess: Well, it's certainly -- I will tell you that flood remains our core focus. It is an amazing business with a tremendous opportunity. We have 20 million buildings in America that need flood insurance that don't have it today. We have the NFIP shrinking and 60% of the people within the NFIP who could save money by switching to Neptune. That's about 1.7 million policies. So give us a good housing market, let's turn those into Neptune policyholders. But at the same time, as we announced last quarter, we are running a beta test of earthquake. Earthquake data doesn't come because we haven't had a major earthquake in decades. And so we're obviously not gathering an earthquake experience data at this time. What we're doing with earthquake is working with our agents and making sure that we have good product market fit before we actually launch a product into the marketplace. I would expect that, that beta test would continue for the next 3 or 4 months, and we would then make a decision around what we're going to launch in California. Operator: Your next question comes from the line of Gregory Peters with Raymond James. Charles Peters: So one of the things that we've been watching is that we've noticed that other companies have announced flood start-up initiatives or expanded their existing food capabilities. I'm thinking about like another local company, I'm thinking about like nationwide, I think they announced something called Titan Flood. So maybe you could just for a moment, talk about how resilient your competitive position is and talk about what you're seeing from other flood alternatives for insurance alternatives that is in the marketplace and if you're seeing anything that's of a concern? Trevor Burgess: Yes. Thank you. I really think that this is a power law business where the more data and the more size you have, the better that business is going to do. If you think about investing in social media companies. There were lots of competitors to Facebook, but you didn't invest and in you didn't make any money. To get very specific about flood insurance competitors, we had a record first quarter sales. It was the best first quarter sales we've ever had. We are not seeing any meaningful impact from any competitor except for the NFIP who remains the dominant force in flood insurance with approximately 85% of the business that's out there. We, of course, pay attention to all potential competitors, and we have seen many, many competitors come and go over the years. It is a very difficult peril to underwrite. We had no landfall hurricanes last year that has giving people a lot of confidence that they can typically underwrite flood insurance. Neptune, you'll remember, has been through 21 landfall hurricanes some of these new startups when faced with a meaningful hurricane in the major metropolitan area where they've sold a lot of policies, at least historically, have not fared very well and has led to many of them going out of business as quickly as they can in the business. But it is important for us always to pay attention to potential competitors and to look at the marketplace. If we are Uber, we want to be paying attention to who could potentially be a Lyft. I just don't see that yet, but we continue to look very carefully. So I would say as of today, we don't believe it's impacting our business. Charles Peters: Fair enough. In your investor presentation, when in the revenue section, you highlight a couple of also the larger renewal portfolio, increased commission. And then in the negative or the headwinds section you cited the residual slowdown in sales due to the active storm season, which you just addressed in the previous question. But you also talked about the ongoing slow real estate market, -- and so I'm just interested in your perspective on how -- if there is a change in the real estate market outlook sometime down the road that, that might become a tailwind? Or how do you size up that headwind versus a tailwind? Matthew Duffy: Greg, thanks for the question. We've talked about this for a number of years now where we've been experiencing the slow housing market. And the most important number to remember there is the 1 that Trevor just mentioned the market as it exists today, has something like 4 million policies for the insurance market and about $3.5 million of those exist would be NFIP G. Today, about 1.7 million, 1.8 million of those policyholders with the NFIP would save money by switching to Neptune. They have not done so because there's been no turnover in the housing market. And so there's not been the ability to shock that policy into the private market to see what that price looks like. And so we believe a change in the housing market and uptick in sales there, whether it's hours and sales or whether it's refinancing activity, would be a huge, huge tailwind to the business. We saw this a little bit at the start of COVID when the housing market picked up now. And while there was a very small incremental impact to midterm cancels in our portfolio, there was a much, much larger impact on new business sales, which far outweighs our installations on the portfolio. So give us a better housing market and we're very, very bullish on what that means for sales and for portfolio growth in general. Operator: Your next question comes from the line of David Motemaden with Evercore ISI. David Motemaden: I had a question just on policy retention. If you could talk a little bit about how that trended in the quarter. I see on Slide 9 that revenue retention ticked down a little bit. still at a strong level, it's at 90% over the last 12 months, but it did tick down from 92% in 2025. So just hoping you can unpack some of the trends there, please. Trevor Burgess: So I think the first thing to mention, then I'll turn it over to Matt for some more details. But the first thing to mention is we're one of the only companies in the P&C space to still be taking positive rate. Last year, our average price increase on renewals was about 13%. And so far this year, it is still positive. It's just happened to be positive mid- to high single digits. And so that explains most of the difference in the revenue retention is just the change in the increase of pricing. I'm really happy that we have our business as opposed to ones that are down 30%, right, and still be up 7% is amazing. So we're very happy that we have picked the market that we're in. You just have to remember that the NFIP prices on a statutory basis, not based upon whether or not it's a hard soft reinsurance market. Matt, what would you add to that? Matthew Duffy: Yes, I think that's all right. The only thing I would add is the machine learning models that are operating on the renewal book that are optimizing for lifetime value of the customer as opposed to any single year retention rate. So the more units that we're able to keep around the higher the lifetime value is not enter and on the portfolio in general. And so we're able to take a long-term view because we have a very, very long-term view of this business. as owner operators. And we will always prioritize ensuring that we keep customers around for the long term and that we have a great product and a great pricing strategy that provides value to the customers over the long term as well. David Motemaden: Got it. Sounds like the policy retention is pretty stable there. I think it was 86. So that's helpful there. My follow-up is just on how you guys are thinking about the FEMA Advisory Council process. Any sort of updates you have in terms of the possibility of a citizen style depopulation and how you guys might react to something like that? Trevor Burgess: So the first thing I would say is that we have no added information. We have heard nothing. We've got no communication. And so other than what we've all read in the press about the time frame being extended, we are not aware of any additional details. What I can tell you though is from a capacity standpoint, we have taken very specific actions to make sure that we're ready in case something does happen. And so we are entirely prepared to flex and bring on as many customers as we need to, to help make sure that means are protected for this peril in case the U.S. government decides to reduce their exposure or get out of the business. Our job, we feel, is to increase the role of private flood insurance and make sure that we're a viable alternative. And we absolutely are prepared to do that and have the capacity back in to do that. Operator: Your next question comes from the line of Tommy McJoynt with KBW. Thomas Mcjoynt-Griffith: I don't think you gave the updated lifetime to date loss ratio for your capacity providers, but I suspect it is in the teens at this point. While some of that may be fortunate weather and some is surely your risk modeling expertise, at some point, does that translate into pressure to actually reduce pricing on an absolute basis? Trevor Burgess: So the first thing is, a, we'll let you know. We plan on announcing that once a year, so we will announce that at the end of the second quarter. The last time we announced that was the end of the second quarter of last year. And so we will update that annually so that just people have a very clear non-seasonally affected view of that. So expect that at a data point at the end of the second quarter. The second thing I would say is that it really just creates an opportunity for us and this is a discussion that we've had with all of our capacity providers. would they be interested in higher volume in exchange for a slightly higher modeled loss ratio. And given our track record and given the exacting specificity our underwriting platform we are able to make changes like that, driven by our data science team, and we have those models live in the system at this point. And we're excited by the revenue growth and the policy growth that we're seeing as a result of those models being deployed. So I think it does create a -- success creates an opportunity to lower prices and get more people insured is really the summary. But please know that this is being done with an incredible system led by an incredible team of engineers and data scientists who are focused on just that optimization of this flood insurance conundrum that United States faces. Thomas Mcjoynt-Griffith: And then switching over to the ChatGPT product that you've rolled out, is there any compensation owed to a counterparty when flood policies and Neptune are placed through that app? And if not, does that just imply the incremental margins on any of those policies are very strong, similar to your direct-to-consumer channel? Trevor Burgess: At this point, there are no money is owed to any counterparty. ChatGPT is not charging for that. To be clear, they don't allow buy ins to take place on their platform. So it's very similar to the way you think about Google, right? If you Google Neptune, you can find it. And even if we didn't pay for Google Search, right, we were the top rank, we would show up as we do, someone could come to us and we wouldn't owe anybody. Now we do some Google ad words just to make sure we're always at the top of the paid search also. But it's very similar to just a Google search engine at this point. Now that may change in the future. We're excited to have launched that product because it's a great showcase for the technology prowess that Neptune and its engineers have but it is something that we think will have limited utility until consumers make the decision that they want to buy via chatbots, which is not something that has happened yet. Consumers really like the advice of their insurance agent in America. And that's why we are really focused on building Atlas+ to help turn our agents into super agents. Operator: Your next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: Just to quickly follow up on the FEMA question. If I understand it right, a congressional vote would come in either September or sooner, but nothing is clear at this stage. Is that the right read? Trevor Burgess: I'm not sure about that. The leaked FEMA memo that was published by Bloomberg seem to suggest that the administration was looking at things that they could do without Congress's involvement. The Biden administration put forward 14 proposals during their administration, proposes to Congress. Congress did not act on any of those proposals. Those proposals all would in pro private flood insurance. So this is really a bipartisan issue, how do we get more Americans insured. But I have not heard anything about proposed legislation being given to Congress for them to consider in September or October time frame. There's been a variety of congressional led proposals that some of which are quite positive Senator Scott has one to allow people to deduct the cost from their taxes, their flood insurance costs in the taxes. So there are a number of very positive suggestions coming out of Congress, but I haven't heard of any specific legislation. Andrew Kligerman: Got it. That was very helpful. Yesterday, we saw the approval [indiscernible] for [ Valeron ], a Bulgaria based broker to distribute policies directly inside of ChatGPT Trevor. Could we see this happening in the U.S. as well? Or do you see AI as more of a funnel into traditional direct channels on Neptune's website? Trevor Burgess: Currently, ChatGPT does not allow direct binding within the app itself. If they change that, we will be able to meet that immediately. But I think this is more about consumer behavior than necessarily the technological availability of something. We've had direct-to-consumer available since the very beginning of Neptune, and it's always made up 2% of our business. And it was 2% of a very small amount 9 years ago, and it's 2% of a much larger amount now, but it's still 2%. So this is really about our consumers now going to utilize chatbots to buy home-related insurance. And I think that's a much larger question then is it possible. Operator: Your next question comes from the line of Pablo Singzon with JPMorgan. Pablo Singzon: First question is on new business. I think this might be the first quarter that you disclosed the growth rate, which I think came in at 4%. I was wondering if you could give a perspective on how the growth rate had trended, I guess, in '25, right, whether over the full year or maybe the past couple of quarters? Trevor Burgess: We felt very good about the growth rate in the first quarter. The number of agents that we're finding was up. We obviously have switched to the single sign-on, which is extremely helpful in that we now have 45,000 agents who have established single sign-on credentials with us. But we'll get back to you on comparable information for the last -- for the prior year. Pablo Singzon: All right. And then a follow-up, just -- so as more pertained insurers and agents pivot to growth, right, whether it's selling auto or homeowners, do you think that helps or the track or maybe even neutral to your efforts to sell flood, right? So how do you start thinking about that your position against that trend because it is clear at this point that everyone is trying to sell more? Does it help or maybe it doesn't really affect you guys? Trevor Burgess: It's extremely positive for us when agents want to add on ancillary products, right? And flood is the most obvious ancillary product to the home or to the business policy since it's excluded by carriers. And so we view that trend as a very positive trend for Neptune. There are amazing agents such as Goosehead and others who have done a great job at really thinking about policies per relationship and how do they always offer flood insurance every time they're selling a homeowners policy that increases stickiness and increases the quality of the advice being given to the consumer. Because, as we've talked about many times, the main problem that we have in the U.S. with flood insurance is that people don't have it. There's 20 million people who are at risk of flooding who don't have the coverage. And so it's an amazing advice to come from a insurance agent to their consumer. So it's a great trend. Operator: Your next question comes from the line of Yaron Kinar with Mizuho. Yaron Kinar: My first question relates to the $195 million revenue target for the year. I'm starting to see some early indications of the North Atlantic hurricane season potentially being a bit lower just because of El Nino. Is that contemplated in that number? Or are you still assuming a normal season and whatever that may mean? Trevor Burgess: Yes. Thank you. We're very aware and we track very closely the predictions around the storm season. There are a couple of dynamics happening. One is phenomenon that you've mentioned and the other equally impactful phenomenon as the C temperature in the Gulf. And the Gulf temperature is extremely, extremely high, which means that the Gulf systems being able to spin up very quickly and gain steam very quickly like Hurricane Michael did that hit Florida with amazing power remain quite possible during the season. I would say the $195 million assumes that there is some storm activity but does not assume a very active storm season. Yaron Kinar: And can you maybe give us a little bit of color as to how you're thinking about that? When you talk about a some storm activity, are we talking about 2, 3 name stores, making land falls and population centers? Trevor Burgess: Yes. We think about that as 1.8 landfall hurricanes, which happens being a long term average. Yaron Kinar: Right, right. Okay. And then switching to capital deployment. So you have $100 million new share authorization that, if I understood correctly, you expect to utilize over the next couple of years, by the end of '27. And then if I just look at the EBITDA margins and the tax rate, I think you get to roughly $150 million of cash flows plus minus for the next 2 years. Are you intending to deploy the remaining cash flows towards filing debt? Or are you going to keep a portion of that as a dry powder for other opportunities? Trevor Burgess: Yes. Remember that we had also announced the RSU net tax settlement, which at today's stock price would use something like million of cash or something. So the employees will surrender the shares, we'll rip those up and then we'll pay the taxes to the IRS with company cash. So if you think about that this September and next September has 2 chunks, plus the $100 million starts to give you a sense of where we would use the cash. And we can work with you on some of the -- as you model out the free cash flow, we have a little higher expectations than you've noted. Operator: Your next question comes from the line of Cave Montazeri with Deutsche Bank. Cave Montazeri: So you keep paying down debt. At the same time, you guys growing looks like it could be at 2x debt to EBITDA by the end of next quarter. I'm just trying to understand what's your metal framework when it comes to debt you want to keep -- do you have a target debt-to-EBITDA ratio in mind for the medium to long term? Trevor Burgess: Yes. We generally would like to stay below 2.5x. So there may be opportunistic times to utilize the stock repurchase as we saw in the last quarter, if there was an event like that again, we would obviously take advantage of that to buy back shares opportunistically and utilize the revolver availability to do so. But absent that, we have, to date, at least continue to pay down debt. As long as we're below 2.5 to 3x levered, we feel very comfortable that we can, given the certainty of how this business operates, that we can begin returning cash to shareholders, and we think stock buybacks are the best way to do that. Cave Montazeri: Okay. And in terms of your -- the technology that you -- like how much of it is built in house versus purchase from third-party vendors? And I guess, of the technology that you're using from third-party vendors, do you now have the ability to maybe build it in-house and make it more bespoke versus some of the more standardized software that you could buy externally? Trevor Burgess: This is a really interesting debate that we often have. And you have to think about Neptune is a rather unique company because we have 62 employees and our entire expense base is less than 10% of our revenue. So we're already about as lean a company as it can be, right? And so if I think about how do I deploy our engineers and data scientists, I wanted to deploy them on things that can generate more revenue. Saying we're no longer using a third-party piece of software like Microsoft Word, could we rebuild Microsoft Word now? Yes. Does it make sense to do that? And maintain the system, et cetera. No, it makes much more sense just to pay Microsoft the whatever it costs $5,000 a year to have it. And so we are very focused on how do we deploy our engineers to increase revenue growth rather than save the couple of hundred thousand dollars that shows up in our externally purchased software and most of the software that we're purchasing at this point is really commodity type of software. Matt, what would you add? Matthew Duffy: Yes, Cave, I'd just add that all of the core functionality that exists in our systems today and try inside an Atlas and Proteus and all of the systems that we've mentioned is built entirely in-house. Trevor's comments are 100% true for ancillary software that may be helpful from a customer service standpoint, Zoom, that type of functionality, but all of the core software is built entirely enhanced. Operator: That concludes our question-and-answer session. I will now turn the conference back over to Mr. Trevor Burgess for closing remarks. Trevor Burgess: I'll end the way I started by just talking about this moment in history, I've never been more excited about being an entrepreneur than I am right now. Our entire team is Get to be working at Neptune on this challenge on this problem using the tools that are now available to us. We are live watching the updates from Anthropic from ChatGPT, from Google, from X about what tools are available to us and how can that allow us to move more quickly to help get these 20 million Americans insured for this payroll that they're not protected for right now. So it's a great time to be an entrepreneur. It's a great time to be at Neptune. And thank you for joining us today. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Taylor Morrison's First Quarter 2026 Earnings Webcast. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations. Mackenzie Aron: Thank you, and good morning, everyone. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. These statements are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call which are reconciled to GAAP figures in the release where applicable. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer. Sheryl Palmer: Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Eric Heuser, our Chief Corporate Operations Officer. I am pleased to share the results of our first quarter performance and look forward to providing an update on the progress we are making towards our strategic priorities for the remainder of the year. Our first quarter results reflected the effectiveness of our diversified strategy, the quality of our core locations and the disciplined execution of our teams. We delivered 2,268 homes at an average price of $578,000, generating home closings revenue of approximately $1.3 billion at an adjusted home closings gross margin of 20.6%. This drove adjusted earnings per diluted share of $1.12 and 11% year-over-year growth in our book value per share to $64. On the capital front, we invested $503 million in land and development and $150 million in share repurchases and ended the quarter with $1.6 billion in liquidity. As I shared on our last earnings call in February, early signs heading into the spring selling season were positive, and the quarter played out largely as we expected. With sales activity building through the quarter and March representing our strongest month. That momentum is consistent with normal seasonal patterns, albeit with slightly less acceleration than we have seen historically, reflecting continued consumer cautiousness. April started off somewhat slower as typical, coinciding with the holiday weekend, but momentum then picked back up, and we're looking forward to a strong end to the month, even with all the headline noise. Most importantly, as we prioritize the balance between price and pace, we achieved our first quarter sales with a significant increase in the share of to-be-built orders to 38% from 28% in the fourth quarter. As a result, we began to rebuild our backlog, which increased 23% from year-end to 3,465 homes. As we anticipated, this reacceleration in demand for to-be-built homes suggests that historic bio preferences are reemerging as excess spec inventory is cleared across the industry, and our new community openings support compelling value propositions for our shoppers to personalize their new home. One way in which we are helping drive this shift is through design center open houses, which enjoyed record attendance in the first quarter at over 140 events across the country and drove to-be-built sales activity with a strong average conversion rate of 23%. We are further supporting this shift with mortgage incentive programs that provide confidence to our build-to-order customers and enhance their buying power, generally at less cost than incentives required for spec sales. In addition to this favorable mix shift, we also realized more than a 100 basis point sequential reduction in incentives on new orders. And lastly, we made significant progress in selling through our finished inventory, which declined 30% from year-end to 863 homes as we reach targeted spec levels in most of our communities. We have positioned 2026 to be a year focused on setting the stage for reacceleration of growth in 2027 and beyond. This includes a plan to open more than 125 new communities this year, roughly 30% more than we opened in 2025, including about 40 that already opened in the first quarter. supported by an enhanced community opening framework that is helping our teams execute these openings successfully, another 45 or so communities are scheduled to open this quarter during the remainder of the selling season. These openings support our expectation that we will end the year with between 365 to 370 communities which would be up 8% at the midpoint compared to 341 communities at the end of 2025. These communities will generally begin contributing closing later in the second half and into 2027. I'm particularly excited that over 20 of these new openings are in Esplanade communities. This includes the anticipated grand opening of our first Esplanade in Nevada, providing unmatched views of the Las Vegas skyline. This community is already enjoying significant interest with a 1,400 plus lead list and is expected to command record lot and option premiums, with Esplanade consistently generating superior home prices mid- to high 20% gross margins and strong demand resiliency the growth in this unique segment of our portfolio is expected to be an important driver of our future performance. Since we last spoke, the market has been faced with another round of geopolitical turmoil intensified macro uncertainty and a shift higher in mortgage rates. As we would expect, consumer confidence has been impacted by these developments, exasperating affordability constraints and AI-related employment concerns. However, we believe the underlying desire for the homes and communities we build remain strong even as the broader macro environment has given consumers a reason to be more deliberate in their decision-making. On the policy front, we continue to have positive dialogue with the administration regarding how we and the industry can contribute to enhanced affordability and housing accessibility. While any solutions are likely to be incremental, we are encouraged by the ongoing focus on this issue and are pleased with the progress we are making in advancing constructive proposals. Erik will touch on read-throughs to our Yardley business in just a moment. Before I turn the call over to him, I want to touch on the progress we are making in technology. Our online reservation system continues to be a standout example. In the first quarter, we recorded over 1,000 reservations with a 58% conversion rate. Reservation buyers continue to transact at a higher average selling price with stronger option attachment than our nonreservation sales. Encouragingly, we achieved the lowest copra rate we have seen in years, reflecting the power of our reservation platform. On the AI front, we now have more than a dozen AI-powered applications in production across finance, sales, purchasing and customer experience and adoption has more than doubled year-over-year with over 2.4 million internal AI interactions recorded in the first quarter alone compared to approximately $3 million for all of last year. On the customer-facing side, our AI-powered contact center is delivering real-time agent coaching and dynamic scripting on every customer call with automated quality management applied consistently across all interactions driving improved customer satisfaction and sales outcomes. These investments are translating directly into results with an increase to more than 11,000 online sales appointments generated in the first quarter. We are achieving all of this through technology and automation, not incremental spend with more than half of these capabilities built in-house by our own teams. As a result, our overall technology costs are declining even as these capabilities continue to scale. There are many more initiatives advancing through our project management office that I look forward to sharing as they go live in the months ahead. In closing, our ability to reaffirm our full year 2026 guidance in the face of a more challenging macro environment speaks to the underlying strength of our business and the effectiveness of our diversified strategy. We are concentrating our resources where we have the greatest competitive advantage, managing costs and capital with discipline and positioning Taylor Morrison to establish an even stronger and more differentiated portfolio. I believe the actions we are taking today will seperate us in the years ahead as we look to continue creating value for our customers, our communities and our shareholders. With that, let me turn the call to Erik. Erik Heuser: Thanks, Sheryl, and good morning, everyone. At quarter end, we owned or controlled 75,626 homebuilding lots, of which 51% were controlled off balance sheet. While our controlled ratio has recently declined due to normal first takedowns and our active reevaluation of our deal pipeline against current market conditions, we still intend to manage toward our long-term target of at least 65% control. Based on trailing 12-month home closings, we owned 3 years of lots out of a total of 6.2 years of the controlled supply, which we believe is the right balance in today's environment. As Sheryl laid out, our land investment strategy is focused on core, well-located communities that serve our discerning customer base with approximately $2 billion of planned homebuilding acquisition and development spend in 2026. In the first quarter, we invested $503 million comprised of $279 million for lot acquisitions and $224 million for development. As we deploy this capital, we will remain prudent and balanced in our use of land financing tools. These include seller financing, joint ventures, traditional option agreements and land banking, and we selectively deploy each as we seek to optimize cost, risk and return at the individual asset level. Our preference is seller financing when available as it tends to be the lowest cost. When it is not, we evaluate JV structures, traditional options or land banking. The result is a diversified and flexible pool of structures that allow us to cost-effectively control lots off balance sheet or defer cash outflows to improve our returns and manage our portfolio risk. Given the increased investor focus on land banking, I wanted to share some perspective on this topic. As of quarter end, approximately 10,000 of our controlled lots were in a land bank representing approximately 13% of our total lot supply and about 25% of our controlled lots. Our remaining control lots were spread between 33% in JVs, 26% in single takedowns and 16% in traditional lot options. To further put our selective use of land banking in context, in the first quarter, only 6% of our lots approved by our investment committee were tagged to be financed via a land bank. We believe this balanced approach is a source of competitive advantage and one that is reflected in our relative gross margin performance with only about 25 to 30 basis points of capitalized interest in the first quarter attributable to land banking and seller financing related project financing. Turning to another area of focus, our build-to-rent platform Yardly develops purpose-built, single parcel horizontal apartment communities. We have been encouraged by our engagement with policymakers and their general recognition that Yardly's model is fundamentally distinct from the scattered single-family rental activity targeted by our recent legislative discussions, and we continue to believe we are well positioned as that policy dialogue evolves with flexibility around product and execution optionality. Operationally, we closed on the sale of 1 JV-owned Yardly community for approximately $41 million during the quarter. We now have 16 projects actively leasing and an additional 13 projects currently under development. Supported by our land bank, roughly 90% of Yardly's total units are controlled off balance sheet with a total investment of approximately $320 million at quarter end. While we await greater clarity on the regulatory front, we remain confident in the long-term demand dynamics for this unique rental offering that provides affordable housing solutions for those seeking an alternative to traditional multifamily apartments, often before being ready to commit to home ownership. Now I will turn the call to Curt. Curt VanHyfte: Thanks, Erik, and good morning, everyone. I will begin with the details of our first quarter financial performance and then review our guidance metrics. For the first quarter, reported net income was $99 million or $1.01 per diluted share, adjusted net income was $109 million or $1.12 per diluted share after excluding inventory impairment charges, of $8.2 million and pre-acquisition abandonment charges of $5.6 million. This compares to reported net income of $213 million or $2.07 per diluted share and adjusted net income of $226 million or $2.19 per diluted share in the first quarter of 2025. Both closings volume and average selling price came in roughly in line with our guidance, with 2,268 homes delivered at an average price of $578,000 generating home closings revenue of approximately $1.3 billion. This was down from $1.8 billion in the first quarter of 2025 driven primarily by lower closings volume. Our adjusted home closings gross margin of 20.6% came in stronger than our guidance of approximately 20%, driven by several factors, including favorable costs as well as product and geographic mix during the quarter. On a reported basis, home closings gross margin was 20%, inclusive of $8.2 million of inventory impairment charges. This compares to an adjusted gross margin of 24.8% and reported gross margin of 24% in the first quarter of 2025. As anticipated, the decline reflects a higher mix of spec home closings and elevated incentive levels. Looking ahead, we expect that our margin trajectory will be shaped by 2 offsetting dynamics. On one hand, the recent rise in mortgage rates in a more cautious demand environment are likely to sustain the incentive pressure. On the other hand, the progress we are making in rebuilding our to-be-built sales mix is a tailwind. To-be-built homes carry higher gross margins than spec closings. And as those sales convert to closings, we expect this mix improvement to be the primary driver of margin recovery. On balance, we continue to expect gradual margin improvement beginning in the second half of the year with the pace and magnitude dependent on how the sales and interest rate backdrop evolve through the remainder of the selling season. This also assumes relatively stable construction costs at mid-single-digit lot cost inflation. SG&A expense was $149 million in the first quarter or 11.4% of home closings revenue compared to 9.7% in the first quarter of 2025 due to the deleveraging impact of lower revenue. However, in dollar terms, SG&A expense was down $28 million or 16% year-over-year, driven primarily by lower commission expense and payroll costs as we have effectively managed our overhead structure. As closings ramp through the year, we expect the SG&A ratio to improve toward our full year target in the mid-10% range. Now to sales. Net orders in the first quarter totaled 2,914 homes, down 14% year-over-year at an average selling price of $603,000, up 2% versus the prior year. Our monthly absorption pace was 2.7 net orders per community, up from 2.4% in the fourth quarter of 2025, but below 3.3 in the first quarter of 2025. We ended the quarter with 356 active selling communities, up 4% both sequentially and year-over-year. Cancellation trends remained manageable with our cancellation rate at 10% of gross orders in the quarter, down from 12.5% in the prior quarter and from 11% a year ago. This was the lowest cancellation rate since the third quarter of 2024. Turning to starts. We started 2,371 homes in the first quarter. or approximately 2.2 homes per community per month. This compares to a monthly starts space of 2.1% in the prior quarter and 3.3% a year ago reflecting our management of spec production as we work through existing inventory. Going forward, we will continue to roughly align our starts pace with community-level sales activity. With cycle times down more than 1 month year-over-year, we have greater flexibility to start and close homes, including to-be-built orders within the year. We also made progress in working through our finished spec inventory during the quarter. Finished specs declined 30% sequentially to 863 homes while total specs declined 9% to 2,692, which is roughly in line with targeted levels. Net interest expense was $11.2 million in the first quarter compared to $8.5 million in the prior year, reflecting land banking activity. This is consistent with our prior guidance, the net interest expense would increase modestly year-over-year. Our financial services team achieved an 88% capture rate in the quarter, stable compared to a year ago, supported by competitive mortgage offerings and strong alignment with our homebuilding operations. Among customers using our mortgage company, the average credit score was 750. Average household income was approximately $181,000, average loan-to-value ratio of 80% and an average debt-to-income ratio of 39%, reflecting the financial quality and resilience of our buyer base. Turning to our balance sheet. We ended the quarter with total liquidity of approximately $1.6 billion, inclusive of $653 million of cash and no outstanding borrowings on our revolving credit facility. Our net homebuilding debt to capitalization ratio was 20.5%, unchanged from a year ago. Our next senior note maturity is not until 2028. We remain committed to disciplined and returns-driven capital allocation, including the return of excess capital to shareholders after investing in profitable growth opportunities. During the quarter, we repurchased approximately 2.5 million shares of our common stock for $150 million at an average price of $61 per share. We continue to target $400 million of share repurchases this year with $863 million remaining on our $1 billion authorization, which expires in December