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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.
Gustaf Meyer: Hello, everyone, and welcome to today's Live Q with Senzime. With me here, I have the CEO of Senzime, Philip Siberg. First of all, we will hear a presentation from him. And after that, we will have a Q&A session. And also, on our website, you can see that you can send in questions to the Q&A session. But first, we will hear the presentation from Philip. Philip Siberg: Okay. Good morning, pleasure to be here. I am pleased to announce the Q1 2026 report from Senzime. So just to start off with kind of a high-level summary. So Q1 2026 was a little bit of an outlier quarter. We reported a temporary dip on our growth journey, yet, at the same time, we reported strength in margins and good cash flow. And the full year targets remain intact. What kind of stuck out in Q1 was slower sales in the U.S., specifically of closing new monitor deals, and mainly driven what we've seen as delayed purchasing processes and a year starting with a bit of macro concerns in the U.S. Nevertheless, we reported 40% growth in our sensor sales, calculated in constant currencies. Our underlying gross margin continues to improve very nicely. And we also reported a good traction on our operating cash flow. So all in all, I remain confident in our full year targets despite the growth dip, and I will explain a little bit more on the background. So let's deep dive a little bit specifically on the U.S. market that I mentioned. If you look at the U.S. business, it grew 11% in local currencies in U.S. dollars. Specifically look at disposables, the sensors, it grew at 55%. But then we were affected by, of course, the strong Swedish krona and the weak U.S. dollar. So versus the first quarter of last year, it was about 15% lower. So this ultimately led to our reported sales decreasing with 5% in the U.S., which was about SEK 2.5 million (sic) [ SEK 0.75 million ]. But as I said, the growth, I would say, was predominantly delayed because of TetraGraph deals that were delayed and many of them moved into the second quarter. We do not see any of our deals that have been lost to competition. On the contrary, we've been secured with a number of verbal commitments, and we know that they are in the pipeline to close as they come. So during the quarter in the U.S., we shipped out 246 TetraGraphs, and I will tell you a little bit more about a new business model that we've launched as a complementary service. And of those 246, 120 of them were part of our new TetraGraph-as-a-Service model. So if we look at the TetraGraph-as-a-Service, this is a business model that we've introduced in the U.S. It's a little bit of copying what's been common typically in the robotic surgery world. So what we do is that we provide the TetraGraph monitors on subscription. So we own them and we place them with hospitals. And then we charge customers with a premium on the disposables that are used. So for hospitals, this is a compelling rationale, because it shifts kind of the capital purchasing process rather to operational processes and costs. So it simplifies and accelerates purchasing processes. And for us what it does is that it shortens sales cycles. The 2 deals that we have secured during the first quarter were closed at about half of the time versus a typical capital purchase. And if you look at the type of deals that we sell to customers, the value for us over time is about 90% of the revenues contribute from the sensors. So by having a variable sensor price, it creates strong margin enhancements for us over time. So the first 2 key wins in the U.S. were to 2 Ivy League hospitals on the East Coast, and we supplied them with 120 TetraGraphs to their hospitals. So we have had a tradition of focusing very hard on the U.S. market, because that's where the conversion to our technology is happening the fastest. This is a map that I've shown before. We've had a lot of announced and big hospital wins over the last 15 months. And if I now start to add up to that one, and I put in -- so what we've done so far this year? And I'm saying year-to-date April. So we've had a number of important accounts. We secured a big hospital extension in Florida. We recently announced a statewide IDN expansion deal. This is to become one of our larger customers with a run rate of about SEK 6 million a year. We announced an IDN entry. So we've entered into one of the largest IDNs in the world, secured a number of hospitals, both on the Central U.S., but also on the West Coast. And there's a huge potential for us to further leverage that opportunity. We've won a very important children's hospital in Texas and the Ivy League hospitals I already mentioned. So just to just give you a few of what's going on in the first 4 months of the year. So right now, in the U.S., we have about 250 hospitals as customers. Okay. So to wrap up the U.S. and try to conclude a little bit and comparing the numbers apples-to-apples. So if you look at what it was last year. So last year, in Q1, that was the time when we rolled out the new next-generation TetraGraph. Quite a few of the rollouts were demo monitors and some were upgrades to accounts we already had. So if I compare that and then I look at, okay, what happened this quarter. So I had my reported sales, and then I had about SEK 2.5 million in currency effects, and on top of that, I had the TetraGraph-as-a-Service where it did not have a capital revenue, rather the long-term enhanced margin revenue on sensors. So if we look at that all in all, and just compare these apples, just to explain, there's about 6.5 million, the ratio of difference here. So the underlying business in the U.S. is still moving in the right trajectory. Okay. So let's move on and look at, in general, the global business. So we continue to grow our installed base and grow our shipments of TetraGraph. So we've shipped over 5,500 TetraGraphs by now. In the quarter, we shipped out 376 in total versus 443 last year. And again, last year was a little bit boosted by upgrades and demo units that came out. If we look at our disposable sensors, remember, this is a razor-razorblade business where each patient connects to a sensor. We continue to grow the sensor business very nicely. We passed the milestone during the quarter of 1 million monitored patients. And this is an important milestone for us. Not only does it help to enhance margins, we get economies of scale, but it also provides kind of the reference base for further growth. So if you look at the rolling 12 months of the sensors, and sometimes go up and down in volume, it's a 66% (sic) [ 27% ] growth. So to sum up a little bit of sales numbers. We've talked about the U.S. here first in line. Europe has had a decent start of the year, almost 60% growth in terms of disposables. We also had a small currency negative effect because of the euro. The rest of the world had a little bit of weaker start of the year, still very strong belief in the opportunities in Japan and South Korea, and we will certainly catch up that during the year. So you can see, if you look at the spread of our business today, U.S. is a little bit less dependent and the sensor sales continue to be very strong as part of our company. Something that was announced during the quarter and that we have preannounced before, but during the quarter, the actual publication of the new pediatric guideline was published. So this is a guideline set that was created by the European Society of Intensive Care and Anesthesia. And really what it says is that children that receive neuromuscular blocking drugs as part of surgery should be monitored using a quantitative neuromuscular monitor and preferably use an EMG-based solution because of the higher accuracy and reliability, and that's exactly what we offer. So the pediatric opportunity is interesting. I mean it is a smaller part of our overall business. I would say it's about 5 million patients a year versus about 100 million in total for adults and all patients. But children are a specific group here. I mean, residual paralysis is common. And with residual paralysis, I mean that they wake up and they're still partly paralyzed. The consequences of this are serious. Children end up in postoperative care and they get all kinds of different respiratory issues. And the issue has been here, lack of available technology and a lack of kind of practice standards. So I think this is a very strong guideline, and we have had the fortune to work with a lot of the guideline authors. We've conducted a number of webinars and seminars, and I believe we have the support to really grow this business opportunity. And to look like where are we in this pediatric opportunity. It has been a small yet important part of our business, but it's a notable number to see that in Q1 -- the number should actually be here 2026, I can see -- we actually threefold increased the sensor units, and we sold 65 TetraGraphs specifically delivered to pediatric operating rooms. So definitely a trend shift here, yet from small levels. Another important news piece we had during the quarter is that we introduced what's called the TetraCom. The TetraCom is a novel technology that enables physicians and IT personnel to connect the Senzime TetraGraph directly to hospital health records, meaning directly into Epic and Oracle and other types of systems. And we do have a suite of partnerships where you can connect the data through providers such as Philips, Masimo, GE, and Mindray. But with the TetraCom, you can connect seamlessly, wirelessly directly into these systems. So it's a way for us to provide a service and also monetize on the data and the value to the customers. Let's look a little bit more about the numbers. So gross margin, I mentioned initially that the underlying gross margin continues to improve, and it does. So in the quarter, the underlying gross margin was 69.3% (sic) [ 69.2% ]. We continue to improve it versus end of last year and Q1 last year. We continue to have a number of effects on the gross margin that are, I would say, beyond the company's control. We have the U.S. tariffs. They are still hitting us. We will see where that ends up, and we have the currency effect. So we had quite a hit on the currency in Q1. So the reported gross margin was 63.1%. We continue to increase pricing. We are noting U.S. pricing levels now for us increasing. So I continue to iterate that the gross margin will improve over time. If we look at our operating expense level, I've iterated before, we continue to keep it very flat. So we try to grow this business rapidly with a flat operating expense curve. We were actually down 5% versus last year and almost 17.5% versus Q4 of last year. And this is important, because we continue to invest in sales, in marketing, in med affairs, and we continue to do a lot of science to be the industry leader in our field. If we then move down the profit and loss and look at the cash flow. So I think the cash flow stood out this quarter. It improved by 33%. Yes, we are still negative, but as we work diligently on optimizing working capital, we're starting to see that the burn rate is significantly getting down. EBITDA was slightly better than last year. Net earnings improved drastically, which was majority of focus or a result of currency effects. So we had SEK 55.3 million in cash by the end of the quarter, and then we have a credit facility of an additional SEK 42.5 million. So I think we're well funded for our venture. And to comment on the credit facility, this was something we announced in conjunction with our Q4 report, but just to iterate it again, we had a group of key shareholders and a bank, DBT, which is part of NOBA Bank Group, that provided us with a credit facility of SEK 50 million. This is to be used for working capital purposes to give us the flexibility to grow very fast. And there are no warrants, no dilutive instruments or any other type of special conversion rights. We have called for SEK 7.5 million of this, and that was part of a contractual obligation as part of the credit facility from DBT Group. If we look at our shareholder base, if we look at the kind of the top 10, it hasn't changed very much. There are some small changes, but the top 5 shareholders remain very strong and intact. We have 3,600 shareholders. There has been some good trading volumes. So definitely has been shares trading hands. I don't have the specifics of who's been buying or selling at this point. Okay. So a little bit back on the goals and where are we. As I've said so many times before, we're on a mission here to radically build and create the undisputed market leader within quantitative neuromuscular monitoring. We're targeting a very big market. There's a lot of hospitals, and there's a lot of operating rooms left to be converted. And the outlook for our business is that we're going to continue to grow in line with what we've done in the past. So if you look at our full year goal, it remains strong and intact despite this little dip in the growth rate of Q1. And we're going to make this happen by continued streamlining and optimizing the gross margin, continuing to scale down on the operating expense level and continue to grow our recurring base of revenues. So just a minute on what is it we do again. So remember, we have developed -- we're the first in the world to have pioneered a technology, make it available in operating rooms to make sure that people are intubated at the right time, that they get the right amount of these paralytic drugs and the reversals of them, and that they are extubated at the right time. Sophisticated technology. We have over 109 patents now, 40 years of research behind this, but a very smart real-time technology to assess and monitor the level of paralysis in the patient. And this is specifically important in operating rooms where, for example, you're doing robotic surgery. This is just an example picture from a Swedish hospital, a good customer of ours. But what's been seen in published research, if you use the type of technology we have, you can eliminate complications related to these dangerous drugs. And you can actually reduce the amount of these drugs by 70%. So you're not only saving the patient, but you're saving the hospital a lot of money on this. So to wrap up on the key takeaways. I mean, we are in a hyper growth journey. We've had a CAGR of almost 60% over the last 5 years. Yes, Q1 stuck out a little bit, but that curve is going to continue. Operating expenses and margins, we are improving. We're on the path to profitability. There is a strong demand for our products out there. The pipeline is strong. We have a lot going on and I think will materialize, and I'll come back to that. And again, the guidelines are there, the science is there, and the clinical need is there. And we have the people, we have the technology, and we have the funding to make it happen. So join us on our mission as we safeguard every patient's journey from anesthesia to recovery. Thank you. Gustaf Meyer: Perfect. Thank you very much for the presentation. Philip Siberg: Thank you. Gustaf Meyer: So we have received some questions, and I'll also have some questions by myself. First, maybe we can focus on the sales. Came in a bit lower than expected. You also stated that this is mainly due to FX, also a softer U.S. market. You also believe that this is temporary. What kind of arguments do you have for that statement? Philip Siberg: Yes. I mean, like I said, it was an outlier, a little bit of kind of a onetime quarter. I think we saw that so many of these opportunities have been working on for a long time. Just had a difficulty. I mean there's these budget processes, the year starts, and it was difficult this year to really get it to close as fast as we were hoping. So we just saw a general -- specifically in the U.S., that is like 60%, 70% of our business, which is pushed forward. And it was difficult to put a very, very sharp kind of excuse on it, but just hearing like, okay, macro level, we're a little bit concerned about what's going to happen in inflation rates in the U.S., et cetera. So it just kind of gently pushed. And I think we caught up a little bit here and some of the things that happened early April. And I feel that the market is kind of waking up. And I've noticed some industry colleagues and peers seeing similar types of -- a little bit of a whirlwind in the U.S. market in Q1. Gustaf Meyer: Because also, if we look at your press releases during Q2, it has been a better order flow. However, of course, you do not press release all of your orders. Philip Siberg: No, we don't. Gustaf Meyer: But you would say that, in general, it looks much better during Q2? Philip Siberg: I mean, so far, so good. We're just 3 weeks into April, but I feel more confident now than I did a couple of weeks ago. And I feel a different tonality, so definitely. Gustaf Meyer: Perfect. I was actually a bit surprised about the sensor sales during the quarter, because if you look at your installed base, it continues to increase. And I expect the sensor sales to increase quarter-by-quarter. What is the reason behind that? Is that delayed orders as well? Philip Siberg: Yes. I mean there's always a little bit of fluctuations between months. And some sensor orders came in on the 30th of December and then it kind of stocked up. So I think I don't see any -- there's no kind of worrying trends or differences. It just kind of comes and goes with a little bit of ordering patterns. But perhaps what I noted a little bit -- I was looking at the same thing, why it's a little bit -- it's just -- I mean, we had a number of big hospital opportunities and wins that we did last year. And it's just taking time for things to materialize. And for example, we were awarded this big NHS contract in the U.K. in December, and the hospital is still working to get everything installed and getting it planned as part of their operations. So we're a little bit tied in the hands behind the big hospital systems. Gustaf Meyer: And what about the rest of the world markets? It was also a little bit of a setback there as well. Philip Siberg: Yes. So if we start way to the East, so Japan, we announced in December that they got the regulatory approval for a new system. They started rolling it out early January. They've secured -- so we had a pretty good kind of volume shipment to them in December. They've now started to win deals. So they're on good progression. Japan is going to do the big kind of major launch in May in the Japanese market. South Korea keeps doing well. We're still struggling with the regulatory approval. It takes time in South Korea. So a couple of months left, I believe. And South Korea is on a good trajectory. It was just a little bit of phase between the quarters in terms of sensor shipments. So nothing really that stood out in any way. But South Korea is a little bit awaiting the new TetraGraph to be approved. Gustaf Meyer: But do you still expect a little bit of a bounce back? Philip Siberg: I do. I do. Yes. And I have -- I mean, in Asia, I have 2 very strong partners. They give me very clear, like accurate pipelines. So I feel more confident working with them. Gustaf Meyer: Perfect. Also, I received a question from an investor. You write that no deals have been lost and that several purchases were postponed into Q2. How much of these delayed deals have already materialized or been confirmed after the end of the quarter? Philip Siberg: Yes. I mean, good question. And the deals typically, specifically in the U.S., are always -- the larger ones are competitive in some way. So the hospitals invite 2 or 3 of us in the industry, they evaluate it and they test it. And so we always try to understand like did we win this competitive deal or not. And we continue to have very strong win rate when there's a competitive deal. Then there might be deals happening outside that we know of, of course, but others are winning. But as I noted, we've seen that a number of these deals, we typically get a verbal acceptance afterwards. They say, okay, we've chosen your system, there's been a vote, we like it, and now it goes to contracting purchasing. And that's the process that sometimes takes time, because you end up in a big bunch of contracts and sometimes it takes a week and sometimes it takes 9 months. But overall, some of these things that we knew about came in now and they keep on coming in. Yes. Gustaf Meyer: Perfect. Let's leave the sales for now and focus on the costs, because I also received a few questions about the cost development. OpEx during this quarter came in at SEK 35.6 million. It's a little bit of a decrease. What kind of level should we expect in the upcoming quarters? Philip Siberg: I mean, we're going to continue on that type of a level that we are now, potentially even a little bit lower. I mean, we've invested heavily in bringing out a new technology to market. But I think the larger we get, the bigger scale and the leverage we have. So as we're now inside IDNs, we're inside hospital systems, the cost of sales will reduce over time, because we can automatically get scale effects from where we are. And we've done a lot -- a lot of groundwork has been done. So that's why I keep on saying, we're foreseeing that we can keep this level potentially even a little bit lower, just being a lot more effective and a lot of the work done, so now it's just about execution. Gustaf Meyer: So when you also say that maybe OpEx can even go down a bit, is that mainly, if we talk about the specific line item, is it selling expenses and so on? Philip Siberg: Just always being super cost conscious and keeping everything under control. Gustaf Meyer: Yes. Also, if we talk about -- you changed your business model a bit when you're now offering the TetraGraph for free. So my question is, what has the market response been? Philip Siberg: Yes. We don't offer it for free. We offer it as a service. Gustaf Meyer: Yes. Philip Siberg: So I think the response has been very positive, because even the hospitals know that contracting purposes or process can take over 2 years. So by doing this, by coming in, it just changes the opportunity to be more a standard operational. And the deals that we announced were closed in just a couple of months. So it's a different shift. And I mean, some big hospital systems, they want to own the capital. They have the funding and that's part of their business. But many are used to this kind of just a service process. We take care of it. And we can control it. And if they don't deliver on the volumes that we want them to, we simply take them back and we move into the next hospital. So it's a flexibility for us. But again, the value is here in the premium price that we get on the sensors. And then we do a lot of other kind of compliance requirements in terms of training and other things that they should do. So I believe this -- I will come back in the next quarter to show that this is actually going to drive up utilization. Gustaf Meyer: But if you look at the number of monitors that were delivered during this quarter, it was 367 sic [ 376 ], if I'm correct. And was it around 250 in the U.S... Philip Siberg: Something like that. Yes. Gustaf Meyer: And 120 of them were as a service. Philip Siberg: Yes. Gustaf Meyer: Do you expect it to be like 50-50 between the... Philip Siberg: Roughly, probably a little bit lower on the service side, but somewhere around there. Gustaf Meyer: Yes. Great. Also, another investor wanted to know more about TetraCom. Also about that. Maybe you can -- what has the... Philip Siberg: Yes. I mean, as I presented it -- I mean, it's a platform technology offering connectivity of our systems directly into electronic health records. And when you sell this, you typically sell it under the IT budget. So the IT budgets, if I generalize them, there is a little bit more elasticity there, there's a little bit more funds available. They understand the cost. So by doing this, we can add a cost. We sell the TetraCom at a specific price point. And then we also charge for an annual service fee for this. So we kind of introduce both. We upscale the TetraGraph hardware device, but also get even more kind of recurring revenues on it. And then there's some other benefits to this is that we can actually pull out the data as well. We can use the data for continued product development, research purposes, and can help the customers to summarize the data and kind of AI-generated reports to see how are they doing, how are they progressing to guidelines and to best practices, et cetera. So there's a number of benefits. Gustaf Meyer: But it's always -- sometimes the rollout, it always takes some time and so... Philip Siberg: It does take some time. We're just about to wrap up the first big installation with the TetraCom. Gustaf Meyer: Okay. But when do you expect that we can see significant numbers in quarterly reports? Philip Siberg: I think, later this year. Gustaf Meyer: And you will disclose it separately or... Philip Siberg: I will try to, yes, hopefully. Gustaf Meyer: Great. Also, I wanted to talk to you about the contract that you signed with this major IDN in the U.S. So maybe you can just talk more about that, because it's a huge potential. Philip Siberg: It is. Yes, definitely. I mean, again, IDNs control a large part of U.S. health care. It's like big clusters of hospital systems. Some of the bigger ones have up towards 150 to 200 hospitals. So there's strong powerful kind of mechanisms. And getting in there, the benefit of them is that you can ultimately get centralized contracts, but it's a long path. And you need to work your way [ underwards ] and you need to win hospitals and then get key opinion leaders who drive and mandate for your technology and then get them to ultimately convince the C-suite on top. And we've been working on this big kind of umbrella IDN for a long time, and we've now made our way into different corners of this IDN, and we identified the champion who is driving this internally. So why I wanted to make a news announcement about it is just because I think there is an apparent opportunity to grow this and become kind of a centralized vendor within the IDN system. So that was one important. I mean the other one that we announced last week was also interesting because there, we're already in, and it shows just how we can expand within an IDN once you're in. Sales process is faster. It's already validated. And again, I can grow the business with limited expenses, because I'm already in the system. Gustaf Meyer: But what's the probability -- if I talk about the first IDNs, up to 150 or more than 150 hospitals, what is the probability that you will, let's say, a couple of years or a few years that you will have TetraGraph monitors on each of these hospitals? Philip Siberg: I think it's unlikely that we'll have it in 150 hospitals. But I think there's an opportunity to become a big supplier to the whole of the system, definitely. And as guidelines increase kind of the requirement of them, I think, yes, there is ultimately an opportunity to have it. I just want to be moderately careful in my expectations. Gustaf Meyer: Okay. Great. I'll turn to the next question actually about the U.S. market, about your whole addressable market. How much would you see that you are penetrating at the moment? Philip Siberg: We're just skimming the ocean here. Like I said in the presentation, we have about 250 hospitals as customers. The U.S. has roughly 5,500 hospitals. On top of that, you have a number of ambulatory surgery centers. So there's a lot left to be done. And the driving force is, again, references, the products, the guidelines. And one thing that stood out that I'm starting to hear, there's more and more legal lawsuits going on in the U.S. market, where hospitals have not had adequate monitoring, patients have had complications, and they're now saying that, okay, well, we need to have this type of technology, because we're not guidelines compliant. So that will ultimately help to drive our business and accelerate it. Gustaf Meyer: Great. And also, what would you say is the -- when you have these dialogues with hospitals, of course, you have a high win rate, but what are the biggest reasons why hospitals do not want to adopt TetraGraph? Philip Siberg: I've always said that the worst competitor I have is kind of the anesthesiologist who's been doing one way for 40 years and doesn't want to change. Gustaf Meyer: But now you have the guidelines. Philip Siberg: Yes, yes. So I mean, we have a target to have 80% compliance. That's what we see. And some of our best customers are up towards 90% compliance, but you will never get 100% compliance of any technology in a hospital despite guidelines or standard of care. There's always going to be discrepancy. So it's just hard work time and then getting -- we're trying to help every single hospital to adopt kind of protocolization and make it standard of care, so you get to that 80% to 90% compliance rate. Gustaf Meyer: Perfect. But if we look into the rest of this year, and maybe except the U.S., what other markets would you say will be extra interesting to follow in this year? Philip Siberg: I mean, we've always kind of tried to keep it focused on a couple of Asian countries, Europe and the U.S. We have some interesting outlier markets that are popping up. I mentioned last year, we got approval in Mexico, for example. We've had some notable deals won during the first 4 months here in Mexico. So that's an interesting market. Mexico kind of resembles a lot about U.S. Recently, we had market approval in Saudi and a couple of Middle Eastern countries. I think Saudi is a very interesting market. And I think that's going to be our major markets in the future. It's just a little bit disrupted down there right now, so it's delayed some of the things. But we have a great partner. They are working on getting the kind of local buy-in. So I think we're going to have traction in there. And then we continue to expand very carefully, very sharply without more expenses, but we got approval in Vietnam. We got approval in Taiwan. So we're expanding carefully with partners. Gustaf Meyer: Yes. Also, you stated in the report that you continue to have the objective to become cash flow positive at the end of this year. Looking into this quarter, a little bit of a setback, you expect a bounce back in upcoming quarters, also cost to maybe be flat or even decrease a bit. But how confident are you that you will be cash flow positive in Q4? Philip Siberg: Yes. So a number of things need to happen. One, we need to keep on growing. We have a strong pipeline, specifically U.S. market, but also together with our partners. So we need to continue to leverage on that. We need to see that the recurring revenues -- remember, the sensors are recurring revenues. And they were, what, 70%, 74% of the business. So that keeps growing up. The gross margin, I've talked a lot about before, it will continue to grow. There are some volume things happening here. We kind of celebrated this 1 million mark, and that triggered kind of a volume price component to it. So the gross margin has all the prerequisites to really increase. And we'll see about the tariffs. We just started the project yesterday. I was trying to get back. We have paid about roughly SEK 5 million in tariffs to the U.S. It would be fantastic if we get that money back. It's going to probably -- we're probably going to get a little bit back, I believe, now hearing, but it's going to take time. And then the third part is strict cost control. So these 3 things, plus working with working capital, getting paid faster and then being optimal there, all those stars aligned together, I still believe strongly that we have the opportunity to get to these goals. Gustaf Meyer: And as you mentioned, the gross margin, if we look at your numbers in the presentation, it was at minus 4.4% in currency effect. Do you have any plans for any actions to maybe reduce that? Because it's always difficult FX. Philip Siberg: Definitely. I mean, we increased the prices in the U.S. I'm seeing -- there was about 5% increase now that I saw on the average sales price. So it's started to kick in. I think we're trying to always get a higher price point, and we're building into every single contract that we are independent of tariffs, et cetera, that, that will -- so we've backed off to do kind of currency hedging, because there's always -- it's a lottery here, which way it will go, we do not know. And for now, we're just trying to stabilize the cost. Gustaf Meyer: And also your other, not objective, maybe it's more of a guidance that you have a sales growth in 2026 in line with previous years. Are you still that confident of that one? Philip Siberg: I am. And that's why I reiterated that the long-term targets remain intact, yes. We set up -- I mean, we haven't guided anyway this year in terms of quarter. We set a goal for the year, and we said that we want to continue to grow in the same pace as before. And that means in absolute terms to grow in the same kind of base that we have. And again, we do it by recurring base of business, winning new deals and getting more recurring on that one. And the further we progress as a company, the bigger the base is, and we're just -- we're getting scale. That's really the message here. Gustaf Meyer: And what about the cash situation? Yes, do you believe that it will be sufficient to... Philip Siberg: Yes. I mean, we were clear in the report and the annual report. I mean, we have the funds needed to do this. If we, for some reason, foresee that we need to accelerate things again or do differently, then things can change. But I have the support from strong shareholders. We did the credit line to have like a backup, and we're not foreseeing any low-priced rights issues or anything like that to happen. Gustaf Meyer: Perfect. Just one last question before we end. Or is there anything else that you would like to highlight? Philip Siberg: No, I'm just -- I mean, I wasn't -- when you're on a growth journey like we are, I've tried to kind of raise a warning signal in the past. Some quarters will have a little bit of a dip. You can't have -- but I've had the fortune to, every single quarter, quarter after quarter the last 3 years, always have a fantastic growth. So it hurts, and I'm annoyed when the growth curve takes a dip, but it just creates more energy and more confidence. We're going to get back. It's just about grit and delivery. Gustaf Meyer: Yes. I hope that we see a really good bounce back in Q2. Thank you very much. Thank you for being here. Philip Siberg: Thanks.