of 2027, Despite the evolving market backdrop, we are pleased to reaffirm our full year 2020 guidance across all key metrics, including approximately 11,000 home closings at an average closing price of $580,000 to $590,000. Our ending community count is expected to be between 365 and 370 by year-end. We expect our SG&A ratio to be in the mid-10% range of home closings revenue and our effective tax rate to be approximately 25%. In terms of capital allocation, we expect our homebuilding land investment to be approximately $2 billion. Lastly, we expect to repurchase approximately $400 million of our common stock leading to an average expected diluted share count of approximately $95 million for the full year. For the second quarter, we expect to deliver between 2,500 to 2,600 closings at an average closing price of approximately $575,000 and a home closing gross margin of at least 20%, excluding any inventory-related charges. We expect our ending community count to increase to around 370. Our second quarter effective tax rate is expected to be approximately 25.5% and our average diluted share count is expected to be approximately $95 million. Now I will turn the call back over to Sheryl. Sheryl Palmer: Thank you, Curt. As I reflect on the first quarter, I am proud of what this team delivered in a market facing elevated uncertainty and consumer caution, we exceeded our gross margin guidance, rebuilt our backlog, made meaningful progress on spec inventory and reaffirmed our full year outlook, all while continuing to advance the strategic priorities that will define Taylor Morrison's next chapter. None of this happens without the dedication and discipline of our team members who show up every day to serve our customers and execute our strategy. To our team, thank you. Your commitment is what makes this company exceptional. Looking ahead, I'm confident in the strategic direction we have chartered. The pivots we are making, concentrating our portfolio in the strongest markets and consumer segments, scaling our footprint and especially our Esplanade resort lifestyle brands, improving our sales mix and deploying technology to drive efficiency are already bearing fruit. As we continue to execute through 2026, we're laying the groundwork for a reacceleration in 2027 and beyond. I look forward to sharing our continued progress with you. Thank you to everyone who joined us today. Operator, please open the call to questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays. Elizabeth Langan: You have Elizabeth Langan on for Matt today. I was wondering if you could touch -- I was wondering if you could touch on the maybe your expectations around the cadence of margin [indiscernible] quarter with your 2Q guide is implying maybe a plan to step down and then you noted that things should improve through the back half as you increase your mix of tubibuilt homes. Is that going to look more like a onetime step up? Or is that going to be more of a sequential improvement throughout the year? Curt VanHyfte: Elizabeth great question. Maybe just to kind of start with kind of Q1. In Q1, as we alluded to in our prepared comments, we did have several factors that went into the margin, and I just want to touch on a couple of those relative to the mix. So on the mix front, we did close more homes than anticipated in our higher-margin divisions. So that was a key contributor. We also closed more to-be-built in the quarter than anticipated as we pulled some in from Q2 into Q1. And finally, what I would say is we closed fewer homes on lower-margin homes that we had anticipated and now have moved into Q2. So when we begin to think about the margin guide for Q2, all of those are then going to reverse and have that impact for Q2, which is kind of one of the main drivers as we looked at developing the guide for the quarter. And so we looked at cost mix, incentives, higher interest rates and where we kind of landed was when we look at maybe 3 key areas: the reverse of the mix dynamic in Q1; two, the continued kind of moving through and clearing our inventory; and three, just the higher interest rates that are in the market. And of course, we tend to work with all of our consumers on a one-on-one basis to make sure we're maximizing the efforts for each person's situation. And so that's kind of behind the backdrop from a Q2 perspective. And then when we begin to think about Q3 and beyond, we haven't necessarily guided to that. But based on the progress that we've done relative to clearing the inventory and increasing our to-be-built mix of sales in Q1 we do continue to expect to see that mark a gradual increase in our margins in the back half of the year. Now the tough thing about that is what is the magnitude of that? And that's going to be highly dependent on interest rate, the market backdrop, consumer sentiment, a bunch of different things. But if all things hold here today, we would expect a gradual increase in margin in the back half of the year. Elizabeth Langan: Okay. And kind of a follow-up to that. With the potential for the gradual margin increase throughout the year, is that -- can you maybe speak about incentives, like how much that could play into it? And are you assuming that, that 100 basis point step down. Is that something that should be consistent throughout the year? Or was that more a onetime step down in 1Q? Sheryl Palmer: Elizabeth, this is Sheryl. Thanks for the question. The 100 basis point sequential reduction, I believe, was a real positive. And reflects a number of different factors. The mix, as Curt mentioned, the mix of to-be-built versus inventory homes with that 100 1,000 basis point improvement. As you know, these incentives program tends to be less costly. So the mix is a tailwind. And I hope it continues to be with our focus on to be built. . Even with the progress we made in selling through finished spec inventory, which declined as Curt mentioned, 30%, we were able to be more disciplined in pricing even on the spec home. Some were correlated to competition probably getting off the year and aggressive incentives, but mostly a discipline in how we are how low we're willing to go. I think our sales teams did a great job holding the line. As I've said before, we aren't going to sell at any cost. We placed just too much value within our communities, and we'll continue to sell them from a position of strength. Some communities are going to be about volume, particularly as we sell out of these more remote locations, but others -- it's all about capturing value. We also replaced in many instances, our most expensive forward commitment programs with another version of our proprietary buy bill program, which is allowing our customers to get a lower monthly payment than some of our most aggressive forward commitment rates I do expect that to continue. And as we've said before, it's all about personalizing a program to meet each consumer's needs. So to your -- will it continue overall, the rate environment will clearly be a factor. And we should expect incentive pressures to persist as long as rates remain elevated. That said, we are very focused on community by community optimization using every tool available to balance that pace and price as we did in the first quarter. I'd say, in total, we're cautiously optimistic that incentive levels will stabilize, but we'll be prepared to adjust as the market dictates. Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Unknown Analyst: This is Chris on for Mike. I was hoping you guys could touch on your expectations for start cadence in the coming months and the delivery outlook for the second half of this year, the 2Q guide implies a sequential step down and certain increase in the back half as a result. I just want to get your thoughts on timing there, 3Q vs 4Q on deliveries? Curt VanHyfte: Yes. Chris, I can take that one. Thanks for the question. Relative to the starts cadence, as you saw in Q1, I think we started 2,371 homes, we sold 2,900. So in Q2, and that -- part of that was as we were clearing out some of the inventory. And now as we look to Q2, we would expect our starts to approximate our sales which is kind of what our consistent message has been as -- even though we had to work through some of the inventory on a go-forward basis. So that's kind of what we're aligning to on a go-forward basis for Q2 is aligning our starts with sales. And so you can imagine that we would be taking up our starts in Q2 relative to that. Sheryl Palmer: And the good news is, given what's happened to cycle times, Curt, we can actually start homes, Chris, much later in the year than you've seen over the past. So you'll see much more of an even cadence than this huge spurt to get to the year-end finish line. Unknown Analyst: Understood. Appreciate that. And just going back to the second half gross margin trajectory. I realize you are putting out guidance, but the modest improvement -- is there any way you could put some numbers around the mix of step up? It sounds like your new communities are slated towards the back half of the year and that is margin accretive. Is there any kind of colocation providers just the mix dynamic alone in terms of delivery timing? Sheryl Palmer: I think it will ultimately depend on the spec sales that we sell and close in the quarter. So it's hard to quantify exactly what that looks like. But as Curt mentioned, we still have a number of finished specs, but we've made great progress. We'll continue to make our way through those in the coming quarters. But as you noted correctly, you will see a heavier back end on the to-be-built based on the success we've had first quarter and our new openings with a high focus on to-be-builds. Operator: Your next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: Great. I'd love to there's been some encouraging trends, I guess, with yesterday's report by one of your large competitors in this morning around seasonality kind of holding in there -- you alluded to maybe the month starting out -- month of April starting out a little slower but starting to pick up again. And I'm curious, as you look at the trends in March and April, maybe better than peer just given all the macro noise, if you're seeing any relative strength within that across your footprint, either by buyer segment. And in particular, I'm thinking about move-up or active adult or even by region, that kind of stands out in your view is kind of anchored or led the results that you've seen? Sheryl Palmer: Yes. It's a fair question, Mike. As I mentioned in the prepared remarks, April started that first week, the holiday week, just a tad slower but once again, I think when I looked historically when Easter falls, that is pretty consistent. But then momentum immediately picked up, and we're looking forward, as I said, to a strong ended the month, even with all the headline noise we're seeing. But more broadly, I think what we saw through Q1 was pretty consistent with normal seasonal patterns. Sales built through the quarter, with March being the strongest month. In fact, I think we've seen an improvement in sales every month since late summer. As everyone's mentioned, consumer confidence was clearly has been impacted by the war and just overall macro uncertainty. But as we've said in the past for the most part for our customers, it's about, should I buy now not can I? And so what we're seeing is really the underlying desire for homeownership remains strong. I think last year, we felt a lot of folks were just hanging around the hoop and they've come off the sidelines. Traffic in our communities remain steady. In fact, we had our lowest cancellation rate since the third quarter of '24. So at 10%, I think that says a lot about the way the consumer is feeling. They're transacted. The ones that are transacting are committed and they're qualified. If I think about some of the regional differences, Mike, you'd expect performance was slightly varied across the market. The West was, I'd say, our most resilient area with orders just down about 8%, and they were led by the bay that was actually up year-over-year. And the rest of the markets in the West were just slightly down. Phoenix was also a pretty nice standout with year-over-year improvement in absorption. I also think as I look across the West markets, they were aided with low resale inventory across each of the markets. And once again, pretty consistent across each of the West divisions. When I move to the East Coast, it was down a bit more 17%. But I'd remind us that Florida had a very strong first quarter last year and some very difficult comps. But either the Florida markets held their own. We saw a nice resurgence in Naples for the season. The Orlando business was probably down the furthest, and that was -- we had a number of closeout and opened new community openings. We also saw a really good mix shift in communities with our average sales price in Orlando, up over $100,000 year-over-year. When I think about other markets in the East, Atlanta saw the greatest increase year-over-year in sales across our entire company, and that growth came in both community count and pace. And particularly nice to see the job growth in our Florida markets and the continued reduction in new supply pretty much across the entire East. Central was down somewhere in between the 2 on orders with a shopper -- probably what I describe as a sharper closings decline, partly a function of mix and timing of community life cycle transitions. A number of new openings in Houston and Austin. Austin actually finally saw what I would say, some stabilization in backlog, had the best sales month in quite some time and can seem to stabilize. So in total, Mike, I think as we continue to shift our strategic priority to core well-located communities, reduced exposure to noncore locations where we've seen just the greatest pricing sensitivity. I think you'll see continued pickup in our central markets. Across all the regions, we're executing on the same strategy, calibrating incentives, pricing community by community, really balancing that pace and price, doing it through differentiating our product. And I should also mention leveraging our online sales capabilities that really were helpful throughout the quarter. Michael Rehaut: Great. That's a great overview. I appreciate it, Sheryl. I guess, secondly, I'd love to kind of understand incentive trends across your markets as well and don't necessarily have to go through around the around the world per se. But just maybe even on a broader basis on a consolidated basis, how would you characterize incentives as they trended through the quarter? And if you expect, we're starting to hear about some level of stability potentially if you're seeing that and expecting that to persist into the second quarter? And if that has anything to do in your view with how inventory trends may have potentially also started to stabilize as well, both new and existing. Sheryl Palmer: Yes. It's a fair question. We talked already about the 100 basis points improvement in sales. But if I were to talk about it broadly, Mike, I would say similar to past quarters. The most expensive incentives tend to be with our first-time buyer group. Obviously, with the success we're having on the to-be-built, that was part of that was a good part of the 100 basis point improvement. But honestly, just as much of it came through a reduction in our spec incentives. So it was nice to see it in both areas. When I look at the cost of our forward commitments, the more expensive incentives, they were down quarter-over-quarter. When I look at our noncontract incentives, they were down. When I look at our contract incentives, they were down. So I'd say pretty much across the business, the exception would be where we had a higher penetration of specs and first-time buyer business, Mike, the last thing I'd probably mention on that just because I think it's an interesting stat as we looked at all the numbers is our incentives were down even though we offered the lowest average interest rate as we've seen in a number of quarters. So to think that our customers got the benefit of a lower rate and our incentives were down. It was a nice trajectory. Curt VanHyfte: Sheryl I think as Mike suggested, I think the supply factors are also helping a little bit. If you look at unsold finished inventory, it's really down in almost all markets across the U.S. and the starts per community have kind of rationalized. And so as we think about the general new home inventory, there seems to be some stabilization. And on the resale market, I would say, in a good way, it's somewhat boring. Our markets average about 4.5 months. We've seen real stabilization on listings, only up 1% month-on-month and pricing actually a little bit of pricing power in the markets in resale. So it seems like a general stabilization that's helping that backdrop for both new and resale. Sheryl Palmer: And we saw what about 1/3 of our communities, Curt, with some pricing. That was just base price adjustments. -- obviously, it'd be a much larger number if we considered a reduction in incentives. Operator: Your next question comes from the line of Jonathan Bettenhausen with Truist Securities. Unknown Analyst: So you made a comment in your prepared remarks about buyer preferences returning to kind of more historical norms. Can you give us some more specifics on what exactly you mean by that? Is that more of a preference towards build to order? Or are you also referring to specific feature of the home as well? Sheryl Palmer: Yes. No, fair question. I think honestly, it was more relating to the shift in the 38% to-be-built orders from the 28% in the fourth quarter. I think an important milestone and reflects what we think is a reemergence of for us, historic buyer preferences, obviously, clearing the spec inventory is helping that I mentioned on the call as well that we have hosted a number of design center open houses, and that's certainly been a key catalyst. We held over 140 events in the first quarter with a 23% conversion. But I think most importantly is that most of those sales were to-be-built sales. So we really saw customers coming in wanting to personalize their house. So I'd say it was more on the mix. But we also saw an overall increase in design center revenues. So I think it's also on the personalization of what they want in their homes. Erik Heuser: And also the share of the community, right, Sheryl as you think about 82% of our buyers say that the community is as important as the house. And I think it's beyond just the offering and hopefully, that long-term gravitation to the overall community as well. Sheryl Palmer: And you're saying it's a fair point, Erik, because we're also seeing it in lot premiums being generally slightly up in most divisions, flat overall. So I hope that helps. Unknown Analyst: Yes, that's helpful color for sure. And then also, it was a strong quarter for the Financial Services business on a year-over-year basis. What kind of went into that and should we expect that performance to continue through the balance of the year? Curt VanHyfte: Yes. Great question, Jonathan. A couple of things that I would say are the main drivers there. One is the high investor demand in the secondary market was very favorable in the quarter. And the second thing I would say is we're operating the business with just a lower cost structure overall. So those are kind of the 2 main contributors to that. As we look forward for the rest of the year, a lot of that will be dependent on, again, that investor demand in the secondary market, and we'll just kind of keep our fingers crossed, and we'll see how the rest of the year plays out. Operator: Your next question comes from the line of Rafe Jadrosich with Bank of America. . Rafe Jadrosich: Great. I really appreciate all of the color that you gave on the land banking exposure. Just a couple of follow-ups on it. Can you talk about the like accrued interest or the option maintenance fees relative to what's like flowing through your P&L today. And if it's sort of matched up and how we think about the potential like margin implications longer term? And then how do you think about seller financing like relative to land banking as you continue to sort of increase the option mix? Erik Heuser: Yes. Rafe, it's Erik. I'll start and then maybe when it gets to some of the accounting, ask Curt to jump in as well. When it comes to seller financing, it's always been a preferred tool of ours. When we have the ability to talk to a land seller, and really add value over time to their property. We found that cost of capital to be lighter than most other sources. So historically, it's kind of gravitated in that 6% to 7% range. So that is a preferred methodology. When it comes to land banking, yes, we did make mention of kind of the gross margin impact to the business. We do cost it in 2 different buckets, being capitalized interest and interest expense. And it does flow over time. So depending on what you have flowing through the portfolio, the timing of those communities, you're going to see a little bit of kind of picking the python as it moves through the financial statements. Curt VanHyfte: Yes, Rafe, generally speaking, when a site is under development, we capitalize the interest into inventory. And then when those houses close, they get -- they come through on the closing on the margin front relative to that home. -- when a site is done with its development, we then treat that interest expense as a period cost, and it gets run through the P&L down in interest expense. Rafe Jadrosich: Great. That's really helpful. And then on the margin outlook side, I think you're assuming sort of stable construction costs, have you seen any impact from inflation related to the geopolitical backdrop yet? And what's the expectation there? Like we've seen some price letters and obviously, diesel costs are up, do you have contracts that like lock you near term? And what's the potential just the overall impact. Curt VanHyfte: Yes. Great question, Rafe. What I would say, first and foremost, our costs quarter-over-quarter were down. So we're very proud of that. Our teams continue to do a lot of great work and working with our trade partners and our suppliers on trying to execute on our house cost reduction and mitigation strategies. Relative to what we're seeing relative to the Middle East conflict is today, nothing tangible has come through. To your point, there's been a lot of news out there relative to potential increases coming. But thus far, we have not seen any of those come through yet to us and hit us. Now if they were to happen to come through based on what I articulated a second ago is that we continue to work on our house cost reduction strategies overall. And so if there is some impact, I think we can overcome a lot of that and offset a lot of it based on some of those strategies. And if there is some flow-through for this year, it's going to be mainly a Q4 event if it does impact us. But I'm pretty optimistic about our team's ability to continue to work on our strategies to minimize overall cost increases. Operator: Your next question comes from the line of Jay McCanless with Citizens Bank. Jay McCanless: So a couple of questions. And Sheryl, thank you for all the color around the design center events. I guess, could you maybe give us some context of how many of those you ran last year and what type of conversion improvement you saw versus last year? Or was this a new initiative that you all did this year to try and see what kind of to-be-build demand was out there? Sheryl Palmer: No. We've been doing it design days for years. I would say we ramped it up pretty meaningfully. We've gotten better at it, and we really have focused it. It's not exclusively around to be built. But by giving folks the time with design experts in a very relaxed evening environment, we've just found it to be a remarkable tool. So I don't want to say it's double, but it's close to that. Jay McCanless: Okay. And then the second question, you guys talked about mid-single-digit land inflation. I guess kind of a 2-part question. One, has the resurgence of to be built demand come faster than you all expected? And I guess, two, is there an opportunity to maybe rebalance some of your land portfolio to walk away, sell, however you want to term it, some of the more entry-level dirt to focus on more of the A and B locations that you have sitting in the land portfolio now and maybe help offset some of that land cost inflation with higher gross margins, et cetera? Sheryl Palmer: It's a great question, Jay. And we continue to open up. If we look at community strategy. I think it really has set us up for a repositioning and a reacceleration into '27. When you look at the communities we opened in the first quarter and a number of what we've we have planned to open in the second and the back half, many of them are focused on the move up. Yes, we do have to continue to sell through on what I would call our first-time buyer position. But when I look at some of the success in those openings, specifically, I mentioned Atlanta. Our team there opened 2 new move-up communities in the quarter, booking nearly 60 sales. Only 3 of those 6 specs. They did just a great job in presales a lot about what I talked about with the new -- the enhanced framework on our community openings, really making sure that we're doing a nice job in the presales. And it's just continuing to yield dividends for us. Last quarter, I think I talked a great deal about, a new community that we opened in Phoenix with the success we had. In fact, that's a community that's mostly move up. And we're restricting sales in that community to ensure that we can align sales and construction cadence and have the ability to raise prices. So it's evolving through our investment committee approvals. But yes, you'll continue to see a greater pivot to the move-up and the Esplanade. Curt VanHyfte: And Jay, that kind of inflationary number is kind of the historic perspective of what's running through the P&L. So to Sheryl's point, and you know that we've spent some time and energy kind of pairing the portfolio fourth quarter and first quarter as you see some of those walkaway costs. And so to your point, as we look forward, that in step with what's coming through the investment committee, I think last quarter, we mentioned about 85% of what came through in 2025, we would deem core and 100% in the first quarter. So that will continue to kind of evolve and get us back to where we want to be. . Operator: Your next question comes from Ken Zener of Seaport Research. Kenneth Zener: Could you -- looking at order seasonality, which historically peaks in 1Q, then kind of moderates. Can you talk to the expectations given that orders and starts are going to kind of be reflective of each other? It sounds like in your commentary. And is that like driven by new communities? Sheryl Palmer: Yes. We've talked about a fairly significant opening cadence. So I think to Curt's point, that will align well with starts. We talked a little bit about April and the momentum we're seeing there. So given the increase in communities and just the robust reception that we're seeing from the consumer, I think you'll continue to see a balanced view on specs and to-be-builts. But overall, I don't see much difference in our overall absorption levels as we continue to work our way through the second quarter. Kenneth Zener: So you say absorption, are you referring to the pace kind of holding the same? Sheryl Palmer: Yes. I think pace generally holding the same and then obviously a ramp-up in communities. . Operator: Your next question comes from Alan Ratner of Zelman & Associates. Alan Ratner: So I appreciate all the color so far. I was hoping to dig in just real quickly on the pace and price kind of decision or strategy and really kind of trying to figure out the elasticity you're seeing in demand right now because when I look at your orders for the quarter, down 14% year-over-year, it seems like that was in line with your plan, given the fact that you reiterated the guide, but it does seem a little bit lighter than what we've seen from some of your competitors. And I'm curious, as you kind of drill into the local market data, do you feel like you lost a little bit of share in the quarter? And was that at all a function of dialing back those incentives and maybe prioritizing the price and margin over pace in the quarter? Or am I perhaps thinking about that the wrong way? Just curious if you've done any analysis on that front. Sheryl Palmer: Yes. No, I appreciate the question, Alan. Interestingly enough, and I understand that we missed consensus on orders. But when I look at our internal plan, we were actually spot on. So when we plan the year, guided to say 11,000 closings, our internal expectations on sales, pretty accurate. When I look at the pace market by market. As I said, we had a couple of markets that had larger misses. I pointed to Orlando with some of the repositioning. So with a reduction in community count a little bit in Denver. But across the rest of the business, I'd say exactly within expectations. As far as dialing back incentives, we've always talked about, Alan, that certain communities are intended to operate at a higher pace and some were going to extract all the value out of. And I really believe that. We have too much confidence in the communities we build that we're just not going to come to some of the aggressive discounting that we've seen. We don't need to. We think we can create more value this way. So in total, a little lighter, I know than what the market expected, but actually in line with our expectations. Alan Ratner: Got it. I appreciate that. And I guess I'll leave it there since the market is open. So I appreciate you squeezing me in. Thank you. . Operator: Your next question comes from Paul Przybylski with Wolfe Research. Paul Przybylski: I guess, Sheryl, you mentioned that geopolitical events the rate increase tied to that has been a headwind to consumer confidence in the first quarter. In prior shocks like this, how long has it taken the consumer to rebound, if you will. Would you expect maybe the spring selling season extends into the second half of the year? Or is the consumer more apt to wait until '27 for more certainty? Sheryl Palmer: No. I think we're already, it's an interesting question, Paul. And I'd say each market performing a little different on what the consumer is saying on the sales floor. I mean our web traffic is up considerably year-over-year, which I find a very encouraging sign. Foot traffic down a bit in most of our markets. But certain markets, I'll speak to Denver. It seems to be very, very tied to interest rate volatility. Other markets, I would say the macro just hasn't seemed to impact the way the consumers think in. So my instinct is, you're right, that we will see the spring selling season behave a little bit differently this year. It has been pretty consistent to what I'd say has been more historic norms if we know what normal looks like anymore and probably will go a little bit longer. Based on the level of activity that we're seeing and the engagement on the website and with our sales and online sales team members. Curt VanHyfte: And maybe just one encouraging thing, Sheryl, as you think about generations, millennials specifically, 88% when they show up, they say they're definitely or seriously considering a home purchase. And so -- it's just one data point, but it is encouraging to see when they are engaged, that they are serious. And so you always imagine that all to your point, there are some things that pull people off the fence. Some of it will be some of the things you mentioned. And for others, it will be something else. But it's encouraging to see some of the folks that are showing up very engaged. Sheryl Palmer: Well, and our conversions are at record highs. So the folks to your point here that are showing up have intent to buy. Paul Przybylski: And then you mentioned AI employment concerns. Is that still pretty much contained to IT sector? Or are you seeing that broaden out across your consumer segmentation. Sheryl Palmer: Yes. You mean as far as any resistance because of concerns around jobs. Yes. It's not something that our sales team hear a lot about. Certainly, there are some tech markets that may be a little bit. But I wouldn't say today that it's been a significant factor. When I look at the cancellations even though they're low, and I tried to get any trends there, Paul. There's some -- there's been some job concern, but it's actually a very small piece of the total cans. Operator: There are no further questions at this time. We reached the end of the Q&A session. I will now turn back the call to Sheryl Palmer for closing remarks. Sheryl Palmer: Well, thank you very much for joining us to discuss our first quarter. We wish everyone a good few months, and we'll look forward to seeking you at the end of Q2. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Old National Bancorp First Quarter Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statement legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides containing non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan for opening remarks. Mr. Ryan? James Ryan: Good morning. Earlier today, Old National reported first quarter 2026 earnings that exceeded our internal expectations and analyst estimates. We carried strong momentum into the year and our performance in the first quarter reinforces our confidence in the full year plan. This quarter demonstrates disciplined execution as we have reliably delivered quarter after quarter. We delivered robust loan growth, powered by continued strength in our core deposit franchise and disciplined funding management in a highly competitive market. We controlled expenses and generated strong fee income, which helped offset net interest income pressure from typical seasonality and the recent sub-debt issuance. Credit performance remains solid, supported by healthy liquidity and capital levels. We also acted decisively on capital returns, repurchasing shares during the quarter, including reducing auto Bremer's trust position in Old National, and we intend to deploy the remaining authorization over the course of the program. Bottom line, we are executing and we expect to keep building from here. Our priorities remain clear: drive organic growth and return capital to shareholders. Organic growth starts with talent, and we are investing accordingly. We recently announced a strengthened commercial leadership team, promoting proven internal leaders and adding experienced bankers from several super regional institutions. Our team is focused every day on winning new clients and deepening existing relationships and building the next generation of bankers. Our commercial pipelines are at record levels, and our talent pipeline is as strong as it has ever been. We are also accelerating efficiency and scalability through technology and AI investments supporting positive operating leverage. As a result, we delivered a record adjusted efficiency ratio that remains in the top decile of our industry. On the operating environment, the quarter brought higher for longer rate outlook and continued industry uncertainty. Old National is built for this backdrop. Our balance sheet remains neutral to the short end of the curve, our granular low-cost deposit base helps contain funding costs and our strong underwriting and straightforward community banking model positions us to perform through volatility. Importantly, nothing we are seeing changes our outlook. Loan pipelines are at record levels. Momentum is building, and we remain confident in our full year expectations. To close, we're off to a great start in 2026, and we're executing against our commitments. Our focus remains on organic growth and disciplined capital return. This is not a time where we need acquisitions to achieve our objectives. I want to thank our team for delivering a strong quarter and for staying relentlessly focused on our clients. With that, I'll turn the call over to John to walk through the quarter's financial results in more detail. John Moran: Thanks. As Jim mentioned and as summarized on Slide 4, we delivered another strong quarter and a solid start to the year, reflecting continued momentum in organic growth, disciplined expense management stable credit performance and increased capital return with robust capital levels. . Beginning on Slide 5, we reported GAAP 1Q earnings per share of $0.59. Excluding $0.02 of merger-related expenses and a noncash expense associated with the final distribution of a legacy First Midwest pension plan, adjusted earnings per share were $0.61. Results were driven by better-than-expected loan growth and fee income along with well-controlled expenses. Credit remained stable with less than 20 basis points of non-PCD charge-offs. Our profitability profile as measured by return on assets and on tangible common equity remain top decile versus our peers. Capital finished the quarter with CET1 over 11% and we grew tangible book value per share, 6% annualized and 11% year-over-year despite absorbing the majority of Bremer onetime charges, better-than-expected balance sheet growth and returning capital to shareholders in dividends and share repurchases. Specifically, during the first quarter, we returned $151 million to shareholders. On Slide 6, you can see our quarterly balance sheet trends, underscoring strength in our liquidity and capital positions. Our loan-to-deposit ratio remained 89% and the CET1 ratio is comfortably north of 11%. Again, we compounded tangible book value per share year-over-year despite the impact of the Bremer close merger charges over the past year and the increased pace of capital return. We repurchased 3.9 million shares during the current quarter and 6.1 million shares over the last year. With dividends and repurchases, our combined payout ratio was 64% of 1Q adjusted net income to common. As we've stated in the last several quarters, the best investment we can make today is ourselves. On Slide 7, we show trends in earning assets. Total loans grew 8% annualized from the last quarter, led by 16.9% annualized growth in C&I. Production was diversified across our commercial book and the next few quarters should be supported by record high pipelines of $5.5 billion, up nearly 14% from year-end levels. The investment portfolio was essentially unchanged from the prior quarter with portfolio purchases offset by changes in fair values. We expect approximately $2.4 billion in cash flow over the next 12 months. Today, new money yields are running about 83 basis points above back book yields on securities. Strong loan growth, ongoing repricing across both loans and securities and continued deposit pricing discipline supports stable to improving net interest income and net interest margin over the course of 2026. I would point out that the first quarter was impacted by 2 fewer days, our sub debt issuance in late January and the spread dynamics inherent in this quarter's loan production, which was skewed decidedly toward near investment-grade floating rate C&I. Moving to Slide 8, we show trends in deposits. Total deposits increased 4.2% annualized, primarily driven by commercial and retail growth and partially offset by seasonally lower public funds balances. As a reminder, 1Q is the low point for our public funds deposits with those balances typically rebuilding over the second and third quarters. Noninterest-bearing deposits declined slightly to 23% of total deposits from 24% in the prior quarter, partly reflecting the seasonal factors I just mentioned. Despite remaining on offense with respect to client acquisition in a competitive deposit environment, we were able to decrease total deposit costs by 8 basis points and lowered interest-bearing deposits and even better 14 basis points linked quarter. We achieved an approximate 93% beta in our exception priced book in conjunction with the Fed cuts in the fourth quarter. These actions resulted in a spot rate of 170 basis points on total deposits at March 31. Overall, our deposit strategy performed as we expected, and we successfully achieved the down rate beta that we had targeted for this rate cycle. Slide 9 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.61 for the quarter, and our profitability remains peer leading. Moving on to Slide 10, we present details of our net interest income and margin, both of which reflect my prior comments around day count, the nature of this quarter's loan production and the impact of our sub debt issuance. You'll note that we remain neutral to short-term interest rates, and we have a total of nearly $8 billion in fixed rate loans and securities expected to reprice over the next 12 months. Slide 11 shows trends in adjusted noninterest income, which was $122 million for the quarter, exceeding our guidance. While most of our fee businesses performed in line with our expectations, we again saw better-than-expected performance within mortgage despite typical seasonal patterns in that business and within capital markets. In both cases, this was driven by the mid-quarter dip in rates. Continuing to Slide 12. Adjusted noninterest expense was $354 million for the quarter. Run rate expenses remained well controlled, and we generated positive operating leverage, both quarter-over-quarter and year-over-year. We reported a record low 46% adjusted efficiency ratio, and we have now realized 100% of the $111 million of annual run rate cost saves that were anticipated with Bremer. On Slide 13, we present our credit trends. Total net charge-offs were 26 basis points or 19 basis points, excluding charge-offs on PCD loans. Criticized and classified loans increased $113 million this quarter as Bremer loans transitioned to Old National's asset quality framework consistent with our due diligence expectations. Legacy Old National upgrades partly offset this increase. Nonaccrual loans to total loans decreased modestly, the fourth consecutive quarter of improving performance trends due to active portfolio management. The first quarter allowance for credit losses to total loans, including the reserve for unfunded commitments was 122 basis points, down 2 basis points from the prior quarter, primarily driven by charge-offs on PCD loans and loan growth in lower risk portfolios. Consistent with the fourth quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global economic uncertainty. Lastly, given the continued focus on loans to nondepository financial institutions, we'd again like to emphasize that our exposure is de minimis. All said, MDFIs are approximately 1% of total loans all are performing and like other businesses that we bank most are long-standing client relationships. Slide 14 presents key credit metrics relative to peers. As discussed in past calls, we've historically experienced a lower conversion rate of NPLs to NCOs as compared to our peers, driven by our approach to credit and client selection. That continues to be the case, and we remain comfortable around the credit outlook. On Slide 15, you can see our capital position at the end of the quarter. Regulatory ratios in TCE were stable linked quarter as strong retained earnings were offset by the robust quarterly loan growth, share repurchases and merger-related charges. Still, tangible book value per share was up 6% linked quarter annualized and 11% year-over-year. Our peer-leading profitability profile continues to generate significant capital, which opened the door for capital return late last year. As previously mentioned, we repurchased 3.9 million shares of common stock during the first quarter and have $383 million remaining under our program. Lastly, of note, while not yet finalized, we would clearly expect a capital benefit under the proposed capital rule changes. This would mainly come from reductions in RWA treatment within our mortgage book and changes to the treatment of unfunded commitments over 1 year. Obviously, these changes, if finalized, could present meaningful capital optionality. In any case, we feel confident in our plans to continue to execute on our buyback plan, which runs through the end of February. Slide 16 includes our outlook for the full year 2026, which is unchanged from our prior guidance. We believe our current pipeline supports full year loan growth of 4% to 6% and based on the results of the first quarter, we suspect we may trend to the higher end of this range. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2026, generally in line with our asset growth. Our NII guidance remains unchanged, and our balance sheet remains neutrally positioned to short-term interest rates. Obviously, the exact path of NIM and NII in 2026 will depend on growth dynamics the shape of the yield curve, the absolute level of rates in the belly of the curve and the competitive landscape, but our base case outlook assumes the Fed has done for the balance of this year and that the 5-year, which has been volatile year-to-date, stabilizes at about current levels. We expect our fee businesses to perform well, supported by a robust loan pipeline that is driving capital markets activity, along with continued momentum in our wealth management and brokerage businesses. To that end, we believe we would trend towards the higher end of our full year fee income guide. Expense guidance is unchanged despite a lower-than-expected outcome in the first quarter. but this is due to a robust talent pipeline and our expectation of continued investment in operational excellence. As a reminder, second quarter includes normal seasonal factors such as merit increases. Our expectations for credit and income tax rates are unchanged. In aggregate, you'll note that we expect full year results that yield 15% plus growth in earnings per share and again, feature positive operating leverage with peer-leading profitability good growth in fees, controlled expenses and normalized credit. To close, the first quarter sets the tone for the rest of 2026, and we are on the front foot. We intend to stay there. Organic loan growth was strong and pipelines are healthy. we maintain a granular low-cost deposit franchise and our credit book remains stable. That gives us the flexibility to invest in ourselves in talent and in capabilities while continuing to return capital to shareholders. As Jim said at the top of the call, Old National enters the balance of 2026 with good momentum and added conviction in our ability to execute. With those comments, I'd like to open the call for your questions. Operator: [Operator Instructions] And our first question comes from the line of Scott Siefers with Piper Sandler. Robert Siefers: John, I was hoping you could please walk through sort of the major drivers of NII momentum going forward. I know you touched on the seasonality in the first quarter and the impact of the sub debt issuance. But just that because I think the year started a little weaker than at least the market had expected those idiosyncratic factors notwithstanding. But you kept the guide, I think the quarterly NII will need to average about 5% higher through the remainder of the year to get to the midpoint. So just sort of what gives you confidence in the guide and what are the major puts and takes you see. John Moran: Yes. So obviously, I think, first and foremost, we've got a more cooperative yield curve today than what we had on average for the first quarter. So that will be a helper -- and then we've got $5.5 billion sitting in the pipeline, up 14% year-over-year, and we feel really good about the growth outlook. And what's driving that is a little bit more balanced in terms of CRE versus C&I than what we saw in the first quarter. So I think the spread implications of that are favorable to us as we look forward into 2Q, 3Q. Robert Siefers: Okay. Perfect. And then -- so that sort of touches on the second one, which was sort of the margin specifically. So presumably, that beneficial mix shift in the loan portfolio should be helpful. But just when we think about the sort of launching point of the 355 margin, any other factors that would cause it to sort of jump up from here. I think in your prep remarks, you sort of suggested stable to improving for both NII and the margin. John Moran: Yes. I think stable to improving is the right way to think about it. Recall, we will get 4 basis points back on dates and so that will kind of the launch point there. And yes, I think stable to improve is the name of the game for this year. . Operator: And our next question comes from the line of Ben Gerlinger with Citi. Benjamin Gerlinger: I just want to double check to run through the numbers a little quick. You said a higher end of the range, the higher end of the range. You're building out a bigger team and hiring you guys say the higher end of the range on expenses? Or is it still within that despite the lower core on 1Q. John Moran: I'm just going to -- I'm going to walk it back on 1 thing that you said. So we said loans high end of range, NII guidance is unchanged, fees, high end of range and expenses is unchanged despite a better-than-expected outcome in the first quarter. And that piece of the guide, Ben, on the operating expense side is really not the talent pipeline that Tim and Jim are building I think we're having more conversations today than at any other time that I can remember since I've been at Old National, and we're really excited about that pipeline. Benjamin Gerlinger: Yes. I apologize. It was on higher -- but you retire still good. Just wanted to kind of push you a little bit here. So like things are looking good and you're hiring and you're setting up -- the hires today are obviously not impacting much for growth on '26, call it more of a '27 and the '28 story. Both looks good. Why not be more aggressive on the shareholder buyback or return? John Moran: Well, I think -- look, I think we feel really good about where capital is. We fully intend -- we've got $383 million left on this existing authorization. We would fully intend to use that through the end of that authorization in February. Look, a combined payout ratio that's close to 2/3 of what we generated in the first quarter and still being able to support loan growth, I think is a pretty good place to be. And so we feel comfortable with where we are. And obviously, we'll if those capital rules become final, we'll have some additional optionality and clearly, think about what we're going to do with that, and that would be... Unknown Executive: Incremental to everything we're doing today. John Moran: Exactly. . Operator: Our next question comes from the line of Brendan Nosal with Hovde Group. Brendan Nosal: Starting off on loan growth here. I know you've been kind of working towards these numbers for years and years in terms of the bank's growth capacity, but it really feels like something clicked this quarter and will continue to click for you through the balance of the year. Has anything changed environmentally in your favor? Or is this just kind of the culmination of a lot of effort. John Moran: Yes. Thanks for the question. It's certainly -- we're leaning into go-to-market strategies. We're really focusing on sales excellence and just being tighter in who we're targeting, how we're targeting and leveraging the full plethora of products and our platform that we have to offer. And we've seen that really come together nicely this quarter, and we like the trends that we see in the record pipelines that we have. We think that will continue to come to fruition. And as we add more bankers and more talent, we like the opportunity to continue to drive that growth going forward. Brendan Nosal: Okay. Okay. Great. Maybe pivoting to capital. I heard the commentary on the proposed capital rules and the benefits that would drive for you for others, and I think you mentioned that opens up the option set down the road. I mean can you walk through that? I think at the near-term buyback commentary and lack of interest in M&A at present. But like longer term, if you and others are sitting with more capital, what does that allow you to do longer term? James Ryan: Yes. Look, for us, I think you'd see a reduction in RWA roughly in line with what other sort of estimated for midsized banks. Again, on our balance sheet, the 2 biggest drivers of that are the LTVs in our wonderful family book and the line utilization is greater than 1 year. There were some banks that played a lot of games in the risk-weighted asset diet years kind of shrinking the commitments down to 1 year minus a day. Old National never did that. So the capital treatment on that piece of our book will be favorable. I think in total, it could be up to 100 basis points, give or take, on CET1, and that is not a level that we're going to run the bank at. And so I think it would be and foremost, supporting continued organic growth; and then secondly, return to capital. I think it's also just getting comfortable with where the industry settles at. Where is the right CET1 ratio, where the right TCE ratios to run the organization long term. I think the industry is still trying to find that target level. Clearly, we believe we have a lower risk model and should be at the peer average or lower, but there's a lot of work to kind of get there to define what those normalized levels should be. Operator: And our next question comes from the line of Chris McGratty with KBW. Christopher McGratty: On the Basel discussion, the 100 basis points that John referenced, ballpark. We've heard a lot of banks. Kind of in our follow-up calls talk about the importance of balancing CET1 and TCE. One going as far as saying 8% might be the right number for TCE. How do you -- I know the rating agencies care, how do you view the interplay between the two? John Moran: Yes. Look, I think those are the 2, and we have long been sensitive to those as you know, right? So I would say that we feel really good about where we are in TCE as evidenced by the fact that we're returning a pretty significant chunk of capital in the quarter and 64% combined payout ratio on the quarter's kind of core net income. . While still supporting organic growth. So as Jim said, I think we still got to kind of figure out what the right long-term numbers are as an industry and then what's appropriate for Old National Bank, but we feel really good about where we are. James Ryan: The challenge Chris becomes from a stress testing perspective, we feel really good about our capital levels and now we could push it harder. But there becomes a point in time when under periods of stress, our industry goes back to the higher capital levels are the ones that maybe feel a little less pain. So I think we're just trying to figure out what's the right long-term view and not get caught up in today's whatever short-term window might be. And how do we balance all the other stakeholders like you suggested. Christopher McGratty: Yes, you want to stay off the screens when things get a to get it. On deposit pricing, as we stay -- if the forward curve is right, there's no more cuts, or read that 170 spot are we flatlined basically until the Fed moves again? John Moran: Look, I think we still got some opportunity in the back book. We've definitely got some opportunity as brokered roles but I think the material decreases in spot rate are probably behind us if the Fed is done for the year, which is our base case expectation. And I would tell you, the deposit competition it's intense, but rational. And the environment around specials has stayed a little bit frothy longer than what we would have probably hoped for as an industry. Operator: And our next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: When I look at the Slide 10 on the impact of net interest margin that 19 basis point negative impact from rate and volume mix. Relative to 5.88% total loan yields for the quarter, should we expect that loan yields to increase in the second quarter as the -- obviously, the rate impact is decreasing or basically gone. And then maybe the first quarter had a overly high concentration of higher-quality C&I loans, which carry lower spreads. I guess that's not a bad thing at all, but I just want to get a sense of what a good loan yields is to start off as we head into the second quarter. James Ryan: Yes. I think you've got the moving parts of that, right, Janet. It's the on loan yields, like margin overall, 10 basis points of that was day count for us. The balance of it was sort of sober down and most of that was offset by funding costs. And then there was a de minimis amount, just on churn in the book, so sort of, call it, 5 basis points, 4 or 5 basis points on loan yields, just regular churn. And I think going forward, much like margin, I think it's kind of stable to improving and will depend a little bit on business mix of production. John Moran: Yes. When I look in the pipeline, just a couple of factors on the loan side. One, a greater portion of our pipeline is being driven in community markets, where we see a little less competition, and we see that segments and some of our strong community markets, where we have great market share and good brand picking up. . And then secondly, a larger part of our pipeline for the second quarter is in kind of core middle market, which third, fourth generational companies where you can tend to get a little more spread on that as well. also can get good core operating deposits with those loans as well. So as we look at the mix second quarter compared to first quarter from a timing standpoint, just had some of the higher quality loans that have slightly lower interest rates. In the second quarter, we see that mix shifting. Sun Young Lee: Got it. That's very helpful. And I would also love to hear a little bit more about what you're doing on the AI front that you mentioned earlier that's helping on the efficiency and expense enterprise-wise? James Ryan: Yes. So like others, we are investing in AI. We've got an AI center of excellence stood up within our technology and data teams. I would describe our progress to date is a lot of -- it's a lot of singles and doubles. And a really good example of that, that we shared with people is we had some like old Power BI legacy code that we lifted and shifted into a new data environment. It was kind of clunky. We threw AI at it and had what would have taken some of our best programmers month cleanup was done in a week. And so that would be a real life example of sort of -- I would describe that as a single and I think we've got some really interesting use cases that we're looking at. Probably the first 1 for us that we're going to dive deeper into is in risk management. If you think about everything that needs to be built to embed risk into the first line. Almost all of those jobs, which the big banks just through bodies at are checkers of checkers. And that is a perfect AI use case and I think something that, look, 100. That threshold is probably moving anyways, but it doesn't mean that we're not at work on thinking about things that we need to do as a bigger bank. And I think that the cost of that going to be a fraction of what it would have been even just 3 years ago because of some of the advancements in AI. So we're excited about it. And there's a lot of stuff watt the bank that we think help drive frees up dollars for us to go and invest in the more exciting stuff, which is the revenue-facing talent pipeline that Tim is building. Operator: And our next question comes from the line of Brian Foran with Truist Securities. Brian Foran: So the loan growth momentum, I mean, if we think about scenarios where it continues to be at the high end or above the guide, do you think earning assets will be growing at the same level? Or is there some point where if loan growth if we're start to pencil in 7% or 8% loan growth, we should moderate securities and cash a little bit. James Ryan: Yes. I think it's probably fair to think about everything sort of growing about lockstep. So I think as loan growth goes, the liquidity book would grow with it. Brian Foran: Got it. And then on the Basel discussion, I know it's very early, the proposals could change, so maybe it's too early for this question, but you referenced how some specific areas get much better treatment. Do you think this is big enough where from a strategic standpoint, you might do more hiring or focus in certain types of lending or you might deemphasize others. Is this a big enough move that you'll actually start remixing the business a little bit to optimize around it? James Ryan: It's probably a little early to say for sure on that. The one place where I think when you think about our WA treatment and 1-4 family. It seems clear that the regulators are trying to encourage banks to be back in that business in a somewhat more meaningful way. And so there's interesting implications to that, that we would think through, I think, if it became a permanent role. Operator: And our next question comes from the line of Brandon Rudd with Stephens. Brandon Rud: My first question, if I could drill in on loan yields a bit. I know it's primarily rate mark related now, but do you have the purchase accounting accretion for the quarter? John Moran: Not handy. It was roughly unchanged, though. I think the net-net of sort of purchase accounting accretion and interest collected on nonaccrual was a wash, like no impact on overall margin. Brandon Rud: Got you. Okay. And then for the other side of the balance sheet, I heard your earlier comments about deposit cost competition. Superregional Bank last week said the Midwest is a bit more competitive than other regions around the nation. Since your footprint kind of stretches across the Midwest, are there markets in particular that you're seeing more competition than less than others? John Moran: In the Midwest, no, not really. I would say that our most competitive market is probably Nashville. And that does -- we don't really have a back book in Nashville to worry about or certainly not the size back book that we have in other markets. But yes, I think most of our markets are competitive but rational. James Ryan: Yes. I think the other interesting thing is that some of the large national players are hanging some pretty steamy rates out there. So that's primarily competing with our wealth and private client businesses, which can be a little bit challenging at times. Operator: And our next question comes from the line of David Chiaverini with Jefferies. David Chiaverini: On expenses, can you talk about areas of investment and how we should think about positive operating leverage, the extent to which it should come through based on the guide we're modeling pretty decent operating leverage. But can you talk about those 2 things? James Ryan: We are likewise modeling pretty decent positive operating leverage on the year, David. I think, in fact, when we stack it up against our executive peers, we were either #1 or #2 on that metric for this year. And look, our expectation is that we'll continue to drive quarter-over-quarter and year-over-year positive operating leverage, and we walk into every single budget cycle. With that as a guiding sort of principle. So we know that, that's a metric that's important. It's something that we're focused on, and it's something that I think will deliver in 2016 for sure. David Chiaverini: Great. And then shifting over to your comment about pipelines on the loan side being up 14%, great to hear. Any particular industries that are driving that? John Moran: David, they're pretty balanced, no real industry concentration. And I would say we've seen a really nice pickup in CRE pipelines. So across the board, C&I remains strong. CRE is building -- and we've seen markets like Minnesota, where our momentum there is building pipelines there are higher than they've been in the last 18 months. So we feel very good overall about the pipelines, and it's a good mix of CRE and C&I, but with no concentration from an industry standpoint. Operator: And our next question comes from the line of Jared Shaw with Barclays. Jonathan Rau: This is Jon Rau on for Jared. Just looking at some of the components of deposit pricing, it seems like the exception book has been driving most of the downward pressure on deposit costs and the non exception book might be even going up a little bit in terms of average cost. Can you just talk about the dynamics there? And is if there's any emphasis being placed on moving to more weighting towards exception pricing? James Ryan: Yes. So the exception book is where we saw all of our uprate beta, and that's kind of how we've always managed deposit costs at Old National. So it is where we've experienced all of the down rate beta as well. we're really pleased with how that's performed. I would say if you're looking at quarterly sort of puts and takes on deposits, don't forget that there's some seasonal factors in our first quarter. Our public funds balances are at a low point in 1Q, those rebuild in 2Q and 3Q, and there's some seasonality in our noninterest-bearing on both the commercial and the public side of things as well in the first quarter. So that might explain what you're kind of scratching out there on the quarter's deposit costs. Jonathan Rau: Okay. Great. That's good color. And then maybe just a little more on the leadership changes in commercial banking bring in Chris. I guess, is there any specific areas of expertise in terms of lending verticals or anywhere else that he brings that would kind of alter the pace or areas that you're hiring in? John Moran: Yes. Chris' background is diverse, and we're very excited about what he can bring. But primarily on the C&I side, when you think about asset-based lending and core C&I middle market banking, the old school banking that we're very known for and very proud of. I think Chris will do an exceptional job of helping to drive that growth. At the same time, John Thurston on the -- on the corporate banking side, as our leader and President of that, we're looking at different ways to grow there, and we're excited about the depth he brings of a 30-plus year career across business banking, commercial banking and corporate banking. So excited about what each of them can bring to our growth going forward. Operator: And our next question comes from the line of John Arfstrom with RBC Capital Markets. James Ryan: We were just in Minneapolis yesterday. I didn't see you in the Skyway. Jon Arfstrom: No, I had a seatbelt on my office chair. Can't leave my desk. A few follow-ups. John, you said the yield curve maybe is a little bit more cooperative now. what changed, what makes it more cooperative and what's more ideal for you guys? . John Moran: Well, the 5-year came back to $390-ish , which is definitely helpful and there's some -- there's better -- there's a little bit better steepness finally. Now it may have gotten there for the wrong reasons, but we'll take it, right? So a little bit of steepness and a better belly is certainly helpful for us. Jon Arfstrom: Yes. Okay. And then just following up on the positive operating leverage question. You flagged a record adjusted efficiency ratio this quarter of 45.7%, which is great for your company. Are you saying that could go lower, John? Is that the message? John Moran: I think we're going to try to keep it where it is or maybe grind it lower... James Ryan: I think the tension, John, from my perspective, is that we don't want that to be an inhibitor to investing in our future, investing in growth, investing in talent. I think that's just the dynamics. We inherently know like if we're able to successfully convert this talent pipeline, that's an 18-month kind of breakeven scenario. And inevitably, the people that we're looking at hiring are kind of top decile performers, so they just come at a much higher cost on average. And so I don't want that number of 45% to be a number that stops us from investing in our future or the growth of the organization. So that will be the tension that we'll just have -- as I've said publicly a few times like, hey, nothing would make me happier if I have to come and apologize to you all that our expense guide is going up because we just had that much success in recruiting and attracting great talent to join the organization. Jon Arfstrom: Yes, fair. I don't want to say it's good enough. We want to keep pushing, but that's pretty good for you guys. James Ryan: I agree. I mean you know our history. That's remarkable if you go back and look at our history . Jon Arfstrom: Yes. Okay. And then the last one on the buyback. You flagged that you took a piece of the buyback from you bought from the Bremer Trust, how much is left there? Are those negotiated transactions? And kind of what's the plan? Is it more of a -- I guess it's maybe more of a bummer question, but what do you think the plan is and how much did you get from the trust? James Ryan: Let me just -- we actually flagged that transaction when we did it. It was around $50 million of stock. And so we just wanted to repoint that out. We did put a filing out on that. And the whole point is honestly, they see great value in long-term ownership. We expect them to have long-term ownership -- we're obviously sensitive to the concentration that they bring. So no material change to the current ownership other than the $50 million we reduced and I just don't see them wanting to do anything different in the near future. Obviously, they're in control. The lockup expires really quickly here. But after the lockup expires, I don't see them doing any changes based on our conversations but anything after that, they have to decide. The good news is we have the right of first refusal. So to the extent that they want to come to the market, we'll be there to support that. But I don't anticipate that based on our most recent conversations. Jon Arfstrom: Okay. Operator: And there are no further questions at this time. I'd like to turn the call back to Jim Ryan for closing remarks. James Ryan: We appreciate everybody's support. And as usual, we'll be here all day to answer any follow-up questions. Thanks so much. Operator: And ladies and gentlemen, this concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing (800) 770-2030 access code 9394540 and this replay will be available through May 6. If anyone has additional questions, please contact Lynell Durkol at (812) 464-1366. Thank you for your participation in today's conference call, and you may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Las Vegas Sands Corp. First Quarter 2026 Earnings Call. At this time, all participants have been placed on a listen-only mode. We will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to Daniel Briggs, Senior Vice President of Investor Relations at Las Vegas Sands Corp. Sir, the floor is yours. Daniel Briggs: Thank you. Joining the call today are Patrick Dumont, our Chairman and Chief Executive Officer, Dr. Wilford Wong, Executive Vice Chairman of Sands China, and Grant Chum, CEO and President of Sands China and EVP of Asia Operations. Today’s conference call will contain forward-looking statements. We will be making those statements under the safe harbor provisions of federal securities laws; the language on forward-looking statements included in our press release also applies to our comments made on the call today. The company’s actual results may differ materially from the results reflected in those forward-looking statements. In addition, we will discuss non-GAAP measures. Reconciliations to the most comparable GAAP financial measures are included in our press release. We have posted an earnings presentation on our website; we will refer to that presentation during the call. Finally, for the Q&A session, we ask those with interest to please pose one question and one follow-up so we might allow everyone with interest the opportunity to participate. This presentation is being recorded. I will now turn the call over to Patrick. Patrick Dumont: Thanks, Daniel. Good afternoon. Thank you for joining the call. As we look to the future, we could not be more enthusiastic about the opportunities for our company. Our strategic priorities remain clear and consistent with the goals of investing with discipline and creating meaningful shareholder returns. Turning to our current quarter results, we once again delivered outstanding financial results at Marina Bay Sands in Singapore, with EBITDA increasing over 30% to reach $788 million. Singapore is an ideal market for high-value tourism spending; our focus on creating unique and memorable entertainment and hospitality experiences for our guests has been a tremendous success. The company’s fundamental operating strategy relies on three critical pillars: our people, our product, our service. When we get these three pillars optimized, we can create outstanding financial and operating performance. We are seeing that at Marina Bay Sands today, and we could not be more enthusiastic about our additional opportunities for growth in Singapore as we continue to enhance the customer experience for our guests in the years ahead. Turning to Macau, we delivered $633 million in EBITDA for the quarter, an increase of over 18%. Mass market revenue share reached 25.7% for this quarter, our strongest performance since 2024. As in Singapore, the operating pillars of people, product, and service underpin our strategy to deliver growth in Macau. We believe we will deliver growth over time in Macau as we implement specific strategies to improve both our products and our service levels. We have a goal of reaching $700 million in quarterly EBITDA, and beyond over time, as we fully implement our investment and operating strategies and as the Macau market continues to grow. Today, the growth in the Macau market is primarily driven by the premium segments. The competition in that segment remains intense, and luxurious suite product coupled with outstanding service levels are critical to success. We have the suite product to effectively compete in the premium segment at both The Londoner and Grand Suites at Four Seasons. We are singularly focused today on matching that suite and room product with the service levels that the most discerning and valuable customers in Macau increasingly demand. We are making progress. We have meaningfully increased our gaming revenues, gaming volumes, and premium customer patronage since implementing the recent changes to our reinvestment programs. Implementing meaningful improvements in the service pillar of our strategy in Macau will be critical to realizing additional growth and securing our long-term success. We believe we have outstanding opportunities for growth in every segment as we implement our strategies. Accordingly, we will be making targeted investments in training and hiring of additional customer-focused team members throughout the portfolio. Creating and delivering unique and memorable hospitality experiences is the centerpiece of our strategy, and improving service levels in Macau is critical to the achievement of our long-term financial and operating objectives. In addition, we plan to introduce refreshed and luxurious room and suite products throughout the portfolio, as we further execute the product pillar of our strategy. We are focused on the highest-return projects to increase cash flow over the next three years. We will begin with The Venetian, where work is already in progress, with refreshed room product beginning to come into service in 2026. Additional luxurious suite products and the total product refresh are targeted to be completed by 2027. Meaningful patron growth we have seen in The Londoner and Grand Suites at Four Seasons provides support for these investments. It is important to note that the work we envision will not create significant disruption throughout the portfolio. The scale of our portfolio will allow us to serve customers in other properties and elsewhere in each resort while work is in progress. Nothing we are doing as we invest in the portfolio over the next several years will hinder our ability to use our scale advantages to outperform the non-premium segment should spending in that segment accelerate in the future. We are confident in our strategy in Macau, and we look forward to updating you on our progress as we execute our plans. Let us move forward to provide some additional detail on our current quarter financial performance. Macau EBITDA was $633 million. If we had held as expected in our rolling program, our EBITDA would have been lower by $15 million. When adjusted for higher-than-expected hold in the rolling segment, our EBITDA margin for the Macau portfolio of properties would have been 29.6%, down 200 basis points compared to 2025. Our principal focus in 2026 is to deliver revenue and cash flow growth across the portfolio. Our investments in improving service offerings will naturally increase expenses and will continue to negatively impact margins as we implement our strategy. We do expect margins to improve over time as we grow revenue in the lower end of the premium segment and in the non-premium segment, where the scale of our hotel inventory gives us natural advantages as we improve our service levels and further refine our reinvestment strategies. Margin for the quarter at The Venetian was 33.5%, while margin at The Londoner was 29.6%. We expect growth in EBITDA as revenues grow. We will use our scale and product advantages together with service level improvements and targeted incentives to effectively compete in every market segment. In Singapore, Marina Bay Sands EBITDA for the quarter was $788 million at a margin of 53%. If we had held as expected in our rolling program, our EBITDA would have been higher by $6 million. The outstanding financial and operating results at MBS reflect the impact of high-quality investment in market-leading product, world-class service, and the growth in high-value tourism. Turning to our program to return capital to shareholders, we repurchased $740 million of Las Vegas Sands Corp. stock during the quarter. We also paid our recurring quarterly dividend of $0.30 per share. We have now purchased 14.3% of the company’s outstanding shares over the last ten quarters, and we believe additional repurchases of Las Vegas Sands Corp. equity through our share repurchase program will be meaningfully accretive to the company and its shareholders over the long term. While we did not purchase any shares of SCL during the quarter, we do continue to see value in both the Las Vegas Sands Corp. and SCL names. The company’s ownership of SCL remained at 74.8% as of March 31, 2026. We look forward to continuing to utilize the company’s share repurchase program to increase returns to shareholders. Thanks again for joining the call today and for your interest in Las Vegas Sands Corp. We will now open the call for questions. Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. If listening on speakerphone today, please pick up your handset to provide optimum sound quality. Also, we ask that each participant limit themselves to one question and one follow-up. Please hold a moment while we poll for questions. The first question today is coming from Daniel Politzer from JPMorgan. Daniel, your line is live. Daniel Politzer: Hey, good afternoon, everyone, and thanks for taking my questions. Singapore, it has gone from strength to strength to strength. I think you had $18 billion of rolling chips in the quarter. I mean, I guess, how do you think about what is driving this? I mean, it is just kind of the levels here. And to what extent are you seeing any benefit from some of the things kind of evolving in the geopolitical landscape that may be hitting other regions and possibly benefiting Singapore? Patrick Dumont: Thanks. So there are a couple of things about the Marina Bay Sands growth story, which is really a story about investment. The more we invest in high-quality assets, the better service levels we have, the more we are going to differentiate the product that we have, and the more high-value visitation we are going to get. Look, I think the VIP segment is just a very competitive segment across Asia. The fact that we are able to see success here with these very high-value patrons is really just an example of the execution there at the property. I will tell you that our main driver of profitability at Marina Bay Sands is mass win and slots. VIP is a very volatile segment, and it can be concentrated at times. It is high-value customers, and they can vary from quarter to quarter. What I will tell you is that with the introduction of IR2, we will have more product to address this market and scale with it. But the one thing to note is that we had an outstanding quarter. The team did a phenomenal job. These quarters can be highly concentrated and can vary. And then just turning to Macau, you mentioned the goal to get back to that $700 million in quarterly EBITDA level. Obviously, it is going to require a little bit more investment. But, I mean, in terms of the market growth that you have to get there, how—at what level do you have to see the overall market or mass grow? Is that something you can kind of get to or achieve independent of the market really accelerating here? Look, I think we are heading in the right direction in Macau. I think you see the growth this quarter, and you see that our focus on service and improving our product—we have some work to do there across the portfolio, as we mentioned—is starting to show some progress. And so, in our mind, that is a milestone that is achievable. Obviously, it is going to require some growth in the overall market. But more importantly, it is going to require us to continue on the execution of hospitality and service that we are showing. Grant, do you have anything else to add? Grant Chum: First of all, the market continues to grow. We had 14% growth year-over-year this quarter, and it is notable that we achieved significant revenue outperformance against each segment. So we gained share in every single segment both on a year-over-year basis as well as sequentially. So we achieved the EBITDA growth as well as sequential margin improvement at the same time as we optimized our reinvestment levels. Daniel Politzer: Got it. Thanks so much. Operator: The next question will be from Brandt Montour from Barclays. Brandt, your line is live. Brandt Montour: Hi, everybody. Thanks for taking my questions. So over in Singapore, you have a slide that you show us on theoretical rolling hold. And I know that that is just a pure statistical output from betting mix, but you do show it kind of curling over and reverting back lower. I just want to make sure: are you guys seeing a change in betting behavior or any type of reversion away from side bets, or the sort of long-odds bets that you talked about? Patrick Dumont: Yeah, I appreciate the question. You know, the VIP business is very volatile, and there is an interesting occurrence in the way patrons play now, which is some customers who are high-end VIP customers on rolling programs play traditional bets and they bet in a much more traditional, conservative way. And then we have other patrons who really enjoy the volatility and the side bets that we present. And so, if you look at 2025, where we hit the peak of 4.2% with $9.1 billion in rolling volume, we had patrons in the building who really loved those side bets, and so it drove the theoretical higher. In the case of this quarter, with $18 billion of rolling volume, it was a barbell. We had people in the building who were betting the traditional bets in a very conservative manner and rolling a lot of volume, and then on the other side, we had some people who were really playing the side bets. And so the way we got to 3.6% was a more traditional VIP hold mixed with people who were taking advantage of the side bets and having a more, let us call it, modern approach to the game. So what you ended up with was this 3.6%, but it was not like an average play. It really was a barbell. Brandt Montour: Okay. That is really helpful. Thanks for that. And then a second question would be on Macau. You know, the base mass is not where most of the growth appears to be coming in the broader industry right now. And I am just curious if you guys are starting to see any green shoots in that customer, given we have seen a little bit of better stock market and maybe some other green shoots in the macro. But just anything that you check or are watching from your KPIs on the macro level that gives you any sort of confidence or incremental confidence in that segment? Grant Chum: Thanks for the question. The market growth is driven by premium segments, both in rolling and non-rolling segments. But we can point to a couple of indicators to show that the base mass and the mass growth is actually solid. If you look at not so much the base mass tables, but the slot and ETG segment, we are seeing strong growth as a whole in the market, and Sands China outperformed the market in that segment by a significant margin this quarter. So our slot and ETG segment grew by 31% year-over-year and 10% sequentially, especially driven by our more mass-orientated properties in Parisian and Sands, where you can see the slot and ETG number has grown tremendously. The second indicator is our retail business. We actually hit a quarterly all-time high in tenant sales in this first quarter, which is an exceptional performance. Tenant sales grew by 37%. Yes, it was driven by the jewelry and watch sector, but the spending was very broad across all of our malls, and we also saw significant growth in the fashion segment as well. So from the slot segment and from the retail mall, you can see that consumption is solid, but clearly for the GGR, the premium segments are still driving the majority of the growth. Operator: Excellent. Thanks, everyone. The next question will be from Robin Farley from UBS. Robin, your line is live. Robin Farley: Great, thanks. Just circling back, Patrick, you were making comments about Singapore and you talked about both VIP and mass, and then you said something like IR2 will give us more product to address that. Were you suggesting that IR2 would be focusing on one or the other of those markets, or did you just mean broadly product to address the Singapore market? So I just want clarification on that. And then I do have a follow-up. Patrick Dumont: Yeah, no problem. Thanks for asking a follow-up on IR2. In our mind, this will be the most luxurious and most highly amenitized hotel in the world. And our intention is to set a new standard for luxury hospitality, which will naturally attract very high-end patrons, some of whom are gaming patrons on rolling programs. And so my comment around the volatility and concentrated nature of the VIP/CIP play that we see in Marina Bay Sands, in our mind, can be smoothed a little bit by having more inventory to bring in more of these very high-value patrons. And so while IR2 will not be focused solely on VIP patrons, it is really going to be for all the high-value tourists that we have coming into our building. But it is really going to set a new standard, and those types of customers tend to gravitate to those types of hospitality and amenities environments. It will also have an unbelievable entertainment component, which we believe will also appeal to the highest-value tourists that we have—highest-value patrons we have coming into the building. So we hope that that gives us additional inventory and strength at the highest levels of patron rating. Robin Farley: Great. Helpful. Thank you. And just a follow-up on Singapore in general. I do not know if you have any thoughts about how we should think about the two properties and what combined EBITDA might look like or incremental EBITDA from IR2—any sort of, I know it is early, but big picture. Thanks. Patrick Dumont: I think for us, we are really looking to get our targeted return on invested capital across the total investment. We have always said that we kind of target a 20% return. So that is kind of where we are trying to get to. And if you look at the productivity that we are seeing out of our highest-end products within Marina Bay Sands, we believe that this is achievable, and that is why we are investing in the project. The market is very unique. The tourists that are coming into the market, the structural tailwinds that are supporting growth in Singapore, the value that Singapore has demonstrated as a tourism destination, the fact that we are going to have an arena now that we control that will have some of the best presentation technology in the world—we are very excited about the opportunity there, so we think it will enhance not only the experience you would have at IR2, but the type of guests we have coming across the portfolio, because of what it will bring in terms of additional amenities. So, for us, we are looking at a total project return in excess of the 20% we talked about. Robin Farley: Great. Thank you. Operator: Thank you. The next question will be from Stephen Grambling from Morgan Stanley. Stephen, your line is live. Stephen Grambling: Hi. Thank you. This is maybe digging into one of the questions on Marina Bay Sands. Can you maybe just talk about how the customer concentration may have evolved over time? Are you actually getting more customers, and is the comment about having the highest-end customer meaning that your IR2 being able to attract—you are hitting some kind of threshold where you just do not have enough space for some of these customers, or is it just that you are getting more play out of each individual and you have not seen any kind of upper bound on that? Thank you. Patrick Dumont: We went from 132 suites to 770, and we need more capacity. We wish we could have IR2 tomorrow. I think for us, there was a sea change in the way that we presented our products there. You hear us talk about the quality of the design—our design excellence initiatives—and our design team has done outstanding work. The service levels there are extraordinary. Our hospitality team has really stepped up. Our culinary efforts have really improved over time. Our nightlife is really accelerating. And with the strength in our retail business there, we really have so many amenities that just drive the highest-value tourist from the region to Singapore and to our property. And we are able to use a lot more capacity when it becomes available. So we are looking at IR2 as a way to really increase the high-end suites that we have, add amenities across the portfolio that we do not have today in terms of entertainment, additional ballrooms, additional culinary, additional sights to be seen. For us, this is something that we hope will have a multiplier effect on what we have on offer there. But we need more capacity. Yes, we made the change; we started bringing in much higher-value tourists into Singapore and to our building. But there are more of them. And so we are looking forward to the opportunity to grow and to take advantage of what we see as the market opportunity. Stephen Grambling: That is helpful. And maybe one follow-up, but just on Macau. I think you mentioned some of the investments going on there. Can you just remind us of some of the timing of some of the renovations and work that you are doing and how you are thinking about where to invest based on what you are seeing in the market now? Patrick Dumont: So a couple of things I will highlight, and then I will turn it over to Grant. I think for us, we have a very strong fundamental view for the long-term success of Macau, and our company has been built from Sheldon’s original vision that investment and scale create a competitive advantage. What you see in Macau today is—even though the market is hypercompetitive in certain segments—we continue to perform in those segments with high-quality product, the right service levels, and the right marketing. So for us, we are going to look to invest in our portfolio. We do have scale, we do have rooms, we do have amenities, we do have retail, we do have entertainment—to invest in a way that will give us the maximum opportunity to take advantage of what we see as growth in segments that we are getting the benefit of today. I think the next couple of years, you will see us invest in certain areas that we think we have underinvested in over the last five years, in an attempt to reposition some of our assets to better address the market today and make us more competitive. Grant, would you like to add anything? Grant Chum: Sure. We can see exceptional results from our new product throughout the last three to four quarters. So part of our market share gain is a function not just of our reinvestment strategies, but also the ramp-up of The Londoner and Grand Suites. You can see that very clearly in our results. And, of course, Four Seasons with the Grand Suites product is also very competitive. Looking forward, we have said, I think in Patrick’s opening remarks, we are starting the renovation of The Venetian. This is our flagship property, and we are very excited by the upcoming transformation of The Venetian. This will deliver new inventory progressively starting in 2026 and then the entire project should finish by late 2027 or early 2028. Stephen Grambling: Very helpful. Thank you. Operator: The next question will be from Elizabeth Dove from Goldman Sachs. Elizabeth Dove: Hi. Thanks for taking the question. So it looks like the buyback stepped up a little bit this quarter. I am just curious, especially as you see this continued Singapore EBITDA going from strength to strength, is this an appropriate kind of quarterly run rate? Or how do you think about capital returns more broadly longer term? Patrick Dumont: I think we have said for a long time, we see significant value in both Las Vegas Sands Corp. and SCL equity. We are going to continue repurchasing shares. We thought this quarter represented a significant opportunity where levels were, so we were a little more aggressive than maybe you have seen in prior quarters. But our goal is to continue to repurchase shares in a meaningful way. We think it is an important part of our return of capital strategy, and it is something that really creates long-term value for our shareholders over time. You see the share count reduction over the last couple of years. It is very meaningful, and we are going to continue to look in that direction as we think about return of capital. Elizabeth Dove: Got it. Thanks. And then, as we think about Macau for the rest of the year, we are only a couple of months away from comps starting to get a little bit tougher. Obviously, you are making progress on the margin side with that sequential uptick, but how do you think about your ability to keep improving on that, especially as the comps get a little tougher going forward? Grant Chum: Thanks for the question. First of all, revenue growth is an important factor. Over time, we expect higher revenues will drive margin improvement. Outside of that, we are investing heavily, as Patrick referenced, in improving our service offerings across our operating capacity, across our salesforce and distribution, and also importantly, into our hospitality and gaming service levels. Those initiatives are having an impact on the cost structure and will continue to impact the margin in the near term. At the same time, we are driving revenue growth. We are achieving revenue share gains, and over time, we intend to grow margin as the revenue levels continue to increase. In terms of the reinvestment levels, we have been able to spend less on reinvestment relative to revenue on a sequential basis. We see, at least in our strategy and our ability to optimize, stabilization in the reinvestment levels. The market continues to be very competitive; we have to continue to monitor the dynamics very carefully. But for this quarter, we were able to achieve both revenue growth and sequential stabilization and improvement in our reinvestment strategy. Operator: Thank you. The next question will be from Chad Beynon from Macquarie. Chad, your line is live. Chad Beynon: Hi, good afternoon. Thanks for taking my question. Two questions on Macau. One, just wanted to ask about how the entertainment calendar looks maybe through the rest of the year at Cotai Arena and then at the smaller venues. And then my second question is more around just the sentiment with the base mass customer—really good growth in the first quarter, as we have talked about a couple of times—and particular growth in the Chinese stock market and just overall what we are able to see in consumer sentiment indicators. But are you getting any different sense from your customers since the tensions in the Middle East have started, or do you think most of the base mass customers— Patrick Dumont: Hey, Chad. You have a lot going on there. Sorry. We will answer all these questions so you do not have to ask nine questions at once. Let us just break them into little segments. We will get through them all, I promise. Alright, first on the entertainment calendar, and I will stop there. First on the entertainment: one of the things about the entertainment calendar, you know, we have been investing in entertainment assets for years in Macau. We feel that entertainment is a great way to drive inbound tourism into Macau from both China and actually from the surrounding region. We are very happy to have some uptick in tourism from outside of Macau coming in, and we think over time entertainment is an important component of that. We also feel like entertainment is a great way to show off the quality of our assets and the quality of the experiences that you can have at our portfolio of properties. So we have been really focused on not only investing in our entertainment assets—you saw the renovation of the arena that allowed us to have the NBA games—but also other things that we are doing around the portfolio to enhance the customer experience with our entertainment assets, including programming. I did want to address that just in terms of the physical asset side, and I would ask Grant to comment on the calendar. Grant Chum: The calendar was strong in the first quarter for us, which helped our performance. We did 11 to 12 shows during the quarter. If you look at the pacing of the calendar, like Patrick said, we will continue to use entertainment content as a driver for resort visitation, and it helps us across every segment of the patron value chain. We do see that the big tours have slowed down in the Asian tour stops this year versus the prior immediate two years. However, we have the ability to bring content of different size and different spectatorship because we have access to both the Venetian Arena, which is the bigger arena, as well as the mid-sized Londoner Arena. So we are able to bring a more diverse range of acts and content because we do have the scale on the performance venues, which is an attraction for different artists and promoters, because being able to access high-quality venues at different times of the year is not always easy. We do have an advantage with a number of acts and artists in the region where we can offer them best-in-class and a different range of performance venues all the way from the Venetian Arena to Londoner Arena and then also to our performance theaters. Patrick Dumont: In regards to the mass gaming, I think you have seen 30% growth year-over-year in the overall market. For us, that just speaks to the attractiveness of the assets in the market, liquidity, accessibility, and just the overall growth in demand, which I think has been super helpful for us. Grant, I do not know if there is anything else you want to bring up as far as mass. Grant Chum: I think that is it. Patrick Dumont: And then you were going to ask us about Middle East disruption. Was that your next one? Chad Beynon: Yeah. Just if you think that the Chinese customer can power through in the same way that we are seeing a U.S. customer, given where oil prices are and how that all factors into sentiment? Grant Chum: The way to think about this is the number of options available to the outbound Chinese visitor. If you look at the options available today versus three months ago, six months ago, the reality is destinations that are closer to home are going to gain share in general as a result of the current environment, for all sorts of reasons that you are familiar with. So the net effect from a demand standpoint is, I think, a positive one for both Macau and Singapore because these destinations are going to be more desirable and more preferred during the current geopolitical environment and also given the cost of air travel. All of those factors put together in this environment right now mean the short-haul destinations, especially ones of this appeal in Macau and Singapore, are going to be more popular with the Chinese market. Chad Beynon: Thank you both. Very helpful. Thanks. Operator: Thank you. The next question will be from George Choi from Citigroup. George, your line is live. George Choi: Thank you very much for taking my question. Just a quick one from me. Based on the numbers that you are seeing right now, how do you see the popularity of side bets amongst your Macau players versus Singapore? And do you guys introduce more new side options in Macau? Thank you very much. Grant Chum: You are normally the first one to notice on the side bets. We have introduced some new side wager options in Macau over the past week. In terms of your question about popularity, it remains true that the take-up of side bets, especially as a percentage of total wagers, is much higher still in Marina Bay Sands than in Macau. That said, the take-up of side wagers in Macau is increasing. The propensity to wager on these side wagers—we do see a progressive trend upwards, and I think the introduction of these new side wagers that we will be implementing now and in the next few months will further enhance that propensity. Thank you very much for calling. Operator: The next question will be from Joseph Stauff from SIG. Joseph, your line is live. Joseph Stauff: Thank you. On MBS, I wanted to follow up on the rolling chip volume—just an absolutely huge number in the quarter. I am wondering about the volatility associated with this. Is it visitations and what those visitations will do in terms of volume? What is easier for you to program, I guess, between the two? And was there a particular reason maybe in the first quarter that drove higher visitation from this clientele versus, say, other quarters? Patrick Dumont: The VIP segment is volatile. It can be concentrated, and it depends on who shows up when. So it is about visitation, and it is about bringing the highest-value patrons we have who want to be on a rolling program into the building. The great news is, we have longstanding relationships with historical customers, and we have new customers coming into the building. They love our service, they love the hotel suites they get, they love the food, entertainment, and retail. So it is really a total experience proposition. Then they show up and they play. For us, it is about having the right amenities to satisfy these very high-value customers and just getting them into the building. Joseph Stauff: Got it. Thank you. Operator: The next question will be from Analyst from Wells Fargo. Your line is live. Analyst: Hey, guys. Thanks for the question. I guess just one on CapEx. The maintenance CapEx and the SCL-level CapEx in the slide deck moved up the next couple of years. Is that maybe just, one, you guys are doing so well, so why not reinvest a little more aggressively? And then two, is it a pull-forward concession—just curious on those two numbers. Also, some of the things you guys referenced around the Venetian rehab? Thanks. Patrick Dumont: One of the industry greats a long time ago said that depreciation is real in our business, and we have to spend money to maintain our positioning and to grow. We are doing a full portfolio review to make sure that we are deploying capital in the most efficient way and that the highest-return projects generate cash flow growth. This increase in CapEx is based on our expectations that if we invest more, we will grow more. Analyst: Perfect. Thank you. And one other question. The promotional activity in Macau looks like it ticked down a little bit sequentially. Could we kind of assume that it is higher year-over-year again in Q1, but it is getting better as we look forward—is it just you guys really ramped it in Q4, kind of stickiness you are seeing from early promotional activity, demanding less of it as we go forward? And should that be one of the factors helping out this drive towards that $700 million number? Thanks a lot, guys. Grant Chum: We have been able to optimize some of our programs having started to change our reinvestment programming and approach since 2025. This is a natural progression as we change our programs. We assess what worked or was less effective, and great credit to the team—we were able to achieve good optimization in this quarter whilst continuing to gain market share and grow revenue. We are also able to optimize the reinvestment level because we have been more successful in leveraging our product advantage. We have been able to ramp up The Londoner and Grand Suites especially, and that has helped us tremendously, especially in the core premium mass mid-tier segments, growing the customer base there. That speaks to the CapEx and the upgrading of product referenced by Patrick. As we review the portfolio, there are going to be other significant opportunities for us to invest for growth, and at the same time as it is growing, it also allows us to be more targeted and disciplined in reinvestment as these products come online. Analyst: Great. Thanks for the time, guys. Operator: The next question will be from Steven Moyer Wieczynski from Stifel. Steven, your line is live. Steven Moyer Wieczynski: So, Patrick, I am going to ask another question about getting to the $700 million a quarter in Macau. Obviously, there is a lot of promotional activity taking place right now in the market. To get to $700 million eventually in EBITDA, does that assume your competitors pull back so-called aggressive promotions, or, said differently, does that assume more of a normalized promotional environment from not only yourselves but also your competitors as well? Patrick Dumont: No. Actually, we are thinking about that in the context of current conditions. It is a very competitive market. Look at the growth that we experienced in Q1, but I think the market is growing, and I think we are also helping to grow the market with the high-quality assets that we have. For us, when we think about $700 million, it is about continuing to invest, having the right marketing programs, utilizing our assets more efficiently. It would be helpful if the market grows a little bit; additional growth in the market and expansion of GGR market-wide is helpful. But we think that it is in the context of the current conditions. Steven Moyer Wieczynski: Gotcha. And then, sticking with that, Patrick, I know you do not give guidance, but based on what you just said there, is it fair to think that this sort of run rate of, let us call it, $600 million a quarter in Macau is probably the right way to think about the market for the foreseeable future until that base mass business really does return? Patrick Dumont: I think the one thing I want to be careful about is, there is seasonality in our business. I know you know that. The second quarter is typically our softest, and sequential comparisons between Q1 and Q2—given we have Chinese New Year in Q1—are always tough and sometimes not that helpful. But just directionally, we would like to believe that we are in a really solid place as we continue to grow our business and make the right moves in terms of marketing and utilizing our assets. That is kind of how we think about it. Steven Moyer Wieczynski: Thanks so much. Appreciate it. Operator: Next question will be from David Katz from Jefferies. David, your line is live. David Katz: Hi, afternoon. Thanks for taking my question. I appreciate it. Can we just talk about The Venetian a little bit and the degree to which we should be factoring in some disruption as you go through that room renovation? Any qualitative perspective would be helpful. Thank you. Grant Chum: Thank you for the question. No, we do not expect meaningful disruption impact. We will be balancing the out-of-inventory with the business needs, and we are able to redistribute the demand throughout the rest of the portfolio. At the same time, new rooms will continuously be coming back to the active inventory starting from the third quarter of 2026. So even as total number of keys will be reduced modestly during this period, we are going to be benefiting from brand-new suites coming online over the coming quarters, especially when the multi-bay suites come back online towards the back end of 2027. David Katz: Understood. And as my follow-up, I know we have touched on this just a bit, but maintenance CapEx we usually think about in the context of non-discretionary versus projects that can be decided upon and moved around. I understand every company’s perspective on it is different, but just noticing in the deck—should we think about that $500 million number as something that is non-discretionary? And how did that come about? Patrick Dumont: First off, we believe that it is necessary to maintain our business. It is split between Marina Bay Sands and Sands China. We just want to be realistic about what we believe we need to spend going forward to ensure our buildings are kept in the best possible condition to maximize our cash flow. We do not view this as optional. We view this as something that is a responsible move to take care of our buildings into the future. David Katz: Thank you. Operator: And the next question will be from John DeCree from CBRE. John, your line is live. John DeCree: Hi, everyone. Thanks for taking the question. I know we have covered the topic of OpEx in Macau a little bit, but maybe just to round it out, if you could provide a little color, maybe coming at it from a modeling angle. Are we expecting the investment in service you have talked about to grow in line with revenue? Are these going to be fixed-cost people coming online—more staff—and will that happen regardless of which way revenue goes? Or is it something that you will time throughout the year as revenue increases at different paces, you will add service levels? Just trying to get a sense of how much fixed cost is coming in this year versus variable depending on revenue. Patrick Dumont: These are hires that are designed to increase and enhance the service levels of our buildings. Ideally, as we grow revenue—because we are bringing in higher-value patrons—we get some scale or some operating leverage across these fixed costs, but they are primarily payroll. We are adding people in certain areas to service certain patron tiers, to enhance their experience, and make sure that we are at the highest standards for service. So this hiring, in our mind, is actually beneficial because while we have to hire and train these people and add them to our team so that we can accomplish our goals in providing leading hospitality in the market, combined with the investments and the renovations that we are doing, this will put us in a better position to grow. You need the people and you need the physical product in order to provide the patron experience that allows you to differentiate and draw the highest-value customers into your buildings. This is an investment in the future. John DeCree: Got it. Thanks, Patrick. Maybe just a quick follow-up on that. For the new hires—apologies for being granular—are they coming on a rolling basis going forward, or have they already been hired? When should we think about the lion’s share of the additional staff coming online? Patrick Dumont: A significant number are actually in the OpEx now. We have people joining our staff, and some of that is actually in the margin today—some of the additional payroll associated with the service enhancement. It will continue to be added over the next couple of quarters. Operator: That concludes today’s Q&A session, and it also concludes today’s conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
Operator: Welcome to the Corbion Q1 2026 Results Conference Call. [Operator Instructions] Please note that this call will be recorded. I would now like to hand over to Mr. Alex Sokolowski, Head of Investor Relations. Please go ahead, sir. Alex Sokolowski: Thank you, operator. Good morning, and welcome to Corbion's First Quarter 2026 Interim Management Statement Conference Call. This morning, we published our Q1 2026 results. The press release and presentation can be found on our website, www.corbion.com Investor Relations Financial Publications. Before we begin, please note that today's discussion will include forward-looking statements based on current expectations and assumptions. These statements involve risks and uncertainties that may cause actual results to differ materially from those expressed. Factors beyond our control, including market conditions, economic changes and regulatory actions can impact outcome. Corbion does not undertake any obligation to update statements made in this call or contained in today's press release and presentation. For more details on our assumptions and estimates, please refer to our annual reports. This is Alex Sokolowski, Head of IR. And with me on the call are Olivier Rigaud, Chief Executive Officer; and Peter Kazius, Chief Financial Officer. Now I would like to hand the call over to Olivier. Olivier? Olivier Rigaud: Thank you, Alex, and good morning, everyone, and thank you for joining us today for Corbion's First Quarter 2026 Earnings Call. Let me get straight to the point. As we outlined in February, the first quarter reflects phasing effects, primarily Nutrition, and the very strong comparison base in Functional Ingredients & Solutions. Against that backdrop, we delivered group sales of nearly EUR 294 million and an adjusted EBITDA of EUR 37.8 million with a margin of 12.9%. While this is below last year's exceptional start, it's fully in line with our expectations. And importantly, it doesn't change our confidence in the year end. In fact, what we are seeing now is encouraging. April trading confirms that momentum is building, and we expect a clear acceleration in both volume and earnings as we move through the year. Let me highlight what is driving that momentum. In Functional Ingredients & Solutions, we delivered stable sales of EUR 236 million against a very strong prior year. Underneath that, volume and mix were positive, supported by continued strong demand for natural preservation solutions and the solid growth in Biochemicals and Lactic Acid to PLA. While margins were temporarily impacted by mix, we expect a steady improvement from Q2 onwards. This will be supported by lower sugar costs and disciplined cost reduction execution. Growth will continue to be driven by structural demand for food safety solutions and increasing adoption of PLA, particularly in 3D printing and as dynamics in fossil-based plastics evolve. In Health & Nutrition, Q1 sales of nearly EUR 58 million reflects phasing into the remaining of the year. The fundamentals here are strong. Demand remained robust. Fish oil prices are going up. Our contract positions are intact, and we expect a normalization of sales and volume growth from the second quarter onwards. Our Biomaterials business continues to build momentum and delivered a second record quarter in a row delivering growth across orthopedics, drug delivery and aesthetics. On the TotalEnergies Corbion joint venture, we also achieved organic growth and our divestment process is progressing as planned. At the group level, margins were impacted by mix effects and temporarily lower operational leverage in Q1. These are timing-related factors, and we expect a clear improvement as volume ramp-up and cost measures take effect. This bring me to cost discipline. In a macroeconomic environment that remains volatile, particularly with well-known geopolitical tensions, we are acting decisively and have implemented a focused cost reduction program. Turning to cash flow. Q1 free cash flow was negative at EUR 15.7 million, and as expected, given seasonal patterns. We remain fully confident in delivering EUR 85 million to EUR 90 million for the full year. Looking ahead, we fully reaffirm our 2026 outlook. We continue to target 3% to 6% organic sales growth and adjusted EBITDA margin of around 17% and strong cash generation with performance weighted towards the second half. This will be driven by sustained demand in natural preservation, normalization in nutrition, improving PLA market conditions and disciplined execution of our cost reduction initiatives. While uncertainty in energy and input cost remains, we have robust mechanisms in place, and are actively managing volatility through pricing, hedging, sourcing and operational control. So let me close with this. Q1 reflects timing and conversion effects, not the strength of our underlying business. Our fundamentals are strong. Momentum is building, and we are executing with discipline and focus. We are confident in our ability to deliver on our commitment for 2026. With that, let us move now to questions. Alex Sokolowski: Thank you, Olivier. [Operator Instructions] Our first question this morning comes from Wim Hoste, KBC Securities. Wim Hoste: Yes. I have 3, please. The first one is on the raw materials versus pricing dynamics. I know there's significant hedging on sugar and energy and some of the other components. But can you maybe quantify or elaborate a little bit on the kind of headwinds you're seeing maybe also on transportation costs or logistics issues, et cetera? And then also, what kind of pricing initiatives you put against that? So that's the first question. The second one is on foods. Can you maybe elaborate on the contract wins that are mentioned in the press release? What kind of products, geographies are we talking about regarding these contract wins? And then third and last question would be on the progress with the PLA divestments. Can you maybe elaborate a little bit on the process, the number of interested parties, the alignment with Total on that? So those are the questions. Olivier Rigaud: Okay. Thank you, Wim. I will answer the food and the contract wins, and Peter, the points on the raw material pricing and the PLA. Let me start with your second question on contract wins. Basically, what we see in foods are twofold. One is related to our natural preservatives and primarily related to some specialties in there on clean label. You might remember, we discussed during our CMD about the new EU listeria regulation, that is getting implemented in July this year '26. So we've been actively working on this, and this is bringing very nice upside, primarily related to our natural vinegar systems. And we see that really already starting in Q1, but accelerating over Q2 as customers are preparing to switch to new preservation systems. Amongst others, we see strong momentum in seafood. That is one. The second one is more U.S.