Operator: Good day, and welcome to the Lam Research Corporation's March 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ram Ganesh, Vice President of Investor Relations. Please go ahead. Ram Ganesh: Thank you, and good afternoon, everyone. Welcome to Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the March 2026 quarter and our outlook for the June 2026 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release and the accompanying presentation slides for today's call can also be found on the Investors section of the company's website. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Actual results could materially -- differ materially from those expressed in such forward-looking statements. Please see the accompanying presentation slides for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying presentation slides. This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim. Timothy Archer: Thank you, Ram, and good afternoon, everyone. Lam is off to a solid start in calendar year 2026, with revenues and profitability in the March quarter at the upper end of our guidance ranges and earnings per share exceeding the top end of our guided range. Revenues were at record levels, highlighted by the first $2 billion quarter from our Customer Support Business Group. Our guidance for the June quarter points to Lam's strong momentum in an accelerating AI-driven semiconductor demand environment. In January, we shared our outlook for 2026 WFE in the $135 billion range. Since then, spending projections from customers have moved higher across all device segments. We now expect WFE of $140 billion with a bias to the upside as the industry continues to work through various constraints. We believe this sets the stage for another year of compelling WFE growth in 2027. For Lam, the AI-driven demand environment is creating an ideal setup for continued outperformance. Semiconductor technology inflections required to meet escalating AI compute needs are driving higher deposition and etch intensity. In 2026, we see Lam's served available market or SAM, percent of WFE, expanding to slightly more than the mid-30s percent level, well on track towards our stated goal of high 30s percent over the next few years. Lam is prepared for this moment by transforming how we innovate, build and support. The semiconductor manufacturing equipment needed to address the industry's most critical challenges. Our commitment to R&D and the velocity with which we have scaled our development capabilities have enabled us to create the broadest, most competitive product and services portfolio in the company's history. This is fueling our current outperformance and puts us in an excellent position to deliver on our future growth ambitions. Across all device segments, we are seeing greater opportunity for Lam. In NAND, AI transformation is moving beyond compute and into the storage layer. [ Hoken ] economics are driving changes to the memory hierarchy used in AI data centers including rising adoption of higher layer count QLC-based NAND devices for SSDs. We expect total data center bits this year to be greater than both PC and mobile segments combined with growing -- continuing growth in data center mix into the future. The growing device performance requirements of AI data centers are driving an acceleration of NAND technology upgrades. As you may recall, we said in early 2025 that roughly $40 billion in conversion spending would be required over several years to enable existing NAND installed wafer capacity to produce devices with more than 200 layers. We now anticipate that this conversion will be pulled forward with the majority of spending occurring before the end of calendar year 2027. In parallel, we expect growth in bit demand will drive greenfield capacity investment, especially considering that overall industry installed wafer capacity is expected to decline more than 20% from prior highs by the end of this year. Looking further ahead, we see continued adoption of NAND in the AI memory stack, driving even higher layer count NAND devices. With the largest installed base of tools for 3D NAND, Lam is uniquely positioned to benefit from this trend. As manufacturing complexity scales with layer count, we see an expanding set of deposition and etch opportunities, all rooted in our established leadership in high aspect ratio cryo etch, dielectric stack deposition, [ Worldline ] metallization, backside stress management and gap fill technologies. In dielectric etch, our Vantex and [ Flex ] tool sets delivered the industry's highest power density and productivity for dielectric channel hole edge applications, where we have a market-leading position. In conductor etch, we are also seeing momentum for our [ Kio ] systems as customers collaborate with us to maximize device yield in a constrained capacity environment. In a recent win, a customer switched to [ Kio ] in the middle of their production ramp due to superior defect performance and better yield. In deposition, we are seeing the transition to higher layer count NAND, also driving greater demand for our Strata, [ Altus Halo ALD ] and [ Vector DT ] products. Altogether, we believe the production proven strength of our portfolio puts Lam in a great position to outperform overall NAND WFE growth as AI demand accelerates over the next few years. In DRAM, AI's power and efficiency requirements are driving an industry transition to 1C generation devices. As feature dimensions shrink, the industry is shifting from traditional silicon nitride base dielectric films deposited using furnace, the more advanced ALD silicon carbide [ loc ] layers to achieve bit line capacity in production. Studies have shown the re-architected device structures, combined with low [ KBitline ] spacers can reduce capacitance by over 60%. Lam's Stryker carbide solution with its unique plasma source enables capacitive scaling by depositing dense, conformal and tunable low dielectric films with high productivity. As a result, our Stryker based solutions are the tools of record at all leading memory makers for bitline spacer applications. As the industry moves to 1C nodes, we see our total dielectric deposition SAM and DRAM growing more than 20%. With innovations like Stryker ALD, we believe Lam is well positioned to gain share within this expanding opportunity. In foundry/logic, calendar 2025 was a record year for Lam. We are carrying that momentum into 2026 as we capture more opportunities from inflections at the leading edge. Most notably, this quarter, we achieved both dielectric etch wins at a key founder logic manufacturer. Our first dielectric edge wins at this customer. And finally, we see growing demand for our advanced packaging solutions where we bring unmatched experience in equipment design and process technology for copper plating and [ TSC Edge ]. Lam's advanced packaging revenue growth is expected to exceed 50% in calendar year 2026. Turning to our Customer Support Business Group. We delivered our first $2 billion plus revenue quarter. Demand was strong across spares, upgrades and services. As customers look to improve fab output in a space-constrained environment, more opportunities are being created for CSBG to deliver innovations that increase productivity and enhance yield for our customers. Our services business posted mid-teens growth over the December quarter. Highlights included a new agreement with a leading foundry/logic customer to deploy our equipment intelligence services for critical deposition applications. The top memory customers also set to utilize our Equipment Intelligence capabilities in R&D to enable faster ramps of new nodes for NAND and DRAM production. We are also gaining momentum with our Dextro cobots, which deliver an unprecedented level of automated tool maintenance precision and repeatability. Customers using Dextro and production are benefiting from higher output and in some cases, improved yield from existing capacity. In the March quarter, we expanded Dextro coverage to 8 Lam tool types up from 6 last quarter. We also introduced the next generation of Dextro, which packs 10x more compute power than the first generation into a smaller footprint. This quarter, we will ship our first Dextro cobot for a deposition product further increasing our ability to create value from our overall installed base more than 100,000 chambers. It's an exciting time for the semiconductor industry and for Lam. In an accelerating demand environment, we see rising deposition and etch intensity creating a multiyear outperformance setup for Lam. We have made strategic investments across the company to capitalize on this opportunity. increasing the velocity of both our technology development and our operational execution. Our progress can be seen in our strong March quarter results, our higher June quarter outlook, and our expectation that second half calendar year revenues will exceed the first half. In short, we are delivering on the tremendous opportunity in front of us with more to come. Thank you, and here's Doug. Douglas Bettinger: Excellent. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a very busy earnings season. Lam is off to a solid start in 2026, building on the momentum we delivered across 2025. In the March quarter, revenue gross margin and operating margin came in above the midpoint of our guidance ranges, while earnings per share actually exceeded the high end of the range. We also achieved our third consecutive record revenue quarter. March quarter revenue came in at $5.84 billion, which was up 9% sequentially and up 24% from the same period in 2025. The deferred revenue balance at quarter end came in at $2.22 billion, which was flat sequentially. Within this balance, however, customer down payments came down by roughly [ $300 ] million, while the other line items increased with the growing business levels. I just mentioned that down payments are now at the lowest level we've seen in nearly 4 years. From a market segment perspective, foundry accounted for 54% of our systems revenue in the March quarter, which was down from 59% in the December quarter. Revenue in dollar terms was approximately flat sequentially, and it was up 35% year-over-year. Foundry saw strength in investments at the leading edge, as well as ongoing mature node spending. Advanced packaging within foundry continues to be an area of solid growth for us. Memory was 39% of systems revenue, up from 34% in the December quarter. Within memory, we delivered record DRAM revenue accounting for 27% of systems revenue which was up from 23% in the December quarter. High-bandwidth memory investments remained strong. The profile of spending is also gravitating towards the 1C node and beyond enabling the ramp of DDR5 and LPDDR5. Nonvolatile memory contributed 12% of our systems revenue, up slightly from 11% in the December quarter. As Tim outlined, AI workloads are accelerating demand for higher capacity NAND and Lam continues to benefit from strong leadership within this segment. We expect to see growth in NAND investments throughout the remainder of the year as the industry converts to 256 layer and above class devices. And finally, the Logic and Other segment came in at 7% of systems revenue in the March quarter, in line with the prior quarter. Let's turn to the regional breakdown of our total revenue. China came in at 34%, which was a slight decrease from the prior quarter level of 35%. We expect that China revenue in the June quarter will decline from these levels. Korea and Taiwan each came in at 23%, which was both up from 20% in the prior quarter. Both the Korea and Taiwan regions represent record revenue level in dollar terms in March. And I just mentioned that this regional mix was generally in line with our expectations from the beginning of the quarter. Customer Support Business Group generated a record $2.1 billion in revenue in the March quarter, which was up 6% sequentially and up 25% from the same period in 2025. Sequential growth was driven by a large and expanding installed base and the continued expansion across our spares, upgrades and services business, partly offset by Reliant. Growth in spares and service is benefiting from strong factory utilization across the industry. Let's take a look at profitability. Gross margin in the March quarter was 49.9%, which was at the high end of the guidance range, driven by multiple factors, including favorable customer product mix as well as improved factory efficiencies. Operating expenses in the March quarter came in at $866 million, up from the prior quarter's level of $827 million. The increase was driven by seasonal employee-related costs as well as higher headcount to support our growth. R&D accounted for 68% of total operating expenses. We will be growing R&D investments throughout the remainder of the year. March quarter operating margin was 35% at the high end of our guidance range due to the higher revenue and the improved gross margin. The non-GAAP tax rate for the quarter was 9.2%, which came in lower due to benefits from higher equity compensation vesting, which is deductible on the taxes during the quarter. We continue to see the tax rate below the mid-teens for calendar year 2026. Other income expense in the March quarter was $8 million in expense compared with $10 million in income in the December quarter. The variance in OI&E was primarily the result of small losses in our venture portfolio as well as lower interest income. Interest income decreased due to the lower cash balance in the quarter. And as we've talked about in the past, you should expect to see variability in OI&E quarter-to-quarter. For capital return in the March quarter, we allocated approximately $800 million to share buybacks through a combination of open share repurchases and a $200 million accelerated share repurchase transaction. Our average buyback price was approximately $211 per share. We also retired $750 million of unsecured notes that reach maturity using cash from the balance sheet. Additionally, we paid $326 million in dividends. In the March quarter, we returned 139% of our free cash flow. Our plans remain to return at least 85% of free cash flow to our shareholders over time. The March quarter diluted earnings per share came in at a record of $1.47 which was above the high end of our guidance range. The diluted share count was 1.26 billion shares, which was flattish with the December quarter and consistent with our guidance. And I just mentioned that we have $4.3 billion remaining on our board authorized share repurchase program. Let me pivot to the balance sheet. Cash and cash equivalents totaled approximately $4.8 billion at the end of the March quarter, which was a decrease from $6.2 billion at the end of the December quarter. The decrease was primarily driven by capital return activities that debt paydown as well as capital spending. Days sales outstanding was 64 days in the March quarter, an increase from 59 days in the December quarter. Inventory turns improved to 2.9x from 2.7x in the prior quarter. These were our highest level of inventory turns in over 4 years. As a company, we remain focused on our strong asset utilization and return on invested capital. We're pleased with the sustained performance we continue to deliver here. We will be managing our inventory and supply chain to align with the growing demand that we see in front of us. Noncash expenses in the March quarter included approximately $97 million in equity compensation, $103 million in depreciation and $13 million in amortization. Capital expenditures in the March quarter was $332 million, which was up $71 million from the December quarter. Spending was higher to support the strong demand environment that we're seeing. Investments are enabling a second manufacturing facility in Malaysia as well as lab-related investments in the United States and Taiwan. Looking forward, we continue to expect capital expenditure to be in the 4% to 5% of revenue range. We ended the March quarter with approximately 20,600 regular full-time employees which was an increase of approximately 900 people from the prior quarter. Headcount increases were primarily within the manufacturing and field organizations to support volume growth. as well as in R&D to support our long-term product road map. As we scale the organization, we also undertook a small workforce optimization focused on efficiency. You'll see this in our non-GAAP reconciliation. Let's turn to our non-GAAP guidance for the June 2026 quarter. We're expecting revenue of $6.6 billion, plus or minus $400 million. Gross margin of [ 50.5% ], plus or minus 1 percentage point. We're expecting this expanding gross margin despite slight headwinds that we're seeing from customer mix. Forecasting operating margins of 36.5% plus or minus 1 percentage point. And finally, we're forecasting record earnings per share of $1.65, plus or minus $0.15 based on a share count of approximately 1.255 billion shares. So let me wrap up. We're executing well against our financial objectives and driving operational efficiency while increasing R&D investments to extend our technology leadership. With our expanding installed base, the strength of our product portfolio and our disciplined approach to capital allocation, we remain confident in Lam's setup for continued outperformance. Operator, that concludes our prepared remarks. We would now like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from Timothy Arcuri with UBS. Timothy Arcuri: Doug, I wanted to ask about gross margin. The guidance is great, it's [ 50.5% ]. It sounds like despite the mix being against you. So you're kind of already edge at your target model, right, because you were saying above 50. And I'm not asking you to update that model. But sort of can you like deconstruct how you got here so fast? And maybe also, I think people want to hear how much capacity you have? I know you mentioned that you're adding another site in Malaysia. So can you just speak about sort of what the puts and takes are going to be on margin going forward? Douglas Bettinger: Yes. No, Tim, it's a great question. Yes, I think we're pretty pleased with where we're at from a gross margin standpoint. And it's been a lot of real hard work from the company, honestly. I think you'll remember, I don't know, 4, 5 years ago, we talked about expanding our factory footprint to be closer to where our customers were. And that has delivered efficiencies from just a proximity standpoint, from shorter frame logistic lanes. From slightly lower cost from a labor standpoint, a better supply chain set up all of those things. Those were self-help activities that we undertook and frankly, we've delivered on it. So when I think about the global operations part of the company, they've really done a wonderful job. On top of that, we're working on everything we can do to get paid for the value we're delivering to customers. That's something we're always doing. And I think we're doing a reasonably good job with that, Tim. So anyway, when you put all of that together, I think we're pretty pleased with all of that, and I'll let Tim add a few things here. Timothy Archer: Yes. No, I was just going to add one other part that's pretty important in showing up is very important in this constrained period, which is the performance of our tools. We embarked -- Doug talked about some of our higher R&D spending. A lot of that was to ensure that all of these new tools that we have hitting the field enter the level of maturity that's beyond what we had probably delivered in the past. And that's very important for our customers in a period of fast ramp. That also yields benefits for us in terms of installation and warranty spending, which flows through to gross margin. And so you're seeing some of that as well. So that's something that, again, we're focused on going forward is reliability of systems, maturity of tools as they hit the fence. Douglas Bettinger: And let me just add one more thing. Yes, let me add one quick thing. I know there's going to be a question [indiscernible], how should our model gross margin for the rest of the year? I would encourage you to kind of keep it roughly in the levels that we just guided you to in June. This is going to kind of level out at where it's at, I think, for the rest of the year. So as you build your models, keep that in mind. Timothy Arcuri: Awesome Doug. And then I guess just as a follow-up. So there's been a big like massive new fab project. I mean you guys have obviously seen this news bigger than anything we've ever seen before. I mean I think that this customer would have to get in the queue given how booked out things are. Are you seeing -- I mean, I don't want to ask just about that one customer. But like are you seeing these signs of these huge new fab projects, sort of the customer base expanding? And if you did want to comment on that particular fab project if they're sort of coming to you was like a new opportunity, that would be great. Timothy Archer: Yes. Obviously, we can't comment on any specific customer, but clearly, the environment right now is such that there is -- there's just not enough to do. There's not enough memory in the world. And so -- and people are worried about supply. And so I don't think it's a surprise that more companies around the world will start to enter into the semiconductor space. And that's why when we talk about the longer-term outlook, it's a combination both of the increased demand, but really increased demand at some of the most compelling leading-edge opportunities that are presented to Lam. And so I think this is -- when we talk about WFE, there's so much -- only so much that can be executed in this year. But again, you see a lot of these projects starting to line up that I think represents opportunity in the future. Operator: Our next question comes from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I just wanted to touch on your commentary around '27 visibility. And can you kind of speak to your discussions, conversations exceeding 18, 24 months, whether you're starting to see real slotting and desire to lock in time frames for delivery? And I guess as part of that, how are you kind of working your supply chain for readiness for that ramp? Timothy Archer: Yes. So clearly, we're about halfway through '26. And so given our lead times, of course, we're having conversations with customers about '27. And in some cases, for planning purposes, like getting resources ready engineers hired and trained in the right locations, those -- some of those conversations even extend beyond that. We have customers who clearly announced fabs with openings in 2028. There's no reason not to start having conversations with them about what the tooling is it's going to be required based on the node that we run, kind of the size, the resourcing requirements. So I'd say we're in various stages of those conversations, but the more visibility we have, the better we can get our supply chain and our own capabilities ready. I think it is a case where today, our view on WFE, as I said, for 2026 really has a lot to do with what we believe can be executed. We talked about this upward bias. We're working a lot with customers on near-term constraints, things they can do within their existing fabs. But at the same time, preparing for those new fab openings and true kind of greenfield shipments as they roll out later this year and through next year. Douglas Bettinger: Yes. [indiscernible], I'd just add, it feels like it's setting up to be a pretty good year in '27 right now based on what we can see. Christopher Muse: Excellent. And then maybe a question on CSBG. Obviously, tremendous focus on trying to get every bit out the door in this very tight environment. Curious if kind of the upgrade business that you're seeing is sustainable? And is there kind of [indiscernible] we should be thinking about for full calendar year '26 revenue growth in that bucket? Douglas Bettinger: Yes, [indiscernible] that's a great question. Look, I think we're feeling really good about CSBG, industry utilizations are high. So spares was quite strong in March. Service was quite strong in March. Tim talked about the new Equipment Intelligence and cobots that we're rolling out. We're excited about that. Our customers are excited about that. So when you see how strong it was in March, I think it popped up, I think it's going to kind of sustain roughly at these levels as we go through the remaining quarters in the calendar year, maybe up a little bit. But I think we're feeling pretty good about the strength that we're seeing here. And frankly, we're innovating here, too. So I think we feel pretty good. Operator: Our next question comes from Harlan Sur with JPMorgan. Harlan Sur: When you -- when I speak with the process development and integration engineers, obviously, of your customers, they're very focused on next-generation technologies and architectures and that's what we hear on these calls, right? How Lam is enabling 3D device architecture, cell structures, driving high aspect ratios, new materials, et cetera. But then when we speak with the manufacturing and operations teams, it's a very different focus, right? And the vocabulary set is very different. It's all about throughput, uptime, defectivity, overall fab cycle time. And then especially with the tight supply situation and constrained premium space environment that we're in today, any incremental improvement in high-volume productivity could unlock like literally millions of dollars of incremental wafer output. You've talked about things like the Dextro cobot, but any other enhancements that you're driving, Tim, to the installed base on productivity and manufacturability and more importantly, like, how are you guys monetizing this? I assume it's maybe primarily services and upgrades? Timothy Archer: Yes, it is a too-focused world, as you talked about. And the good news is we've got the company organized in a way that we can focus on both with significant intensity. So clearly, leading edge being in front of those inflections, a number of years, we said sometimes 5, 6, 7 years, you're working with the customer in advance of that node ever reaching production. But at the same time, especially in the environment we're in right now, I mean, production output, uptime yield, those things are really what are most critical to customers in the immediate term. Plus, I would say, really identifying the bottleneck tools within the customer that's limiting output and helping them with those workstations. Equipment Intelligence, if you think about what it does is it allows us to look at massive amounts of data coming from our tools on every single wafer, and that shortens troubleshooting time if there is a problem with the tool. It helps us with the time to ramp those tools either on new process or as they start up, helps us to match tools, better tool to tool chamber to chamber, all those things can yield -- lead to those tiny little improvements in yield that really do matter for the customer. On the Dextro cobot, we've talked about the fact that at some customers, the precision and repeatability of the maintenance has actually yielded improvements in both output and yield and does through -- that through better first time right. You do the maintenance, it comes back up and is back into production more quickly. And also just the improved repeatability of, like, let's say, the new part placement inside the chamber, actually has had positive effect on the yield need. So that's something we're really focused on. How do we monetize it. Yes, it's through services and obviously, in some cases, new tools. Harlan Sur: Yes. Okay. I appreciate that. And for Doug, your OpEx grew 5% sequentially in the March quarter, implied OpEx growth in June is 7% and given the leverage, it's allowing you to actually exceed your long-term operating margin target of 35%. So how should we think about the OpEx growth through the remainder of this year? And I guess when is the team going to update its long-term targets? Because as the year unfolds on more revenue growth, you're clearly going to drive margins above the 36.5% op margin range that you guided to for June, right? So when is the team contemplating like updating this long-term targets? Douglas Bettinger: Yes. Harlan, it's a great question. First, let me talk about the spending trajectory for the year. Listen, I think at the end of the day, this management team likes to see the top line growing faster than spending so that we can deliver leverage and that's absolutely how we're thinking about things this year. Having said that, we're going to grow spending this year because, frankly, we can afford to do so, and we have some things that I think are quite innovative that we've been thinking about that we've wanted to put a little more money towards. So we're going to do that. We've decided we're going to do that this year. And yes, we're talking internally about the fact that we're above the previous model that we gave. And yes, I know we need to give you an updated framework and we will do that later in the year. And we haven't bottomed out on exactly when or exactly how we're going to do it, but we know we need to and we will be doing that, Harlan. Operator: Our next question comes from Atif Malik with Citi. Atif Malik: My question is on the NAND market. It seems like near-term NAND is still low, like 12% sales, but something has changed versus 90 days ago, you guys are talking about NAND growing through the year and the pull forward in that the $40 billion number. So can you [indiscernible] has changed in the NAND market? Are you seeing signs of capacity additions? Or what has changed maybe with [ KB Cash ]? Timothy Archer: Yes, we didn't mention [ KB Cash], but I think it's a good example of exactly what I was referring to when I talked about it, it's increasingly important role in the AI memory hierarchy. And so clearly, there is increased demand for NAND coming from AI data centers, and that's helpful. But also, if you think of the -- on a relative basis, what under investment in that area, partly as customers make choices about clean room allocation and obviously some other devices like HBM were so hot during that period. Also, going back to what we said early last year, the installed base had gotten a little bit behind in terms of the state-of-the-art technology. And so most of the installed base at that time, early 2025, about 2/3 of it was still running in the [ 1xx ] 100-plus layer technologies really when you need to get those incremental bits out now, you need to be 200-layer plus. And so that's what's caused this acceleration is you need more bits. You need those bits to be more capable, you need QLC to meet AI data center demands and so you've started to see the push for accelerated conversions in the technology. And that is -- that's what caused a lot more activity in the NAND space. As people push forward, we didn't also said, look, the conversions are going to happen because that's very -- the quickest way to get to the high capability, but you'll also need greenfield because those technology improvements like in Lam's case, to go above 200-layer, we talked about the number of new tools you need to add to manage the complexity of higher layer count stacks that in itself reduces total wafer output capacity of the industry. And so eventually, you need to add greenfield back to continue to get the big growth we need. So that's the reason we started talking about it is it's materializing as a significant opportunity now on the revenue side for Lam and looks to be so for quite some time. Atif Malik: Doug, you talked about customer down payments at [indiscernible] level in 4 years. And you're also talking about WFE growing in next year. Can you reconcile those 2 comments? Douglas Bettinger: I guess what I would tell you, Atif, is the group of customers that generally provided on payments aren't the ones that are growing the quickest, and that's absolutely what we're seeing going on right now. Operator: The next question comes from Melissa Weathers with Deutsche Bank. Melissa Weathers: I had a more thematic question maybe for Tim or Doug, if you want to take a stab you can do. We've heard a lot of about reasons why this memory cycle is different with HBM and trade ratios and new applications like [ SOC ] and it does seem like AI is driving memory demand growth a lot faster than what we've seen historically. So I guess, do you ascribe to the view that this memory cycle is -- I won't say the D-word, but there's a change this time around? And then what kind of actions are you taking to derisk the cyclical side of things while still being able to capture the upside? Timothy Archer: Okay. Well, it's a great question. And maybe I won't use the D-word either, but I think it's -- or maybe I will. I think it's different for Lam in that -- and there was an earlier question that talked about how so many of these new devices have different architectures, 3D scaling. And so I think the most important thing about this memory cycle is it is a cycle in which you're seeing dramatic improvement and change in the etch and dep intensity. And so the complexity of 3D scaling has created a lot of new opportunities for Lam. And so that is driving both SAM expansion plus share gain for us through those new applications. So I feel like compared to prior upturns in memory, we are and we're doing even better just because of that extra layer of etch and dep intensity scaling. How do we prepare if there is ultimately that peak, which we're not -- we're certainly not calling right now given the tremendous demand that's out there. But it is we operate very flexibly. I mean, Doug talked about a lot of our operational investments we've made. And in many cases, some of the things we talked about, Dextro cobots, Equipment Intelligence. These are all kinds of capabilities that in many ways, allow us to support our customers without so much of the fixed cost scaling that we had to make in the past. And so we always have an eye on what's it going to look like if the business were to slow down. And I think if you look at our track record, in those periods, we've also outperformed. Douglas Bettinger: And Melissa, maybe I'd just add. I mean, the way I'm looking at this right now is memory is just so critical in all of these accelerated compute architectures to feed the parallel compute, you need just data coming in to keep the machine going. And so the criticality of it maybe is more than it's ever been from my point of view. And I observe -- maybe I'll use a different D-word disciplined investment, right? I mean, everybody likes profitability that they're generating right now. Everybody is just kind of lugging into where demand is. And I think that's a good thing for all of us in the industry. Operator: Our next question comes from Srini Pajjuri with RBC Capital Markets. Srinivas Pajjuri: My question is on China. Doug, I think your comment about prepayments being down. I'm guessing that's related to China. Can you talk about what you're seeing in terms of the demand environment in China? And as you go through the next few quarters, what are your expectations? Douglas Bettinger: Yes. I think, Srini, what we described a quarter ago is still the way I would describe it this year. I think WFE in China is flattish year-over-year from '25 to '26, maybe it's up a little bit. But you're just seeing so significant growth from the global multinational set of customers that China as a percent of the overall revenue is coming down. The other dynamic in China is you're starting to see some of the global multinationals in China spending a little bit more, too. So when you look at that overall geographic distribution in China, it's also broadening out in that regard. And yes, you're right about the fact that down payments are down -- down payments tend to come from smaller customers, and a lot of them are in the China region, and so those 2 things are correlated together. Srinivas Pajjuri: Okay. Great. And then my next question is on the CSBG. So obviously, I think it grew at a double-digit pace for the last several years. And I think last quarter, if I recall correctly, I think you were expecting high single digits because of the reliant slowdown here. But it does seem like the clean room issue is not going to get resolved. Demand is very strong. So my question is, should we -- I mean, are you seeing any acceleration in terms of your services and spares business? Is this something structural in your view going forward? Douglas Bettinger: Listen, Srini I'll let Tim comment after I give you a little bit of data. What drives a lot of spares and service, frankly, is utilization in the overall industry. Utilization right now and in the March quarter, is very, very high. And so a lot of the growth at least contributing to some of the sequential growth in CSBG was the uptick in spares and service from that utilization. I don't know that utilization can get any higher than it is. Frankly, it's pretty full out right now. And so when you think about growth sequentially over the next couple of quarters, those components of CSBG are probably kind of plus or minus where they are. Now Tim talked about advanced service and cobots and [ EI ], that layers on top of that to a certain extent. And then also, if you think about what's going on in mature node spending, a lot of that is what drives Reliant and that's flattish this year. The real growth is coming from stuff at the leading edge, which we're really benefiting from move to etch and dep intensity. So Anyway, that's just a few things to think about relative to CSBG. Anything you'd add, Tim? Timothy Archer: No, not really. I'd just point out that you're trying to work on constrained workstations within a fab. Again, this is where things like the Equipment Intelligence, how to get those tools up faster for production. There's a lot of focus on that. That's the short-term prove out. And I think that long term, that then has a real benefit because once the value has been seen in this kind of constrained environment, I think that it will be more likely that new fabs get built with all of those intelligent services and automated maintenance capabilities built in right from the start. Operator: Next question comes from Vivek Arya from Bank of America. Vivek Arya: To many of your memory customers are talking about long-term contracts, LTAs, pricing arrangements and whatnot. How is that translating into your visibility and pricing power? Should we expect customers to start putting down payments to secure your capacity also? And if not, why not? Timothy Archer: Well, it's a good question. I would say that it's translated into a longer visibility for us. As I mentioned in an answer earlier, clearly, we're having conversations with customers now at around the time that they're starting to construct these fabs, it means we have much longer visibility. And I think the most important thing there is to be ready with the resources that are needed and our own capacity to be needed to support those shipments. And so I would say, we're working with customers today short term in their existing fabs. We're working with them with these long-term fab plans and being ready. And in many ways, that's allowing us to be more efficient. As Doug talked about disciplined build out in our operational capabilities, our manufacturing, our supply chain. I would say that it is translating into financial benefit for Lam as well by having those longer visibility conversations. Douglas Bettinger: And Vivek, I mean, listen, we're having very long-term conversation with customers, but we don't need down payments. We generate ample free cash flow from the business we run the commitments we're going to get from customers are important and significant and they're happening, certainly, but it doesn't require down payments for us. Vivek Arya: Got it. I guess maybe the subtext of my question is the gross margins that you're seeing, right, the 50.5%, how durable are there? So let's say if memory pricing goes down next year for whatever reason, do you still think these gross margins are sustainable? And maybe you can even expand from these? Or do you think these gross margins are because the industry is so tight today. So I'm not asking for a gross margin forecast per se. I'm just trying to understand that if you're customers are getting assurance of their pricing? Is there anything Lam can do to help get assurance around your pricing and your -- the sustainability of your margins over the next 1, 2 years? Timothy Archer: You know what -- actually, we're not going to give you a gross margin forecast longer term. But I think that what you can see and what we've said is we have been building the gross margin improvement in our company around fundamental capabilities, either our own through our own operational efficiency or through the value that our equipment delivers. And that can be technically as the manufacturing becomes more complex, it can be the unique capabilities our tools provide from a technical or a productivity perspective. And so we have moved at a pace where we feel like the improvements we're making are sustainable because they're rooted in real value or real efficiency. And they're not a -- they're not leveraging sort of the opportunity, and they're not transactional in nature. They're really founded in fundamental value delivered to the customer. And when I talk about things like cobot, for instance, the value of a cobot is rooted directly in the value being delivered to the customer through better uptime, better yield, and we get paid for that. And I think those types of things are sustainable. When we deliver technology that enables the move to the next technology node. We think those are sustainable regardless of the cycle because it is delivering value to the customer. And that's -- we're in this for the long term with our customers, and that's why we look at, at all of this. Operator: Our next question comes from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe comment on in terms of the WFE uptick you expect which of the product areas do you expect the most kind of incremental leverage? Is it kind of split across all of them? You talked about advanced packaging, but which was driving the most upside to the overall spending envelope this year do you believe? And is that being driven mostly by early fab clean room pull-ins or something else? Douglas Bettinger: Yes, Jim, I'll comment and then if Tim wants to add I'll let him do that. I think the reality of it is everything is a little bit stronger. I think everybody in the industry is working on finding a little bit of clean room that they've been able to just accelerate to a certain extent. Demand has always been there. Demand is as strong as I can remember it. Frankly, it was strong 90 days ago. It continues to be maybe even a little bit stronger right now, and everybody found a little bit more clean room and so they were able to take a little bit more equipment. Operator: Our next question comes from Stacy Rasgon. Stacy Rasgon: For the first one, I wanted to push a little bit more on the services growth. So I understand the drivers around utilization topping and the Reliant weakness. But I mean, you also talked about the $40 billion in upgrade spending pretty much all happening by the end of '27. I don't get the feeling that we've had like tens of billions of that upgrade spending happening already. So it almost feels like we should have tens of billions of upgrade spending happening between now and the end of next year. And from what I understand, I thought that all goes into your services business. So why shouldn't that be a pretty big driver of services growth, I guess, between now and the [indiscernible]. Douglas Bettinger: Yes. Stacy, I would point out a couple of things to you. In that $40 billion number. Yes, there's upgrades for sure, but there's also new equipment purchases, right? There's some new things, right? When you upgrade the installed base, you need to buy new equipment to break bottlenecks and constraints. There's also some new equipment as the industry moves to moly. So it's not all just upgrades. And the other thing I would say relative to upgrades is upgrades were actually quite strong last year in '25 and are going to continue to be for the next year or 2. So that's part of the upgrade story. And then the other components, like I said, spares and service. It's already pretty darn strong in March and, frankly, Reliant with the mature node spending being a little bit softer than everything else, that's the puts and takes to get you to kind of quarter-by-quarter plus or minus flattish as you go through the rest of the year. Stacy Rasgon: Okay. That makes sense. If I could ask a follow-up. So you guys are seeing WFE growing this year on the order of, what, $30 billion, like you said, 110 last year to now 140 plus this year. And that's very strong, but it strong that it is, as you know, it is a constrained growth because of clean rooms. And those clean rooms start to come online into next year. Does that suggest to me that the sequential growth of WFE next year ought to be even stronger on a dollar basis than it is in '26 because you'll have some were to actually put the tools, whereas you don't really have that this year. Like what's wrong with that logic? How would you push back on that? Douglas Bettinger: [indiscernible] to decline to comment on the exact magnitude of WFE next year, but we do firmly as we sit here today, look at clean rooms are going to be more available next year and where we believe demand to be WFE is going to be nicely growing next year. And it's too soon for us to give you a number, but we feel pretty good about the growth trajectory into next year. Timothy Archer: Yes, I'd also point out that every year that goes by, as technology advances, etch and deposition intensity rises. And so as those new clean rooms come on and they're targeting more advanced technology nodes, that's better for -- certainly better for Lam's position within whatever the term I used compelling WFE growth is. Operator: Our next question comes from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I just want to follow up on an earlier question on the upgrade to the WFE numbers, the $135 billion going to $140 billion plus. Is there a way to segment was the bigger driver NAND? Was it CPU tightness? Or was it just AI strength? Douglas Bettinger: Krish, what I said is everything got a little bit stronger because everybody got the little bit of [indiscernible] clean room. So it's not any one component of the customer base. Everything is just a little bit better. Sreekrishnan Sankarnarayanan: Got it. Got it. And then as a quick follow-up. It looks like the third-party market share data came out and you folks gained share in PECVD quite a bit last year. I'm curious which vertical drove that PECVD share gain? Was it DRAM or foundry/logic or something else? Douglas Bettinger: Do you want to take that Tim? You want to [indiscernible]? Timothy Archer: Sure, go ahead, Doug. Douglas Bettinger: Listen, I think PECVD is such a broad pervasive tool. It shows up in every component of the customer base. One area I think that sometimes is underappreciated is the use of PECVD and underfill in advanced packaging, honestly. And that was a key contributor. Tim talked about we see packaging this year growing 50%. We talked about real strong growth last year. PECVD benefited from that, obviously. Timothy Archer: Yes. I think PECVD also shows up. It's challenging because you think about the old traditional PECVD applications. But even as I mentioned, as we move forward in NAND, for instance, even like our Vector [ DT ] backside stress management actually is a PECVD application. So in many ways, it's such a pervasive technology, and so we see that improvement in PECVD. Operator: Our next question comes from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: I was wondering if you could talk a little bit just about where your lead times sit today? And then also, I think you talked about the second Malaysia factory opening. When is that ramp? And can you remind us like what is the size of that relative to, I think it was a pretty large first facility that you have like 700,000 square feet. Douglas Bettinger: Joe, first saying, we don't specifically put numbers around our lead times, but they are stretching out a little bit as demand is obviously quite strong. So [indiscernible] I'm going to give you a number though. Second, the second [indiscernible] facility, we'll come on the second half of the year. And yes, you're right. The first one was our largest factory in the network. This will be nearly the same size or maybe approximately the same size as the first one. So it will give us the opportunity to scale into the next year's demand, I think. Joseph Quatrochi: That's helpful. And then I was just curious, I was wondering if you could talk a little bit about just your position for high band with flash. And just any thoughts around that? What does the SAM potentially look like for you guys there? Douglas Bettinger: I'll let Tim should take that one. Timothy Archer: Well, I think in any of these cases where you are talking about device architectures that require 3D scaling. I mean, obviously, our SAM opportunity just grows. I think these devices in the exact process flows and [indiscernible] still being worked through. But the types of systems we have, whether it's high aspect ratio conductor etches, higher-spec dialectric etches, the depositions ALD, it will be a great opportunity for us if it -- when it comes to fruition. Douglas Bettinger: Operator, I think we have time for one more question. Operator: Our next question comes from Vijay Rakesh with Mizuho. Vijay Rakesh: Just a quick question on the DRAM side. It looks like it grew very nicely, up 45% year-on-year. On the -- when you look at HBM3E going to HBM4, with the higher layer count, I think, 50% higher. Is there a way to look at what your content uplift is per 100,000 wafers or something HBM3E goes to HBM4or 4E? And I have a quick follow-up. Douglas Bettinger: Vijay, maybe I'll comment and then maybe let Tim talk about the technology. Yes, clearly, it goes up. We haven't given specific numbers around it. But obviously, the higher stack required. I'm getting a little feed back. The higher stack requires more equipment, a little more challenging for the industry. So you clearly need more equipment. We haven't given a specific number on it in terms of dollar per 10-K. Vijay Rakesh: All right. And just on the follow-up on HBF. I mean are you seeing book SanDisk and Hynix talking about it, I guess, but outside of that, when you look at high bandwidth flash, are you seeing investments or CapEx picking up there? Is that something you're seeing into '27? How would you look at that ramp? Timothy Archer: Yes, I'd probably leave it to our customers to talk about their timing on these kinds of new technologies. But as I mentioned earlier, on any new technology, we're engaged with customers quite well ahead from a technology perspective of any production ramp. And then it's very much up to them ind. The one thing that's true, and we talked about it is that these are being driven by the growing importance of NAND as we see it within the AI memory hierarchy. And so again, we think it's something that in a matter of time, this kind of capability is likely needed and [indiscernible] technologies that will support it very well. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Doug Bettinger for any closing remarks. Douglas Bettinger: Listen, I think Tim and I, and Ram would just like to thank everybody for your time and attention during what I know it's a super busy earnings season. I know we're going to see lots of you as the quarter unfolds at different conferences and road shows. So we're looking forward to that. And again, thank you for your interest in the company. We appreciate it. Operator: This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the Arjo Q1 presentation for 2026. [Operator Instructions] Now I will hand the conference over to President and CEO, Andreas Elgaard; and CFO, Christofer Carlsson. Please go ahead. Andreas Elgaard: Thanks a lot, and thanks everybody for dialing in and listening to Arjo's First Quarter of 2026. So we believe we have been able to pull together a stable first quarter and we're happy to share that with you. And also, we will talk a little bit on how we are progressing the work with shaping the future Arjo. So just to begin a little bit from my side. And to remind everybody of who we are and what we do because we are really very purpose-led in everything we do. This is something that is very strong in Arjo. We exist and are present at people's most vulnerable moments, and we help them to keep their integrity and dignity and really make sure that they have the best possible situation when they need it the most. We, as you know, we work across several product segments and categories. So from patient handling and hygiene to medical beds, the mattresses that goes on top often focused on helping to relieve pressure injuries. We work with VTE prevention, diagnostics and disinfection. So these are our product categories. We are about 7,000 people and with an annual turnover of approximately SEK 11 billion. And we are truly a global company with sales to more than 100 countries. So let me just start by fly over a summary of the first quarter of 2026. So we delivered solid growth in Q1, 3.8% is within our guidance. And it's really driven this year by a positive trend in U.S. in capital sales and strong sales in rest of the world. And also this year, as you saw in Q4, the flu season was not as strong as it usually is for us in U.S. and that has continued. So this is despite a somewhat weak flu season. So we are -- we think this is really a stable result that we deliver. The gross margin is slightly below last year, and we are, of course, put under continued pressure when it comes to currency and the tariffs in U.S. We are working with trying to compensate this through efficiencies and also to manage our costs in a good way and then looking into price adjustments, especially considering the situation that is in West Asia. So still uncertain how this will affect us, but we are preparing for making sure that we manage those effects. So just to also highlight, we had healthy cash flow in the quarter compared to last year, it's an improvement, and it follows the seasonal pattern. So this is also something to mention. The adjusted EBITDA came in at SEK 456 million. And maybe one thing to highlight is that we started in the quarter to work on our future strategy, and we've had very intense work and a lot of engagement across the company, and we are progressing in a really good way. And I will come back to this a little bit more towards the end. So if I zoom in a little bit on sales in North America, we had both in Canada and U.S., really strong end to the quarter. So month of March was really strong. In total, I would say that U.S. continued to grow in the quarter, and Canada came in slightly below last year. But they really met some very strong comparable number. So all in all, a really strong performance is what we have seen, meeting very strong comparable numbers. Of course, when you meet stronger numbers, the percentage growth is, of course, affected. And as I mentioned before, for U.S., the flu season was not as strong as it usually is but we compensated that through capital sales in Patient Handling. If you look at the rest of our sales beyond North America, in Western Europe, we were struggling a little bit and it's mainly U.K. that is helping us with it -- not helping us, but that stands with the decline. And most other markets are performing in a good way, and especially France and Italy have had a really good performance in the quarter. Rest of the world beyond Europe then and North America was really, really strong, and the growth was really carried through several markets performing, but the shout out, especially to South Africa that delivered a large medical beds order in their region. And I just want to hang on that topic just because it gives some flavor to what we're doing. So we have modernized 36 health care facilities in South Africa, this was a special product tailored for their needs. So 2,300 new, more than 2,300 new beds and mattresses. And this to us is not just -- it's a logistic exercise. It's an installation exercise. It needs to be done when it suits the hospital and it needs to be done with good margin and good cash conversion. And all of this came to life through really good strong teamwork from customer to back in supply chain. So by that, I hand over to Christofer. Christofer Carlsson: Thank you, Andreas. As Andreas stated, we had a stable start of the year. Overall, our gross margin came in at 42.6% compared to last year's 43.7%. Looking at the drivers. The growth in Patient Handling improved group margins, driven by strong development for our floor lift Maxi Move 5 and ceiling lift. Also, our Diagnostic business improved margins driven by higher volumes and a favorable sales mix. The Rental business gross margin slightly increased, driven by France, U.K. and Australia, while U.S. had a negative development due to weaker flu season and some capital conversion among customers. However, the main part of the gap came from an unfavorable product and country mix impacting the gross margin by minus 1 percentage point, mainly related to a large medical bed order in South Africa. At the same time, U.S. tariffs had a negative impact of SEK 10 million year-over-year, representing a 0.4 percentage point decline in gross margin. In addition, FX had a minor negative impact on gross margin but in absolute numbers, the gross profit and negative FX effect of SEK 123 million. Finally, our Service business margins were in line with last year when excluding U.S. tariffs. If we now move on to the EBIT slide. Next slide, please. As you can see, adjusted EBIT in Q1 came in at SEK 190 million compared to SEK 208 million last year. However, when excluding U.S. tariffs and FX, the result is in line with last year. Looking at the costs, OpEx declined in the quarter due to FX effects, at the same time, the organic OpEx increase was 2.8%. In addition, we had a positive effect from revaluation of accounts receivable and accounts payable of SEK 3 million in the quarter reported under other income and expenses. Last year, the equivalent amount was minus SEK 34 million, resulting in a delta of plus SEK 37 million year-over-year. So overall, the total FX impact on adjusted EBIT amounts, therefore, to a minor amount of minus SEK 7 million in the quarter. Moving to EBITDA. Adjusted EBITDA for the quarter was SEK 456 million compared to SEK 486 million last year. And adjusted EBITDA margin was in line with last year and came in at 16.9% versus 17.0% last year. The EBIT margin increased to 6.8% versus 5.9% last year. This improvement was supported by lower restructuring costs that came in at minus SEK 6 million in the quarter versus SEK 40 million last year. Now we move over to working capital and cash flow. Next slide, please. Operating cash flow improved in the quarter amounting to SEK 237 million. This was SEK 53 million higher year-over-year, mainly due to improved cash flow from working capital. Following our normal season pattern, the change in working capital were minus SEK 142 million versus minus SEK 180 million. Working capital days increased to 83, up from 81 in Q1 '25. Cash conversion in the quarter improved to 52.7% compared to 41.3% last year. For reference, our cash flow from investing activities was minus SEK 135 million compared to minus SEK 215 million in Q1 '25. The decrease is mainly due to SEK 48 million lower investment in rental assets. If we now move over to the net debt and leverage. Next slide, please. The