-related where back on the GLP-1 trend, we've had a couple of major wins on high-protein functional systems for our bakery business. And we have been able to build some inventory to prepare for the big launch in Q2 on that front as well. These are the -- amongst the two major drivers of these food ingredients contract wins, you know, that we discussed about in the press release. Now to you, Peter, for the 2 other questions. Peter Kazius: Yes. So if you look on a raw material perspective, Wim, then you are right that in sugar, we have kind of full visibility for the coming periods, and look fully hedged for this year and also hedged into 2027. I think the other key components, which I would like to call out, which relates to the Middle East is, of course, energy prices and therefore transport prices, as well as if you look to the Middle East, then sulfur is playing a role as well and we use sulfuric acid in the production of lactic acid. Now, if you look to the three components: energy, and you can find it in the annual report is around 7% of input cost, is well hedged. So for the remaining part of the year. So I would say minimal exposure on that one. In transport, we do see some exposure, and I think the exposure is mainly on the sulfuric acid part of the equation, which how we currently view and look to it, we were talking here on a number in this year of up to EUR 10 million. And we are indeed taking pricing actions and mechanisms in the market, and that's a combination of prices, surcharges and all the rest. So that's a bit the current outlook, Middle East impact, I would say, from a cost perspective. Then on your question on PLA, I would like to stay a bit higher level, but we are progressing nicely and on track. And I indicated in the Q4 call that we anticipate to bring more news by mid-2026 because I don't want to hamper or jeopardize the process itself. Alex Sokolowski: Our next call this morning comes from Robert Jan Vos from ABN AMRO. Robert Vos: I have a few questions as well. Based on what you said about pricing in FI&S in Q1, still slightly negative, but the mix plus phasing of input cost materials, should we anticipate positive pricing in the forthcoming quarters? That's first on FI&S. Second one is maybe elaborate a little bit on the softness in the North American market? Then moving to H&N. You say that you expect volume mix growth to return to positive in the next quarters compensating for Q1. So my question here is, do you expect -- because Q1 was pretty negative, do you expect positive volume mix growth for H&N in the full year? And related to this what about pricing in H&N in the coming quarters? And my final question, the cost savings. Can you elaborate a little bit on this? What is the amount that you expect for this year that you can take out of your model? How is it split per division? And are there upfront costs related to this? Olivier Rigaud: Thank you, Robert Jan. So I will discuss the answer on North American softness and the H&N. Whilst Peter, you can take pricing and cost savings, yes. So let me start over, Jan, with the softness on North American market. Indeed, we are exposed to some large categories as bakery and meat there. And we've seen, of course, the inflation impact and tariffs impact in the U.S. to some large customers, that impacted already Q4 last year. And we've seen some continuation of that in some of these categories. Although I have to say lately, when we look at retail numbers, you would say bakery is leveling off. So it's not declining anymore, whilst the meat sector is still declining in the U.S. Now as I said, it's unequal. We see, indeed some of these developments, as I just mentioned, in a very specific area being the natural preservation in the clean label. There is still underlying quite a lot going on related to MAHA on clean label development, primarily on preservation specialties. And nothing new, but the continuation of the fortified proteins compounds that we see. So yes, as you know, it's a big market for us. It's a mixed bag. On the meat side, it's more negative than in bakery where things are stabilizing. There is a new spot which is a bright spot for Corbion emerging in the U.S. being around culinary, where it was part of also our strategy to develop business in culinary. And I mentioned just before on the previous question that, indeed, we also spread around this Listeria antimicrobial systems now primarily based on vinegar. So we see really strong sales of vinegar-based preservatives across the board, not just in Europe, but also in North America. On the H&N expected return, there, as we said, indeed, we see already a much better momentum starting in Q2, and we have a very good visibility as we speak now on Q2. As you know, and we explained primarily going into aquaculture, this is a concentrated market with 5 large players, and it's really phasing to one of these customers that we knew upfront, that is now kicking in as from Q2 on one side. But the reason why -- I mean -- and to your question, we expect a positive volume mix growth for the year. And we see a few strong underlying drivers. First of all, as we said, we've been able to renew the expired longer-term contract. So we have a good contracted position for the year. That's one thing. We are developing nicely into adjacent market, being human nutrition, and also we have very nice development into the shrimp market as well as we speak in the Asian markets. So that's the second driver we see supporting our growth this year. And obviously, on pricing, we see also nice upcoming impact on -- later on this year, non-contracted part of our business, supported by a fish oil price increase. You might have seen now the final quota for Peru has been officialized and is 36% lower than last year. So that is obviously driving fish oil price up, which is a nice support going forward for a non-contracted part of the business. What also these lower quota do say, just to close that point, is basically that the famous fish oil gap we've discussed many times and also at CMD was anticipated to be around 50,000 tons shortfall for fish oil, is more likely going to be much higher than the 50,000 tons for this year. Again, we are tracking that every day, but so that -- what makes us feeling really comfortable on our H&N for this year. Peter? Peter Kazius: Yes. So your point on the pricing, Robert Jan, it was indeed negative in Q1, driven, by the way, by lactic acid pass-through mechanism to the joint venture, with a bit of positive even in some other areas. The price uptake, which I just discussed related to the Middle East, is not included in Q1 and will be only as of Q2, but mainly in the second part of the year. So I anticipate a mild negative in Q2 and then basically returning into positive. If you look in terms of the acceleration of our cost savings program and if I look a bit on the timing and the impact of that, then the saving program, together with the sugar basically, if I look to an impact Q2 already versus Q1, I anticipate an increase of around EUR 5 million. It will be mainly in Functional Ingredients & Solutions and a bit and Health & Nutrition. I want to make one additional comment because you did ask, sorry, I forgot. In terms of kind of additional costs, we did incur some additional costs in Q1 in anticipation basically of this program. Robert Vos: Okay. That's very helpful. One follow-up maybe. Now that you mentioned that there were some costs taken in Q1. I also saw that depreciation and amortization was EUR 23 million in the quarter, which appeared a bit high. Is that a proxy for the remaining quarters? Or did it include some impairments in Q1? Peter Kazius: No, it includes some small adjusted items related to two different elements. One is the divestment process of PLA, as you can imagine. And the other one, which is good news, which you will not see basically in our numbers, but only in -- sorry, H1 is that we had a positive tax outcome in a discussion with the Spanish authorities, which would have a positive impact of around EUR 5 million in terms of tax this year, and we incurred some costs, which are also included in that part. So if you look from a depreciation element specifically, it's around just above EUR 22 million, which is in line basically with kind of the trend in Q2, Q3, Q1 and Q4. Alex Sokolowski: Our next question this morning comes from Fernand de Boer from the Degroof Petercam. Fernand de Boer: Fernand de Boer, Degroof Petercam. Actually I had one question. If I look to the drop in EBITDA in FI&S, you can say, okay, part is because of ForEx, maybe the mix was negative, but still, there is an absolute decline of EUR 10 million. So could you help me out a little bit on the bridge because I can understand maybe that food sales were quite negative in that respect. Peter Kazius: So if you look to the absolute EBITDA, indeed, it is a drop. There indeed currency in it, as you know, because it was $1.05 basically in last year, and it is $1.17 in the U.S. dollar in the average of this year. Then if you look to the delta, there is indeed a kind of negative impact in the equation of mix, price and volume. There is, if you compare to last year, of course, a bit of inflation in that one. We did have some additional costs as I indicated. And the other one is, and it's maybe a bit technical accounting wise, but we do share the kind of bill of SG&A, across the different segments. So that means if you have a reduction of your overall sales, it's also impacting basically the absolute number in... Alex Sokolowski: Our next question this morning comes from Setu Sharda of Barclays. Setu Sharda: Yes. So one question on the volumes, given the soft Q1 start and the ongoing inflationary pressure on end market, on customers, has your base case assumption for the volume growth changed in either division and how sensitive is your FY '26 guidance to a slower-than-expected volume ramp-up in Health & Nutrition? And my second question is on the fish oil contracts. Could you clarify how much of your Nutrition business is currently sold on a spot basis versus under contracts? And when do the existing contracts typically come up for renegotiation? And could you provide like more color on how you are approaching contracting in context of volatile fish oil prices? And my third question is on if you can give more info on the trading, how has been the Q2 trading till date in both in FI&S and Health & Nutrition? And are you already seeing some sort of recovery that you are expecting? Olivier Rigaud: Yes. Thank you, Setu. So on taking your question on H&N and fish oil, basically, if you look to the way we are ramping up the H&N volume and primarily the omega-3, which is the large chunk there, what we see is that, again, across the year -- last year, if you remember, on customer phasing, we had a kind of U-curve and this year it's more a V-curve in terms of the contract. And this is, of course, the pattern -- the ordering pattern of this business, which is volatile quarter from a quarter to another, although we have this now firm contract position for the year, but we have a great visibility on this contracted part. And then, as you know, we are adding more stable sales and predictable sales in both pet nutrition and human nutrition that is now nicely ramping up. So we have -- and there, we have also very good visibility. So if I look to the fully contracted position, this year is very similar in H&N than last year, where we have around about 2/3 of our business and their longer-term contract and 1/3 that is open. To your pricing question, obviously, what is open going forward, we have already proof of evidence that we can pass on already some price increases over the next 3 quarters. And these are roughly double-digit price increase on the open contract related to fish oil. Now, where fish oil is going, as you know, we've seen fish oil prices going from the low $3,000 per ton, now around $4,500, $4,600 sometime. And this is what we are translating. On the long-term agreement, to your second question, we are really not looking to align our pricing on fish oil only. The aim of the game during this 2 to 3 years deal is to have visibility on margin because then we are hedging our sugar. And we do not want to play the commodity game that fish oil is about. So it's about giving really visibility and security of supply to fuel the supply gap to our key customers. And some of them, of course, do share that view, others less, but this is the way we approach it. Now, on the renewal, to your question, we had a contract that was ending by end '25 that we have renewed, and the others we are ending in '26. So it means that we would probably start next multiyear negotiation for the next years in the course of the summer to renew these type of contracts because they're all ending now by end of '26. So that's, I mean, again, what I could say on that. On the inflationary pressure, this is, I mean, a difficult one because, of course, I mean, we see our customers trying to push also price to retail and to their consumers. Now, with what Peter explained and what we are facing with the Middle East crisis and how we're going to push also our sulfuric cost and extra freight costs, these are really pricing we are implemented wherever now we have open contracts, but the vast majority will be implemented as from early H2. So this is what we have and what we are planning. But quite a lot of conversations are going on. I have to say that, on freight, it's different from FI&S than H&N. In H&N, on this large aquaculture contract, we have freight clause in all these contracts where we pass immediately any freight surcharge. It's a lot more limited in FI&S where you have this lag. There's going to be a 3-month lag to push these prices as from the end of July, early August. Setu Sharda: That was helpful. Just one question, like because -- do you see any -- like how is the trading update until now, like have you seen the recovery in Health & Nutrition? Olivier Rigaud: No, it's a pretty good. We have very good visibility on Q2, very good, and it's really a very strong start of Q2 there. So I'm feeling really good, feeling really confident what we see in both divisions actually already in April. Alex Sokolowski: Okay. Our next question this morning comes from Karel Zoete from Kepler Cheuvreux. Karel Zoete: I've had two questions actually in relation to the FI&S business unit because the margin has been, of course, a bit lower than expected in the quarter. But if we zoom out, it's been a couple of quarters in which profit margins are declining instead of going up towards the 14% to 15% ambition level. So in relation to that, what are the incremental savings efficiencies, et cetera, you try to capture now? And the more longer-term question then is the positioning of the business. Where are you losing market share? Or is it simply the exposure to more mature categories in the U.S. that have been under pressure? Peter Kazius: Okay. Let me do the first one in terms of the longer-term trajectory and then Olivier can take the market one from that perspective. And you are right, that you see basically a kind of negative momentum if you look quarter after quarter. And I don't want to be -- but there is always a bit of volatility around it, frankly speaking, a bit of phasing. And I don't want to basically go to all these details. But if you look to Q2, and let's start with that. Then I did mention we anticipate a kind of EUR 5 million impact of sugar and cost reduction savings, of which the majority will be in FI&S, and that will lead to a kind of sizable margin improvement as of Q2, following actually an improvement into Q3, Q4. So with that one, I think that in terms of Q1, we reached the bottom, Karel, from a longer term perspective. If you then say the ambition level is still there, I anticipate for the full year to be higher in terms of FI&S margin than last year, but not to the 15%. Olivier Rigaud: Karel, so on the cost positioning of the business, this is a very valid question. So if you look to the entire FI&S, basically, I'm taking it outside the lactic to PLA that is a longer-term formula contract to the other pieces, basically there is this natural preservation specialty that is where we invest in growth, which is high margin, high growth. And we see even a lot more options around the lactic derivatives, but also the vinegar, the antioxidant and a lot of food ferments that are growing the mold inhibitors. So this is the part we really want to grow and focus on. And this is where we are investing in resources, as well. There is the functional systems that basically is transitioning right now from a pure bakery-only play, where we want to specialize in something that has close synergies with preservation, meaning enzyme cocktail shelf-life extension, and this is a business we are now really simplifying as part of the cost program as well to really simplify SKUs and focus on the high end. So this is really one of the big angle of our cost optimization program that Peter mentioned. And then you have what I call the basic derivatives, lactic -- plain lactic acid that is commoditizing where we basically changed the governance, where we run this business now since January with a new team in a very lean base. And that's the business we also are looking to now restructure, leveraging basically where we have the lowest cost plant in Thailand and primarily the new lactic gypsum-free plant. And this is not where we're going to invest going forward. So the aim is really to have this gradual shift in portfolio to the preservation specialties and restructure the functional systems into the shelf life extension and less exposure to bakery-only business going forward. So that's, I mean, our mission there. Now, as you know, there is still a large chunk of these commoditized lactic acid or less differentiated, if I would say, which is where I think pricing discipline is important, but also cost management. And back a minute to the FI&S margin, as Peter alluded before, we started this program. We presented our new Chief Operating Officer ambition in the CMD as well, where as part of also the new ExCo governance, he kicked off a major program that we embarked on. And of course, in Q1, you see the cost of that program is not a benefit yet. But that's fine, we are planning to develop more around that during our H1 results. So that is to come. Alex Sokolowski: Our next call this morning comes from Sebastian Bray at Berenberg. Sebastian Bray: I have two, please. You have talked about, Olivier, the pieces of movement in terms of last expiry of long-term contracts in '26 for algal oils. If everything were to remain the same as it is today and spot prices for fish oil were to remain the same, assuming that the contracts expire and are then re-struck, is the pricing effect from algal oils for 2027, roughly flat? Or is it different to that? My second question is on the ongoing negotiations regarding PLA divestment. Are there any dissynergies to think of here? Because the current setup of contracting is that there is almost an over-the-fence style cost-plus agreement. Is a buyer interested in, let's say, renegotiating that? Or do the economics in all likelihood remain intact as they are for supply of lactic acid to the PLA JV post divestment? Olivier Rigaud: Thanks, Sebastian. So your H&N question is very relevant. Now, you know, what we said publicly in the past is that these long-term contracts were at that time negotiated between $4,000 and $5,000 equivalent, yes. So obviously, we need to understand the fish oil price dynamic in the coming months when we're going to be at the table of negotiation in the summertime. Now, having said that, if you compare the fish oil price volatility, we know it has been picking up to $8,000 or $9,000 and going down as low as $2,000 in the past. We believe this type of price level are the longer-term sustainable price at the margin we have and we need going forward, and you know this level. So I mean, again, it's a difficult answer because, indeed, obviously, as we are growing volume, we have better and better operational leverage and we should get better margin as we go at this price level between $4,000 and $5,000. And we believe these are the longer-term right level of prices. Now let's see where the fish oil price development going to be over the next month, but again, for these contracts, we want to disconnect from fish oil volatility. On the PLA dissynergies, obviously, you know, and this is not -- I'm not pitching that, of course, the sale of that business, but the combination of this PLA factory next to the largest lactic acid plant in the world and the lowest cost one is very powerful for any new owner of that business. Now, obviously, there is a long-term agreement to supply lactic acid that is in place until 2035 and that would survive any change of control of the PLA JV. And for Corbion, whether we own part of the JV or not, it's a very nice plant filler because this business is, as you know, in these huge lactic acid factories, operational leverage is very important and you really make -- and start to make a lot of money when you run above 80% to 85% capacity. And for us, this plant is a guarantee that we run at really very high capacity rate. So it's quite critical. We remain the supplier, and it's the way also to buffer our two lactic plant on sites, yes. So we see it as, I think, a very nice addition. And actually, it's a deal and a contract with very little, if any, cost. It's a pipeline. So yes, on the front face, the margin might look low, but it has such a huge operational leverage impact on the rest of the lactic that we sell to the preservation and other categories that it's very important. So there are no specific dissynergies that we see from that deal. Alex Sokolowski: Our next question this morning comes from Reg Watson at ING. Reginald Watson: I'd like to come back to the cost cutting, if I may, Peter. Thank you for giving us the EUR 5 million delta between sort of Q1 and Q2. Could you break that down a bit, please? How much of that is the absence of the costs you had to take in Q1? And how much of that is the cost saving? And how much of that is the sugar? And a follow-on question from that is, how do you expect this to build through the quarters in the year? Is this a one-off cost-saving exercise? Or do you see further benefits to come in the coming quarters? Peter Kazius: Yes. No, thanks. So the EUR 5 million, by the way, relates to sugar and cost reduction activities. So it's not even reversing the other basically element. This is a kind of recurring benefit, and I actually think it will increase over the second half of the year as well. Reginald Watson: Okay. And then to that, in terms of the language and Olivier, Peter, feel free either of you to answer this. You mentioned that the sales strength in Q2 is expected to "more than compensate for Q1." As analysts, we're too hung up on quarterly volatility, if we look at first half in the round, do you expect them to deliver positive volume for -- sorry, positive sales with particular volume mix for the business as a whole? Peter Kazius: So if I look for, let's say, the business as a whole in terms of volume mix, then for the first half, I do anticipate indeed a kind of positive elements. If I look in the combination a bit, then Health & Nutrition, I see a recovery, but that is around kind of the same. If you look in terms of price, I think I alluded in terms of FI&S, I anticipate in Q2, still a mild year-on-year price reduction, driven by lactic acid to PLA and then basically reversing of that trend in the second half of the year, driven by the growth which we made on Middle East and partly pricing that's true. In terms of Health & Nutrition, if I pick pricing, then we had a kind of 4% pricing delta. I anticipate a mild kind of price erosion during the remainder part of the year. Reginald Watson: And then final question from me. How is the ramp-up of the gypsum-free lactic acid plant going? Where are you at on continuous capacity utilization? Olivier Rigaud: So Reg, so where we are, as you know, the plant is designed on 125,000 tons of lactic acid. We are now approaching really the 100,000 tons type of level on that plant, yes. And it's also important that -- because we've discussed that in the past as well. It's also because these are significant additional volume we put in the market that we -- it's important we also put that in the market wisely, also making sure that, yes, we do not come with large volume that would necessarily impact our margin anywhere. So there is a conscious ramp-up that we have as well on this. Obviously, the sooner we can fill it, the better, but we see a very nice upside on the remaining part of the year on basically PLA that is requiring a lot more globally. And that's, I would say, to me, quite an important statement because, as you know, the conversion ratio usually between lactic and PLA is 1.4. So you need 1.4x lactic to PLA. So when PLA grows, it's really accelerating massively the need of lactic acid. And we see that for our JV, but we see that also for Chinese players right now. And that's something that when we look to the whole balance of lactic market, it would be really helpful to see how Corbion can leverage on one side, the fact that we have a competitive position because we are gypsum-free. And we know our main competition is Chinese. The second is, if you look over the last 6 months, there is quite a positive trend in the favor of Corbion when we look to the carb cost, the sugar -- the Thai sugar cost versus Chinese cost and all our competitors in China are on corn. So the ratio is again back in favor of Thai sugar since September last year. So it's already 2 quarters. And that, I think, going to support also Corbion margin going forward. Reginald Watson: Okay. So I'm really pleased to view that you're running that plant at 80% capacity utilization because that must be driving efficiencies in terms of variable cost of production, et cetera. So that must make it probably the most cost-efficient plant in the world for lactic acid, Am I wrong with that? Olivier Rigaud: No. You're right. But primarily right now with the Middle East, this is the only plant in the world with no sulfuric acid because this -- the whole story about, of course, as you know, conventional lactic process is that you are using lime and then you need sulfuric to precipitate into gypsum. Reginald Watson: Yes. Olivier Rigaud: And the reason why we developed that process over the years is to have no gypsum, hence, you don't need sulfuric. So that's a big competitive advantage, primarily these days with what's happening in the Middle East. Reginald Watson: And then does that mean then that the cost benefit of the ramp-up is now already included in the numbers? Or should we continue to see more benefit to come from any further utilization, any further ramping of this, through the year? Olivier Rigaud: We have already factored in, in our outlook what we think we're going to achieve in terms of capacity this year. So the rest, we keep for '27. Alex Sokolowski: Very good. And our last question this morning comes from Eric Wilmer at Van Lanschot Kempen. Eric Wilmer: Yes, two remaining questions, brief questions, actually. Given that sugar prices or sugar costs actually have come down year-on-year, might this actually result in market dynamics and forcing lower product pricing for functional ingredients during the remainder of this year? And maybe on customer behavior, are there any signs of -- given the current disruptions, customers stocking up your product, you mentioned sulfuric acid supply chain issues. And maybe actually also a third one then on transportation costs. You talked about obviously increasing them. I was wondering to what extent are customers receptive, different from what they may read. Energy costs have actually started to come down a bit again. And I've been hearing that this is not always a very straightforward discussion. Olivier Rigaud: No, I think, Eric, so good point. So basically, I think, we have -- except -- I mean, again, in a few large U.S. contracts, and of course, the joint venture of PLA and sugar-related costs is not something we have really widely spread. So obviously, key customers do track, of course, input cost. But in terms of competitive dynamic, today, it's getting really about, as you know, our critical competitors in lactic are in China, and they are based on corn. So the important is to look to the Chinese corn versus New York 11, Thai sugar or Brazilian sugar. So that's one. And this is what plays in the competitive dynamic. On stocking, we -- I mean, we don't see that because -- of course, the situation has been heavily complexified with tariffs and still is. And what we see is that the advantage of Corbion being the only lucky producer having a plant in each geography is really helpful for us. So there are different dynamics if you look to the U.S., where we have our plant in Blair, Nebraska, in Brazil, in Campos dos Goytacazes, in Thailand. So we do not anticipate any extra customer stocking. On the opposite, we see people being so tight on working capital that we have a lot of rush orders, a lot of last minute which are creating other issues. So that's what we see. And on freight cost, yes, of course, as I said, Health & Nutrition is very different than FI&S. In Health & Nutrition, all the large contracts do have a freight clause that we review on a quarterly basis. So if freight costs are, let's say, improving or declining in the next quarter, we would apply it and vice versa. In FI&S, it's very different. And as you know, we have a big route that is impacting Corbion, where most of the European lactic acid is freight from Thailand to Europe. And this is a very large volume because this is the feedstock for all the derivatives we are making into our Spanish and Dutch operations. So that's an important one for us, where basically, we have more choices than to push these extra freight cost to the market. And this is what Peter explained what we are busy doing and what we have to do. Alex Sokolowski: Okay. This concludes our conference call this morning. Thank you all for your attendance and questions, and we look forward to discussions at upcoming conferences in the next weeks. Please note that we will hold our Annual General Shareholders Meeting on May 13, 2026, in Amsterdam, and our Q2 half year '26 results on July 31. Information on both meetings is available on the Investor Relations page of our website, and we look forward to engaging with you again. Operator, you may close the call. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Per Brilioth: Okay. Hey, welcome, everybody. This is our -- as in we are VNV Global. This is our Q1 investor call. And I'll kick things off. We have like this usual summary page, which is the next one. Yes, NAV $462 million, which is down a bunch since the end of last year. And as we tried to sort of highlight in the narrative in the report, it's because of market and the peer group, the public sort of peer group from which we take multiples, they're down a lot. In some cases, there are names that we use that are down like 30%. And that's the main driver because the portfolio at large is doing really well. And as I wrote sort of -- if that sort of peer group multiple that we download and multiply with what we see at our companies, if that would have been flat this quarter, the NAV would have been up since the end of last year. So -- but this is how we value the portfolio. And it's no -- can sort of change that from quarter-to-quarter even if we don't think it sort of reflects the reality of the value here. And so we're subject to that volatility. And sort of if we -- if the second quarter were closed today, it would have been up. We'll see where it closes. But we're basically subject to that volatility. That volatility has taken the NAV down, but it's not reflective of what's going on in our portfolio. And I don't know if one sort of just has a go at trying to put the big sort of high-level reasons for why this peer group is down. I think it sort of falls into 2 main buckets. One is this fear, uncertainty, combination of those and what AI will do to a bunch of software companies. And as we've been on and on about before, we really don't see that as relevant even sort of -- it's the other way around for our portfolio companies is that we feel that these companies in our portfolio, they benefit from the emergence of AI platforms, models, that whole new toolbox in so many ways. I mean, the combination of hardware sort of proprietary data sets and sort of a customer base that sort of goes directly onto the platforms without any intermediaries. And just the ability sort of these sort of new ways of writing code and software, et cetera, is so beneficial basically for these companies. So -- and then the other one, of course, is I think you'll agree with me is this sort of are we heading to a recession, energy prices are up, inflation is up, interest rates are high because of inflation, that whole thing. And the point there is that we have sort of strong elements of countercyclicality in our portfolio. So in tough times, you use these products more. It's most intuitive around BlaBlaCar. We'll come back to that, but it's there basically. So yes, so with that sort of long-winding intro, I thought we'd sort of kick off this -- we'll take you through the numbers and touch a little bit upon the different names. So Bjorn, do you want to run us through the numbers? Björn von Sivers: Sure. So starting off sort of the overall portfolio. Here is a simplified sort of breakdown of the balance sheet. So as Per mentioned, NAV down to $462 million, down 15% over the quarter in dollars to $3.61 per share. In SEK, that's SEK 34.25 per share or down 12% over the quarter. Total investment portfolio amounted to $503 million, consisting of sort of $486 million of investments and $17 million worth of cash. Important to note that sort of we have an additional $30 million of cash and cash equivalents, but in liquidity management investments. So all in all, we're looking at sort of cash, cash equivalents and liquidity placings in the range of $47 million, borrowings down to $45.7 million as per quarter end. Continue to trade as a significant discount to NAV as of today, sort of 49% discount. And moving down to the sort of big drivers over this quarter is, of course, the larger constituents of the portfolio and just going through sort of the few largest ones here. So BlaBlaCar, obviously, the largest driver, down 27% or $44 million to $120 million for the holding, primarily driven by depreciating multiples over the quarter, both driven sort of from the overall rapid developments and uncertainty coming from the AI space, but then also, of course, from the geopolitical tension, whereas BlaBla sort of part of that peer group is in the OTA travel-related marketplaces that's been hit a lot. Same goes for Voi, that's also down over the quarter based on multiples. It's the order of sort of 16% or $20 million. HousingAnywhere here actually valued on a new transaction, we participated with EUR 1 million and then another sort of $1.5 million sort of converted from earlier convertible investments we held. Numan and Breadfast based value on transactions were relatively flat, a little bit of FX on Numan. And then Bokadirekt down roughly 10%, also driven by contracting multiples. All in all, these 6 names represent SEK 26 per share or sort of on an aggregate basis, 77% of the NAV. And again, sort of ended the quarter with $70 million of cash and cash equivalents and $30 million in liquidity management investments. Also sort of during the quarter, we bought back another close to 500,000 VNV shares and also a small amount of the outstanding bonds, which I'll come to now, which we also sort of announced today that we announced a partial buyback offer of the outstanding bond up to a transaction cap of SEK 275 million. This is to sort of effectively take down the gross debt and also lower the interest expense going forward. We launched this today and we'll hopefully have sort of the outcome sometime next week. With that, I thought I hand back to Per and we'll touch a little bit more deep in the larger portfolio holdings. Thanks. Per Brilioth: Yes. And yes, the structure of the portfolio looks very similar to what you've seen before. And so nothing really to comment here. But if we flip to the next page, this portfolio, as we've been on and on about, trades at sort of roughly half of the reported NAV. And as we -- as I think it's clear, we think it's -- we think that NAV is attractive, cheap. And hence, we've been buying back stock as we think that, that's the absolute best thing one can do with shareholder money. Our sort of aim is absolutely to continue doing that. And the reason being, as the next slide shows, as you've seen before, is that this is a portfolio that at large is positive, is earnings positive, is profitable. The slight downtick from a year ago is because of the absence of Gett, which is a profitable company. But at large, this company -- this portfolio is profitable and not sort of craving a lot of money to stay alive. And so that's not a reason for saving money to sort of put back into the portfolio names. We can use the money we have to buyback stock. And this profitability does not come at the expense of growth. We've made a new slide, which is the next one, just to -- which sort of you'll recognize it from earlier that this portfolio continues to grow over the past sort of is it 3 years, you've got a CAGR of nearly 30% across these 6 top names in terms of revenue growth, and it's turned from being slightly negative profitability to positive. So big change there. And as we try to highlight here also just as a reminder of how markets move around, these 6 names are -- those 6 names back in '23, this quarter, first quarter of '23, we had them in our NAV at $446 million and total NAV was like $800 million back then. And we now value them at $358 million. And so despite that sort of big shift in loss-making to profitable and very, very sort of steady growth. This last quarter, that portfolio grew by some 25%, still but marked lower. The overall NAV is, of course, lower also because we've sold some stuff to pay down debt. So I think that's a useful reminder of where we've come from and where we are today, both in terms of sort of quality of the portfolio, but also how we market. Yes. If we then go into the bulk of the portfolio, there's nothing really new around BlaBlaCar. This is a good summary, I think, around how they sort of closed 2025. EUR 2 billion of GMV is a sizable number. I know GMV is not revenue, but it's -- and as you remember, a bunch of their markets are unmonetized yet and some of them are really coming strong into monetization like Brazil now, but others remain unmonetized, waiting for liquidity to sort of further improve. But still GMV, that's a tool that many people use to sort of value these kind of sort of platforms, et cetera. And if you use that number and to where we're marking it today, it's 0.4x GMV, which I think is fair to sort of categorize as attractive. Certainly, in my mind, that is. And if you go to the next page, we also have a BlaBlaCar that's doing really well at the start of 2026. They have had a strong start. And -- and also of late, we've really seen this element of countercyclicality in the business model where oil prices go up, it's -- energy prices go up at large, driven by oil prices now. The activity of BlaBlaCar goes up because it's more expensive to drive a car and you're more prone to get other people into fill those seats. You do that through the BlaBla platform. So BlaBla gets more business and the graph on the right sort of highlights that. I think that's sort of all for BlaBlaCar. If we -- let's go and talk about Voi. Dennis, do you want to run us through Voi? Dennis Mohammad: So Voi closed a record 2025 with EUR 178 million of net revenue. This is up 34% year-over-year and adjusted EBITDA of EUR 29.3 million, which is up 70% year-over-year and adjusted EBIT of around