decrease in net debt this quarter is driven by improved operating cash flow, lower investments and positive FX effects. Our financial net came in at minus SEK 36 million compared to minus SEK 43 million in Q1 '25. The improvement relates to some positive FX effects. Our cash position remains strong. Net debt to adjusted EBITDA stayed flat versus the year-end and came in at 2.2. Our equity ratio stood at 50.5%, up from 49.8% at year-end '25, mainly due to positive FX effects in equity. With that, I will now hand it back to you, Andreas. Andreas Elgaard: Thank you, Christofer. So I thought that it would be good maybe to just share a little bit on how the work of shaping the future of Arjo is going. And too early to reveal anything, but I can still try to give you a flavor on what we're doing. And we put the headline here, but it will be a story of untapped potential because being new now into Arjo soon, 4 months into the role, I see a lot of potential in the people, in our relationships with our suppliers and in the relationships with our customers. It's really -- it's not just an industry that has healthy growth expectations, but it also Arjo as an organization is really filled with potential. But this in order to be able to untap that, we really need to have clarity on where we're going and make sure that we build the capability to execute as well. So one way of doing that is by inviting leaders from across the organization to make sure that we build a common ground, we create alignment, we create understanding on where we are and where we need to be in the future. And by doing that, you don't just get the strategy that comes from top, you get a strategy that is well anchored across the organization, and that really helps you when it's time for execution. So our ambition is to go from strategizing straight into execution, that is the ambition. And creating a clarity in where we're going is really important for everything from product development to supplier relationship development and to product development. But it's also very important if we want to continue to grow also in new product segments or if we want to open new segments where care is moving. It will also be something that will guide us if we need to accelerate our growth or our strategic movement through acquisitions in the future. But strategy and talking too much about the future, sometimes can dilute the focus on here and now. And I, for one, is super focused on that we need to deliver two things. We need to deliver clarity for the future, so we know how to execute and build the future Arjo, but we also need to deliver results short term. So what you can expect from us is a strategy that will focus both on the here and now and how we lay the foundation for the future. so you will have both of it so to say. And our ambition is to get this strategy approved during summer and that we will be able to communicate that to you after the summer. That means the second half of 2026 so that's a little bit the status on where we are by in the work of creating the future Arjo. And by that, we hand over to the Q&A section. Operator: [Operator Instructions] The next question comes from Filip Wetterqvist from SB1 Markets. Filip Wetterqvist: I have a couple. First, can you quantify a little bit more on the contribution from the 36 facilities in South Africa to global sales organic growth? Like what would the underlying organic rate have been ex this order? And how does that inform into the exit run rate into Q2? The first one. Andreas Elgaard: Okay. Thank you for your question. I don't think we have communicated the size of the single order. And I do think that when we have orders of materiality, we will do press release and specify those things. So we have not done that. So we are not giving guidance on that because that will reveal information to competitors that we don't want to reveal. But 2,300 -- more than 2,300 beds to 36 care facilities. It is a substantial order, but we don't judge it being material. Filip Wetterqvist: And my second question, you mentioned Middle East cost pressure from Energy & Transportation as a fresh headwind here in the report. Did you see any impact already here in Q1? Or do you anticipate it in Q2? And what is the current run rate assumption for '26? Andreas Elgaard: Yes, thanks for the question. So we have seen a minor effect in Q1. But of course, we and everybody else in the world are very much aware of how much oil affects not just the energy sector, but every -- I would say every process industry and every food production farm in the world through the production of fertilizers. So of course, this will have effects. But we -- so we are preparing to try to mitigate that in the ways that we can. We don't give forecasts on what that might be because -- and I don't think Arjo is the best equipped to give forecast on the financial consequences of the crisis that is ongoing right now. But given that, of course, we are preparing us for the scenarios that we see internally. So I hope that answers your question enough. And I mean if this conflict becomes short term, hopefully, there will still be effects. That's for sure. But if it becomes short term, I also think it will be something that the world will be able to manage. And this is something that affects Arjo in the same way as it affects everybody else. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Andreas Elgaard: Okay. Thank you very much. So today is the Annual General Meeting. So we are super excited. There will be more than 120 shareholders that will come and listen to us, and we will give a similar message to them. But of course, we will focus on 2025. We'll give a short highlight of the first quarter this year, and we will also give some flavor on the strategy work. So we'll share a movie where different leaders from Arjo is talking about that. We are really excited about that. And by that, we say thank you for this call, and we remain at your disposal. Bye-bye. Christofer Carlsson: Bye-bye.
Tom Erixon: Hello, and welcome to Alfa Laval's first quarter report. Fredrik and I will share some time going through the details. Because of today, we also have an AGM starting relatively soon, we need to limit this call to 45 minutes. So our apologies if our Q&A session is slightly short. With that, let me, as always, go to some first introductory comments before moving on to the presentation. So first, overall, we felt we had a stable quarter, well in line with our expectations. The pattern of a strong transactional business and a hesitant project business continued in the quarter. Second, the implementation of the new operating model continued in a high pace with adjustments to the financial reporting, management appointments and consolidation in various areas. The financial weight of the changes during this process was limited in the quarter. And then finally, with the war in the Middle East, our main priority has been employee safety in the region and appropriate customer support in difficult times. The financial impact on Alfa Laval was limited in the first quarter and medium term, the energy crisis may provide both some downsides and some upsides across the world in terms of our customer base. So with that, let me go to the key figures. We started '26 well with order intake growing sequentially and with a 6% organic growth compared to last year. Sales was on the low side, partly because of a very high invoicing towards the end of 2025. Despite the lower invoicing and big currency movements, the margin improved slightly to above 18%, mainly due to a positive mix. Moving on to the Energy division. Demand was as expected on a very high level across many end segments, and with a continued recovery of volumes in HVAC, including the heat pump market. The data center business was as expected, strong and continued to grow in the quarter. Going forward, we are now starting to build the data center order book for 2027. We are, of course, concerned for our customers in the Middle East with the damage inflicted on critical infrastructure. The rebuilding process in the region is not clear to us at this point, but we are ready to put all available resources to support the regional needs in the years to come in this very critical situation. Then to the Food & Pharma division. Demand was firm with a 9% organic growth in the quarter. While the transactional business was on a new record level, it was gratifying to finally book sizable oils and fats projects in Brazil, including biofuel components. The outlook for biofuel projects is improving gradually with a viable project pipeline going forward. The consolidation of the BU structure continued in the quarter and in addition to building the future growth platform for the Pharma business. In the Ocean division, we remained as expected on a lower order intake pace compared to the record last year. But at the minus 12% organic decline, it was still a good quarter and better than expected. Ship contracting at the yards was very active due to high freight rates and longer shipping routes. It had a positive effect on orders in general and for cargo pumping specifically. In this application, we are now starting to build the order book for 2028. The energy crisis may trigger additional offshore projects outside of the Gulf to gradually compensate somewhat for the shortfall of volumes. It may impact our offshore business in a positive way going forward. The margin remained stable at around 22% based on the solid order book, which will continue during 2026. Then on to Service. On group level, we remained at about 30% of orders in Service for the Ocean division higher due to the slightly lower capital sales and for the Energy division, the opposite at 25% of total orders due to significant growth in capital sales, especially on the data center side. Volumes were perhaps a little bit on the low side overall and flat compared to last year. We expect to regain the growth path in service going forward. In the Ocean division, there is a negative effect though from sanctioned ships that we cannot serve amounting to about 5% of the global fleet at this point. In addition, there is significant stress on ships and crews in the current crisis, which may delay some service work further. In general, though, as I said, we expect to return to growth in the year. A couple of comments on the top markets and regions. As you know, China and the U.S. are 2 top markets in some time, and both developed well in the quarter with the U.S. on a new all-time high. Our expansion plans in both markets continued with full speed with several site investments in both countries. We also added a smaller Chinese heat exchange companies to the group, supporting their growth plans as well as creating a better coverage of the Chinese market for Alfa Laval as a whole. In terms of the regions, please note that the numbers includes currencies, so they're not the organic. They are the overall growth numbers. And as mentioned, North America and Latin America had a very strong quarter with significant growth, especially in the North America. Europe was flattish with the exception of Eastern Europe that grew well in the quarter. Middle East and India, both faced headwinds due to the ongoing crisis and the energy crisis, and that was reflected in the order intake at this point. And in fact, both India and Southeast Asia are the 2 regions with the biggest short-term exposure to the energy crisis at this moment. Finally, Northeast Asia had a good quarter overall. But of course, they are impacted by the very high marine orders from Q1 last year. Other than that, China and Northeast Asia developed well in the quarter. So that's a summary where we are on that. And I'd like to hand over to Fredrik for some further details. Fredrik Ekstrom: And thank you, Tom. So moving on then to some comments around orders received. But before I start I have some additional comments on order intake and a quick word on the change. We have adopted an order intake approach that reflects new orders in the quarter only, meaning revaluations of the order book are not deducted from the order intake. This is highlighted and explained in more detail in Note 1 referring to accounting policies in the quarter 1 report. And now to some additional comments on order intake. A clear impact on the comparability of figures is currency rates, where the SEK has appreciated against both the euro and the U.S. dollar over the last 12 months. This impacts the comparability with almost 10%. The structural component is related to acquisitions and mainly due to volumes of the acquired Cryogenics business. Organic growth in the quarter exceeded 6% with the Energy division accounting for a good part of that increase with growing data center volumes and a recovery in the HVAC end markets. Food & Pharma also noted a strong organic growth intake in its 2 largest markets, oils and fats and dairy while the Ocean division remained stable with a normalized marine pumping systems order intake. The order book closed in the quarter at SEK 48.7 billion compared to the SEK 48.3 billion at the year-end 2025. SEK 32.1 billion of this is scheduled for invoicing this year. The current order book supports a continued good invoicing level and the order book is assessed to be in line with current input cost levels and the book-to-bill in the quarter was 1.11. On to sales. Currently, we are only experiencing minor disruptions to our supply chain related to the escalated geopolitical tensions, primarily the conflict in the Middle East. Once again, we are impacted by currency with almost 9% negative comparability. Organic growth at almost 2% with a structural contribution of 3.8%. The aggregate impact is negative with 3.3% with a quarter sales level of SEK 15.9 billion. This level, which is somewhat lower than expected, is affected by delaying -- delayed invoicing of projects to a minor extent, transportation disruptions, particularly related to the Middle East and normal seasonality from quarter 4 to quarter 1. Our gross profit margin was on a high level of 39.9% compared to 37.5% in quarter 1 2025. The positive data can be traced to an accretive invoicing mix of transactional business and service, a strong factory in engineering result and good purchase price variances from cost levels set in our standard costing. On the cost side, S&A increased with 1.9% in the quarter and R&D with 4.2%. Approximately SEK 75 million cost increase in the quarter was related to the new divisional structure. Amortization of step-up values increased to SEK 174 million, reflecting the acquisitions made during 2025 with majority related to the Cryogenics business. Taxes also landed within guidance range and operating income in the quarter landed at SEK 2.7 billion. And finally, an EPS of SEK 4.59 with the majority of the deviation stemming from lower invoicing and currency impact. Adjusted EBITDA of almost SEK 2.9 million was, as previously mentioned, supported by a strong factor in engineering result, positive purchasing price variances and an accretive invoicing mix of transactional business and service, negatively impacted by currency with SEK 264 million and SEK 75 million related to the new divisional structures and strategy initiatives. 18.1% adjusted EBITDA margin in the quarter exceeded the 17.7% in quarter 1 of 2025 and is well above our target level of 17% over a business cycle. On debt levels, they have increased from quarter 1 last year, reflecting the financing of the Cryogenic acquisition. In the quarter, we have an MTN bond of EUR 300 million that has matured and been repaid. SEK 1.2 billion in commercial papers was issued, and we expect to issue a further amount of commercial papers during the coming quarter to cover the upcoming proposed dividend of SEK 3.7 billion. Net debt in relation to the last 12 months EBITDA was just shy of 0.7. The increase in lease liabilities reflects the balance sheet impact of renewed long-time leases for some of our operating footprint. Cash flow in the quarter saw a strong EBITDA contribution of SEK 3.7 billion. Working capital change had a negative impact of SEK 1.5 billion, where the majority comes from the building up of work-in-progress inventory and a strategic buildup of buffer inventories for some commodities that we believe are at risk of disturbance from the disruptions that are caused by the conflict in the Middle East. Capital expenditures were somewhat below guidance at SEK 529 million and yielded a free cash flow before acquisitions of SEK 708 million. Acquisitions in the quarter accounted for a cash flow impact of SEK 565 million, stemming from the majority share acquisition of the Chinese heat exchanger manufacturer and a SEK 50 million share in Industrikraft. Finally, the contribution of financing activities is related to the repayment of the EMTN bond of EUR 300 million and the issuance of commercial papers of SEK 1.2 billion. Finally, some financial guidance going forward. We expect CapEx to remain high but stable within a range of SEK 0.6 billion to SEK 0.8 billion in the next quarter and a whole year level within the range of SEK 2.5 billion to SEK 3 billion. Amortization on about the same level of quarter 1 with SEK 175 million and in the next quarter and SEK 600 million for the entire year. And finally, a tax interval of 24% to 26% for both quarter 2 and the entire year. And with that, I hand back to Tom for some forward-look commentary. Tom Erixon: Thank you, Fredrik. And while history is clear, obviously, forecasting in today's environment is somewhat complicated. We don't consider that the looming energy crisis and the war in the Middle East is having any major impact on our outlook in this moment in time. In general, we are somewhat more optimistic about the year now than when the year started about a quarter ago. And demand specifically sequentially for this year in the second quarter is expected to be on a group level, somewhat higher than the first quarter. And on a divisional level, we expect the Energy division to remain on the current all-time high level in the second quarter. We expect demand in the Ocean division to be higher than in the first quarter and we expect the Food & Pharma division to remain at approximately this level with both some upside and perhaps downside depending on how larger projects are materializing in the quarter. So that's where we are in terms of our forecasting in a crystal ball. And with that, I'd like to open up for questions. Operator: [Operator Instructions] The first question comes from the line of Daniela Costa from Goldman Sachs. Meihan Yang: It's actually Meihan here. I just want to have 1 question on data center business. What is the percentage of the energy businesses is data center now? And do you see a difference on the order intake trend on liquid cooling versus air cooling? And what's the ASP difference on those 2 products for you? Tom Erixon: If we move back 1 quarter, we then stated that the 12-month rolling order intake on the data center side amounted to approximately SEK 2 billion. If we move up to this quarter, now 1 quarter later, the ongoing rolling 12 months is at around SEK 2.5 billion. Obviously a bit higher in this quarter specifically, but over the last 12 months, that's what it is. So it's a clear growth trajectory as we have indicated earlier. We remain on that growth territory right now. I don't have in my head the split between air and liquid cooling, but what we have in the plans, and it's pretty clear is that we will have fairly slow, but still a meaningful gradual shift towards water cooling in the incoming orders. But I believe we are still clearly in the majority of the air cooling if I take it from the hip. We can confirm to you later on. But I think that's where we are. Operator: The next question comes from the line of Kim John from Deutsche Bank. John-B Kim: I'm wondering if you can help us kind of square the circle here. If you look at Clarksons data, I think you had some pretty good activity in tanker contracting. I'm trying to think about that and the cadence of your order intake, not just for Q1, but potentially through the rest of this year. Is that something that would have shown in your numbers at some point in time? Or is this still to come or am I misinterpreting here? Tom Erixon: No, I think we came in a bit stronger on the order book for new contracting in this quarter than we had expected when we started. As you know, the outlook -- your outlook was a little bit gloomy when the year started. I think right now, we are at the -- the count is at around 500 ships this year so far, which is significantly higher than last year at the same date. And so it looks like we are coming into a decent year of contracting and we saw a little bit of those effects and a little bit higher product tanker contracting than expected in the beginning of the year. And in March, we had a bit of effect on that, and we may very well have something on that kind also in Q2. Operator: The next question comes from the line of Gustaf Schwerin from Handelsbanken. Gustaf Schwerin: I have a few. Maybe starting with the invoicing level in Q1. Can you give us a sense of the magnitude of sales delay here? And also if this is an effect of customer decisions or something else? That's the first one. Tom Erixon: I'd be a little bit careful in sort of using the delay. What you should be aware of is that after the SEK 19 billion in invoicing in Q4, obviously, sort of we went a bit all in on the invoicing side towards the end of the year, and that had some spillover effect into Q1. We are shipping products on normal delivery times a normal delivery commitments without any major disruptions on our side. I think the difficulty we sometimes have is to predict exactly the percentage of completion. And so those payment schedules, typically they don't get accelerated. But for various reasons, in larger projects, the execution of those projects, they moved the time line a little bit here and there in terms of commissioning and final payments. And so I don't want to -- it's not an -- we're not looking at an operational problem. It's just a bit of seasonality between Q4, Q1, and perhaps not a perfect bridge to the timing of invoicing in the number of projects. Gustaf Schwerin: Okay. Secondly, on energy orders, clearly stronger than we had expected and also better than the comments you had back in Q4. I mean the main positive delta there is data center. Is there something else that's stacking out? Tom Erixon: I think there was a lot of things sticking out actually. I think the transactional business in Food & Pharma went to a new all-time high after a fairly strong Q4. That was not exactly in our mind at the time. The slight improvement on the ship contracting side was not exactly in our mind at the time. And maybe even the HVAC side, although we saw a turn already in Q4 last year. We picked up a bit better on that as well. So I think that there have been a number of contributing factors. So it sounds like I'm all super happy with all of the order intake. It's not -- that's exactly true. If we have 1 miss in the quarter, I think that is related to the service side, which is flattish compared to last year. There are some maybe small structural temporary reasons around that. So we feel fairly committed that we're going to return to a growth path for the rest of the year. But as an individual quarter, we didn't quite see the organic growth in service that we've been used to for the last 6, 7 years. Gustaf Schwerin: Perfect. Just lastly, the comment in the CEO letter around escalating cost inflation and you potentially considering price increases by midyear. I mean, how should we read that? As we stand now, do you foresee a material change in your cost base Q2 versus Q1? Tom Erixon: It is a reflection that the energy crisis we are going into is clearly, macroeconomic-wise continuing to drive an inflationary environment that has been higher than we've been used to for a long period of time, and we haven't got the grips with it. And this process that we have of escalating energy prices is not helpful in the current inflationary environment. We see specifically issues in part of our bill of materials. We see a bit of challenge on the logistical cost, and we are just not prepared to passively watch that escalation go on. And we are, by the way, not sure that this problem is over. And we are now returning back to some sort of normality on the energy side. So I think we created a bit of inflationary way ahead of us. And as we did last time when we had this problem, we will prefer to deal with it proactively rather than afterwards. But it's no -- it's nothing specific on Alfa Laval's sourcing mix or exposure that puts us in a different position than anybody else. I think you will see a number of companies doing the same thing. Operator: The next question comes from the line of Andreas Koski from BNP Paribas. Andreas Koski: Two questions. First on HVAC, where you're seeing the recovery continuing. Can you -- do you have a good feeling of how the distributors' inventory levels are today? Is there a possibility that we will see both end market demand improving at the same time as the distributors have to restock a lot after the destocking that we have seen over the many years? Tom Erixon: I'm looking at Frederik. Listen, I think I think we are -- when we look at the... Andreas Koski: I can ask it this way instead, if you want. I mean when we look at HVAC in the past, we were at a quite high level. And I think the heat pump business was at a total of around SEK 3 billion, and now we've been below SEK 1 billion when it comes to the heat pump business. So is there a possibility that we will reach the previous peak that we saw a few years ago in the... Tom Erixon: I think -- all right, let's take it from there. I think we actually peaked at around SEK 2 billion, if I remember correctly. And we've been partly down in the pace that has been below SEK 500 million. So this has been a really significant destocking. And we've seen now for a couple of quarters that the volumes are picking slowly up, and they were picking up a little bit faster in Q1 than before. But I don't think there's a lot of inventory, certainly not excess inventory in the systems right now. I think we are looking at -- we're looking -- we are still on less than half of the peak. So I think we are balanced with the market. I think the big question for us is how much? There's a number of questions as to the current energy crisis, how will it affect our business in offshore? How will it affect the electrification, the move to heat pump and a number of other areas. And so there are some upside coming from the current energy crisis in terms of energy resilience and diversification that may put some extra volume growth into the market. But otherwise, we expect a fairly slow growing heat pump market in Europe. And we expect to be maybe back towards the -- the then record levels early as 2030 or so. So it is -- that's our main business case. But of course, we may see increased subsidies and increased push again, higher gas prices and so on, that is again favoring the heat pump market. So it is kind of an upside, but I would not look at that upside as more than maximum SEK 1 billion or so, if I were you. Andreas Koski: Okay. Great. And then coming back to Gustaf's questions about potential price increases. And you mentioned that you're seeing inflation picking up. But can you just remind us how you are impacted by the tariffs? And if there will be an incremental impact for you because of the updated Section 232 tariffs? Fredrik Ekstrom: Yes. So as Tom expressed, I mean, the inflation that we're seeing is probably ahead of us, and it comes in the form of being -- staying close to our suppliers, and there's a signaling that for a lot of the energy-intensive inputs that we have into our products that, of course, that's being driven up by the current energy prices. That's one part of your question. And to the second part of your question, yes, there has been a shift in the so-called Section 232 or an update of it. I believe it was the second of April that the update went through. Our assessment when we look at it and we look at it from the different product groups and the different supply chains that we have is that it's fairly neutral for us. We don't see that we have a big impact neither negatively nor positively. There are some negatives and some positives, and they weigh out in the end. But of course, we keep a close eye on this. And you have to remember that when I say different supply chains. We have everything from delivering finished units to delivering components for assembly in the U.S. to spare parts and then there's whole host of supply networks around there that come from Mexico, Europe, China and so forth, it's a little bit different, but our assessment as it stands today is that it doesn't imply any major changes to the cost of tariffs as we have it today. And to be clear, from the new level that was set after the previous round of tariffs was deemed illegal. Andreas Koski: Understood. And then lastly, on the updated way of how you will present your order intake and that you will not include cancellations and revaluations. When you write about the order book in the text, in the report, will you there mention if you have had revaluations and cancellations? Or will we just see the order book development basically? Fredrik Ekstrom: Yes. No, you will see the order book development for certain. And referring to that change, I will remind you that when we went into quarter 1 last year and we had the big movements of the NOK and the U.S. dollar, in particular, to pumping systems where we had a revaluation of backlog that was reflected in our order intake at that point in time of almost SEK 800 million. And so the critique or the feedback that we got from the market was you're not really reflecting the demand and the new orders as you get them on the market if you're actually netting out revaluation. So this was a little bit a response from our side to say, let's align ourselves with the way the market is getting this information from other peer companies. So it was a little bit in response to that. So we don't see it as anything dramatic. I think the new number clearly reflects what the real demand is on the market and what the new orders in the quarter are. And I take on board your feedback on whether we should include it into the backlog in the report. Andreas Koski: No, because there is -- when I look at it now, there is a possibility that you have had some cancellations, which would also be interesting to know about, actually, because the order intake was SEK 1.6 billion higher than sales, but your order book only increased by SEK 400 million in the quarter. And that's why I was wondering if you would have mentioned in the text if you had cancellations or revaluations, but I understand that you... Fredrik Ekstrom: But I take it with me and just to answer the question, the lion part of that change is revaluation due to currency. Operator: The next question comes from the line of Klas Bergelind from Citi. Klas Bergelind: Sorry, I joined a bit late, maybe you covered some of this. So first, on Ocean, the higher demand you see into the second quarter. I'm trying to understand the dynamics between cargo pumping versus offshore and then rest of Ocean. Is this a step-up you see in cargo pumping or in the other categories, i.e., ex Framo? The reason for asking is that it typically take some time from contracting improvement until you see improved orders outside Framo. So that dynamic would be interesting. Tom Erixon: Yes. You're asking for a lot of granularity here. So I'm a little bit hesitant to meet your question too much. But as I indicated before, part of a slightly stronger order intake in the ocean than we perhaps expected for Q1 was related to higher product tanker contracting that had some effects at Framo. And it's possible that, that, to some degree, will continue. But don't keep me hostage for doing product-by-product prophesies. All in all, we see a slightly more favorable environment on it, and then you have to do a little bit of your own risk assessments there. Klas Bergelind: All right. Fair enough. My second was on the heat pump side. Did you say that there is a quarter-on-quarter improvement already in your orders now within HVAC? Or is this a sentiment improving? It feels a bit early that we would have a broad-based improvement in heat pump orders. I mean maybe in certain countries, but I'm just interested in what you said there. And sorry, I was late on the call, maybe you talked about this. Tom Erixon: Yes, we did but no problem. But there has been, over the last couple of quarters, a clear improvement in the volumes. Now I would say that the big part of that has been the completion of the destocking process, which was getting completed towards the end of last year as far as we could judge. And if we were correct in the depletion of excess stock towards the end of this year, then the first quarter order intake on heat pumps were reflecting a better production plan and a stronger production plan at our customer site in terms of their expectations into Q2, Q3. So we had a pretty clear growth at that point in time. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Tom Erixon for any closing remarks. Tom Erixon: Thank you very much. Thanks for being. It's a very busy day for all of you guys. So we appreciate taking the time and we're going to be off to AGM. And so hopefully meet some of our investors there. So thank you very much for your attention, and see you next quarter. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your line. Goodbye.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford First Quarter 2026 Results Conference Call. [Operator Instructions] As a reminder, today's event is being recorded. At this time, I'd like to turn the conference call over to Luke Lemoine, Senior of Corporate Development. Sir, you may begin. Luke Lemoine: Welcome everyone, to the Weatherford International First Quarter 2026 Earnings Conference Call. I'm joined today by Girish Saligram, President and CEO; and Anuj Dhruv, Executive Vice President and CFO. We'll start today with our prepared remarks and then open it up for questions. You may download a copy of the presentation slides corresponding to today's call from our website's Investor Relations section. I want to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein. Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our earnings press release or accompanying slide deck, which can be found on our website. As a reminder, today's call is being webcast, and a recorded version will be available on our website's Investor Relations section following the conclusion of this call. With that, I'd like to turn the call over to Girish. Girish Saligram: Thanks, Luke, and thank you all for joining our call. I'll start with an overview of our financial and operational performance, followed by a short-term outlook on the markets. Anuj will then cover specifics on financial performance, balance sheet, detailed guidance. and I will wrap up with some thoughts on the current operating environment and structural market dynamics before opening for Q&A. To summarize our Q1 2026 performance, we delivered revenue of $1.152 billion, adjusted EBITDA of $233 million at a 20.2% margin and adjusted free cash flow of $85 million. I would like to thank all of our One Weatherford team and especially our Middle East-based employees for their focus on customers, safety in a complex and challenging environment. I would also like to highlight our announcement during the quarter of a proposal to redomesticate from Ireland to the United States, specifically Texas, which we believe will simplify our corporate structure, enhance capital management flexibility and support long-term shareholder value creation. As illustrated on Slide 3, revenue declined 3% on a year-on-year basis, but it is important to note that it was predominantly driven by the divestiture of the pressure pumping business in Argentina. On a sequential basis, revenues were down 11%, reflecting typical first quarter seasonality and the conflict in Iran, partly offset by continued strength in parts of our international portfolio and some second quarter opportunities that materialized earlier in the first. North America was modestly softer as operators maintain tight budgets and U.S. land activity remained under pressure. Latin America declined sequentially as expected, but this was partly offset by higher artificial lift in Argentina. In Mexico, we continued to make meaningful progress in the first quarter. Collections remained strong and consistent, reinforcing our confidence in the new payment mechanisms we discussed on our last call. This not only supported our Q1 cash flow performance but also contributed to a sequential improvement in working capital efficiency. The Middle East, North Africa and Asia region was impacted by the Iran conflict in the Middle East which drove delays, dropped drilling and workover activity and resulted in project suspensions in multiple countries. Since the start of the recent Iran conflict and over the course of the past few weeks, our priority has been the safety and security of our employees and ensuring business continuity to the extent it was feasible. Each country in the Middle East has been impacted in different ways, and we have taken actions in close coordination with customers and advice from local authorities. While the drop in revenue and result in high decremental margins, the most obvious manifestation financially, we are also working through additional complexities. Freight costs have risen dramatically and with logistical disruptions, there are both delays and higher costs in moving materials and people to the appropriate locations. With the strong manufacturing, supply chain base and local expertise in the region, we were able to navigate the first month of conflict well. There was a financial impact, but that has been offset through contributions from the rest of the international regions and other items in the first quarter. However, with the prolonged nature of the conflict, the impact of lead times, inventory drawdowns, logistical bottlenecks, the impact is expected to show more clear in the second quarter, both in the region and to shipments outside the region. With the assumption that the conflict is behind us and activity starts to normalize towards the latter part of the quarter, we believe the conflict would result in about $30 million to $50 million profit impact over the first half of the year. However, we are very encouraged about second half 2026, along with increasing confidence in activity levels in 2027. As the region rebounds in response to a growing need for energy security, we believe we will be well positioned to assist our customers in their efforts to normalize operations and provide that energy to the world. From a segment perspective, WCC revenue was largely flat year-over-year with higher Liner Hangers activity, partly offsetting lower cementation products and TRS activity in MENA. DRE revenue declined 8% year-over-year, primarily from lower activity in Latin America, MENA and North America, partly offset by higher wireline and drilling services activity in Europe. PRI revenue declined 11% year-over-year, mostly driven by the sale of our pressure pumping business in Argentina, partly offset by higher subsea intervention activity. Across all 3 segments, our product lines continue to benefit from differentiated technology, a strong installed base and the operational and manufacturing capability we have built over the past several years. Our first quarter adjusted EBITDA margin came in at 20.2%. Typical Q1 seasonality resulted in lower margins and that was further exacerbated starting in March by the Iran conflict. We remain focused on productivity and cost actions to support margin performance. And barring the Iran conflict persisting, we believe they will result in margin expansion in the second half 2026. We are also taking further actions to fine-tune our portfolio through a series of small not core divestitures. These will each be smaller than our Argentina Pressure Pumping divestiture by divesting these businesses should remove lower-margin revenue from our portfolio base, reduce capital intensity and align with our strategic priorities. Our adjusted free cash flow for the first quarter was $85 million, which was supported by very strong collections across most of our geographies, including continued progress on payments from our largest customer in Mexico. Importantly, our Q1 working capital efficiency improved by approximately 100 basis points sequentially, reflecting disciplined execution and the positive impact of continued strong collections. We believe free cash flow conversion will improve for the full year versus our prior expectations with continued progress towards a 50% through-cycle target. Turning to our segments. Slide 7 through 9 layout key highlights. During the quarter, we continued to build momentum with new contract wins across our portfolio and key regions. These wins are a testament to our operational and technical capabilities to deliver a range of differentiated technology and cost-effective solutions for our customers. I'm especially encouraged by key awards this quarter, including a multiyear integrated conditions contract with TotalEnergies in Denmark, a 5-year TRS contract with Phu Quoc POC in Vietnam and a multiyear contract with Shell to provide artificial lift in Argentina. On the operational side, in our PRI segment, we completed the AlphaV casing system deployment in the U.K. sector of Liverpool Bay. We also achieved important milestones in the Kingdom of Saudi Arabia, where we set a new global record for extended reach wireline worth logging over 29,000 feet measured depth with our compact well shuttle system, successfully executed the first rigless thru-tubing sand-control gravel-pack there, restoring a shut-in gas well without a workover rig. And we also successfully trialed our rod lift system at the Jafurah gas field. Now turning to our outlook. As we near the second half, we are encouraged by a number of contract awards and project start-ups that should lead to noticeable second half growth over the first half. However, it goes without saying that the conflict in the Middle East must conclude and operations must normalize to pre-conflict levels. These startups in the second half include Argentina, UAE, Brazil, Australia, Indonesia and Egypt. We are encouraged that second half 2026 international revenues could possibly be up year-on-year and are constructive on 2027 being a year of growth. Furthermore, we are seeing early signs of improvement in offshore deepwater activity, underpin a rising service-related demands in core basins such as Gulf of America, Brazil, the Caribbean and the Caspian Sea. With that, I'd like to turn the call over to Anuj. Anuj Dhruv: Thank you, Girish. Good morning, and thank you, everyone, for joining us on the call. Girish has already shared an overview of our first quarter performance. For a more detailed breakdown of the results, please refer to our press release and accompanying slide deck presentation. My comments today will center around our cash flow, working capital, balance sheet, liquidity, capital allocation and guidance. Turning to Slide 21 for cash flows and liquidity. In the first quarter, we generated $85 million of adjusted free cash flow, representing a 36.5% adjusted free cash flow conversion. This compares favorably to the 26.1% conversion we delivered in the first quarter of 2025 and was supported by very strong collections across most of our geographies, including continued progress on collections from our key customer in Mexico. While sizable collections remain outstanding, recent payment trends have remained consistent, reinforcing our confidence in the full year free cash flow outlook. Our adjusted net working capital as a percentage of revenues was 27.9% in the first quarter a sequential improvement of approximately 100 basis points, driven largely by improved collections relative to the revenue base, supported by continued collections from our key customer in Mexico. While the year-over-year comparison remains affected by the revenue base decline, we are encouraged by the direction of travel. All things considered, we remain fully committed to our internal initiatives aimed at achieving the goal of 25% or better. As we stay agile and adapt to evolving market conditions, we continue to execute on a series of cost improvement actions across the company during the first quarter. Our cost optimization efforts remain guided by 2 objectives. First, we are rightsizing elements of our cost structure, including headcount, real estate and supply chain footprint to better align with activity levels with a clear focus on ensuring each incremental dollar invested supports profitability. Second, we are maximizing the productivity of the current cost base by leveraging shared services, digital platforms, in artificial intelligence to enhance efficiency and margin performance. We have seen the impact of these cost actions in the first quarter, and they have helped partially offset the impact of revenue decrementals, pricing pressure, geopolitical conflict in the Middle East and the Argentina divestiture impact. During the first quarter, CapEx was $54 million or 4.7% of revenues, down approximately $23 million compared to the first quarter of 2025. As we align our budgets with the current market conditions, we continue to expect the midpoint of CapEx for the full year 2026 to decline relative to 2025. Given our investment in our infrastructure programs, the mix of our CapEx spend in 2026 will be noticeably different. Our CapEx on product and service line assets will decline commensurate with market activity and the completion of build-out on key projects, but we will see an increase in IT-related spend on our ERP systems. We continue to remain in the 3% to 5% range that we have laid out and will make the appropriate and prudent trade-offs through the cycle with cash returns guiding our decisions. In the first quarter of 2026, we returned $30 million to shareholders, comprising $20 million in dividends and $10 million in share repurchases, reflecting the 10% increase in quarterly dividend announced in January. Since the inception of the shareholder return program, we have now returned more than $330 million to shareholders via share repurchases and dividends. Our balance sheet remains very strong. At the end of the first quarter, we had approximately $1.05 billion of cash and restricted cash our net leverage ratio remained well below 0.5x. This outcome reflects our focus on strengthening the capital structure over time. Our stronger-than-ever balance sheet provides a solid foundation to not just navigate business operations in a challenging environment, but also pursue strategic opportunities. Turning to second quarter 2026 guidance on Slide 22. We expect revenues to be in the range of $1.017 billion to $1.110 billion and adjusted EBITDA to be between $195 million and $220 million. The sequential decline in the range is primarily a function of the Iran conflict and the operational disruptions in the Middle East. We expect adjusted free cash flow in the second quarter to be broadly in line with first quarter levels. For the full year 2026, we have greater confidence in the second half ramp, but our refining our guidance ranges to reflect the impact of the Iran conflict in the first half. Revenues are now expected to be in the range of $4.5 billion to $4.95 billion and adjusted EBITDA is expected to be in the range of $945 million to $1.075 billion. Adjusted free cash flow conversion is now expected to be in the mid-40% range, reflecting increased confidence on collections combined with our operational initiatives, and their effective tax rate is expected to be in the low to mid-20% range for 2026. Thank you for your time today. I will now pass the call back to Girish for his closing comments. Girish Saligram: Thanks, Anuj. Before we open it up to questions, I want to step back and address the macro backdrop as I know it's the lens every one of you is applying to our results and to our guidance. The first quarter unfolded against the most severe disruption to the physical oil market in the industry's history. I want to acknowledge and recognize the leadership efforts and resilience of our colleagues customers and partners across the Middle East region. Our people performed extraordinarily through this period. Operations continued in a lot of cases, and the attitude and focus of our team was, frankly, one of the proof points I'm proudest of this quarter. The conflict in Iran, the closure of the Strait of Hormuz in early March and the subsequent damage to infrastructure across the Gulf pulled roughly 20% of seaborne crude and significant LNG volumes out of the market almost overnight. Several well-respected sources have indicated this will take months to years to fully repair. The IEA has characterized this as the largest supply disruption in the history of the global oil market, and I don't think that framing is hyperlinked. The April 8 ceasefire was a welcome development, but OPEC+ March supply fell by more than 9 million barrels a day, month-on-month, and prompt physical cargoes are still trading at meaningful premiums to the strip. Even right now, it is clear with the daily announcements and volatility that the notion of the strait being completely open to passage is not being manifested in reality. Now what does all of this mean for our industry and specifically for Weatherford? I'd offer 3 observations. First, energy security has been fundamentally rewritten as a strategic priority, not as a slogan, but in capital plans. You're having conversations today with national oil companies, IOCs and independents that simply were not happening 6 months ago. And those conversations are about adding productive capacity adding redundancy and hardening infrastructure. Second, the demand destruction the IEA is flagging in its most recent monthly update, concentrated nation petrochemicals and aviation is in our view, cyclical while the supply response required on the other side is structural and multiyear, you cannot replace 9 million barrels a day of OPEC+ output with inventory releases indefinitely. And third, while it won't happen overnight, the pricing environment or services should eventually tighten because the same service intensity that funds reinvestment economics for our customers is the service intensity that flows through our P&L. Against that backdrop, our outlook for the second half of 2026 and into 2027 and beyond is splendidly, the most constructive it has been since late 2023. In the Middle East, we expect multiyear acceleration of capacity and resilience programs across Saudi Arabia, the UAE, Oman, Iraq and Kuwait, and are very well positioned to participate given our installed base and our integrated offerings across drilling, completions and production. There are structural multiyear tailwinds, and we should see a reacceleration of FID activity in North American East Africa and Eastern Mediterranean gas projects that had been previously deferred. In North America, higher sustained prices and a renewed policy emphasis on domestic production should translate into rising completion intensity, and our portfolio is leveraged directly to that activity. In international offshore and in mature field intervention, where our artificial lift and well services franchises are differentiated. We see a demand set that looks to us more like the front end of a durable up cycle than a late cycle peak. To be clear about what I'm telling you, while the immediate couple of months are a bit murky, we believe the industry is entering a period of multiyear visibility that is rare in the sector and Weatherford's portfolio, our geographic mix and the operating discipline we built over the last several years position us to convert that environment into earnings, free cash flow and capital returns at a rate that I believe the market has not yet fully appreciated. We will stay disciplined. We will continue to execute on the capital allocation framework we laid out, and we will keep doing what we have done every quarter, tell you exactly what we see, deliver against it and let our results speak. Thank you for your time this morning. Operator, we are ready for questions, and please open the floor. Operator: [Operator Instructions] Our first question today comes from Dave Anderson from Barclays. John Anderson: So you tend to be a bit more measured in your outlook, as we've seen over the years, but this is a pretty big shift in tone from you. Some inspiring closing remarks, and I agree this is -- seems to be a rare opportunity in terms of visibility. You were saying it's the most positive in 2023. I was wondering if you could talk a little bit more about the structural shift you're seeing, maybe a few of the areas where you think you're really going to excel. And also, if you could touch on some of the conversations you were mentioning, kind of how all the different customers are talking to these days and kind of what those conversations are about. I just kind of want to see if you could elaborate a little bit more on all this. Girish Saligram: Sure, Dave. Appreciate it. And look, you're right, we do tend to be a tad bit measured about it. But look, at the same time, we are always keen to point out that we are very clear about what we see and we deliver to that. And look, this time around our comments truly reflect that we feel that the mid- to long term is incredibly positive for the sector. Look, it's unfortunate the way it's come about, the backdrop is not great and especially from a humanitarian standpoint. But from a business standpoint, as this conflict comes to end, we think it's going to really result in structural dynamics that are very beneficial. So let me walk you through a couple of things. Look, first of all, as we pointed out and as everyone knows, there's been a lot of disruptions operationally on activity. So there is going to be a lot of work to go in and restart production. That's going to require service intensity. Again, we are very well positioned with our production portfolio. What tends to happen when you've also got production that shut in as some of our customers do, when you bring these wells back up, it's not a guarantee that you're going to get back at the exact same flow rates. And so you might have and likely will have in multiple circumstances, additional intervention work, et cetera, to go back in and make sure you're getting the same production rates. Again, very well positioned to participate in that. And then lastly, you will to offset that decline in production need more drilling. And again, that's where our existing contract base comes very handy. On the other side of the equation from a demand standpoint, what we think is, first of all, you're going to have to replace all the strategic reserves that have been depleted. That is going to take a fair amount of catching up to do. But this notion of energy security that I alluded to in our prepared remarks, we think it's really important, and you'll see a lot of customers do 2 things. First, customers who don't have any sources other than import will look to expand their strategic reserves, and I think that will create a demand stimulus. And the second is countries who have both oil and gas operations but still net importers will emphasize their own local operations a lot more heavily, and we are starting to see that today with multiple customers outside of the Middle East that we are talking to about expansion plans because they want to reduce their reliance on imports. So net-net, what we think is this will lead to structurally higher oil prices and LNG prices, et cetera, which flows back to structural demand for our business. And so we think, look, coupled with what we see in the offshore side of the world, we think for the next few years, this is going to result in significantly more opportunities for us. John Anderson: The world has certainly changed. Girish Saligram: As indeed. Operator: Our next question comes from Scott Gruber from Citigroup. Scott Gruber: I want understand the Middle East just given that the activity set has been very dynamic there. And your exposure differs a bit from larger peers. So just curious if you could walk us around the region, which countries and which product lines have been most impacted by activity disruptions, which have been more resilient, just some color on that complexion and that dynamic would be great. Girish Saligram: Sure, Scott. Look, I want to start off by truly acknowledging our gratitude to our customers. Their leadership has been phenomenal in the face of some very adverse circumstances. So Aramco ADNOC, KOC, PDO -- the list goes on and on. Every single customer has really, really taken a lot of effort to ensure safety, the security of all of our employees, making sure that everyone feels the same, facilitating logistics and that's helped a lot. Look, as we look at it, before I go country by country, one of the things that's important to note, for us, you're right, the Middle East has been our largest region. It's the region where we have the largest share. But as a result, we have a lot of local capability in the region as well. We have local capabilities in each country. It's also where we have our flagship manufacturing. And as a result, we were able to withstand the first half of the conflict reasonably. We had built in inventory levels, and we worked at alternative logistics routes within the region to make sure that everyone was well supplied and well stocked. . As we look at it sort of on a country-by-country basis, everything is -- every country is a bit different. In Oman, for the most part, operations have been fairly normal, and there's really been no disruption. In Kuwait, we have seen some disruptions and some slowdown of activity. In Iraq, there has been some suspension of projects, and that is where one of the countries where we had to evacuate some personnel as well early in March. In Saudi Arabia and the UAE, most of the operations have been normal with the biggest impact being on the offshore side. So I think what we have really seen over the course of March is on a day-by-day, week-by-week basis, things started to slow down a little bit more. And so that's why, as we pointed out, we did have an impact, but it was muted, and we were able to offset it with other things. And then going into April is kind of when everything was sort of at the level that we are currently seeing that run rate off and truly sort of at a disrupted level. Operator: Our next question comes from James West from Melius Research. James West: I wanted to kind of flip the Middle East question around and talk about or get your thoughts on countries that have restarted operations because we -- we're hearing about activity pickups in Iraq, in Kuwait, Saudi on land didn't really shut down. And so the disruption is not 100% everything in the Middle East is down. It's not that the countries aren't trying to get back to work either. We obviously have storage issues and transport issues. But -- but it seems to me like the -- your customer base is trying to get back to operations. And I wanted to clarify if that's the case and that's what you're seeing. Girish Saligram: Yes. Look, I think that process has certainly started. Again, it varies on a country-by-country basis, James. I'll start with Qatar, which was probably the most affected. I didn't talk about Qatar earlier. Again, Qatar Energy has done a wonderful job with their leadership of making sure that safety was truly the one priority for personnel, but they've started to sort of start drawing up plants, get back, et cetera. But look, I think rightfully so, every country, every customer is being careful about this, has been cautious, has been thoughtful and making sure that they're prioritizing safety and security above everything else, but also doing this in a fashion that is going to be sustainable over the long term versus just a let's rush back and do something that is half big. So we are starting to see a little bit of a normalization. But I think until the Strait fully opens and everyone can start loading up cargoes, it's going to be very difficult to get back to that full sense of normalcy just because storage capacity is essentially running out, and there's nowhere to go with the barrels. So -- so I think that's going to be a gating factor on really getting back. And then, of course, making sure that the ceasefire is truly permanent on the offshore side, especially, I think that's going to be another thing that everyone's going to look at. So we are starting to see plans getting drawn up. Everyone is starting to work towards that. There is a little bit of activity in a few places, but nothing yet that would suggest that we are back to immediate novelty. But I'm confident that, that will happen and hopeful that will happen over the course of the quarter. Operator: Our next question comes from Saurabh Pant from Bank of America. Saurabh Pant: Maybe I want to flip a little bit and talk a little about Mexico. It seems like things are steady, positive and steady is more important than positive alone, perhaps, right? But I saw in your press release, you were talking about the rebound in activity in Mexico in 1Q, I know that from a low base in 1Q of last year. So maybe you can talk to how things are moving on the ground in Mexico. And then any early commentary you can give, Girish, on 2027, how that might roll in Mexico? And then perhaps, Anuj, if you want to just talk a little bit about the new payment mechanism with your largest customer there? And then just what's baked into your free cash flow outlook for the year, just from a collection standpoint. Girish Saligram: Sure. So, look, on Mexico, I think suffice to say, we are very encouraged by what is happening. Look, we have said this multiple times. It's really about being steady right now. And thank you for noticing that. It's not about now all of a sudden a big growth inflection, but we are encouraged that there is stability we think that stability will continue on an activity level. And look, there's now additional customers as we diversify our revenue base in Mexico. So I think over the next few years, it will be a bright spot. Right now, we're just very pleased with the fact that activity levels have normalized, and we are starting to get paid, and I'll let Anuj talk a little bit more about that. Anuj Dhruv: Sure. So on the payments and collection standpoint, Saurabh, we are very constructive on collections. So if you recall last year in 2025, the government of Mexico announced a few structural reforms with the essential goal being to create an environment where the -- our largest customer in Mexico is structurally and financially sound. And that included pre-capitalization. It included other tax reforms and so real structural changes and not cyclical changes that were put in place. And since then, the collections or the payments, I should say, from our largest customer in Mexico have been like clockwork. They put in a $13 billion mechanism for payments from Banobras, and that mechanism has worked extremely well. So in Q4, we received a large payment from them. In Q1 of this year, we received a large payment, and we expect this trend to continue. And so we're expecting collections to come in Q2 as well as in the back half of this year. Taking a step back, on the total balance we have from our largest customer in Mexico, it's about $283 million as of March 31 in our Q, and we're constructive that we'll continue to get these collections here over time. And so if you add all that together, this is one of the backbones and pillars for why we are optimistic on our robust free cash flow generation for the year, and we've guided to the mid-40% on a full year basis. And on this topic, as we're here, I do want to take this opportunity to thank the local team in Mexico. They have done an excellent job working with our largest customer there in getting these collections through the door. Operator: Our next question comes from Doug Becker from Capital One. Doug Becker: Girish, you gave us some high-level comments about project start-ups that supports your confidence in the ramp. I was hoping you'd go into more detail about the moving pieces for the back half of this year and 2027. Girish Saligram: Yes. So Doug, I'm not going to call out specific contracts, of course. Look, we mentioned a few countries. Over the past 2, 3 quarters, you've seen us make several announcements on on new contract wins, I think that's really what feeds into that second half ramp that we expect. We also typically have a higher degree of seasonality from a product sales standpoint, both on completions as well as artificial lift that leads into the second half. So we see that pipeline. We've got the purchase orders. We've got the manufacturing teams cranking on that. So we feel very good about that. Look, the last piece of it is we've got several significant capital sales contracts, then this really leads into both '26 and '27 on the offshore side that we feel very good about. And some of it will come in this year, some of it will come in next year. And then typically, those get followed up with aftermarket pieces as well. On the offshore side, we've seen a lot of different announcements from operators. We've got [indiscernible] plants that are moving forward for operations to start up in the latter part of this year in early 2027. We've got expansion plans, whether it is in the Eastern Mediterranean, the Caspian. We've got the Caribbean. And look, we've got several contracts on there that we are in the process of mobilizing for our CapEx spend reflect some of that as well as well as our personnel moves. So all of that really sort of puts that together and brings it up. Operator: Our next question comes from Derek Podhaizer from Piper Sandler. Derek Podhaizer: I just want to maybe talk about quantification of the Middle East impact a little bit more. You pointed to the $30 million to $50 million of profit impact. How do you -- how should we think about the split between lost revenue versus elevated costs and logistics, the fuel? Can we maybe get a deeper dive into that from a country perspective and how we should think about the return in normalcy, the shape of second half of this year if we get a resolution by the end of the second quarter? Girish Saligram: Sure. So Derek, let me start with a couple of things. Look, first of all, that is truly a first half view. And some of that was already experienced in the first quarter. It wasn't huge, and we were able to offset it, which is what we didn't call it out explicitly exactly how much impose. But the totality of that first half is in that 30% to 50% range. Secondly, the range is important because the range really depends on not just the timing of operations returning to normalcy but also a function of where it comes in and what does the new normal actually mean, right? . Look, I think what we have seen so far is in the first quarter, the revenue hits were not very significant. It was really most of an elevated cost base as operations shut down. and we maintained all of our capacity on the ground. As we go into the second quarter, and you've seen that reflected in our guidance with the reduction in revenue levels. That is a pretty significant impact, especially as we have countries that have gotten significantly disrupted and operations have paused for several weeks. I alluded a little bit to Iraq [indiscernible] pieces of Kuwait, et cetera, offshore and Saudi. So that all has an impact. And look, that typically will have a very high detrimental impact simply because we are not having a knee-jerk reaction on personnel, et cetera. So we are very committed to our team as well as to our customers and making sure we are ready when operations resume as we hope they would reasonably quickly. The cost side of it is a different story, right? So we are seeing that very immediately on freight costs, for example, that have sold dramatically in addition to freight costs having gone up and they've gone up in multiple parts of the world. It's not just restricted to the region with the increase in pricing in jet fuel, et cetera, which also leads to sort of general expense increases. We also have logistical additions, right? So because we are not able to ship through our normal routes, we are shipping to alternative ports and then you have additional trucking costs et cetera. So I would say, right now, it's really sort of order of magnitude, 60-40 from a revenue cost standpoint. But that can fluctuate on a country-by-country basis. And it all depends on when things come back. What we've sort of assumed is really towards -- over the course of the quarter, things normalize. It's very, very difficult to pinpoint this and say this is the day everything goes back given that we really don't know what the geopolitical outcomes are going to be. And so that's why we've taken a little bit of liberty on having a broader range here. And I think once all of this is behind us, we'll be able to provide a heck of a lot more clarity on exactly what happened in terms of the various impacts and how the forward curve looks coming back. But either way, look, assuming that again, we are entering the third quarter, the second half essentially with all of this behind us, we think that activity profile ramps up significantly. And the good news for us is we've got the capacity on ground. We've got the fulfillment network on the ground and we have the ability to ramp up very, very quickly. Operator: Our next question comes from Jim Rollyson from Raymond James. James Rollyson: I just wanted to change topics a little bit and inquire a little around the redomestication back to the U.S. You mentioned I think is at the beginning that there are some financial benefits, but I'd like to see if you could elaborate on that a bit. Anuj Dhruv: Sure, James, I'm happy to take that question. So we are proposing to redomesticate from Ireland to the U.S. and specifically to Texas. This will go to a shareholder vote here soon. And as we alluded to in the prepared remarks, the reason for us to do this is simple. It increases shareholder value. And it does so by simplifying many of our administrative and compliance complexities that we have. It does also position us much better from an M&A perspective and also from a tax perspective. And so we've talked in length about our North dollars, one of those being free cash flow. And this initiative here is a step among many steps that we're taking to get to our target of achieving 50% free cash flow conversion. I do want to take this moment to note though that this is a corporate structural change only. This will not impact day-to-day operations. It doesn't impact how we interact with our customers, where our leadership team sits and our priorities will continue to stay the same. . Operator: Our next question comes from Phillip Jungwirth from BMO. Phillip Jungwirth: Can you come back to the portfolio pruning comment? Last year, you divested a higher capital-intensive business in Argentina, and we have seen free cash flow conversion improve. What's the nature of future divestitures and how maybe they don't align with the strategic priorities, whether it's technology advantage, scale or regional positioning? Girish Saligram: Yes. Look, Bill, we've gone through a few different phases in the company. But if I break it out very broadly, right? Our initial focus was we had to stop the bleeding several years ago. And so we stopped activity and divested businesses that were losing us money that we couldn't operate notable examples being drilling services in the United States, our wellhead business, for example, those kinds of things we got out of because we just were not making money on those. We had a lot of other businesses, though that we put a lot of effort in to make sure they were generating cash. And at that point in time, look, where the company was, we didn't have a whole lot of flexibility on what exactly we might have wanted to do with the portfolio. And you've all heard my comment before of if you can't have what you want, you want what you have. And as long as what you have is generating cash that was okay to a certain point. As we have sort of been working through the company and sort of really saying we want to be a company that is a technology differentiated, that's how we win business. Two, we want businesses that are truly capital-light. And third, we want things that we can add value into. A lot of things have now come up that are decent businesses, they're not bad businesses. They generate us margins for us that generate some degree of cash, but they're not really -- they don't fit that lens. And so we have tried to now then go after those. And those are really the intersection of our product line and country strategy and say, how do we move that out. So pressure pumping in Argentina was a great example. It wasn't really technology differentiation for us. It was very, very capital intensive and really didn't fit what we wanted to do. Things like rentals, things that have a high pass-through of third-party services, for example, tumor cancer business. Those are things that, look, we don't necessarily feel have the right place in Weatherford, but might another organization. So again, we want to be very thoughtful about this. This is not just about taking x amount of revenue out and saying we're just done with that. We actually think there is monetary value in these. So we are working through a very systematic process on these. They're all pretty small, which is why -- look, we think the effects will be on the edges. And to put it in perspective, and then to reiterate what we said on the comments, each of these is definitely much smaller than the Argentina divestiture. So we don't expect it to have a huge impact, any single one of these. But we are now in a position where we've got a great opportunity to continue to high-grade the portfolio and continue to look for opportunities where we can bring in things that are more differentiated, either organically or inorganically. Operator: And our next question comes from Keith MacKey from RBC Capital Markets. Keith MacKey: So just want to keep on the free cash flow thread. It looks like things are certainly improving, increasing the target from the low to the low to mid-40s or to the mid-40s rather. Just curious on that 50% through cycle targets, how aspirational of a target that is are the things that you've talked about, Girish, things that you have a very high degree of confidence we'll get you there? Or will there need to be additional things done to achieve that target over time? Girish Saligram: Yes. Let me just start, and I'll have Anuj give you the specifics on this. Keith, look, we don't put out randomly aspirational targets. Our philosophy has always been we put a target, we got a line of sight, so we absolutely intend to achieve this. So I'll let Anuj talk about the how. Anuj Dhruv: Yes. So I'll maybe take this opportunity to talk a bit about our margins, but also for cash. And so we haven't been shy, Keith, to really highlight 2 north stars that we have. One is margin and the second is free cash. And on the second, it's really maximizing the absolute amount of free cash, but then also maximizing our free cash flow conversion from EBITDA. And starting at the top, the key for us is to invest our money where we think there is line of sight to high ROIC. And so we're laser focused on how we deploy our CapEx dollars to ensure that we can drive cash returns from those dollars. From that, we then look at how do we optimize all of the levers we have to drive margin, our procurement, our supply chain. We then look at our cost structure. We have numerous initiatives underway that are driving the optimization of our cost structure. A few examples being do we insource, do we outsource? How do we use technology, how do we automate? How do we drive efficiencies? And it's not just saying what we're -- it's not just saying it's doing it. In 2025, if you recall, we had significant, significant reductions one, to rightsize activity to the head count that we have, but also, two, to really optimize based on all these initiatives that are underway. And so that then takes you EBITDA. You drive EBITDA and EBITDA margins. And thereafter, the focus is on how do you convert that EBITDA to free cash flow and hit the 50% target. And so that is a continuous relentless focus on AR, AP inventory. And a few of the tools I mentioned before with regards to automation using artificial intelligence, are key really for us to go and chase things on the AR, AP and inventory side. We do have inefficiencies like every company then. And on the AR side, there are situations where an invoice can cross the hands of many people before it goes to a customer. And so these are on-the-ground items that we are focused on. These aren't the high-level corporate items. These are on the ground, how do we structurally improve our processes so that we can continue to drive a better cash outcome. And on the inventory front, it's about optimizing, it's about reusing inventory. We've recently deployed an AI tool that allows us to look at inventory that might be sitting idle in a plant and allows us to use it in similar or other locations before a similar process. And so this allows us to reuse inventory that otherwise might have been potentially obsolete. And so these are all initiatives that are aimed at driving our working capital and optimizing that. Then you have on the interest expense side. And so last year, if you recall, we delevered our debt portfolio by $160 million. And we also refinanced $1.2 billion of our 2030 notes, and we extended them out to 2033. And by doing so, one, we derisk the balance sheet. But two, we also reduced our interest expense substantially we printed in September of last year, the lowest spread to treasury for an OFS high-yield company ever at that point in time. And so we're expecting to get $35-plus million on a run rate basis relative to 2025 on the benefits from lower interest. And then lastly, on the tax side, we've alluded to how we're going to optimize our tax structure and the redomestication from Ireland to the U.S. and to Texas specifically is a key, key milestone in this initiative. And so you'll likely see some of the accrued benefits this year from that change, but you'll really see some of the cash benefits start kicking in 2027. And as Girish alluded to, this is our initial target. It's not an aspirational target. This is our initial target. My aspirational target is well above 50%. And so this is our core is how do we continue to improve, not just based on the initial target, but also maximizing what we think the true potential of the company can be. And that is, in my view, over time, above the 50% level. Operator: Our next question comes from Josh Silverstein from UBS. Joshua Silverstein: Girish, you mentioned the potential growth in offshore and you have NPD is one of your strongest offerings. Can you talk about the growth potential here over the next few years? And are you already starting to see signs of an uptick? Girish Saligram: Yes, look, I think it's one of the most exciting parts of the portfolio right now as well as one of the most exciting times. we've Talked a lot and others have talked about the offshore cycle over the next several years that everyone sees happening. And as you look at what we've done, we've got several offerings, NPD being foremost amongst them. We've got a very, very healthy share of the NPD market on the offshore side. But what's interesting is, over the next order of magnitude a couple of years, we still think there is an opportunity for 30-odd drillships to get equipped with MPD systems. And if you take a conversion of even about 20% to 30% on that which is, I think, reasonable. That's a pretty significant opportunity. So we've got a rental fleet. We've got the ability to drive capital sales followed by aftermarket service agreements. Our technology differentiation on deepwater is very significant. We've got a lot of new advances on control systems as well that bring it together. On the shallow side of it, shallow market side of it, we've got the motors offering that is starting to get a lot of traction. Look, recently, we have put together -- we've built a new center of excellence in Houston, for managed pressure wells. We are actually hosting an event there during the OTC week in Houston with several of our customers. So I think this is something that over the next few years, has a lot of tailwind and something that I'm excited about seeing a lot of growth. Operator: Our next question comes from Ati Modak from Goldman Sachs. Ati Modak: Can you give us your thoughts on the North American markets a little bit? It sounds like there's some excitement around increase in activity, maybe less so on pricing just yet, but would love to get your thoughts on what you're seeing and expecting. Girish Saligram: Sure. Look, I think, first of all, it's a broad -- very broad market. I'll address sort of the two ends of it first and then come back to U.S. land. So I think look, Canada is pretty positive, especially with the current environment. We think there could be additional opportunities there. We've got portfolio in Canada that is a lot more like our international business versus U.S. land, much more of a full spectrum service provider. So I think there's some good opportunities that we got to go after and materialize. And then look, U.S. offshore in the Gulf of America very stable business but also has some very interesting growth prospects. So we think those 2 things are the things that will sort of propose up. U.S. land look, for us, we tend to be a much more product-driven business a little bit more production oriented on the product side where you're right, look, price competition is pretty high. We don't really participate in the true drilling and fracking completion activity. So for us, activity levels on that don't have a direct impact. They do on our cementing products business, et cetera, but it's not as extreme. Look, we think the U.S. market is going to continue to be a little bit more restrained. We have not really seen a significant uptick from our key customers on adding rigs or anything like that. There is a lot of, I think, talk but much more on the private and smaller player side. I think as the next few months develop, I think it will be really interesting to see where ultimately commodity prices stabilize and that activity profile that comes out of it. But we've got a portfolio, I think that's well positioned to benefit from the production side of growth there. Operator: Our next question comes from Josh Jayne from Daniel Energy Partners. Joshua Jayne: Just one for me on global supply chain in the state of it. You alluded to this a bit earlier, but maybe you could just talk about the numerous issues. So outside of the street. So we've had tariffs on top of mind for more than a year. And then we talk about the straight with oil. But that matters not just for oil, but also for aluminum and a number of other products. So I'm just curious how long after the conflict ends do those things take to normalize? And are costs structurally elevated for the balance of this year? And do you believe that these will easily be passed on to the operator community. Girish Saligram: Yes, Josh, look, I think it will take a little bit of time for it to fully normalize. I think there's different components of it. I think things like fuel costs that are being passed through as surcharges will just automatically come down as that abates, both from a commodity price level as well as refining flows and ultimately, fuel being available back to normal levels. I think the rest of it, everyone's going to always try to hang on to price to whatever extent. I mean we do that. Every industry, every company is going to try to do that and say it's now there. What has really benefited us over the past couple of years, our team has done a fabulous job in continuing to diversify our supply chain having multiple sources of supply moving to lower-cost countries for our sources of supply. And so we've been able to withstand that and I think we will continue to be able to drive towards that greater degree of efficiency. In terms of passing it on to customers, I think things that are just trade up surcharges, et cetera, are generally a little bit simpler because you can do that as a pass through though they have significant dilutive effects. Things that are more structural, especially in longer-term contracts become a lot more challenging, and they require very thoughtful discussions. But look, I'm always of the opinion of the -- our customers need a thriving service sector for them to be successful, and we don't just sort of pass it on and say, hey, it is what it is. So it's all about adding value. And as long as we can demonstrate that, I think we will have some degree of pricing flexibility. Operator: And ladies and gentlemen, that we'll be concluding our question-and-answer session for this morning. I would like to turn the floor back over to management for any closing remarks. Girish Saligram: Great. Thank you. Thank you all for joining our call today, and we look forward to updating you again in 90 days. Thanks so much. Operator: And with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. I would now like to turn the conference over to Matthew James Korn, Head of Investor Relations and Corporate Communications. You may begin. Thank you, Abby. Matthew James Korn: Good afternoon, everyone. We are very pleased to have you join our first quarter 2026 earnings call. Joining me from the CSX Corporation leadership team are Steve Angel, president, chief executive officer; Michael A. Cory, EVP and chief operating officer; Kevin S. Boone, EVP and chief financial officer; and Mary Claire Kenny, senior vice president and chief commercial officer. In the presentation that accompanies this call, which is available on our website, you will find slides with our forward-looking and our non-GAAP disclosures. We encourage you to review them. With that said, I am very happy to turn the call over to Mr. Steve Angel. Steve Angel: Good afternoon, and thank you for joining our call. I am pleased with the strong start to the year that our railroaders have delivered. We made great strides in safety, managed through weather challenges, and advanced our efforts to improve efficiency and streamline our cost structure. The progress we have made can be seen clearly in our quarterly results. Volume and revenue grew year over year, while operating expense moved substantially lower, which led to significant margin expansion and EPS growth. Solid earnings and continued capital discipline helped drive higher free cash flow. Altogether, this represents an encouraging first step toward our goal of best-in-class performance. At the same time, we recognize that we are still early in the process, and market conditions remain uncertain. As Mary Claire will discuss, conflict in the Middle East and rising energy prices are creating opportunities for some of our customers, but this has also added to broader concerns about inflationary pressure and potential effects on consumer sentiment. What remains constant is our focus on execution. Our team is responding to customer needs by expanding our service offerings, improving transit times, and converting freight from truck to rail. We are also moving forward on a wide range of cost initiatives as we push to develop the productivity muscle required to sustain performance over the long term. I will now turn the call over to Michael A. Cory to cover our safety and operational highlights. Michael A. Cory: Thank you, Steve. Slide five shows highlights for our safety and operational performance. Best-in-class performance starts with safety, and we made good progress in the first quarter. Our FRA injury rate improved by 13% compared to last year, that is with a 9% reduction in people hours. Our train accident rate improved by over 30%. Operating safely benefits our employees and our customers; it allows us to run a more fluid, efficient network. We remain committed to developing a culture at CSX Corporation where effective risk awareness and safe operating practices are consistent across our organization. Operationally, we successfully managed through the severe winter storms that covered most of the Midwestern and Northeastern United States through the quarter. Our key metrics compare favorably to last year, when closures due to the Blue Ridge reconstruction and the Howard Street Tunnel project impacted our resilience. Train speed, dwell, and cars online all improved on a year-over-year basis. We also delivered record first quarter fuel efficiency of 0.97 gallons per thousand gross ton miles and achieved 0.93 gallons per thousand GTMs in March, our best performance since 2021. Performance at our intermodal terminals has been very good, even as we have absorbed substantial new volume. For example, the team at Fairburn in Atlanta handled a 15% increase in intermodal lifts with our expanded domestic business in the Southeast while maintaining service our customers can count on. As well, the team has been very effective in finding and eliminating inefficiencies. Our engineering and network groups have been improving productivity substantially through more efficient use of work blocks and better overall coordination with our transportation groups. We have seen double-digit efficiency improvement in rail and tie installation to start the year through disciplined curfew execution. I am extremely proud of this team and what we have accomplished. There is so much more that we are working toward. We have great momentum, and our goal is to build on these successes as we progress through the rest of the year. With that, I will turn it over to Kevin for financial results for the quarter. Kevin S. Boone: Thank you, Mike, and good afternoon. As both Mike and Steve noted, 2026 is off to a strong start. Volume and revenue are up, while costs are lower across the company throughout CSX Corporation to drive efficiencies. These results reflect significant work and partnership in nearly every part of the business while maintaining our commitments to safety and customer service. Total revenue increased 2% on 3% volume growth, as pricing gains and higher fuel recovery were offset by business mix impacts. Total expenses fell by 6% from the steps taken to improve our cost structure and improve network fluidity. As a result, operating income increased 20%, with earnings per share up 26%. Turning to the next slide, total first quarter expense decreased by $153 million compared to the prior year. The variance includes over $100 million of year-over-year efficiency savings plus other benefits from real estate and the lapping of network disruption costs, partly offset by inflation and higher fuel prices. Labor costs were 1% lower, as a 5% reduction in headcount paired with a $10 million reduction in overtime expense offset inflation. PS&O savings were broad-based, benefiting from increased accountability for discretionary costs, eliminating wasteful spend, and improved asset utilization. As an example, CSX Corporation’s vehicle fleet is 7% smaller relative to 2024, including opportunities we found to turn in costly equipment rentals that will reduce both operating expense and capital spend. We will continue to press on these costs at the individual asset level, and new tools will support accountability and address unsafe and inefficient driving practices. We are bringing cost control to the front lines of the organization, educating our leaders on costs beyond their own budget. As Mike mentioned, our engineering group has found ways to drive efficiency, including less use of overtime labor, which will reduce capital spend this year. Along the same lines, we are improving visibility of freight car hire expense, so our field leaders can support the network center in managing the cost pool of over $1 million of spend per day. While fuel expense was a headwind in the quarter, given higher diesel prices, we delivered a record first quarter fuel efficiency and remain focused on reducing both locomotive and non-locomotive fuel spend. As we move into the second quarter, we do expect some non-seasonal expense from incentive compensation, timing of contractual locomotive costs, including overhauls, and advisory costs related to industry consolidation. As Steve noted, our focus is on creating a sustainable efficiency process that provides our leaders with tools and data visibility while empowering these same leaders to take action. We are not lacking opportunity to continue to improve as we look forward to the years ahead. With that, I will turn it over to Mary Claire to review revenue results. Mary Claire Kenny: Thank you, Kevin, and good afternoon, everyone. Our business performed well in the first quarter due to the great work of the commercial team and our strong partnership with the operations group. Early on, cold weather and storms weighed on shipments in certain markets, but our network was resilient. We stayed connected with our customers and finished March with momentum, supported by new business, reliable service, and favorable trends in select markets. We had a good start to the year, and we see several positive indicators entering spring. Looking forward, we remain nimble and customer-focused while executing on initiatives to expand our network reach, improve our customers’ experience, and drive profitable growth. Slide 10 covers first quarter volume and revenue performance. Overall, total volume was up 3% in the quarter, while revenue was up 2%. Business mix impacts led to a 1% decline in total revenue per unit. In merchandise, volume was flat year over year, while revenue and RPU grew 2%. Same-store pricing was in line with our expectations, so total merchandise revenue per unit was impacted by mix. Looking at some of the individual markets, minerals growth led merchandise, up 4% in volume, supported by cement and salt shipments. Chemicals was supported by higher frac sand shipments as data center demand drives natural gas production, and strength in plastics as