EUR 3.2 million, up from essentially breakeven in 2024. So a very significant improvement across the board in the P&L. As we alluded to earlier, the company during the year also did a tap of EUR 40 million on the existing bond framework to fund the growth CapEx for 2026. And they also secured an RCF with Danske Bank and Swedbank here in the Nordics for EUR 25 million, which is still untapped, but provides additional financing flexibility should they need it. In Q1 of 2026, we've written down the value of our stake in Voi by 16%. This is primarily driven by peer multiples trading down as Per has already talked about earlier, but in part also driven by FX as the dollar has depreciated against the euro during the quarter. Operationally, Voi has had a strong start to the year. It continues to win tenders in Q1 alone. They won tenders in the Netherlands, in France, in Germany and in Norway. And they've started to roll out their new fleet of e-scooters, the V9 scooter and e-bikes, the E5 and EL2 across the streets of Europe. So putting to use the bond money that they raised at the end of last year. The company will issue their Q1 report on Monday next week, that's on April 27. So more information will be available then. I see we already jump to the next slide, which is good. As Per wrote about in the intro to the report, when Voi issued its bond in 2024, it pioneered the financing model that industry peers have since either replicated or attempted to replicate. We have now received the first public financials from one of those peers and the comparison truly reinforces our conviction in Voi's strategy and in their execution. As you can see in the numbers here on the graph, while Voi grew revenues by 34% year-over-year and generated reported EBITDA, different from adjusted EBITDA, but reported EBITDA of EUR 19 million and EUR 24 million of cash flow from operations, the European peer here saw a revenue decline of 16% year-over-year and on essentially the same revenue base generated negative EUR 13 million of EBITDA and negative EUR 20 million of cash flow from operations. We've excluded EBIT here as the peer change methodology on this metric during the year, so making a like-for-like comparison difficult, but that number was heavily negative as well for the peer. As I said, we are convinced that Voi strategy and execution is the best in the industry. And I think one additional data point that supports that is when looking at the revenue generation per vehicle end day on the right-hand side of this slide. So Voi generating EUR 3.94 per vehicle in a day in 2025 and the peer down at EUR 2.88 in revenue per vehicle per day. We can see here that, that's a 37% more revenue generation per vehicle at Voi. And I think this really shows how Voi's investments across the full platform, everything from hardware, where they have their own proprietary IT module, high-capacity swappable batteries to software where they use machine learning for fleet optimization. They have a very strong fleet and inventory tracking system. And lastly, operations where they have best-in-class fleet sourcing, fleet management, maintenance and eventually resell is truly paying off. With that, we go to the final slide, where there's really nothing new to report. They've seen continued growth on top line and improvements on profitability across the board, as I alluded to earlier. As also mentioned, their Q1 report is out on Monday. So we encourage you to keep an eye out on their IR website then. If we then jump to the next company being HousingAnywhere, HousingAnywhere has had a good first year under Antonio Intini, who joined as a CEO roughly a year ago after having senior roles at both Immobilare and before that, Amazon. Looking at their 2025 financials, the company closed the year with continued growth on top line and positive adjusted EBITDA, which is a big improvement on the year before. In Q1, as Bjorn mentioned, HousingAnywhere closed a financing round where VNV participated with EUR 1 million and where previously held convertible loan notes were converted to equity. With this new funding, we think that the conditions are in place to push growth harder from here, and we look forward to following that transaction, which was done around the VNV mark at year-end last year. If we then finally go to Numan. Numan closed a very strong 2025 with north of 125% growth on revenues and positive adjusted EBITDA. As we've spoken about in the past, their weight loss vertical has been a key driver of this growth over the past couple of years and 2025 was no exception. In Q1 2026, the company has continued to grow, albeit we have seen growth come down from the levels it's seen in past years, primarily driven by some price changes in the market for GLP-1 in the U.K. which initially led to some stockpiling behavior ahead of the increases and then some slightly lower activity following. But as I said, they're still growing year-over-year in Q1, and we value Numan on the back of a transaction that they closed last summer. However, should we have valued it on the back of a peer group model this quarter, it would have been roughly in line with the mark we currently carried at. Finally, this company continues to invest in its unified Numan 2.0 platform, which we believe is a key driver to long-term LTV growth and patient retention, and we look forward to seeing the results from those investments in the quarters to come. That's it on Numan. Handing it back to you, Bjorn. Björn von Sivers: Thank you. I'll finish off with sort of a short comment on Breadfast here, who continue to see strong growth in its core e-commerce business and also sort of initial promising dynamics in its fintech offering. During Q1, the company announced sort of the final tranche of their $50 million funding round, which they completed sort of majority of last year, but the final tranche sort of closed in Q1. So company is funded and continues to grow well, hence, sort of flat valuation still based on this transaction. And then finally, on the top 6 here, we have Bokadirekt, who is also sort of down during the quarter, primarily driven by multiples, but on sort of that side, continued strong performance, strong profitability. Bokadirekt also announced a small acquisition during the first quarter. They bought a company called Zoezi, which is sort of a niche SaaS player for gyms and personal trainers, which will add both sort of top line and profitability to the company. And with that, I think we're through the top 6 names, and we'll head to a Q&A. Björn von Sivers: And as a reminder here on the Zoom, please use the chat function or the Q&A function in Zoom and we'll try to address them. And I believe we have a few questions. We could start with this one for you, Per. Perhaps, once you do the partial bond redemption, what do you think is the remaining headroom to repurchase shares? Or put it differently, how do you weigh sort of the bond redemption versus share buybacks going forward? Per Brilioth: Yes. We -- our target is to sort of -- our goal for a long, long time, as you know, and which we sort of achieved now with the sale of Gett, this has sort of become debt-free and not to sort of be burdened by paying a coupon to -- because of the debt we have. So this is just a continuation of that. But at the same time, we absolutely aim to have liquidity to make use of this sort of gift that the market is giving us of valuing us where we are and put shareholder money to work at that. So -- and we've been active around that, and we do it in the way we do it, as I think you've all sort of seen, we try to -- or we do sort of highlight in press release what we bought the previous week. So I think it's fair to expect us to continue doing that and to sort of and also to fund that. Now this partial bond redemption sort of leaves a little bit of cash. We're still net cash, but -- or yes, barely, but we are -- but it leaves liquidity to continue to do that. So that's good. And when we get to the sort of the end of the duration of this bond, then we -- during that sort of period, we see that we will have completed several more exits. There's an ongoing sort of process, some driven by us, some driven by sort of things at large that will provide us with liquidity. So it's too early to talk about that because nothing is done until it's done. But I feel sort of assured that we will have sort of ample liquidity both to sort of retire this bond at full and then and to buy back stock. But nothing is done, unless it's done, but this redemption leaves us with, I think, a good balance of liquidity to sort of make use of what we want to do here in the market. Björn von Sivers: Another question here on BlaBlaCar. You mentioned profitability at BlaBla briefly. Could you give us some color on how this would scale if the higher activity levels from March were to persist during the year? Does the increased activity sort of translate into higher profitability as well? Per Brilioth: For sure, it does. And we're unfortunately not at liberty to share sort of any further details as much as we would like. We're not at liberty to do that. So -- but for sure, this drives sort of revenue -- business revenue and higher sort of earnings. So it is a positive for sure. Dennis Mohammad: Maybe I can add there, Per, without saying too much to your point, we're not at the liberty to do so. But the core carpooling business that they run operates at north of 90% gross margin. So any kind of revenue coming outside of what you have anticipated covers the fixed cost is already covered, so you get a pretty high contribution on the bottom line from that. So to Per's point, the answer is yes. Per Brilioth: Yes. No, well described, Dennis. So yes, I hope that answers that question. Björn von Sivers: And then sort of a follow-up question sort of on buybacks of shares and bonds sort of given the volatility in the markets and contracting multiples, aren't you sort of more eager to increase buyback levels of the share? And/or if not, are there other plans for sort of additional investments in the existing portfolio companies or new funding rounds? Per Brilioth: There's sort of just having a go at that question, the different parts of it. So there's nothing major. None of the large ones sort of have any large rounds going on. There's small bits and pieces that we have been -- where we've been active in the portfolio, but they're really sort of on the marginal side of things. So not a big sort of draw on liquidity. And yes, no, I mean, if we -- if we had liquidity to do more now, we -- I absolutely would be a strong advocate of doing more in terms of buybacks. I think it's very attractive. I really, really believe that our NAV will be able to deliver serious returns over these coming years. And so if we have sort of liquidity to do more, we'll do that. But sort of obviously need to balance that liquidity, but very eager to sort of participate in the way we're doing now. So it's that balance that you may feel is keeps us doing this at a frustratingly timid kind of level. But it's -- yes, it's necessary to do it that way. If we can accelerate some exits that are at NAV or around NAV, then of course, it makes a lot of sense to do those and then sell. But it's -- nothing is done unless it is done. I feel very strongly that we will be able to sort of complete some further exits and hence, we'll have liquidity to do more, but got to keep an eye on that balance. Björn von Sivers: Another question here, specifically sort of on the Voi valuation, maybe for you, Dennis, other than sort of contracting multiples, what has sort of -- what levers have been moving around on that in the model? Dennis Mohammad: So the multiples are the -- is the primary driver. As you know, we value in the next 12 months. So we've moved 1 quarter forward. So the NTM outlook is obviously higher than it was in the previous quarter since the company is growing. But you also have FX, as I alluded to earlier, the dollar has depreciated against euro. So that's one negative contributor. And also net debt. And in the case of Voi, we don't simply take cash minus debt. We look at what obligations the company has with the existing cash. In this case, it's CapEx investments for 2026, where they've improved the kind of -- they've improved payment terms significantly over the past couple of years. So cash outflows happen during the year to a larger degree than everything going out when you place orders. So it's a combination of FX, net debt, but primarily, as said, multiples. Björn von Sivers: Thank you. With that, I don't think we have any further questions at this point in time. But as always, feel free to reach out over e-mail, and we'll try to be helpful. And other than that, I'll leave it to you, Per, for any final words. Per Brilioth: Nothing more to add, frustrating quarter because of all the stuff that we've talked about, but we feel really positive about the portfolio and the opportunities that we have here. . So yes, when is our next report Bjorn, it's -- we're looking at July 14, the National Day in France. So that's when we will speak next. Thank you, everyone. Dennis Mohammad: Thank you. Björn von Sivers: Thank you.
Operator: Good morning, ladies and gentlemen. Welcome to the Masco Corporation's First Quarter 2026 Conference Call. My name is Jenny, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Robin Zondervan, Vice President, Investor Relations and FP&A. You may begin. Robin Zondervan: Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2026 First Quarter Conference Call. With me today are Jon Nudi, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer. . Our first quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I will now turn the call over to Jon. Jonathon Nudi: Thank you, Robin. Good morning, everyone, and thank you for joining us. Before I discuss our quarterly results, I want to spend a few minutes talking about the continued evolution of our Masco Executive Committee, which we established at the end of last year. Jay Shah, Group President Pulling and Wellness; and Rick Marshall, Vice President of Masco Operating System, recently announced their intent to retire from Masco later this summer. I'd like to thank both Jay and Rick for their leadership and their important contributions to both our business and our culture. With Jay's retirement, we've taken steps to further streamline our organization, the leaders of our 4 largest businesses: Delta, Hunts grow, Bar and Watkins Wellness will now all report directly to me. These 4 leaders have over 80 years of combined service at Masco, have extensive experience in our industry and are key contributors to Masco's performance and our culture. Furthermore, we are adding 2 new leaders to our executive committee with expertise in supply chain and procurement. The addition of these leaders and capabilities will enable us to drive additional efficiencies, leverage our scale and enhance our speed of execution across the enterprise. The structure and leadership composition of our executive committee will help enable greater agility and tighter alignment between corporate and business unit priorities all in the pursuit of delivering above-market top and bottom line growth. In addition, we have continued the implementation of other initiatives that were announced earlier this year. Our integration of Liberty Hardware into Delta Faucet Company is on track as we further leverage the brands, capabilities and scale of our Delta Faucet business. Restructuring actions to streamline our business, reduce head count and optimize operations are ongoing. We incurred approximately $8 million in restructuring charges in the first quarter, and we continue to expect approximately $50 million in total charges in 2026. The -- the savings generated from these actions will fund additional growth initiatives and contribute to our future margin expansion. We're already experiencing the positive impact of these actions in our results. With that, let's dive into our first quarter results. Please turn to Slide 5. Overall, we are pleased with our performance in an extremely dynamic environment. Net sales increased 6% or 4% in local currency, primarily driven by favorable pricing. Additionally, while still down slightly, this was our strongest year-over-year first quarter volume performance since the end of the pandemic. Operating profit was $324 million, an increase of 13%. Operating profit margin was 16.9%, an improvement of 90 basis points. Earnings per share grew 20% during the quarter to $1.04 per share. Now turning to our segments. Columbia product sales increased 7% in local currency, exceeding our expectations, largely due to more resilient than expected volume. North American sales increased 9% in local currency, driven by favorable pricing as well as slightly higher volumes. Delta Faucet delivered a strong quarter with sales growth across all 3 channels: trade, retail and e-commerce. Additionally, Delta Faucet was recognized by USA -- today as a most trusted brand and by Newsweek as 1 of America's most trustworthy companies, demonstrating the significant strength of Delta's brand and service capabilities, which are resonating with customers and consumers. Turning to International plumbing sales increased 1% in local currency, driven by growth across many European markets, particularly Germany, partially offset by the ongoing weak market in China. Operating profit for the Plumbing Products segment grew 10% to $250 million and operating margin expanded 10 basis points to 18.3%. Turning to our Decorative Architectural segment. Sales were in line with the prior year. DIY paint sales decreased low single digits, while Pro paint sales grew mid-single digits. Operating profit for the segment increased 19% to $105 million, and operating margin was 19%. Showcasing our commitment to innovative new products, BEHR PREMIUM PLUS Ecomix was recently named a 2026 Green Building Sustainable Product of the Year. BEHR continues its industry leadership in delivering both innovative and sustainable products. Turning to capital allocation. Our strong cash flow allowed us to return $267 million to shareholders this quarter through dividends and share repurchases. We are pleased with our first quarter performance and the team's strong execution and operational focus. Additionally, I'm proud of how our teams are working quickly to implement various restructuring actions to ensure we have the appropriate cost structure for our business in this rapidly changing environment. Turning to our expectations for the full year. We continue to face a highly dynamic macroeconomic and geopolitical environment. Therefore, we believe it is prudent to maintain our 2026 earnings per share guidance in the range of $4.10 to $4.30 per share. Our guidance includes our expectation that our sales will now be up low single digits for 2026, but that we will also incur higher than previously anticipated commodity costs. Rick will share additional details of our guidance in a few moments. While uncertainty remains in the near term, we are focused on positioning ourselves for ongoing sales and profit growth over the mid- to long term. The structural factors for repair and remodel activity are strong including record high home equity levels, the age of the housing stock and increasing pent-up demand for renovation projects. As consumer sentiment improves, interest rates decrease, and existing home turnover increases, we expect these favorable fundamentals to become a tailwind for our business. In addition, we are taking the right actions to optimize our business, leaving us well positioned to deliver above-market top and bottom line growth. We are committed to our consumer-driven strategy, which leverages our industry-leading brands, expanded commercial capabilities and enhanced operational excellence. We look forward to further sharing the strategy and our long-term goals with you, either in person or online at our upcoming Investor Day on Wednesday, May 13 in New York City. With that, I'll now turn the call over to Rick to go over our first quarter results and 2026 outlook in more detail. Rick? Richard Westenberg: Thank you, Jon, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges and other onetime items. Turning to Slide 7. We delivered strong first quarter results, with total sales increasing 6% or 4%, excluding the favorable impact of currency. In local currency, North American sales increased 5%, and international sales increased 1%. Gross margin expanded 10 basis points to 36% in the quarter. SG&A as a percent of sales was 19.1%, 80 basis points lower than the prior year. Operating profit grew 13% to $324 million in the quarter, and our margin expanded 90 basis points to 16.9%. Operating profit was driven by pricing actions and cost savings initiatives partially offset by higher tariff and commodity costs. Our EPS grew 20% to $1.04 per share in the quarter. Turning to Slide 8. Plumbing sales increased 9% in the first quarter or 7%, excluding the favorable impact of currency. While this growth was primarily driven by pricing actions, which increased sales by 6%, our performance was better than expected, driven by volume, which was up slightly in the quarter. In local currency, North American plumbing sales increased 9% in the quarter. This performance was primarily driven by strong growth in our Delta Faucet and Watkins Wellness businesses. In local currency, international plumbing sales increased 1% in the quarter. Hansgrohe grew in many of its European markets, including its key market of Germany. This growth was partially offset by softness in China and other smaller markets. Segment operating profit in the first quarter increased 10% to $250 million and operating margin expanded 10 basis points to 18.3%. Operating profit was driven by pricing actions and cost savings initiatives, partially offset by higher tariff and commodity costs. Turning to Slide 9. Decorative Architectural sales were in line with the prior year. This performance was driven by mid-single-digit growth in our pro paint sales, offset by a low single-digit decrease in our DIY paint sales. These results were largely in line with our expectations, and we continue to anticipate full year pro paint sales to increase mid-single digits and for DIY paint sales to decrease mid-single digits. Operating profit in the first quarter was $105 million. Growth versus the prior year was primarily driven by cost savings initiatives, which are inclusive of benefits from our recent restructuring actions as well as increased pricing. This was partially offset by higher commodity costs. Operating margin was 19% in the quarter and reflects the benefit of our Liberty Hardware business now being reported in our Plumbing segment. This was coupled with a more normalized first quarter for our paint business as we lap the inventory timing dynamic that unfavorably impacted the first quarter of last year. Turning to Slide 10. Our balance sheet remains strong with gross debt-to-EBITDA at 2.1x at quarter end. We finished the quarter with $1.3 billion of liquidity, including cash and availability under our revolving credit facility. Working capital was 19.5% of sales at quarter end. As expected, working capital balances in the first half of the year remained elevated versus the prior year due to the timing of when tariffs were implemented. However, we continue to anticipate working capital as a percent of sales will be approximately 16.5% at the end of the year. Our strong cash performance enabled us to return $267 million to shareholders through dividends and share repurchases, including the repurchase of $202 million of stock in the first quarter. Additionally, based on the strength of our balance sheet and confidence in our future performance, we recently entered into a 2-year delayed draw term loan of up to $500 million. We plan to utilize the available funds under this facility to opportunistically repurchase our shares. As a result, we now expect to deploy at least $800 million towards share repurchases or acquisitions in 2026, up from our previous expectation of approximately $600 million. Now let's turn to Slide 11 and review our outlook for 2026. While we are pleased with our strong results in the first quarter, there remains a high degree of uncertainty in the macroeconomic and geopolitical environment. As a result, we are largely maintaining our full year outlook. For Masco overall, we expect 2026 sales to be up low single digits versus our previous guide of flat to up low single digits, and we continue to expect our margins to expand to approximately 17% -- regarding cadence for the year, given the timing of tariff impacts, which largely impacted our results in the second half of last year, we anticipate total Masco margin to be relatively flat in the first half of the year versus our previous guide of margin contraction and to expand in the second half of the year as we lap the tariff impact and as our mitigation actions continue to take hold. As it relates to tariffs, on our prior earnings call, we estimated the total cost impact from incremental tariffs to be approximately $200 million before mitigation this year. Given the recent ruling on NEPA tariffs, the implementation of temporary Section 122 tariffs and changes to how Section 232 tariffs on steel, aluminum and copper are applied, we do anticipate the impact of these tariff changes before mitigation to be favorable. However, given the great deal of uncertainty as to where tariffs will ultimately land, it is challenging to quantify. In addition, we anticipate any tailwind from these tariff changes will be more than offset by anticipated increases in commodity and related input costs. Copper prices remain elevated and oil, which impacts a wide range of material as well as logistics costs also remains elevated and volatile. We continue to monitor these dynamics and we'll work diligently to mitigate the impact as we have demonstrated in the past. Turning to our segments. In our Plumbing segment, we continue to expect 2026 full year sales to be up low single digits and our operating margin to expand to approximately 18%, driven by pricing discipline, operational efficiencies and continued cost savings initiatives. In our Decorative Architectural segment, we continue to expect 2026 sales to be roughly flat with the prior year and our operating margin to be approximately 19% and with a continued focus on cost savings initiatives. Finally, as John mentioned earlier, we are maintaining our 2026 EPS estimate of $4.10 to $4.30 per share. This now assumes a $200 million average diluted share count for the year versus our previous guide of 202 million shares and a 24.5% effective tax rate. Additional financial assumptions for 2026 can be found on Slide 14 of our earnings deck. With that, I would like to open up the call for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of John Lovallo with UBS. John Lovallo: The first one is just on the Section 232. -- you said that this could be actually favorable, which seems right to us. But is this really driven by the fact that the product that you're importing whether it's faucets or shower heads, are not entirely copper and that some of the subassembly is done in the U.S. And how do you kind of wrap your arms around what this potential benefit could be? . Richard Westenberg: John, it's Rick. So with regards to our comments on the potential favorability on the tariff impact, it's really an impact -- it's really a composite impact. So it's not just the 232 tariffs, but it's the really on the EBA tariffs at the end of February, the imposition of Section [indiscernible] tariffs. And then, of course, the 232 tariffs, which -- so we look at it from a composite perspective. The 232 tariffs themselves are relatively nominal in terms of their net impact. But on composite, we expect a favorable impact. But in addition to the ones that we talked about in our opening comments, as you probably are aware, the administration is looking into a couple of investigations and Section 301 tariffs as well. The environment remains uncertain. We think net-net, it will be favorable for us for the year, but it's difficult to quantify just given the moving parts -- and as we also mentioned, we think any favorability will likely be offset by elevated commodity costs, as we talked about. John Lovallo: Okay. That's helpful. And then I think you guys said your prior estimate was for consolidated pricing to be up low single digits with mid-single-digit pricing and plumbing and sort of flattish and deck arc. I mean how are you guys kind of thinking about this now, particularly with the move in resins since the conflicts in the Middle East began? . Richard Westenberg: Yes. So with regards to our pricing expectations for the year, our plumbing expectation is mid-single digit. In terms of deck arc, it's really going to be dependent on where we end up commodity perspective, we are seeing significant headwinds given the elevated and volatile oil prices and the impact that it has really across the input spectrum and including freight costs as well, but certainly on the deck arc side with regards to resins, et cetera. And so we're seeing upward pressure in the neighborhood of mid- to high single digits. Obviously, it's still in discussion. And so that's something that we're tracking very closely. -- we -- I think from an overall company perspective, we would expect mid-single-digit inflation, and that's really commodities as well as 1 of the way inflation as well. So it's something that we're monitoring and managing very closely. We do have a track record of offsetting and managing through these challenges, and we believe we'll do so here as well. through a combination of levers. But that's really the landscape. And caveat, as we all recognize it's still uncertain, but there is upward pressure. Operator: Your next question comes from the line of Stephen Kim with Evercore ISI. Stephen Kim: I think you effectively have said that you -- well, you just reiterated that you think that the changes in the tariffs will largely be offset by the commodity. I was wondering if you could give us just an overall estimate of how much that piece, which will be transferred effectively will be for the year. And if there's a quarterly cadence to that, that we should be mindful of? . Jonathon Nudi: Steve, just to clarify your question. In terms of the transfer of costs. Could you just elaborate. Stephen Kim: Offset. Yes, the offset you are basically saying that the tariff changes could be beneficial to you, but the commodity costs will be higher and that those pieces would effectively be offsetting, if I heard you correctly. And so I'm just wondering how big is that piece effectively? . Jonathon Nudi: Yes. We're not going to quantify the actual magnitude of it. I think on a net basis, you can think of them as relatively flat to potentially a headwind for us for the year, just given the extent of commodity inflation that we've seen really across many input costs, particularly copper and zinc as well as oil-based inputs, particularly resins, et cetera. So we're basically tracking that. But I think at the end of the day, those commodity costs are going to offset the favorability or potentially more than that. In terms of your second question, quarterly cadence, this is largely a back half of 2026 phenomenon. As I think we've described in the past, particularly on the plumbing side of the business. commodity costs when they show up in the market really have to flow through our inventory and in our P&L, usually a couple of quarters later. And we saw elevated copper and zinc cost really as we entered into 2026. So that will be more of a back half 26 phenomenon. As it pertains to oil in resin costs. That's a little bit more near term because we've been seeing that as of late, and that's more of a quarter to 2 quarters out. So it's really kind of as we approach midyear and the second half of the year, that we would see that impact -- and that lines up pretty cleanly with regards to our tariff favorability because the tariff favorability is largely driven by the EPA tariff ruling. -- and that occurred as we all know, on February 20. And so that takes some time to flow through our P&L as well. So they tend to map pretty cleanly. But at the end of the day, there's still a lot of volatility out there, Stephen, as you recognize. Stephen Kim: Okay. Great. That's actually a good cleanup. I appreciate that. In the deck Ark segment, your margins were stronger than we expected. And I was curious if you could give us some sense for the relative importance of the cost savings initiatives from restructuring versus pricing? And give us a sense for what your expectation is about the quarterly cadence because we typically see the margins rise in 2Q and 3Q from 1Q. Is there anything that we should be mindful of that would be different this year than normal? Jonathon Nudi: Stephen, this is Jon. I'll jump in first, and then Rick can follow up with anything I missed here. We -- I guess, overall, feel good about this trajectory that our paint business is on. As you know, we exited with the challenging year behind us, and we feel better about our performance. Again, we saw our business overall flat with propane growing mid-single digits, DIY down low single digits. We feel great about the plans we have in place with our retail partner, and we'll continue to, again, grow share with the Pro painter HUTENSa, which is a big opportunity for us, and we've got a significant amount of headroom there and then make sure that we continue to grow with DIY as well where we have a significant share. In terms of margins, I would say, yes, they were up significantly versus last year. they are much more normalized versus a typical Q1 though, we had an easy comp this year versus Q1 of last year. and we feel good about our ability to continue to manage our margins as we move forward. I would say our restructuring actions are paying off and particularly in our bar business as we've taken significant steps to really streamline our cost structure and allow us to compete in the market that hasn't been drawn the way that we'd like overall. And I'll let Rick answer the question just on quarterly cadence, but hopefully, that gives you a perspective. Richard Westenberg: Yes, Stephen. So with regards to Jon's comments were spot on in terms of the implications on Q1. I would just reinforce that the performance in Q1 was driven really based off of of cost reduction actions that were in our control, including the restructuring actions that Jon alluded to. We did see some low single-digit inflation in the commodity input costs. So that's something that we are mindful of, and as I mentioned earlier, are expected to increase over time. So that's something that we're tracking. But I think in terms of our margin performance in Q1, it was largely in line with what we would have seen from a historical standpoint on a clean Q1. Operator: Your next question comes from the line of Sam Reid with Wells Fargo. Richard Reid: Coming back on the quarter here. In Plumbing, really nice beat versus expectations I just wanted to perhaps unpack the plumbing volumes that you put up during the quarter. I know they were modest, but I believe there was some volume benefit there. I just wanted to double confirm that there wasn't any being onetime or any pull forward in there around pricing that we should be mindful of? Jonathon Nudi: Sam, this is Jon. I would say the short answer is no. It was a pretty normalized quarter in terms of inventories. -- we feel really good about deploying business and the performance that, that team put up really around the world where we saw our business grow nicely. Our North American business, in particular, with Delta Faucet had a terrific first quarter. growing high single digits. I think 1 of the -- if you look at our beat versus our internal expectations for Q1, it was really a plumbing and then primarily North American Plumbing and the vast majority of that was really just volume versus expectations. As you're aware, we took a fairly significant amount of pricing as we exited last year. And the team has done a terrific job really putting that pricing in place and navigating with our customers to have really good plans. And we saw our volume perform better than we would have expected from an elasticity standpoint. So we feel like the fundamentals are incredibly strong. We grew share across our channels. In fact, we grew in every channel across plumbing, whether it be wholesale trade or e-commerce. We've got a great new product lineup. Our marketing plans are strong. We feel really good about our plumbing business, and we'll continue to focus on as we move through the rest of the year. Richard Reid: That's super helpful. And then maybe double-clicking on the plumbing price in a little bit more detail. I mean it sounds like the strength was widespread across all of your channels. But could you perhaps give us a little bit more color on whether there were any nuances between plumbing price, say, retail versus wholesale, wholesale versus e-com? We just lost maybe a view on how that plumbing price might have looked by channel. Jonathon Nudi: Yes, this is Jon again. We typically don't get into that level of detail from a pricing standpoint. I think it's suffice to say, though, if you look at our results, we executed our plans well from a pricing standpoint across all channels, given that we saw the price realization in the market that we had hoped for. and our elasticities were as severe as they could be. So again, we feel really good about how we navigated -- and the performance was pretty consistent through all channels. And again, in North America, it was high single digits, which is terrific. Operator: Your next question comes from the line of Matthew Bouley with Barclays. Matthew Bouley: Wanted to start on the growth guidance in plumbing. So you obviously started the year at this 9% growth and still guiding the full year up low single digits. And -- so presumably, those pricing comps will get a lot tougher in the second half. So I guess that part is understood, but you would still need a lot more deceleration in either as soon as Q2 or perhaps even a negative comp at some point just to kind of hit that guide. So I guess the question is, should we be expecting that, that deceleration in growth is sort of already happening here in Q2? Or are you just really building in a lot of conservatism on the volume side that you kind of think is prudent here to sort of get that type of deceleration? . Jonathon Nudi: You're welcome. This is Jon. So as I mentioned, really pleased with the performance in Q1. As we look to the remainder of the year, really, it's the uncertainty that we see in the road around is that, that cause us to keep our guidance where it is. Certainly, you had all of the uncertainty prior to the war and ramp with tariffs. And consumer sentiment and things like that. And then obviously, the war adds a whole another level of uncertainty. So we're looking at 2 things very closely. One, the demand environment and how our consumers purchasing across our markets. And today, we have not seen a meaningful change, but it's something that we're looking at very, very closely. And I think as the oil shock rubles for the economy, we have questions in terms of how the economy is going to perform. Again, nothing to date that gives us pause, but we're going to continue to watch that closely. As Rick mentioned earlier, what we have seen certainly is the impact of inflation from the oil shock, particularly in petrochemicals and particularly in our decorative architectural business. As Rick also mentioned and our team has really, I think, distinguished itself as being able to navigate through tough times in a dynamic environment, and we'll do everything that we can to offset that inflation by negotiating with their suppliers, looking at footprint -- but ultimately, if we have to take price, we'll work to do that in a very efficient and effective way. Matthew Bouley: Got it. Okay. That's very helpful. Secondly, shifting over to the Hansgrohe business. question is on basically both demand and energy costs, specifically in Europe. So as the conflict began, the question is, have you sort of seen any changes either from a consumer perspective? I mean, it sounded like Europe was still positive in the quarter. But anything changing on the margin around demand in Europe or just the energy costs related to natural gas in your business there. So any kind of color on how you expect that to play out? Jonathon Nudi: [indiscernible] I'd say similar to what we're seeing in North America. We haven't seen a dramatic change to date, something we're obviously watching closely. We see commodity pressure in Europe just like we do in North America, and that team is taking -- Hansgrohes taken the initiatives to offset it. And then from a demand standpoint, again, remember that [indiscernible] is really a global business. We like how Europe is holding up at this point. China is no secret. It remains challenging market from a new home construction standpoint and a building standpoint. So if anything, that's the market we continue to look at in terms of trends and looking to improve our trends in that market. But Europe is hanging in there pretty well to date. So we feel good about [indiscernible] as well. Operator: Your next question comes from the line of Ketan Mamtora with BMO Capital Markets. Ketan Mamtora: Congrats on a strong quarter. Maybe just coming back to the full year guidance Jon or Rick, what is the right way to think about sort of what you're betting as the base case? If volumes, the demand environment stay kind of where it is today, do you expect to be more sort of at the midpoint of that range? How should we think about that? Richard Westenberg: It's Rick. So with regards to our guidance, it's informed by all the information that we have to date with regards to what we're seeing in the marketplace. Obviously, the uncertainty in the macroeconomic and geopolitical environment as well as from an earnings perspective, the tariff implications and the commodity implications that we've spoken to already. I mean at the end of the day, we feel confident in terms of delivering our results within the range. And without further input on that, I think you can comfortably assume that we'll end in the mid part of the range. From a top line perspective, our guidance, we did increase our expectations for the year from flat to low single digits to up low single digits. So we do expect growth in our top line this year from a total company perspective, driven primarily in our plumbing space. And from a bottom line perspective, we do expect earnings growth and EPS expansion in lending in the $410 million to $430 million range for the year. Ketan Mamtora: Got it. That's helpful, Rick. And just as a follow-up on the capital allocation side, you moved the target higher to $800 million. Is it fair to say that you see bigger opportunity on sort of the share repurchase side? Or are you seeing kind of more M&A opportunity as well? Richard Westenberg: Yes. Fair question. As it pertains to the increase in our share repurchase expectations or availability for share purchases or acquisitions. Basically, we saw an opportunity with regards to the strength of our balance sheet. We've got a very healthy gross debt-to-EBITDA ratio or leverage ratio and our confidence in our performance, obviously demonstrated in Q1 and our confidence in our future performance and opportunity to look at increasing the cash available for share repurchases from $600 million to at least $800 million. To enable to do that we entered into, as I mentioned in my opening comments, delay draw term loan facility to enable that. So it's really going to be opportunistic. We like the flexibility that, that offers. And we like the opportunity in terms of the valuation that we're at today to be able to be opportunistic and leverage that. And so we'll keep providing updates as we progress on each quarter. But right now, we do expect an increase in share repurchases from $600 million to $800 million plus absent any M&A at this point. Jonathon Nudi: And just reiterating our capital allocation strategy hasn't changed. So we continue to look at M&A. And as we've said before, bolt-on M&A is our focus. We find the right deal, we'll do it. As Rick mentioned, we just felt like this was a great opportunity. we have the ability to go out and borrow a bit more. And we frankly believe that our shares are valued right now we believe that we're performing well, and we continue to as we move into the future as well. . Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Michael Dahl: I wanted to circle back to some of the cost and margin dynamics. I think the question is if you look at this being kind of net neutral to less favorable in terms of costs and tariffs and a lot of uncertainty around the second half. I understand that historically, had the ability to do things to offset this. When you have like broad increases in inputs and global tariffs, it's a little harder to get those savings from shifting footprint. I don't know if I'm wrong about that. So in your guide, if that is potentially a net negative versus your initial assumption is what is the primary lever that you're relying on to offset that and giving you the confidence to still guide margins up in the back half? Richard Westenberg: Yes, Mike, it's Rick. So your understanding of the playing field is accurate in terms of our read of the fact that commodity and input costs are likely to be a headwind that exceeds the favorability on tariffs. And as I mentioned earlier, it is more of a back half of the 2026 dynamic. In terms of the levers that we're looking at, it's really the same levers that we've been executing against already. So footprint in terms of sourcing footprint, is still a lever that we're pulling. And that is really on track in terms of helping to mitigate the tariff impact that we still are encountering but it's also a cost reduction. We've really executed well in terms of our cost savings initiative. And of course, the restructuring that we announced in our February call and John alluded to earlier in his opening comments, that is really taking hold. And so that is amplifying our cost savings initiatives, and we're streamlining the business, reducing head count and optimizing operations. And so that's a huge lever for us, and we're going to continue to do that. And then pricing, obviously, we've been really effective at our execution on pricing and although much of the pricing actions that we've been pursuing are implemented, there's still a lever that we're looking at selectively as we proceed during the course of the year. So I would say overall, Mike, the levers remain the same, and we're going to continue to execute like we've done in the past, and we believe that the mitigation actions that we are executing and we intend to execute through the course of the year. will be sufficient to allow us to mitigate the headwinds and allow us to deliver results complement within the guidance range that we provided. Michael Dahl: Okay. Great. That's helpful. Then shifting gears and back to the -- I guess, part of this might tie back to the capital allocation. I did note that in your [indiscernible], you have a little bit of commentary about the potential to seek relief or refunds from previously paid tariffs, but that nothing has currently been done or contemplated? What can you articulate about your strategy in terms of speaking refunds? And does that tie in at all to kind of the expanded buyback guide where if you do get some refunds, your inclination would be to to return that back to shareholders? Or how would you frame that? . Jonathon Nudi: Mike, this is Jon. I would say we think the refund process still has a lot of uncertainty in it until if and when we get refunds, we'll obviously report what they might be and how it might handle them. But we are not banking on refunds, and it didn't really play any kind of role in our decision to take on the incremental data that we talked about. So again, we're doing particular steps necessary to protect our shareholders. And at the same time, it's still highly uncertain. So we another report, we'll start to review that. Operator: Your next question comes from the line of Trevor Allinson with Wolfe Research. Trevor Allinson: I wanted to follow up on the restructuring actions. I think last quarter, you guys had talked about those being bigger impacts to '27 and '28, but it sounds like you're seeing those come through this year as well and providing nice tailwinds. So can you size for us what sort of benefit you're getting from the restructuring actions here in 2016? And then how much larger does that become as you move into '27 and '28. Richard Westenberg: Trevor. It's Rick. So with regards to the restructuring actions, we're really pleased with the execution, both the true execution and the timing of our restructuring actions as we disclosed we incurred about $8 million in Q1. We had incurred several million dollars in Q4 of last year, and we expect $50 million of restructuring costs for the calendar year and those are on track. And so we're starting to see those savings. We haven't quantified nor do we intend to quantify the savings per se because part of the savings are going to be redeployed in terms of growth initiatives as well as helping us to expand our margins. And that's a contributing factor to our margin expansion this year. You're absolutely right. The restructuring actions are going to be executed over the course of 2026. And -- and so we'll see more of a full year benefit as we move into '27 into '28. But we're going to be managing those cost savings and leveraging those, as I mentioned, to drive growth. as well as managing our margin expansion. Trevor Allinson: Okay. And then second question maybe is related to that then. I mean you guys have made some changes in your incentive comp structure recently. It looks like you've been more focused on growth than you have been in the past. Can you talk about that change? Why you made the adjustment? And does that imply some shifting priorities for you guys in terms of growth moving forward. Jonathon Nudi: Trevor, this is Jon. Maybe I'll jump in. So as I joined Masco last summer, it's clear to me Masco is a high-performing company. As I wanted to do the listening tour and talked to a lot of key constituents. The 1 thing I heard is that there is likely an opportunity for us to drive our top line a bit faster. Don't take the focus off margins. We don't take the focus off of cash flow. The company has done a great job on that. But if you can continue to deliver the bottom line and grow a little bit faster is probably a benefit to everyone. So we've been focused on doing just that. We're taking actions across the board, including the structuring of our executive committee to bring some external expertise in, in areas that we believe that we can benefit, see some additional savings. We're setting up centers of excellence around things like digital marketing and e-commerce, commercial excellence, all in the pursuit of helping to not only grow the bottom line, but also grow our top line a bit more quickly. And then certainly, incentive is important. So we did make a change to change the weight in terms of how we incent our teams. And I would say profit is still the largest percentage of the pie we have balanced it out a little bit to make sure that we have the appropriate focus on top line as well. So I'm really pleased with the progress we're making. I'm pleased that we were able to grow the way we did in Q1. And again, our goal over time is to be able to do that consistently. Operator: Your next question comes from the line of Adam Baumgarten with Vertical Research Partners. Adam Baumgarten: I guess just on the margin piece, you talked about first half margins now being flattish year-over-year, which would still imply some margin pressure in 2Q. Do you expect both segments to see margin pressure next quarter? Richard Westenberg: Adam, it's Rick. So in terms of our margin expectations, you're right in terms of our updated guide for the first half of the year is flat margins. And given the fact that we had expanded margins in Q1, it does imply a margin contraction in Q2. I would just remind you that Q2 of 2025 to last year's quarter, we really weren't impacted by tariffs quite quite significantly at that point in time. And we had a very strong quarter with regards to 20% margin. So it's a challenging quarter from a year-over-year perspective. We do expect a very solid quarter in Q2 from a margin traction perspective. I'm not going to comment on the segments per se, but overall, we do expect some margin contraction, but we do expect to deliver a very strong quarter in Q2. Adam Baumgarten: Okay. Got it. And then I think you guys alluded to maybe some incremental price actions. A couple of questions. Would that be in both segments? And would that happen if kind of commodity costs stay where they are today? Or would you need to see more commodity inflation to then think about raising prices further? Jonathon Nudi: Adam, it's Jon. I guess I would say we're not going to talk about prospective price advances. I just would probably tell you to look at history here, the recent history in terms of how we approach things. And pricing is the last resort for us. We start with negotiating with our suppliers, changing our footprint where possible, taking cost out of our own system. But if the need is there. I think our team has proven that they can take pricing very effectively and efficiently and do in a way that benefits not only the bottom line but doesn't harm the top line as well. So we'll continue to monitor things. Again, as we talked before, I'd say the one surprise for us so far this year has been the impacts on petrochemicals and particularly on our architectural business. So that's an area that we have a lot of focus. We're spending a lot of time with our suppliers to negotiate the best deals we can. And then ultimately, we'll work with our retail partner in terms of how we [indiscernible] forward. But -- just know that we've had good practice over the last few years given all the dynamic environment and feel really confident the team can navigate as we move forward. Operator: Your next question comes from the line of Phil Ng with Jefferies. Philip Ng: Congrats on a really impressive quarter. I guess to kind of kick things off, John. I mean, I think volumes for plumbing came in, as you've pointed out better than you expected. Is that a more resilient consumer, maybe better price elasticity? Can you tease out if there is any share gains of note that drove some of that? Help us kind of think through where, I guess, plumbing would have surprised and it sounds like it's been pretty resilient thus far. Jonathon Nudi: Yes, Phil. Yes, I mean, we're really pleased with plumbing, as I mentioned. It's globally we grew, which is great. I would say, again, versus expectations, it was really North America that we saw the beat. And as I mentioned, the vast majority of that will be versus our expectation was volume. And I would say our Delta team was firing on all cylinders right now. They've got great marketing plan for the year. They've got terrific new products that they've lost. Our vitality rate continues to increase year-over-year. Our commercial plans with our key customers are incredibly strong as well. So team continues to perform. And then when you break it down across channels, we grew high single digits in North America across each of the channels. So wholesale and e-commerce and retail. And that's tricky to do, and the team is hyper-focused on building strong plans at each each of our customers. So we do feel like you're taking some share. And at the same time, I think executed pricing in a really effective way that we didn't see the elasticity maybe that we would have modeled out beforehand. And I think it's to get a testament to strong execution. So -- the last thing I would add is we continue to see strength in our upper premium and luxury segment of the market where we have brands such as Brizo and Axor and Newport Brass. And the high-end consumer definitely seems to be hanging in there strong and we see really strong margins in that segment as well. So we feel great about the performance and feel good about the plans we have in place for the rest of the year as well. Philip Ng: Got you. And just kind of teasing off that, I guess, for Plumbing for perhaps Rick, you guys kept your guidance for up low single-digit top line growth. It sounds like there is nothing of note for 1Q and volumes were up -- it sounds like things are pretty resilient. Could that be a source of upside? Or are you kind of expecting volumes to kind of decline in the back half, perhaps just given some of the macro dynamics that is out there? Just want to kind of think through some of the puts and takes there on the demand side. Richard Westenberg: Yes. Sure, Phil. As it pertains to -- as Jon mentioned and we talked before, Q1 was a really strong quarter. We're very pleased with our results and the consumer in terms of our businesses is holding in there. The uncertainty is something that we're continuing to track both on the macro and geopolitical consumer confidence is a bit challenged. But as it pertains to the fundamentals of our business are strong. The only thing I would point to from a first half versus second half perspective is -- we started to take pricing from a tariff mitigation standpoint in the second half of 2025. And so we'll lap that as we get to the middle of the year. As evidenced by our Q1 pricing of 6% in Q1. We won't see that type of year-over-year comp in the second half of the year. So that's part of the dynamic, just mechanically, but we still feel pretty confident. And obviously, we're hopeful that there is upside relative to our expectations. But at this point, we're we're guiding at low single digit in terms of growth for the year. Operator: Your next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: Wanted to shift the focus to decorative and the sales were flat, still better than what we were looking for down low single digits. Was hoping to get a sense of DIY versus Pro and the different drivers there and where things might be if it's indeed the case maybe coming a little stronger if you're seeing any momentum similar to what you've seen in plumbing and how you might contrast the sales momentum that you've seen in plumbing versus what you're seeing in decorative across, again, DIY versus Pro on the paint side? Jonathon Nudi: Mike, good question. It's Jon. So our sales for the quarter were flat. Clearly, that was a better performance than what we saw in Q4 of 2025 and really most of 2025. When you break it down, we saw Pro continue to grow mid-single digits. DIY was down low single digits, and we feel good about the plans we have in place. I mean I do believe that DIY is going to remain pressured when you look at that business. It's highly correlated with existing home sales. And obviously, existing home sales remain pressured. So as a result, we're putting strong plans in place. We're going to focus on the great quality that we provide the best value in the industry, really make sure that, that's playing through and feel good about our plans with our retail partner. . The pro side is where we continue to see a tremendous amount of opportunity. I mean that's where the growth has been over the last longer time. We have a relatively small share in that space as well. We've grown our share by 200 basis points over the last few years. We're continuing to invest to take friction out of the experience for Pro. So whether that be order online, pick up the store or online, having delivered to the job site. We continue to hire both inside and outside sales reps to develop those pro relationships. And I can tell you that the home people have that same exact was our focus on the Pro as well. So I think we hope to see incremental progress as we move throughout the year. And we remain a tough DIY market, we believe, for the short term, I feel really good about the plans we have in place and the trajectory that we're heading on. Michael Rehaut: Great. No, that's helpful. And I know at the risk of of beating this one to [indiscernible] a little bit, but I think it's going to be a big topic over the next month or two around the strength in plumbing, particularly the volume side. And you just highlighted the fact that you've seen that strength across different channels in North America, a lot of success in your execution. Notwithstanding maybe being a little more conservative in the back half of various reasons. And I presume you also hit on this at our Analyst Day next month. But are we to think about let's say, the share gains that you've been able to achieve in the first quarter as sustainable? And are there parts of the market that maybe you see an opportunity where this share gain dynamic can persist throughout this year into 2028. Just trying to get a sense of the sustainability in the performance. And if there's anything that's shifted within the market, either on the customer side or some of your competitors out there, that lead you to believe that the share gain dynamic can persist on a, let's say, on a medium-term basis? Jonathon Nudi: Mike, good question. I mean, as I mentioned, we feel terrific about what our team has delivered in Q1, particularly in North America. We don't think anything for granted. Our competitors are strong. There's good brands out there and it's a dynamic environment. So we're going to keep playing our game, keep focused on building our brands, innovating and then executing at a high level. And if we do that, we believe it will continue to be as strong as we move forward. As I mentioned earlier, I mean the big question mark for us is just what happens with the end consumer. And a couple of months ago, we clearly talked about it being uncertain times and a lot of dynamic environment. And obviously, since the conflict in the Middle East, it's take it to a whole new level. So we believe that we're just being prudent in terms of, hey, let's wait and see what happens and how it plays out with consumers. And as we mentioned before, we are starting to see some inflation through. So if there's any caution, it's just that. And certainly, these are very uncertain times that we'll continue to monitor and to what we can control. I feel great about what our teams are doing. I feel we have a very clear line of sight into our plans for the rest of the year. and I expect our performance to be strong certainly versus the category. And ultimately, it's the category, how that performs with all these uncertainties and the things that we're watching. Operator: Your next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: Just following up on plumbing. Can you give any additional color on the growth you saw in Watkins and the opportunity or the TAM there? I think you flagged Delta and Watkins as your strongest growers is Watkins growing maybe similar to Delta? Or is it growing faster off a lower base? Is there any product set or brand within Watkins that's really driving the strength? . Jonathon Nudi: Anthony, it's Jon. We feel, as we've talked about, great about Watkins and the opportunity. Watkins did grow in Q1. And we're going to get into a lot more detail at our Investor Day next month in New York City. So we'll walk you through the TAM. We'll walk you through the opportunities that we see -- what I would tell you is that hot tubs is our biggest business, and we like the momentum. We're the share leader in that space across North America, where we're seeing outsized growth is really in [indiscernible], which is only 1% health penetration in the U.S. today. It's very much front and center of the wellness movement, and we're seeing just a lot of demand for that product. So we grew nicely from a walk-in standpoint in Q1. We'll give you a lot more details next month when we get together. Anthony Pettinari: Great. Great. And then, I guess, given the rise in diesel and gas prices, I'm wondering if you've historically seen real sensitivity between gasoline prices and consumer spending for your products? I guess I'm thinking specifically about DIY paint and maybe some of the smaller ticket items. It seems like you haven't seen that so far, but I'm just wondering if that's something historically that's moved the business. Richard Westenberg: Anthony, it's Rick. So -- it's tough to single out a particular driver. I think what we watch, generally speaking, is consumer sentiment as well as overall the health of the economy. And so higher oil prices, as we all recognize, is generally a headwind to consumer confidence is generally a headwind to disposable income. So -- and it's a headwind in terms of input costs. So those are things that we're monitoring closely, and that's one of the reasons that gives us caution and why we're prudent with regards to our expectations as we move out through the course of the year. Again, the fundamentals of the business, as Jon articulated, are really strong. We're pleased with the execution of what we've been doing here at Masco and across our business units. Oil prices is something that is a headwind, but it's more how it manifests itself in terms of consumer confidence, et cetera. For us, in terms of our products, they tend to be a lower ticket R&R items, so they tend to be more resilient in these types of environments. But nonetheless, we're not immune to it, but it's something that we'll continue to monitor and track progress through the course of the year. Operator: Your next question comes from the line of Susan Maklari with Goldman Sachs. Susan Maklari: I want to talk about the longer-term growth path. With the changes in leadership that you announced this week, do you now have the heads of those 4 key businesses reporting directly to you, Jon. Can you talk about what that means in terms of your ability to drive growth over time? And how the executive committee is focused on some of these items? And what that will mean for Masco? Jonathon Nudi: Yes. So great question. As I mentioned before, as I came into Masco, I heard that. top line growth as something that probably was an opportunity, something for us to focus on. And then as I took a deeper the of the feedback, the other thing I heard is just our ability to move with pace and be agile is probably the other area to focus on. So with the executive community returned to 2 things. One, make sure that we have the right experts in terms of our centers of excellence and deep functional knowledge where it matters. . We announced just earlier this week that we're bringing in a procurement -- Chief Procurement Officer who has 30 years of experience in the space and will be able to help us bring the most modern capabilities as which we feel great about. And also with the executive committee, really trying to streamline the organization to have more frequent communication, allow us to make decisions more quickly and move with pace. So with the new organization, essentially have removed a layer -- and with that, we think that our speed and agility will increase even more we talk as an executive committee, we meet once a week. I can tell you I talk to my direct reports many more times than that. And I think with the roll around us and the pace that we're seeing, it's really important that we have the organization that's set up to read and respond and deliver to consumers and customers what they expect from us. Susan Maklari: Okay. That's great color. And then despite the moving parts around inventories and costs, still targeting to get that working capital down to about 16.5% of sales this year. Can you just talk through some of the pieces in there and how we should think about that coming together? . Richard Westenberg: Sure, Sue. It's Rick. So part of the reason our working capital is higher than it typically is this time of the year or has been for the last several months is because of the implications of tariffs. So the payer tariff costs and commodity costs, quite frankly, that lead into our inventory and receivables have elevated our working capital in the shorter payment terms on the tariff bills or invoices also reduces are payable. So there's an overarching tariff dynamic that has been at play. We'll see that normalize as we get into the second half of the year. And we continue to be. The team is very focused on managing not only cost, but also working capital. And so that's something that we'll continue to execute on. And once we get through the normalization of the tariff implications in the second half of the year, we should be able to execute towards the working capital that's more in line with our historical average, and we've guided towards 16.5%. Operator: And your last question comes from Rafe Jadrosich with Bank of America. Rafe Jadrosich: The outperformance in plumbing volume in the first quarter in North America, how much would you attribute to just broader consumer resilience and the category holding up relative to your market share outperforming what you were expecting going into the quarter? Jonathon Nudi: So I'm not sure we'll quantify it to the level of detail you're looking for. I mean, I think the category performed fairly well. I am very confident we also took market share that mentioned I believe that we're firing on all cylinders right now and really strong plans in place across each of our channels, each of our customers. So just leave it out is probably a bit of both. But if I had to say which one was the bigger driver, I would think probably our market share gains. Rafe Jadrosich: Great. That's helpful. And then in terms of the input cost inflation, what you're expecting, can you talk about what the copper price is embedded in guidance for the second half of the year or should we be assuming that copper prices and like stay where they are today. So just what are you assuming to get to the full year guidance? . Richard Westenberg: Sure, Rafe. It's Rick. We're not going to disclose a specific assumption in our outlook. But suffice it to say, I would assume that where we have been recently relays we closed out 2025 is a pretty reasonable place to be. Obviously, it's volatile in that nature. I mean I think as we sit at $6 or above $6 per pound, that is something that represents a bit of a headwind to us, but it's a volatile environment. And at the end of the day, as I've mentioned before, we're not only monitoring the situation, but we're proactively taking actions from a cost reduction standpoint, from an efficiency standpoint and as necessary, a pricing standpoint to mitigate those impacts, whether they're copper, oil inputs, tariffs, et cetera, to be able to deliver the results that we've guided to for the year. Operator: This concludes the question-and-answer session. I will now turn the call back to Robin Zondervan for closing remarks. Robin Zondervan: We'd like to thank all of you for joining us on the call this morning and for your interest in Masco. That concludes today's call. Have a wonderful day. . Operator: This concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems 1Q 2026 Earnings Call and webcast. [Operator Instructions] I would now like to turn the call over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead. Peter Welburn: Thank you, Carly. Good morning, everyone, and welcome to Pegasystems' Q1 2026 Earnings Call. Before we begin, I'd like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts and similar expressions are intended to identify these forward-looking statements. These statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they're subject to certain risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Factors that could cause such differences are described in the company's press release announcing our Q1 2026 results and our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, as well as other recent SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements as there can be no assurances that the results contemplated will be realized. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, non-GAAP financial measures discussed on this call should be considered in conjunction with and not a substitute for our consolidated financial statements prepared in accordance with GAAP. Constant currency measures are calculated by applying the March 31, 2025, foreign exchange rates to all periods presented. Reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems. Alan Trefler: Thank you very much, Peter. I've just gotten back from a few weeks on the road across EMEA and the U.S. and including an AI conference last week. And it's interesting because I think we're pretty practice at separating it from what's real, but there is a lot of confusion out there. Nonetheless, I'm hearing consistent themes from leaders of clients and prospects and partners. In a world of constant disruption, clients want and need innovation without sacrificing reliability. They want solutions to reimagine how their businesses work while still running them predictably and delivering measurable results. This means platforms architected for scale, interoperability and continuous change, where AI is governed, explainable and harnessed in workflows rather than bolted on. That's what Pega provides, a harness for enterprise AI. Blueprint to help reimagine how work should run and have people rethink their businesses and then the Pega platform to operationalize it with confidence and evolve it as regulatory demands evolve. There's a lot of noise about the future of the software industry itself, and it's creating some real confusion and some real moments of doubt and bias. Some investors I've met aren't sure what the future looks like and are even questioning the long-term viability of enterprise software vendors. But we think AI will be good for some and bad for others. And for Pega, it will be good. The reality is that enterprises don't succeed based on the alternative of coding fast using AI. They succeed based on whether they can design the right outcomes, execute them predictably and evolve safely over time. The assumption that AI-generated code can replace architecture is backwards. In mission-critical enterprises, AI increases the value of platforms that are architected for predictability, governance, interoperability and continuous change, and that's us. When outcomes matter with customers, regulators and systems that must evolve for decades, AI-generated code still needs structure. Certainly, for the types of things we do, we have very small things. You can just bind code together. But AI doesn't replace the need to have a business system. Alternatively, if people are using AI to just dynamically reason each process over and over, what we're seeing that's now running up costs and giving nondeterministic outcomes. At the moment you weaken your enterprise platform, you make your whole business weak. Putting AI in the middle in an ungoverned way, that's, I think, just a recipe for disaster. So whether you use AI to generate code that you want to be able to orchestrate and pull together, whether you use AI to be able to run or handle certain parts of your business where you want the creativity of agent-to-agent interactions or whether you want Pega, or whether you want these AI to be able to pull together and orchestrate multiple business functions with a harness like Pega driving that. In all of those cases, Pega adds tremendous value. So let's talk about how mission-critical enterprise software is built. Enterprise applications has always been around a continuous life cycle regardless of technology. It's not a single build moment. You need to design and align on what the software must do and how it must perform. And that design really can involve collaboration for many parties and having a collaborative environment like Blueprint that brings the power of the Internet, the power of Pega best practices and the power of a customer and/or partners thinking all together in a way that they can understand the experience and improve is absolutely central to get it to a great outcome. You got to build it. And there are lots of ways to build it, but the great news about something you've done in Blueprint is basically both. You need to be able to execute or operate it to run it at scale, secure, make sure that it's performance that's being watched and managed. And with Pega Cloud, which you'll see is really, really continuing to grow beautifully, we give our customers a price to execute that is without parallel. And then you need to be able to evolve it and respond to change if the cycle starts again. And this cycle is high stakes, and it's absolutely critical to get businesses not just what they want to get done in 2 weeks or 4 weeks or 6 weeks, but to get them to operate over the years of the business. The Pega model, which is at the heart of the Pega system is the key to most of these key factors. It's the same that lets you design it, let you collaborate, it makes the build trivial. It actually executes it and orchestrates the AI. And best of all, it lets you go back to it and have a structure that you can look at, you can understand and you can direct change from. And that ultimately to us is how this life cycle operates in this new AI orchestration age. While LLMs dramatically accelerate the build, they don't replace these other key factors nor are they going to be able to. That's why clients see Pega. Some people are going, well, why don't we just get software. And certainly, AI can generate code quickly. But prompts to code alone falls short. It doesn't tell the enterprise what should change. And the gap we have isn't coding speed. It's understanding what's there and making sure you don't accidentally change something with unintended consequences. When you're operating at the speed of the prompt, it's actually easier to do that, not harder, particularly if you haven't put out a nice solid architecture that makes what's going on visible. Now we do want it to some people who say that they believe in AI-only execution. Why do I need a workflow engine at all? Why do I need a harness at all? Why don't you just simply turn everything over to general purpose AI agents and manage it and just have, say, a control power that watches what's going on and reports out and keeps things in line. But I'll tell you, this great systems that are difficult to test, expensive to run and nearly impossible to evolve safely. LLMs are incredibly sensible, effective to even the tiniest bits of additional data. And a new version of the LLM, and let's look at how quickly they're coming out, can often behave differently from the one you used just the day before. I think it's safe to say that for many kinds of work, in provision, in propagation is not a reasonable business strategy. People want predictability and reliability. But the other thing which really broke last week is that this approach to AI reasoning is becoming cost prohibitive. I hear growing discussion about the cost of GenAI and how teams are bouncing between token matching in which they try to tell the team to use as many tokens as possible to rationing tokens to usage caps to supplying bills. The concerns are real, but they reflect the misapplication of AI using the wrong AI at the wrong time. When you ask GenAI to reason and run time over and over, again, for processes you've already validated, every interaction becomes a new experiment and consumes tokens. You end up paying repeatedly for the same thinking, which is expensive, unpredictable and hard to scale. Instead, do what Blueprint AI does, do the super heavy reasoning at design time, where GenAI can brilliantly explore options, math work for close, let you collaborate and pressure test decisions. Then use the right AI for the execution, focusing on consistency and speed. Costs become predictable and value scales with governance. GenAI isn't expensive, but misapplication is, and the smart organizations will stop paying the LLM to relearn their business every 5 minutes. Success in the enterprise doesn't come from AI reasoning everything on the fly. It comes from executing redesigned work, reimagined work within clear governance structures. Our architecture uniquely allows enterprises to design intelligence into how work gets done, not bolted on afterwards. Now since we last spoke, we introduced new vibe coding tooling into Pega Blueprint. And this combines the speed of AI augmented design with security and predictability that Blueprint gives. You can try it out on Pega.com/Blueprint. Remember that Blueprint facilitates the reimagination of critical work, not just the development of applications. And that reimagination goes beyond process alone. It includes redefining roles, decision rights, skills and experiences. AI can be applied intentionally to these rather than accelerating what already exists. Users interact with Blueprint designs in natural language now, describing changes by typing or speaking. And the result are enterprise-ready governed workflows. We received continued validation of Pega's leadership across the industry from clients, partners and analysts who see and work with Blueprint AI. Recently, Forrester named Pega as a leader in customer service solutions, recognizing Pega Customer Service, Pega Blueprint and Pega Process Mining for automation and agentic capabilities. So we're also winning awards for our software. We've already this year received 4 awards for innovation related to how we're leveraging AI, including a Product of the Year award. Now we love receiving awards for our work. But personally, it's even better seeing our clients win awards for the work that they do with our software. Just last month, the National Health Service, which provides 24-hour digital and telephone-based health service to Scotland's 5.5 million citizens, received the public sector award for work leveraging Pega software. These sorts of recognitions reinforce our strength and the need to be able to orchestrate complex service journeys and apply AI predictably. Now this is not theoretical at all. If you take a look at how this is playing out, we recently had one of our customers, Proximus, Belgium's largest telecommunications operator, use Pega to modernize a mission-critical B2B installations application, moving from a fragile legacy tool to an orchestrated cloud-ready solution. They built their first prototype Blueprint in 15 minutes and went live in weeks. And numerous other great names, [indiscernible] Vodafone, National Australia Bank have really been able to drive change include a redesign and include extensive automation, all AI-powered. I love the customers are excited about this and that they're going to be coming to PegaWorld in quantity to talk in detail about what they're doing. And these same stories that you just heard and others will be shared to PegaWorld in June in Las Vegas because the way that I think we all learn is by seeing what other clients are doing. And it is such an honor and it's wonderful that customers are willing to come and do that. It's from June 7 to 9, and I would say it's a must-see event, a chance to interact with thousands of transformation leaders from around the world and see incredible new developments at over 200 different AI-powered demos. We have these exciting keynotes lined up with nearly 100 more customers from 60 organizations presenting detailed breakout sessions. MetLife will show how a highly regulated insurer moved from AI experimentation to AI at scale. Unum will discuss large-scale legacy modernization, leveraging Pega Blueprint and AWS transform to rearchitect decades of legacy core system. And I would say that what is also exciting is the breadth of industries. Wells Fargo will talk about how they highlight AI-driven decisioning across billions of customer interactions. So we're going to have great customer stories, but I'm also going to tell you that this year, we're going to have a tremendous product agenda that we're going to be releasing because this is going to be a very substantial year for the product. You've already seen what Blueprint has done. And Blueprint AI has fundamentally changed the upfront design and the reimagining of how people should work with systems. What we're doing this year and what you'll see us be able to show at Pega is how Blueprint AI is moving into the entire development and support suite, so that, that interface, that AI-driven guidance and that power will operate from the moment of visualization and inception that you get from Blueprint, all the way through to how you complete a system and how you support a production system. I think this is the most consequential change to the underlying technology that I have seen and it's there to support the Agentic process fabric technology we have that then allows all of your Pegasystems and even non-Pegasystems to be able to operate as a connected orchestrated network for the next generation of technology. I think only Pega has the efficient runtime intelligence, the deep design time skills, the experience with these key workflow harnesses and is going to be able to put in your hands the way for you to make our harness yours. We look forward to continuing the conversation, and we can continue the investor conversation on Monday, June 8, at noon in Las Vegas, we're also hosting an investor session. So thank you all. We are working hard. And for the numbers, let me turn it over to Ken. Kenneth Stillwell: Thanks, Alan. As discussed last quarter, the rhythm of our business was expected to return to a more typical seasonal pattern in the Q1 of 2026. We entered the year knowing the first quarter would also be a challenging comparison given the $60 million of net ACV add in the first quarter of 2025, which was very much an outlier and roughly 20% higher than any other quarter last year. It's no doubt, and it's an interesting start to 2026. With all of the AI experimentation that Alan mentioned, the federal government shutdown, 2 wars, both in Europe and in the Middle East, clearly puts pressure on the entire environment. So it's not surprising as well that Q1 did have a lower growth rate. We continue to believe in the durability of demand for our platform, especially for our cloud offering. Pega Cloud in the first quarter of -- Pega Cloud revenue in the first quarter of 2026 increased year-over-year from $151 million to $205 million and also grew 30% if you look at that Pega Cloud revenue growth on a trailing 12-month basis. Pega Cloud ACV grew 29% year-over-year as reported, and 27% in constant currency to just over $900 million, an over $200 million jump. It's very exciting to see Pega Cloud ACV now rapidly approach the $1 billion mark. As we've said, ACV growth and mix is reflective of the evolution of our business. Pega Cloud ACV now represents about 56% of total ACV. Our focus on growing Pega Cloud puts pressure on both term and maintenance ACV as well as revenue. Naturally, as Pega Cloud ACV continues to grow as a percentage of overall ACV, it will impact near-term and in-quarter revenue for term and maintenance. Moving to free cash flow. Free cash flow reached $207 million in Q1 of 2026, marking a strong start to the year. As a reminder, our free cash flow is primarily driven by our operating efficiency and our ACV growth, which serves as a proxy for subscription billing growth. We remain confident in our strategy to drive free cash flow and ACV growth for several reasons. First, expansion within our existing client base remains a core go-to-market motion with our sales team continuing to successfully cross-sell and upsell into our installed base. Second, we're accelerating new logo pipeline build with Pega Blueprint as a key enabler. Blueprint makes it easy for sellers to showcase the power of the Pega platform while enabling buyers to reimagine their legacy mission-critical workflows. As a result, Blueprint is already driving meaningful pipeline creation across both new logo and existing clients. We expect this new pipeline will begin converting into ACV in the second half of the year as deals progress through the sales cycle with a faster motion, thanks to Blueprint. This is also an unusually high level of new logo pipeline growth, which is just awesome to see. Third, we're already seeing early proof of Blueprint's ability to accelerate time to value. Last month, I met with a large healthcare organization. This existing client of ours use Blueprint to design and build 2 new applications, one going live in 92 days and a second in 70 days, a strong example of what our platform can do powered by Blueprint. Fourth, we're seeing renewed interest in legacy transformation as more enterprises look to leverage AI and the cloud to modernize their operations. Blueprint is unlocking these legacy transformation opportunities by simplifying how clients reimagine and redesign their workflows to drive growth, reduce costs and improve customer experience. Together, Blueprint and Pega Infinity create a powerful combination, Blueprint to design and reimagine the work and Infinity to run it, reinforcing Pega's position as the platform of choice for large-scale mission-critical workflow transformation. Unlocking legacy transformation is just one way Blueprint is transforming our business. Early signals show Blueprint is accelerating pipeline growth and helping us capture new clients. For example, in Q4, we signed a new financial services logo, leveraging Blueprint's new legacy transformation capabilities with plans to migrate more than 30 applications from a legacy application platform to Pega Cloud. Blueprint is also driving meaningful go-to-market efficiency, where deals once required a full bench of supporting roles, today, our client executives can now cover far more ground with our clients when leveraging Blueprint. Finally, we're seeing R&D benefits as well. Our new Agentic engineering approach will enable us to execute our product road map more efficiently, allowing us to increase our pace of innovation. Since Blueprint runs on Pega Cloud, we can deliver new features and capabilities rapidly to clients and prospects. We're excited to share more about this new approach with you at our upcoming investor session in June. Moving to capital allocation. We continue to maintain a balanced approach, prioritizing investments in long-term ACV growth while returning capital to shareholders as appropriate. In Q1, we returned more than 80% of our free cash flow to shareholders, repurchasing 3.5 million shares for $167 million under our repurchase program and paying $5 million in quarterly dividends. As of March 31, 2026, our shares outstanding decreased from the end of 2025 by 1.6 million shares. Looking ahead, we will continue to opportunistically return capital while maintaining strategic flexibility. Our buyback reflects our unwavering confidence in the durability of our cash flow. As you know, these buybacks are accretive to earnings and also combat stock-based compensation dilution. They are made possible by this strong and durable cash flow. Next, a few thoughts on modeling. We provide full year guidance at the start of the year, and we typically do not issue quarterly guidance or update our outlook during the year. As I mentioned earlier, our renewal portfolio is back-end loaded this year, which means we expect to have higher level of business activity in the second half of the year. The shape of our pipeline also influences the timing of term license revenue, which is largely recognized upfront in the quarter a client contract is renewed. As a result, we expect term license revenue to be more heavily weighted towards the second half of 2026. At the same time, our focus on driving Pega Cloud ACV growth also puts pressure on term and maintenance ACV. The success of our Pega Cloud sales efforts is already reflecting this shift, and we expect it to continue as Pega Cloud ACV scales to 75% or more of our total ACV over time. Put simply, a portion of our Pega Cloud ACV growth is displacing term and maintenance ACV as intended, and we expect this dynamic will persist as we march toward our cloud mix goal. In addition, we're beginning to see a meaningful change in how enterprise clients are thinking about AI. The economics of AI are changing. Frontier models providers are tightening monetization. And in the era of low-cost subsidized all you can use experimentation seems to be coming to an end. As a result, AI usage is increasingly treated as what it is, a true operating expense. Every API call must be justified with clear business value. Given this change, buyers are moving out of the experimental phase of AI into the ROI stage. This transition to profitable AI plays directly to our strengths. Pega has always been focused on delivering measurable business value. AI is not just about efficiency. It's about generating tangible returns, and that's exactly what Pega is built to do. Importantly, our pricing model is aligned with the shift toward outcomes. Pega prices based on cases, which is a measure of the amount of work that the Pega platform executes, tying our economics directly to the business value delivered rather than on users or seats. This stands in contrast to many model providers where pricing is driven by usage metrics like tokens or API calls. As AI costs come under greater scrutiny, we believe our outcome-based pricing model provides a clearer and more efficient path for clients to generate and measure return on their AI investments. As Alan mentioned earlier, we're holding our annual investor session at PegaWorld on Monday, June 8, at the MGM Grand in Las Vegas. During the investor session, we look forward to providing you with additional color on several of the topics that I discussed today. We also plan to provide more insight into how we envision clients driving legacy transformation with Pega and how we're progressing against the long-term targets we laid out last year. We also plan to give you insights into several key Blueprint metrics, including the impact of pipeline build and deal progression and what is most interesting of some of the metrics around new logo momentum. In closing, we look forward to seeing you on the road at conferences and non-deal roadshows over the next few months and at our investor session at PegaWorld in June, which we encourage all of you to join us. Please also note that we plan to participate in the NASDAQ opening bell ceremony on Monday, July 13, at NASDAQ Marketplace in New York to celebrate the 30th anniversary of Pega's initial public offering. With that, operator, please open the line for questions. Operator: [Operator Instructions] your first question comes from Alexei Gogolev with JPMorgan. Alexei Gogolev: Ken, would you mind providing a bit more color on acceleration of ACV growth through the year? I remember you talking about client compelling events and renewal cycles driving potential uplift in the back half of '26? Kenneth Stillwell: Yes. So there's 2 different factors to that. One is our renewal cycle is tipped towards the back end of 2026, which is more -- that's more the usual distribution than unusual. But in 2025, that was reversed. There was not as many compelling events in the back half of the year. So that's one factor. When there are renewal cycles, that is typically an event where clients, if they're going to expand their relationship, tend to do it around that renewal cycle. So that's one factor. The second factor is we've put a renewed interest in new logo focus with Blueprint. And as we build pipeline, that will naturally grow and the conversion of that pipeline will grow the opportunity tends to sit towards the back end of the year as well. So there's 2 different factors that really tip our business momentum towards the back end of the year, which is very different than last year where we had a very, very unusually tipped towards the front end of 2025. Alexei Gogolev: And Alan, in the past, you spoke about AI adoption disconnect. Can you talk a bit more about what you're seeing in terms of the narrative in the industry and update us on the trends from Q1 in terms of agentic adoption? Alan Trefler: Yes. I think that there's some things that looked at properly, you have to really laugh or cry as the case may be. I talk to people -- I spent my whole time out in the field talking to people about what they're doing. So much going on when people talk about LLMs, people talk about the word agentic, people talk -- we talk a lot about LLM technology as we make very heavy use of vector databases, which is a way to use LLM technology but to do it in a very cost-effective fashion. And what I encounter is there are some people who actually article about this, where they think that they will be at their most successful when they use the LLMs for as much as possible. And I'll be honest, that's just crazy. The LLMs do magical things. But what you want to do is use them for the right things, not for the parts of this problem that are statistical and not for the parts of the problem that should be planned out in advance. The be planned out with an LLM that the blueprint does, but should not be just planned and wean and pay this incredible tax for rethinking what you already know. But some people are just so enamored with the LLMs that they're in love with it. And I think some of the enterprises out there have told their teams, hey, we just want you to use this stuff. And I can appreciate that if they're trying to get people to understand it, that's not going to be remotely what ends up sticking, not just cost, but also lack of reliability. And it's like most ungreen thing you could do in terms of the electricity use and all of that. So I think understanding proper use of LLMs is absolutely key. And to be honest, I think we've nailed it. And what I see with the others, structurally different path in just about all cases. Operator: Your next question comes from Raimo Lenschow with Barclays. Raimo Lenschow: I just wanted to stay on that new logo focus that we have, like if I look at you guys over the years, you have been really the high-end provider, very good for complex scenarios, et cetera. But on the new logo side, that was always like a bit of a question. You had a really big installed base. Talk a little bit more about that new focus on new logos. I can see how Blueprint is really going to help you here, but I just want to understand a little bit better on that one. And then the -- Ken, one for you also on the maintenance side. I hear you that the push towards Pega Cloud will impact maintenance. The numbers we saw this quarter, are they indicative of what we see for the year? Or is that -- was there other factors in Q1 that we should be aware of? Kenneth Stillwell: I'll touch on the maintenance one. I think you will see, as we continue to move towards Pega Cloud, you will see maintenance go down over time, and you will see term license be flat to down as well. Even though some clients will still continue to run on client cloud, I think you will start to see that shift, not -- certainly not 100% at any point in the near -- in the foreseeable future, but it will move in that direction. I'll touch on the first question that you asked because -- so the way we think about it, and this is just a framework. If you look at a company like Gartner, they have something like 15,000 clients. I think Forrester has slightly less than that, but still many thousands, probably approaching 10,000 clients. The types of companies that would go and seek advice from a Gartner or Forrester clearly have enterprise spend of some level of size. We believe all of those organizations are an opportunity for Pega. There are others that don't actually subscribe to Gartner as well. But we think the universe is very large. We're not talking about going down to tiny organizations to get that opportunity. There's just a lot of companies that we've not historically sold to. It is a newer motion for us, but not a brand-new motion. We have always added a few new logos. It's just that Blueprint completely changes the dynamic of how fast we can engage with a new logo and the speed at which we can validate if there's interest. And that was the reason why we never really pushed hard on that in the past because we didn't -- in some cases, it might be a 2-year sales cycle to see if there was momentum. And that was the reason why we were very thoughtful about new logos. With Blueprint, that really changes the game. Alan Trefler: Yes. And Blueprint is a great starter, but the thing for that. But a couple of other things we've done that also changed that game. First, Blueprint let you design things that you would have had to be a lead system architect, have had years and decades of Pega experience and some to really do. And now it just happens. We've got a lot of that expertise built in. And every month, we build in more. So we've radically changed the training required curve. We've radically changed the expertise required curve. And candidly, all of these also adjust the cost curves as well at the same time that the improved speed of delivery. We've added this Socratic education, which is a way that we can now make it easier to teach people about their gaps as opposed to having them to go to big formal courses. So there's been a huge simplification. And when we think and we talk about how we want to go from the like 850-ish companies that we would really sell to and have as customers in double, and we're going to continue to really try to do great work for them there to, say, 10,000 as a much more easily acceptable population of multibillion firms that we can go after. We now have a tool that's well equipped for that. And between the fact now that it runs on Pega Cloud and that Pega Cloud is tied in to our predictive diagnostic cloud, which does a lot of self-maintenance, a tremendous amount of making sure performance runs, handle scalingfully on Kubernetes. We're just in a position where we can really go after this. So it's not just a choice to go after, it's also years of product evolution and business evolution that has made this possible. Operator: Your next question comes from Steve Enders with Citi. Steven Enders: To see everybody last week at our conference. I guess I wanted to start on kind of the AI discussion and the focus on becoming a harness for enterprises. I guess I want to understand a little bit better about maybe what this means candidly for your customers in terms of use cases that you see as you kind of try to become that harness layer, kind of how you're thinking about that adoption curve within some of these bigger customers that you have? Alan Trefler: Yes. What I see is that customers, think of Proximus as we just mentioned, think of some of the others look to the use of our AI powered by Blueprint, but still able at critical points in the workflow to call even a non-Pega agent. The idea is that we can actually use our agents, customers' agents, but it all is in the context of a business objective that they were able to think out and design. That, I believe, gives the customers a level of reliability and auditability that they can't come close to with any of the other alternatives there. So I see customers who take the moment to understand that they don't want to read everything all the time. You guys probably all use Claude and Gemini and OpenAI. I was using Claude this morning, putting some questions in, and it starts explaining to me that it's reasoning. It uses terms like frolicking, canoodling. Well, when it's doing that, it's feeding itself tokens. I mean we're paying for these journeys of intellectual research that it's doing. I am thrilled to do that when it's not the exact same stuff that was done that morning. And people who think that they're going to handle credit card disputes by turning them over to a LLM to figure out the detail and nuance for each individual customers are missing the chance to bring stability and efficiency into those operations. And when we explain the harness concept, I think customers really get that. Kenneth Stillwell: I'll just add one additional thought there. If you think about the value that Alan mentioned of the concept of Pega functioning as a harness, you got the efficiency, you've got the risk management that Alan mentioned. You also have the resiliency aspect because we're using multiple models and being able to actually use the right -- the models are -- they have variability in their performance and their speed in the context. So I think we're able to really create this best of all of the models in terms of leveraging it when providing that value at design time and selectively at run time. Steven Enders: Okay. That's helpful context there. Maybe just on ACV dynamics here. I think it would be helpful to kind of know kind of what the net new ACV was if we look at kind of forward FY 2025 constant currency, like what that was for the quarter? And then I guess, on the levels that came in this quarter, I guess, did this kind of come in as you were expecting? Like was that the level you were assuming when you guided for the year? Or does this maybe change how you think about what the ACV growth for the year will look like? Kenneth Stillwell: Yes. So we -- I'll talk about Q1, and I'll also actually mention kind of the first half that we had talked about at the beginning of last quarter. First half last year, we had a significant amount of net of -- everything I'm saying is in constant currency, Steve. We had a significant amount of constant currency growth last year in the first half of the year. That was unusual and will not -- I mentioned will not repeat this year. We were going to be more back-end loaded. So the constant currency growth in Q1 was somewhere around $20 million. I would say it was in a few million dollars of where I thought it would be. It's probably a couple of million dollars lower than what I thought it would be, but pretty close. It was, I would say, more of a rounding error than something that was significant in terms of the growth. And I would say Q2, once again, we don't -- Q2 is not a big renewal quarter either. It's really Q3 and Q4. So that's -- I think the year is not that different than the way that I envisioned it playing out in terms of just the numbers. And we knew that cash flow was going to be stronger in Q1 because Q1 is typically a strong cash flow quarter. So I would say kind of across the board, it wasn't dramatically different than our plan. Operator: Your next question comes from Rishi Jaluria with RBC. Rishi Jaluria: Maybe 2 for me. Ken, let me start with you. In your prepared remarks, you talked a little bit about some of the macro or at least the macro backdrop that we've been seeing and obviously, with everything with government and geopolitical tension and obviously, the prevailing AI side. There's a lot going on there. Maybe can you be a little bit more or expand a little bit more in terms of what have you seen so far this year as a result of kind of all of these? And let's put AI aside for a second because obviously, we spent a lot of time on that. But very specifically around some of the geopolitical stuff, government, et cetera, how has that impacted your business so far? And as you think about things going forward, I know you're not updating guidance, and that's in line with kind of your historical practices. But just how should we be thinking about that potential impact on your business for the rest of the year? And then I've got a follow-up. Kenneth Stillwell: Okay. So once again, I'll follow your lead and leave AI off to the side. I think on government and the government shutdown and some of the changes the government has made, there were a few deals and a renewal or 2 that actually did slip out of Q1. We don't believe that those are like lost deals. It's just more that the process by which we go through like procurement changes in the government definitely has caused a little bit of confusion in Q1, specifically more in March. So that's -- I don't suspect that will extend for a very prolonged period of time, but probably Q2 might still be a little bit of confusion as like GSA starts to take deals more directly, et cetera. So that's -- there's no doubt that there's some backlog of work that needs to process through the government that happened in Q1. On the war, I think that -- look, the war is -- 2 wars, by the way, not 1, both of those wars are very impactful for Europe, right? And 30% or so of our business comes from Europe. So I think that it would be accurate to say that there are people -- there's a potential for a derisking that would happen just because of the impact of higher oil prices, temporary inflation, goods flow being disrupted, et cetera, into not just the Asia Pacific area, but also parts of Europe that are dependent on those same regions. So I think government, yes, some delays. I think that will probably clean up through the rest of the year. The war and how long that stays outstanding will has a risk of hurting the spending environment across IT and all and everything else. I mean, just because of the disruption in supply chain. So -- and we started to hear some conversations that I wouldn't say that I could point to deals in Q1 necessarily, but I think it is definitely something we're watching. Alan Trefler: I think there's been more of a push to go for some of these "sovereign clouds" which AWS, for example, is working on one. But just having that as an extra complication just has the ability to drag things out. Kenneth Stillwell: Yes. Now thankfully, we have cloud choice, and we have the ability to work with different hyperscalers in regions. But there's definitely some tension between U.S. providers and other parts of the world. And we just have -- we have to do our best to manage through that as this war continues -- these wars, I should say, continue on. Steven Enders: Okay. That's very helpful. And then maybe, Ken, I wanted to expand, and this is for both of you. Ken, you talked about this idea of maybe the kind of era of subsidized unlimited tokens might be doing. And I think everyone's experiences with Claude and the likes has kind of shown that as they've been a little bit more -- at least throttling some of the usage a lot. And I think that makes sense. But just to maybe expand on that, can you talk a little bit about as that kind of trend plays out, number one, what does that do to your own cost structure with Blueprint and where you are using the LLM for the design and ideation side, not necessarily in run time as you've been speaking about? And then number two, does that maybe change the nature of some of the conversations where maybe in the past, customers have said, hey, we're going to try AI for everything, whether it makes sense to do it or not or use ours for everything, whether it makes sense to do it or not. And maybe that can change the nature of conversations and has that been showing up yet? Alan Trefler: Yes. I was really seeing those last week actually after Anthropic announced its price changes. It's going to be fabulous for us because Blueprint -- yes, Blueprint is as consumptive as anything else. But when you design something wrong once and run it 200,000 times, the design cost is not really relevant. So that's really nailing it. I do think it's great that the tokens have started to approach closer to reality. They're still very, very heavily subsidized. And I think that subsidy will persist because people are trying to push the numbers up to one of you guys take them public. Operator: Our next question comes from Devin Au with KeyBanc Capital Markets. Devin Au: Maybe just for Ken, on the first one, I know you mentioned some geopolitical disruption in EMEA that's ongoing. But when I look at your revenue performance in the U.S. and APAC in the quarter, it seems like both regions were down quite notably. I know revenue isn't the best metric to assess the business quarter-over-quarter, but I would love to just get some more color on kind of what drove the downtick specifically for those regions in the quarter. Kenneth Stillwell: That's solely just the timing of term license revenue, Devin, and how that compares year-over-year and quarter-over-quarter from Q4 and Q1. In terms of the business activity, I don't believe we've seen any impact kind of bookings or new business in either of those regions. My comment was more -- it would be reasonable to think they would be under pressure. But we have -- the revenue is just related to term license revenue. It's not structural. It's just the timing of accounting. Alan Trefler: And we hate that revenue behaves the way it does. Nothing would make us happier than just be able to report everything on a recurring rate. Devin Au: Understood. Yes. I appreciate the context. And then just a quick follow-up. I know you've kind of talked about a little bit on your remarks on the new bide coding capability that got released to Blueprint. I would love to just speak to -- for you to speak to how kind of usage engagement have kind of trended since that release came out for Blueprint. I mean has that -- have you seen any sort of early signs or signals on greater expansion activity from users using that vibe coding tool? Alan Trefler: Yes, we're getting great comments on it. It's right on the face of Blueprint. There's a little panel on the left of Blueprint. It's an AI assistant. And on any of the pages, if you say, hey, add an insurance policy to this travel request, it will design the data structures and the fields and everything right into the Blueprint. And so you don't have to get it right upfront. Peter would be thrilled to get all that to you. But anybody can just go on to do it. It's absolutely central to what we're doing and great feedback. Operator: Your next question comes from Patrick Walravens with Citizens. Patrick Walravens: Great. Alan, 2 for you. So you talked in your script about the long-term viability of enterprise software vendors and you said, well, we think AI will be good for some and bad for others. What is it going to be bad? That's my first question. Alan Trefler: Well, we've seen it be really bad for it. There are some products that generative AI has just made a feature. For example, we used to -- there was a company we used to license their document processing software. And if a customer wants to, for example, peel feels off of a physical document, they're really good. Now you can just do that by having the customer call the LLM. And so there are what I would describe as point features that massively changed or gone away. I think that there are also -- a lot of the low-end workflow companies, guys like Asana and Monday have really, I think, suffered in the market. They were called work management companies, which was a moniker sometimes applied to us. But I would tell you, we never really competed with them because the types of things we do are so fundamentally different. I think the types of things they do, which often tend to be kind of a small little system for a 10-person work group are going to be the types of things that somebody might be able to just code. Ramping that up to do work across even a 500-person company a 5,000-person company, which is our bread and butter. I think AI just adds a tremendous amount of value to that and doesn't really open us up to risk, as I said. Steven Enders: And then the second question is a little out of left field, but I'm sure you have a point of view on it, and I am feeling it fits into your remarks somewhere. So SpaceX buying Cursor or maybe buying Cursor with -- through $60 billion with a $10 billion breakup fee. What does that tell us about what is going on in the AI world? Alan Trefler: I think I would have to rely on guys like you to tell me, look, I think there are so many -- last week, I was driving up 101, and there was a billboard after billboard of AI company after AI company that I have not heard of many of them. We've got this enormous, enormous collection of code writers, some of whom have become instant unicorns. And what that tells me is AI is in parts of it are in the bubble phase, and that will all shake out. Whether SpaceX makes Cursor one of the few survivors, there'll be a couple of survivors, whether Claude go kills them all, I don't know. I'm not fighting in that brain. So I have no interest to get thrown into it. Kenneth Stillwell: I'll just give one little point that we heard last week at the AI conference we were at Pat, which is Cursor is sort of a harness, right? And so I do think that maybe [indiscernible] for programmers. But I do think it kind of like suggests that like the AI models really need to be governed in different ways for different use cases. Alan Trefler: So when I use the word harness, which is the word somebody else used, but I kind of like it, it's really thinking about being a harness at run time. It is a hard move, but it's a harness design time guys decide, make sure you think about the design the right way, things in the right structure in order, et cetera. But I think you need a design time harness and a run time harness. And I would agree, Cursor is a good design tool. Kenneth Stillwell: It's guardrails for the AI models, right? So I think that's the one thing I could read into that. Operator: Your next question is from Mark Schappel with Loop Capital Markets. Mark Schappel: Ken, a question for you. Could you just talk about what portion of your pipeline is now, say, AI-driven versus more traditional platform ACV? Kenneth Stillwell: So I think I'm going to reframe your question because I think what you're suggesting is how much of our pipeline is led by Blueprint. And I would say almost all of our new pipeline growth is connected to a use of Blueprint in some way, which I would put in the AI camp. In terms of our AI accelerators that we have, like we talked about like Knowledge Buddy, Coach, et cetera, some of the specific run time AI accelerators that we have, we typically think about those as a premium markup, so to speak, on the value of activity that happens through the platform. But if you want to think about all of our new pipeline that's been added, certainly, any new logos, any new workflows, those are led by Blueprint and led by Pega AI. Mark Schappel: Okay. And then, Alan, I was wondering if you could just comment on how the -- how demand for the legacy scale modernization programs you're seeing is evolving, especially in the government and regulated industries. Alan Trefler: So we're engaging. It's slow, but we actually have a number of these legacy transformation projects going on now. And I'm pretty excited about it. It's such a big, big, big market. So we're building up our expertise. We're getting some good examples. And when you come to PegaWorld, you'll be able to see some pretty amazing things in support of that. Operator: This concludes the Q&A portion of our call. I'll now turn the call back over to Alan for any closing remarks. Alan Trefler: Thank you very much, everybody. We're working hard. We appreciate our investors. And I really, really hope to see all of you at PegaWorld. You should fire up your AI agents and have them book your reservations from June 7 to 9 in Las Vegas. And as Ken -- as we mentioned, on the 8th, we're going to have a very, very good and very important investor session, and we have a lot of new things to show. So it should be awesome. See you there. Thanks. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.