domestic producers benefited from overseas supply chain disruptions. Fertilizers saw gains as phosphate exports out of the Bone Valley improved. On the other hand, forest products continued to drag with volume down 9%. We are facing difficult comps as we cycle closures that occurred in 2025, while demand remains impacted by weak housing. One emerging positive here is that shippers are looking more to rail conversion as they weigh the impacts of higher fuel and trucking costs. Intermodal was strong this quarter, with revenue up 5% on a 6% increase in volume. New business with key customers benefited us in both international and domestic markets. Mix was also a factor, with RPU down 1% as we saw substantial growth in our inland ports business, which tends to be shorter length of haul. Finally, revenue for our coal business declined 1% on 1% lower volume, with domestic tonnage slightly up and exports slightly down. Utility coal demand remains high, and strong operational performance in March supported customer restocking, but export shipments were impacted by cold weather that temporarily reduced loading. Sequentially, global met coal benchmarks remained largely flat, but coal RPU benefited from a favorable mix. Slide 11 covers highlights of our market expectations for the rest of 2026. Starting with merchandise, we see near-term opportunities in chemicals, as domestic plastic producers have a stable supply of feedstocks and look to capitalize on global supply imbalances. Commodities like aggregates, cement, and construction steel remain in high demand for infrastructure projects. Our metals business should also benefit from the ramp-up of new facilities we serve. Housing affordability remains a real headwind, particularly with our forest products business, where we have seen additional closures year to date. Automotive continues to be pressured by lower production and the extended retooling of a major plant on our network. Our intermodal business has good momentum, with tighter trucking supply and higher diesel prices creating tailwinds for freight conversions. Customers are also responding well to new, faster service options. We are completing the final infrastructure improvements on the former Meridian & Bigbee Railroad and we will soon be launching improved service with CPKC on our SMX product. SMX provides truck-competitive transit between major markets in the Southeast, with Dallas and Mexico, and recent investments will enhance both speed and efficiency. Additionally, the final infrastructure improvements around the Howard Street Tunnel clearances are nearing completion. When complete, we will shave a day off our East-West transit and will connect markets in the Southeast with markets in the Northeast more efficiently than ever before. Our international performance has been strong against challenging year-ago comps. Though energy cost inflation poses risk to consumer demand and imports, export coal should see the benefits of reopened mines. Power demand remains strong, supporting domestic utility volumes. We do have two facilities on our network now scheduled to shut down in the second quarter, but plant-life extensions present potential upside. Global met prices remain relatively stable, and we expect that to persist amid challenged global steel demand. On the next slide, I will provide an update on our industrial development program. Our team is positioning CSX Corporation rail as a compelling solution for new and expanding manufacturing facilities. Our pipeline of approximately 600 active projects remains strong. Twenty-one projects went into service over the first quarter alone, which should contribute an estimated 33 thousand annual carloads at full ramp. For the full year, we expect approximately 100 projects to enter service. This is a very strong year, with multiple facilities coming online that were approved three to four years ago. For context, these 100 projects are expected to contribute roughly 50% more volume at full ramp than last year’s 85 projects combined. The map on this slide gives detail on our Q1 projects in service, including highlights for three key projects. We worked with Keystone Terminals, a bulk commodity terminal in Jacksonville, Florida, to develop a new rail extension enabling synthetic gypsum shipments to move on our network. Martin Marietta expanded a rail-served aggregate loading facility in Green Cove Springs, Florida, with new rail infrastructure. With strong demand in this market, this facility is expected to reach full ramp by the end of Q2. We also supported Diamond Pet Foods with a multistate site search that settled in Indiana. Our team worked with the company to develop a complete track design that was incorporated into their site plan. I am proud of the depth of work across our sales, marketing, and industrial development teams as they continue to build the strong customer and community relationships that underpin our growth efforts. With that, I will pass it back to Steve. Steve Angel: Thank you, Mary Claire. Now we will review our updated guidance for— Kevin S. Boone: 2026 on slide 14. Our revenue performance was in line with our expectations and showed favorable trends as the quarter progressed. We remain encouraged by the opportunities ahead for the balance of the year. The change to our top-line outlook is largely driven by higher-than-expected energy prices, particularly diesel, which will begin to lift fuel-related revenue starting in the second quarter. Including fuel, and assuming diesel prices follow the forward curve as of this week, we now expect full-year revenue growth in the mid-single digits versus low single digits previously. As you know, higher fuel increases our revenue and our expenses, which can pressure reported margin. That said, we are pleased with our cost performance year to date, and as I described, we have a broad range of productivity efforts underway that position us well for next year and beyond. As a result, we anticipate year-over-year operating margin expansion of 200 to 300 basis points, but we now expect results to trend toward the high end of that range. We still expect total 2026 capital spending to be below $2.4 billion, and we now anticipate— Steve Angel: Free cash flow to grow by more than 60% compared to 2025. In closing, I want to thank everyone at CSX Corporation for their contributions to a successful quarter. We remain focused on our goals and are confident in our ability to continue this momentum through 2026 and beyond. And with that, Matthew, we will open it up for questions. Matthew James Korn: Thank you, Steve. We will now proceed with the question and answer session. In order to ensure that we maximize everyone’s opportunity, we ask that you please limit yourselves to one and only one question. Abby, with that, we are ready to begin. Thank you. Operator: Yes, if you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is 1 to join the queue. Our first question comes from the line of Christian F. Wetherbee with Wells Fargo. Your line is open. Christian F. Wetherbee: Yes, hey, thanks. Good afternoon, guys. I guess, just looking at the guidance here, maybe we will start where you guys wrapped up. In my math, higher fuel adds about 100 basis points to the operating ratio or takes away 100 basis points from the operating margin as we think out through the rest of the year. And so to maintain it and then, obviously, bias the high end is a good outcome. I was hoping maybe you could outline some of the productivity opportunities that you have uncovered—maybe could put some numbers around it, that would be great—but also what is left to come as the year progresses? How should we be thinking about that upper end of the 200 to 300 basis point range as we go through the next several quarters? Kevin S. Boone: Yes, Chris, thank you. Obviously very, very happy with the start to the year. When we convened in the fourth and came up with a plan, that plan consisted of over 100 different initiatives. That is a lot of work by a lot of different people throughout the organization coming together and driving progress. Quite frankly, a lot of the things that we knew were there, the team delivered maybe even more quickly than we thought they would, and you are seeing that in the first quarter results. I think your math around the fuel surcharges is relatively directionally correct. Obviously, a lot of uncertainty on where fuel will end up through the rest of the year, but when you look at the initiatives, clearly you saw a lot of progress on the PS&O line item, and that is a lot of work everywhere. I talked about vehicles. When you look at energy costs, that is one that we are really talking a lot about internally—not only locomotive fuel, but fuel related to vehicles and other areas, utilities. Utility spend is a big part of our spend as well. I would say energy over the next few months is going to be in the crosshairs of everything we are trying to do to drive efficiencies. Vehicle spend, as I mentioned, but the list goes on and on, and we continue to develop that. What our progress has done is given us the opportunity to now think about 2027 and start to build that pipeline. So I am excited about that progress. I cannot thank Mike and his team enough for all their work. It has been a group effort to go after it, and I expect us to continue down this path. We have to hold on to these initiatives, so that will be the big focus as we continue through the year—delivering on the plan that we set forth in the fourth quarter. Operator: Our next question comes from the line of Kenneth Scott Hoexter with Bank of America. Your line is open. Kenneth Scott Hoexter: Hey, great. Good afternoon, and really great to hear and great job on the cost side and the progress there. Exciting to watch the potential. If we think about, Mary Claire, the service, the Howard Street Tunnel, Port of Baltimore project, maybe just talk about timing and scalability of when the double-stacking is going to be fully launched and loaded? And then how quickly can we see it? Because you are already posting mid-single-digit growth now. What can the system handle, and how quickly can we see that volume ramp up? Thanks. Mary Claire Kenny: Yes. I would say on the Howard Street Tunnel, we have talked a little bit about it before, but we are really excited about this project. It has been a long time coming, and the operating team really did a phenomenal job last year getting the work on our end completed. The last bridge should be complete in the next week or so, and then we will have double-stack access. We have talked about it before. There are a couple of things this unlocks for us. One, it is additional capacity and efficiency on the East-West corridor. So you think about going from Western U.S. to Baltimore or vice versa, even Chicago to and from Baltimore. It essentially doubles our capacity there, and it is also going to take about a day out of our current transit. We are really excited about that. It also grants us efficiency on the I-95 corridor. We have really fast service, great service from Florida up into Jersey and Baltimore. Once again, we will have double the capacity there, and we are excited to unlock that. The third component is it allows us to efficiently serve markets that we really could not before. We are adding connection points when you think about places like Atlanta up into the Northeast—and when I say Northeast, New Jersey, Chambersburg, Philadelphia, places like that. That is newer service that we have not traditionally offered because we could not be efficient with that in the past. That will take some time to build. We have been talking to our channel partners and shippers for a while about this; they are very excited about it. We are coming to the tail end of this year’s bid season, but we are seeing some traction, and that will continue to build over the course of the next year or so. From my past experience, I would tell you new services typically take a couple of bid seasons to really get to full ramp. Operator: Our next question comes from the line of Stephanie Moore with Jefferies. Your line is open. Stephanie Moore: Great. Thank you for the question. I wanted to maybe touch on what you are seeing from an overall macro and freight environment. I believe your guidance—at least the prior guidance—did not assume any kind of macro recovery. I am assuming the current revenue guidance also does not assume any macro recovery. Just wanted to get your sense on what you are seeing in the market and the level of conservatism with that underlying assumption. Thanks. Mary Claire Kenny: Yes. I will do a little update on the markets. I talked about some in the prepared remarks. As we came into this year—what we talked about back in January—we saw opportunities in a few markets, but we also saw broader headwinds with industrial production. Baselining what we said in January, we talked about areas around infrastructure investment we still felt very positive about. Think about the aggregate side of the business; think about metals that go into construction—pipe, plate, rebar—those areas we felt good about. We also felt good about our domestic intermodal business with truck conversion opportunity and new services that we had launched. On the other side, a lot of our business is tied to housing and automotive, and those markets have been pretty bleak. As we sit here today, we have not really seen improvement in either of those areas. Auto production still right now is forecast to be down about 2% this year. We have mentioned a few times we have a large plant on our network that is down for the year for retooling, and that is another headwind for us. On the housing side, it is an affordability issue. Interest rates are still high, and they have bounced back up a little bit after everything that has happened in the Middle East. Those are still headwinds. Additionally, in our forest products business, we talked last year about paper and pulp mill closures that we have to overlap, and we will not really surpass those until later this year. Those elements from the beginning of this year have not changed. Where we have seen a bit of a difference is, one, with the conflict in the Middle East, we saw improvement at the tail end of last quarter and into the beginning of this quarter in the plastics business. Domestic producers have opportunity here given feedstocks. Not sure how long that will last, but that has been a more positive upside than we expected coming into this year, when we originally had seen global oversupply in that area. The second area is, with higher fuel prices, that increases the value proposition of rail. We are more optimistic today than we were in January in terms of truck conversion opportunities—primarily in our domestic intermodal business, but some other areas too, like our forest product segment. Operator: Our next question comes from the line of Scott H. Group with Wolfe Research. Your line is open. Scott H. Group: Hey, thanks, guys. So I do not know if Steve or Kevin— we have seen just such massive inflation in that PS&O line the last four years. You touched on it a bit earlier, but seeing some good progress in the first quarter on lowering that— is the $60 million a good run rate, or is there more opportunity to go on fixing this PS&O line? And then maybe if I can— there is just a lot of noise. We had a gain in Q1. We have got fuel moving around. Any thoughts on how to think about sequential margin improvement from Q1 to Q2? Thank you, guys. Kevin S. Boone: Yes. PS&O makes up a lot of different things. I would say Steve would say we are never done there. The procurement team continues to push our vendors for value, and that is going to continue in earnest. There are a lot of different components. It was an area where I and the team definitely saw a lot of opportunities for improvement. In terms of sustainability, we are going to continue to go after it, and, as I mentioned earlier, Mike and team along with the finance team are already pivoting to 2027 and looking at all the cost line items and seeing where there is opportunity. There is absolutely more to come. We are going to layer it in and be very thoughtful on how we think about those costs. Looking at second quarter, we will not have the real estate gain that occurred in the first quarter of $44 million. I did mention the overhauls on the engine side that will be a little bit higher than what we saw in the first quarter, and transaction-related costs that I mentioned. I would also say fuel at higher levels for the second quarter—which we anticipate being higher than on average for the first quarter—will by default have some pressure on the margin side just given where fuel prices are today. But that only motivates the team to go after those costs and drive more efficiency. The focus right now is to deliver the plan that we laid out in the fourth quarter and make sure that everybody is being held accountable to that, then start to build a pipeline for the years ahead to continue the cost efforts going forward. Operator: Our next question comes from the line of Brian Patrick Ossenbeck with JPMorgan. Your line is open. Brian Patrick Ossenbeck: Hey, good afternoon. Thanks for taking the question. Maybe just one quick follow-up for Kevin to start: the gain on sale—I know this can be lumpy. Is that what you expected coming into the year in terms of a run rate for the rest of the quarters? How should we be thinking about that in the back half of the year, since you said it is not going to occur into Q2? And a broader question for Mike: obviously a lot of productivity gains are starting to come through. Maybe the dwell time being a little bit elevated in some of these terminals that we are looking at does not have as much of an impact as we might think from the outside looking in, but I would like to get your perspective. While there are easier comps year over year and it is still improving out of tough weather, some of the areas are up quite a bit in terms of the dwell time. Is that a mix perspective? Is that reworking some of the yard and the systems? I would like to hear your thoughts more on that point in particular. Thank you. Kevin S. Boone: Alright. Let us take care of the real estate. We did anticipate this coming into the year—the $44 million. I would not expect anything of this size the remainder of the year. We always have some small things that come through, and Christina and her team do a great job of identifying those things, but nothing as material to this point. There are always things out there, and whether we are able to convert them and pull them forward, we will see—but not currently in the plan for this year. Michael A. Cory: Thanks for the question, Brian. As Kevin talked about before, our productivity initiatives are really broad-based and across all operations. The overall focus is on waste, cutting overhead, and especially improving our capital efficiency. We have been really disciplined with our engineering work teams’ start times and the full completion of their allotted time. As an example, this year we have been close to 100% on our curfews—the track outages—versus, I would say, 60% to 70% the last preceding years. In cases where we do not get the work done, that is a safety liability, and the overall cost is tremendous. In some cases, to get this work done this year, we have impacted our train and yard plans because we are instilling new methods of performing the work. Closing down a line or a portion of the yard for 24 hours and working continuously has caused some rerouting of trains and traffic, and it has caused delay. That is not our design, but more so a learning opportunity at this point to gain that efficiency to see if we can do it. The plan going forward is to build the right plan around the work that we are doing and the things we are learning from. The focus in the last 30 to 45 days on these efficiency opportunities is really starting to show us where not only we have to dig in and improve, but also places that we need to do some capital work. Some examples we are in progress on: in our yard in Cincinnati, we are completing power switches this year, and we have begun the work in Nashville the same way. We have identified work on sidings over some of our busy Southern corridors to increase fluid activity. Our focus is always on improving those operating metrics, and as much as we are deeply engaged on safety and service, we are driving equally as hard on the internal metrics. We are trying different things to create overall productivity. We are all very aware of the dwell and the train speed, and that is a huge focus for us, and we will bring that back in line, but we are not going to stop trying to get smarter and better in how we deploy all our costs. Operator: Our next question comes from the line of Brandon Oglenski with Barclays. Your line is open. Brandon Oglenski: Hi, good afternoon, and thanks for taking the question. Steve, you are another quarter into the job here, and I know you and the team have aspirations to drive higher return on invested capital. This question is a little open-ended, but I would like to get your input on it. As you look at it today, to drive a higher ROIC in the future, is it really asset productivity, improved business mix or pricing, cost efficiencies, or all of the above? Would love to get some direction on that. Thank you. Steve Angel: Sure. You have a numerator and a denominator in return on invested capital. I have had a lot of experience with this over the years. The best way to drive return on invested capital is to drive the numerator. That is improving our operating margin performance, growing operating income—that is the top line. You have seen our guidance for the year. You have heard both Kevin and Mike talk about the fact that we are working on 2027 productivity initiatives as well as executing during 2026. That is really the secret to driving that top line—to make sure we build that productivity muscle so that we can count on that contribution year in, year out. On the capital side—the denominator—it is being more prudent in terms of how we spend capital. Certainly that has an impact. Mike talked about how we are performing our engineering work in concert with transportation so that we are much more efficient and effective in terms of how we execute significant projects. I would say we were kind of in a mode where we had lots of projects going on simultaneously, not really making the progress we needed in bringing them to conclusion. By working more in a block mode, we are able to execute large projects more quickly, more efficiently, spend less dollars, and get the benefit of that investment. That is just one example on the capital side. Kevin is heavily involved managing the capital funding process. We look at every project now. Everyone has to stand on its own. We follow them individually. We are going to make sure we are executing the way we need to execute. Longer term, when you look at capital spend, I think predictive analytics can play a major role in focusing our capital spend, certainly on the infrastructure side. We can prioritize that spend based on what is needed—not necessarily what we think we need to do from a maintenance standpoint, but what the analytics and the data tell us we need to prioritize in terms of spend. As we move down that path and do a better job with that, I would expect our overall capital spend would be lower year over year because we are spending the money on the right things as opposed to what we believe based on experience we need to spend the money on. All that is a long answer to say that is how I think about return on invested capital. We said we want to be best in class in a lot of metrics. That is one of them. The way to do that is continue to drive that numerator north, grow our earnings year over year, and manage our capital spend very effectively. That is how we will do it. Operator: Our next question comes from the line of Thomas Richard Wadewitz with UBS. Your line is open. Thomas Richard Wadewitz: Yes, good afternoon. Wanted to ask a bit about the pricing side. There has been a pretty substantial and rapid tightening in the spot market, and I think contract rates going up quite a bit too. For Mary Claire or broader, how should we think about the time lag between that and what you could see in intermodal or merchandise pricing? Is there some of that that can benefit you in the second half, or is this really like, it is great to see, but we should expect more pricing in 2027? Then within the quarter, are you seeing any change in underlying pricing in merchandise? I know you talked about mix being a headwind, but is that kind of similar to what it has been or any change there? Thank you. Mary Claire Kenny: Yes, thanks for the question. We talked about pricing last quarter as well, and I would say it is an area I looked at as I came into this role. We have said before that on a same-store basis, pricing should be better this year than what we saw last year. We deliver an important service product for our customer, and it is important that we ensure we are pricing appropriately and getting the value for the service we deliver. In merchandise pricing over the course of this year, discretionary pricing—what we can touch—has been solid, and that will benefit us as we get later into this year and certainly into next year. We have mentioned before that of our total book, it is only about 50% that we can touch in any given year, so we cannot touch everything at the same time, and there is a lag effect. As you think about the intermodal side of the business, we continue to focus on price there just as we do in other markets, but it is different than other segments. For example, in international intermodal, it is pretty heavily concentrated, primarily contracted under long-term deals, and it is not highly correlated to changes in the truck market. So that is a little bit of a different area for us. Operator: Our next question comes from the line of Ariel Luis Rosa with Citigroup. Your line is open. Ariel Luis Rosa: Good afternoon. Congrats on some strong results here. Steve, I am curious for an update on the M&A situation. Last year, we heard a lot of concern that a transcon merger could leave CSX Corporation at a competitive disadvantage. Clearly, a lot of good progress is going on. As we step back and think about what the business looks like a year from now, two years from now, three years from now, to what extent is that a concern? What steps are you taking to position the business for that? Mary Claire talked about the build in the intermodal business opened up by the Howard Street Tunnel and some of the opportunities there. Just give us your updated thoughts on where vulnerabilities might lie and how CSX Corporation is positioned for that future if it does unfold. Steve Angel: Number one is doing what we are doing today and continuing to execute at a high level in the base business. Mary Claire talked about some of the growth opportunities that we have, of which there are quite a few. Obviously there are uncertainties out there in the market, but we feel pretty good about our growth opportunities. We feel good about how we are operating, our focus on capital, etc. A lot of things are going positively in that light. The way I think about the merger—and you have heard me say this before—it is a long process. One I was involved with took three years from beginning to end. A lot of time is going to lapse between now and some conclusion, whatever that is. I would look at any industry consolidation and say that if you are in that industry, there will be some challenges you have to manage, and there will be some opportunities to capitalize on. I suspect if this merger goes through, we will see both. But it is going to take a good bit of time. We do not know what the end result will be. In the interim, we are going to focus on execution and make sure that whatever happens down the road, we will be going into that situation from a position of strength. That has always been my view, and that is where we will be. Operator: Our next question comes from the line of Richa Harnain with Deutsche Bank. Your line is open. Richa Harnain: Hi, thanks for the time, everyone. I wanted to ask about the 21 projects that are expected to contribute—Mary Claire, you said 33,000 in annual carloads at full ramp. When do you expect to get to full ramp? And you have a total of 100 projects expected for the year; do the incremental 80 or so have the same impact as the 21? At that contribution level, we could get to very strong carload growth implied on an annual basis. I just wanted to make sure I was not missing anything or understanding the cadence of that. If we can drill into that, that would be great. Thanks. Mary Claire Kenny: Yes, thanks for the question. Every project is a little bit different, and the 21 projects are across multiple different business units. When I think about our industrial development efforts—what we saw last year, this year, and in the future pipeline—they vary. There are some larger projects. Last year, we talked about an auto plant that came online that, over time, once it gets up to full ramp, will be pretty sizable. It started out with one vehicle, and it will take time for that to ramp. We also have other projects in areas where it is a few thousand carloads. It is smaller in scale and revenue. The good thing is it is a diverse pipeline, and we are excited about that. It is not heavily concentrated in one particular area. As we think about changes in the market, that gives us a benefit as we think about the future. We are excited about it. That is probably all we are going to give from a guidance perspective at this point on ID, but we are certainly excited about the pipeline that we see, and it is an area that we will continue to develop as we go forward. Operator: Our next question comes from the line of Jonathan B. Chappell with Evercore ISI. Your line is open. Jonathan B. Chappell: Thank you. Good afternoon. Mary Claire, the one segment we probably have not touched on from a pricing or yield perspective is coal—up about 3% sequentially, the first time in several years—basically flat year over year, also the first time since 2022. Is this a function of some of the index headwinds finally easing? Is it a mix benefit? Did some of the commodity price volatility help coal maybe vis-à-vis oil? Long way of getting to: is this the start of a recovery, or when you think about coal RPU for the rest of this year, should we extrapolate 1Q? Mary Claire Kenny: Yes, thank you. On the export coal side, last year we saw the benchmarks come down throughout the course of the year. By the time we got to the fourth quarter, they were substantially lower than where they started in January. Into the first quarter of this year, the primary benchmark that we are tied to on the high-vol side has been relatively stable. So we had probably the biggest year-over-year impact in the first quarter, and as we saw those benchmark prices come down last year, that gap will close some if benchmarks stay where they are today, which is our current expectation and what is in our forward thoughts. On the domestic side of the business, we see good demand. There is strong demand for power—data centers and continued investment in that infrastructure are going to continue to pull on power. We feel good about domestic demand. We have mentioned before there are a couple of utilities on our network that are planned to close this quarter, but with the power demand that is out there right now, we expect there could be some extensions associated with those. So we see the domestic overall market as strong, but in terms of impact for us, part of it will be determined by whether we see these closures come about or we see extensions on those facilities. Operator: Our next question comes from the line of Jason H. Seidl with TD Cowen. Your line is open. Jason H. Seidl: Hey, thank you, operator. Question for Mike. Mike, we have the bridges opening up here to enable you guys to run double-stack, and you have made some changes on freight flows around Chicago. What else is on track for the remainder of the year that will help productivity and push margins? Thanks. Michael A. Cory: Jason, in Chicago, just to clarify, we are streamlining our service by running direct from origin points on CSX Corporation to our connecting carriers and belt lines for processing to other carriers. We have always used belt carriers to forward traffic, and now we are combining all the traffic that comes from outside of Chicago through Chicago with a belt carrier. It reduces the handlings, reduces time on all the traffic, and on the reverse, it works the same way. Across the rest of the network, we are looking at a cross-section of productivity initiatives, and we have some really good teamwork going on. Our engineering group is delivering quite a bit of efficiency that we see extrapolating out through the year, and they are working extremely well with our network group. So Casey Albright and Deborah Horchuck are really driving, and we learn more efficiencies every day, Jason. The things that we do not know are what we are going after. On the intermodal side, to Mary Claire’s earlier points about offering faster service lanes and getting that new business, we are putting expansion into our Atlanta terminal in Fairburn. Carrie Crozier and the team are driving some good results there. We are looking for as much productivity in terms of reducing handling, speeding up traffic, and getting rid of inefficiencies that have been inside all of operations—not just through dwell and train speed. There is a lot more out there within the entire group that we are going after. Operator: Our next question comes from the line of Walter Noel Spracklin with RBC Capital. Your line is open. Walter Noel Spracklin: Yes, thanks so much. Good afternoon. Mary Claire, this question is for you. You touched on the pipeline of projects that you have in the works. I am trying to separate what you would get in terms of growth from company-specific projects in total versus what you are seeing in terms of pressure in the macro. Obviously, the net is that you are guiding for flat. Just curious if that is plus two on projects, minus two on macro—something less or more than that? Again, just trying to isolate your company-specific growth so that hopefully, when the market improves and we see some macro improvement, we can layer company-specific opportunities on top of that. Mary Claire Kenny: Thank you. We told you about the projects that we have in the pipeline. We have added strong business over the course of the last several years through ID, and we expect that to continue. We have received questions over time around what broader macro forces have impacted industrial development. On our side, our pipeline has continued to remain strong. We have seen in a few areas where projects have ramped a little slower than what we originally expected due to the macro economy. We also had closures that impacted our network last year, primarily concentrated in the pulp and paper mill side of the business, and some of our customers were driving efficiency within their own business. Still, net of that, we see incremental opportunity with ID. I cannot project the full future in terms of whether we will see something else happen this year in the matter of a closure, but for right now, we think this is certainly a net positive for us. Operator: As a reminder, it is star 1 if you would like to ask a question. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is open. Ravi Shanker: Great, thanks. Good afternoon, everyone. Just a two-parter for Kevin. I think you highlighted some cost headwinds in your commentary—incentive comp and a couple of other things. Can you give us a little more color on quantity and timing of those items? Also, you said a couple of times that you are pivoting to 2027 in the productivity actions. Can you unpack that a little bit more? Is that because 2026 gets pretty much baked and any incremental gains are going to come in 2027? Or is it because the nature of those actions is more long term? Kevin S. Boone: Yes. First, unpacking the second quarter commentary: the things I would point out again are the engine overhauls, some additional costs with transaction costs, and then on the fuel side, with higher fuel price you will see some of that flow through, from the margin profile. Outside of that, I am probably not going to be more specific, but from a PS&O perspective on a sequential basis, it will not be the normal seasonality you would see based on some of those items I discussed. On why we are talking about 2027: yes, we do have a plan in place for 2026. Are we going to hopefully find things, as Mike said—he is finding things all the time? Yes. We want to create a muscle, as Steve said, in the cadence of continuous improvement. The things we want to do in 2027, we have to start now and have a plan together by the middle of the year so we can execute and build momentum. We talk about exit rates in any given year, and we want to build an exit rate in 2026 and in 2027 to make sure we are delivering on year-over-year improvement consistently. That is what the team is focused on for the remainder of this quarter and going into next year. The 100-plus initiatives that we have for this year—we have to make sure we stay on track and continue to add to those as well. Operator: Our next question comes from the line of David Scott Vernon with Bernstein. Your line is open. David Scott Vernon: If we think about the framework for the guidance—the 5% top line, obviously including fuel—I am wondering if you are also getting a little bit more optimistic or less optimistic on the volume side, and if there is any disaggregation between price and quantity in the updated guidance. And then, Mike, when you look at the headcount and the staffing level you are at right now, are you at a level where you are comfortable being able to handle low single-digit growth, or are we going to need to refill the talent pool a little bit? How are you thinking about headcount underlying the guidance you gave us today? Kevin S. Boone: On the revenue side, Mary Claire and Steve highlighted that the majority of the upward pressure on our guidance in terms of revenue is largely around the fuel side of things and energy costs, but those are impacting positively some markets. There are a lot of moving parts in the economy right now. We are watching that. Mary Claire did touch on that we exited the first quarter positively, and we will see if that continues. We are hopeful that continues, and a small amount of that has been embedded in our forward guidance. I will throw it over to Mike. Michael A. Cory: Yes, David. We feel comfortable right now with our current headcount levels. We may see an uptick in T&E labor in Q2 to Q3 where we generally see a little bit higher volume and some peak vacation time. But we are going to continue to carefully manage our attrition levels and always look for ways to be effective and productive with our workforce. We are staying very close with Mary Claire and her team to ensure we are hiring for volume where we need it. We are comfortable right now. Operator: Ladies and gentlemen, that concludes our question and answer session, as well as today’s call. We thank you for your participation, and you may now disconnect.
Operator: Thank you for standing by for New Oriental Education & Technology Group Inc.'s FY 2026 Third Quarter Results Earnings Conference Call. At this time, participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect. I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Sisi Zhao: Hello, everyone, and welcome to New Oriental Education & Technology Group Inc.'s third fiscal quarter 2026 earnings conference call. Our financial results for the period were released earlier today and are available on the company’s website as well as on newswire services. Today, Stephen Yang, executive president and chief financial officer, and I will share New Oriental Education & Technology Group Inc.'s latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental Education & Technology Group Inc. does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on our investor relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead. Stephen Yang: Thank you, Sisi. Everyone, thank you for joining us on the call. I am glad to share with you that Q3 of this fiscal year marks another quarter of solid results and consistent growth. We are pleased to see that after several consecutive quarters of revenue growth exceeding expectations, this quarter has once again surpassed expectations. This reinforces our confidence in the correctness of our strategy and our optimism about future performance. We are even more delighted to see margin expansion in our core business along with the significant contribution from the outstanding performance of Easter byte. Our focus on operational efficiency and investment in strategic initiatives have again driven satisfactory performance and continue to lead our path to sustainable profitability. This quarter, total net revenue grew 19.8% year over year to $1.4173 billion. Non-GAAP operating income rose 42.8% to $202.9 million, while non-GAAP net income attributable to New Oriental Education & Technology Group Inc. increased 34.3% to $152.2 million. Both our core business and new initiatives are gaining meaningful traction this quarter. Breaking down, overseas test prep recorded a revenue increase of 7% year over year for this quarter. Overseas study consulting recorded a revenue decrease of about 4% year over year for this quarter. Our adults and university students business recorded a revenue increase of 15% year over year this quarter. As for our new education initiatives, including non-academic tutoring and our intelligent learning system devices, they delivered sustainable revenue that grew 23% year over year this quarter. Our non-academic tutoring business has been rolled out to around six existing cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business. Our intelligent learning system and device business that leverages our teaching expertise and data analytics to provide adaptive learning solutions has been launched in around 60 cities. We are encouraged by enhanced customer retention and scalability of this new business. The top 10 cities contribute over 50% of the business. Turning to our integrated tourism-related business, which includes study tours and research camps for K-12 and university students as well as new cultural tours for middle-aged and senior travelers, we are delighted that the culture travel China study tour, global study tour, and camp education product continue to be well received, providing customers with valuable knowledge, personal growth, and cultural enrichment. Our student programs now operate in approximately 55 cities nationwide, where the top 10 cities generate over 50% of the revenue. Our other top-notch adult tourism offerings span around 30 provinces domestically and select international destinations. We are also extending into senior health and wellness tourism through partnerships with over 40 wellness facilities in Hainan, Yunnan, and Guangxi, utilizing an asset-light model to pilot the emerging opportunity. We continue to invest in our online-merge-offline teaching platform, leveraging our educational infrastructure and technology capabilities to deliver advanced personalized learning experiences across all age groups. This quarter, we invested $30.6 million to enhance and maintain our OMO platform, which enables us to provide high-quality instruction to students while adapting to their individual learning needs. Turning to East Bay. Esterbuy remains committed to delivering premium products and services to Chinese families. It has advanced its multi-platform, multi-account strategy by launching specialized vertical live streaming channels on Douyin, including Easter by Home, Easter by Food and Vegetables, and Easter by Nutrition and Health. It also continuously optimizes live streaming content and introduced innovative engagement initiatives, including large-scale live campaigns for streamer recruitment and supplier conferences, as part of these efforts to strengthen team capabilities, supplier partnerships, and customer engagement. Looking ahead, Easterby will look to expand its private label portfolio, enhance product R&D and quality control, accelerate app membership ecosystem development, and grow its offline footprint steadily through vending machines and experience tours. Together, these initiatives will drive greater operational efficiency and advance supply chain excellence, supporting sustainable long-term growth. Besides upgrading our OMO system, increased by the positive feedback on our AI applications, we continue to integrate AI across our offerings to strengthen core capabilities. Simultaneously, we are expanding the use of AI to streamline internal operations, thereby boosting efficiency and elevating the support for our teachers and staff. Driving innovation in product capabilities and operational excellence continues to fuel our pursuit of sustainable revenue growth. We look forward to sharing measurable results from our AI investments in the quarters ahead. I would also like to take this opportunity to share a new strategic initiative with you. Historically, New Oriental Education & Technology Group Inc. has focused on serving our customers as each individual. Going forward, we are extending the perspective to serve the entire family unit. Given our diversified offering across different age groups and demographics, we are uniquely positioned to adopt a full life-cycle, full-spectrum approach that addresses the evolving needs of each family member, from children to parents to seniors. To support the shift, we launched New Oriental Home, a private domain platform that integrates our education services, each by used to buy offerings, and the cultural tourism product into one unified ecosystem. Through a single app, families can conveniently access, manage, and redeem services tailored to different members, enabling seamless cross-category engagement and deeper household-level relationships. This platform is already demonstrating strong user engagement and retention through scenario-based marketing and integrated service offerings, significantly enhancing customer lifetime value. At the same time, precision-driven operations improve conversion efficiency and optimize overall operating costs. We have now launched this pilot program in 12 cities as test beds, including Hangzhou, Suzhou, Xi’an, and Wuhan. With over 330 thousand registered families, the platform has achieved campaign activation rates of 10% to 15%, significantly outperforming many public domain e-commerce platforms. This performance demonstrates the high-reach and precision advantages of our education-focused private domain ecosystem. Now I will turn the call over to Sisi to share with you the key financials. Sisi, please go ahead. Sisi Zhao: Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1.237 billion, representing a 16.9% increase year over year. Cost of revenue increased 23.4% year over year to $656.2 million. Selling and marketing expenses increased 9.1% year over year to $198.8 million. General and administrative expenses for the quarter increased 10.8% year over year to $382.1 million. Total share-based compensation, which was allocated to related operating costs and expenses, increased 30.9% to $21.1 million in the third quarter of fiscal year 2026. Operating income was $180.3 million, representing a 44.8% increase year over year. Non-GAAP income from operations for the quarter was $202.9 million, representing a 42.8% increase year over year. Net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $126.8 million, representing a 45.3% increase year over year. Basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were $0.80 and $0.79, respectively. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $152.2 million, representing an increase of 34.3% year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were $0.97 and $0.85, respectively. Net cash outflow generated from operations for 2026 was approximately $7.5 million. Capital expenditure for the quarter was $68.8 million. Turning to the balance sheet, as of February 28, 2026, New Oriental Education & Technology Group Inc. had cash and cash equivalents of $1.7834 billion. In addition, the company had $1.4917 billion in term deposits and $1.9532 billion in short-term investments. New Oriental Education & Technology Group Inc.'s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered at the end of the third fiscal quarter of 2026, was $1.8859 billion, an increase of 7.8% as compared to $1.7499 billion year over year. Now I will hand over to Stephen to go through our outlook and guidance. Stephen Yang: Thank you, Sisi. The healthy results we achieved this quarter reinforce confidence in our operational resilience and growth trajectory. Looking ahead, we remain focused on balanced growth, advancing both revenue and profitability in parallel. We will expand capacity and talent strategically, ensuring growth does not come at the expense of quality. We plan to deepen our presence in markets with proven top- and bottom-line performance while maintaining disciplined resource allocation. We will calibrate the pace and scale of new openings throughout the year, aligning expansion decisions with operational needs and financial results. Cost discipline and sustainable profitability across all business lines continue to be foundational to our strategy. In the coming quarter—what I mean is in Q4—we expect greater cost control to be realized as a result of restructuring and consolidation of our overseas business. A certain level of fixed expense will be reduced, enabling us to pave the way for higher operational efficiency and a better margin profile next year. There will be certain one-off expenses in the coming quarter related to these structural adjustments. Even so, we remain confident in our fourth-quarter profit margin. Looking ahead to next fiscal year, we have strong confidence in our core education business and Easter buy. We will continue to drive sustainable and healthy growth through product enhancement and quality improvement while further optimizing operating costs and enhancing efficiency and profitability. Considering the positive momentum and cost management measures across our business lines, we expect total net revenue for the group in 2026 to be in the range of $1.4296 billion to $140.6669 billion, representing a year-over-year increase in the range of 15% to 18%, driven by encouraging growth across various business lines. New Oriental Education & Technology Group Inc. raises the full-year guidance of total net revenue in fiscal year 2026, 06/01/2025 to 05/31/2026, to be in the range of $5.5614 billion to $5.5987 billion, representing a year-over-year increase in the range of 13% to 14%. These expectations reflect our current outlook based on recent levels of rate development and the prevailing market conditions. Both of the rates remain subject to change. I would also like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that, pursuant to its privileges, we adopted a three-year shareholder return plan. The board of directors has approved the ordinary dividend of $0.12 per common share, or $1.20 per ADS, to be distributed in two installments as part of the shareholder return for fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. The second installment, $0.06 per common share, or $0.60 per ADS, will be paid to holders of common shares and holders of ADS of record as of the close of business on 05/15/2026, Beijing, Hong Kong time, and New York time, respectively. We expect the payment date to be on or around 06/02/2126 or June 5, 2026, for holders of common shares and holders of ADS, respectively. Additionally, we announced a share repurchase program in which New Oriental Education & Technology Group Inc. is authorized to repurchase up to $300 million of its ADS or common shares over this recipient 12 months in the open market. As of 04/21/2026, we had repurchased a total of approximately 3.3 million ADS for an aggregate consideration of approximately $184.3 million from the open market under this share repurchase program. In closing, New Oriental Education & Technology Group Inc. remains firmly committed to sustainable growth, delivering exceptional value to our customers, and generating long-term returns to our shareholders. We continue to maintain close collaboration with the government authorities in China, ensuring full compliance with relevant policies and regulations and adapting our operations to evolving requirements. This is the end of our fiscal year Q3 summary. We will now open the call for questions. Operator, please open the call for questions. Thank you. Operator: Thank you. The question-and-answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the queue on your telephone keypad and wait for your name to be announced. To withdraw your question, please press the key again. We will now take our first question from the line of Jenny Yuan from UBS. Please ask your question, Jenny. Your line is open. Jenny Yuan: Congratulations on a strong set of results this quarter. My question is about margin trends. We know that overall margins expanded meaningfully by 2.3 percentage points this quarter, which is very impressive. Could management please help us break down the key drivers behind this margin expansion? In addition, what is your outlook for margin trends in next quarter and for the next fiscal year? Thank you. Stephen Yang: Thank you, Jenny. It is a good question about margins. Let us start with the margin analysis this quarter. Even though we missed the margin drag from the overseas-related business, we still got group margin expansion by 130 basis points. I think the margin expansion was mainly due to better utilization, operating leverage, cost control, and more profit contribution from Easter buy. As you know, we started to do cost control since March 2025. In the last 11 months, we have seen very good results, which help drive margins up. Our focus on operational efficiency and disciplined resource management has been the key driver of margin expansion. For next quarter, Q4, we remain optimistic on margin expansion, even though there will be certain one-off expenses related to structural adjustments—the consolidation between the overseas test labs and consolidation. These are one-off expenses. Even so, we remain confident in fourth-quarter margin expansion for the whole group. As for the margin outlook for next year, the new fiscal year, we will focus on profitability across all business lines and drive to achieve margin expansion. We are quite optimistic about margin expansion for the core educational business, and we expect East Dubai will generate more profits in the coming year. Operator: Thank you. We will now take our next question from Alice Cai from Citi. Good evening, Sisi and Stephen, and congratulations on the strong results. Please go ahead. Alice Cai: Good evening, Sisi and Stephen, and congratulations on the strong results. May I ask about the capacity expansion plan for Q4 and also for FY 2027? Thanks. Stephen Yang: Regarding expansion, at the start of this fiscal year, we planned to open 10% to 15% new capacity. The net adds of new learning centers in the first three quarters was 8%. That means in the first three quarters, net adds were 8%, so for the whole year, net expansion is somewhere around 10% to 13% or 14%. We only allow the cities with good performance on the top line and bottom line last year to open more learning centers. We care more about better utilization and margins for the whole group. We put new student enrollments into existing learning centers, so the utilization rate will be up for the group. Next year, we will continue to open somewhere around 10% or even a little bit more in learning centers. On the other hand, we have a lot of online and OMO products and offerings. For some online business, we even do not need existing learning centers. I believe in the coming new year, the utilization rate will continue to go up. Operator: Thank you. We will now take our next question from Lucy Yu from Bank of America Securities. Please go ahead, Lucy. Your line is open. Lucy Yu: Hi, Stephen. I have a question on margin as well. You mentioned there will be a one-off restructuring expense in the coming quarter. Would you please quantify how much that would be, either in U.S. dollar terms or as a percentage of revenue? Also, you mentioned a new strategy that will possibly lower the selling and distribution expense or the marketing expense next year. What is your target on the sales and marketing expense for 2027? Thank you. Stephen Yang: The one-off expenses in the coming Q4 relate to structural adjustments of the overseas business. The negative impact on margin is roughly 50 bps to 100 bps, so roughly $10 million to $15 million. Even so, we still remain confident to get margin expansion for the whole group in Q4. We include the one-off expenses in the forecast and still get margin expansion. Regarding marketing expenses next year, we are doing cost control and we put more focus on product quality enhancements, so we do not need to spend crazy money on marketing going forward like what we did in the last three quarters. In the coming new year, we expect marketing expenses as a percentage of revenue will be down. It is another factor to drive the margin. Operator: Thank you so much. We will now take our next question from Yikun Zheng from Citi. Yikun Zheng: Hello, Stephen and Sisi. Thank you for taking my question, and congratulations on the strong results. My question is about the momentum of K-12 business. I remember last summer our K-12 business went through some deceleration. How do you think of the growth trend and the competition for this business in this summer? Thank you. Stephen Yang: On the K-12 business, we beat the guidance again in Q3. We actually beat guidance two to three quarters in a row. In Q4, we are very optimistic about K-12 revenue growth. This year, we changed strategy and put more focus and resources on product quality enhancement, which drives student retention rate up and drives utilization rate up. In Q4, our K-12 business still has revenue growth of about, let us say, 15% to 20%. Grade 9 has 20% content growth plus, 20% plus top-line growth, and high school business less than 15% to 20%. Going forward, even in next year and the year after, we still expect very healthy growth of K-12 because our quality is better than last year, student retention rate is up, and we do not need to spend crazy money on marketing to recruit new enrollments. We are quite optimistic about K-12 growth going forward. Thank you. Operator: Thank you. We will now take our next question from Elsie Sheng from CLSA. Elsie Sheng: Thank you, Stephen and Sisi. Congratulations on the strong results. My question is about the overseas business. I noticed that revenue growth of overseas test prep has been accelerating over the past two quarters. Could you give us more color on the reason behind this? Is it because demand is coming back, or because we gained more market share? What is the outlook for overseas growth in the fourth quarter and next year? Thank you. Stephen Yang: Due to the negative impacts of the economic environment and the international situation, our overseas business was negatively impacted by the outside environment. But our team for the overseas business has shown resilience in almost every city. In the coming Q4, overseas-related business will likely be flattish year over year or up low single digits on revenue increase. Thanks to the great team doing a great job in almost all cities. Next year, I believe we can do even better. Since last quarter, we started the consolidation of the overseas test lab and overseas consulting. Going forward, we will provide a better one-stop service and product to students. We will also do some cost control to save fixed expenses. In the coming new year, I believe the overseas-related business margin will be up. Operator: Thank you. We will now take our next question from DS Kim of JPMorgan. DS Kim: Hi, Stephen. Hi, Sisi. Congrats on the strong beat. Actually, all my questions have been answered already, so let me just ask a couple of follow-ups. First, you mentioned $10 million to $15 million one-off expense in Q4. Can I double check it would be purely contained in Q4, or can there be additional one-offs spilling over into next year? I think it is just one off, but, to provide some confidence and comfort to the market on margin expansion next year, just to clarify. Second, you mentioned the 10% to 13%–14% expansion. Can I double check if that is number of centers or the size of classroom—like area size expansion? And, more importantly, what does this group-level expansion mean specifically for K-9 class capacity this and next year? Stephen Yang: On the one-off expenses, the majority will happen in Q4—one off. Even considering the one-off expense drag, we still get group margin expansion in Q4. It is better for the future because we spend some one-off expenses in Q4, but as a result, we reduce fixed costs in the coming year. That will drive the margin up for the overseas business next year. On capacity, what I am saying is square meter size—net adds. Most of the new capacity we build is in the K-12 business. The top-line growth next year—this is not official guidance, but based on our current estimation—will be somewhere around 15% to 20%, close to 20% or even more. If we open 10% to 15% new capacity, we still have the leverage to drive the average utilization rate up going forward. As for cost and expansion discipline, the local teams will support the job. They have done a great job this year, and I believe they will do an even better job in the coming year on cost control and managing the expansion plan. DS Kim: I absolutely agree it is necessary to make the hard decision to optimize the cost structure into next year. Just to double check—broadly speaking, when we say the one-off, it is optimization of workforce and staff. That is one off, right? It is not like we are ongoing spending on restructuring; it is really that we had to make a hard decision and there was some related cost to it in Q4. Is that a fair understanding? Stephen Yang: Yes, correct. DS Kim: Thank you. That is very clear. Thank you. Stephen Yang: Thank you. Operator: Thank you. We will now take our next question from Jane Yuan of CICC. Please ask your question, Jane. Your line is open. Jane Yuan: Good evening, Stephen and Sisi. Congratulations on this quarter’s strong performance. I noticed that on the new education business side, revenue top-line growth remains strong, but I see a slight moderation in the number of paid users for the learning device. Could you help us understand what is behind the shift? Thanks. Stephen Yang: On paid users, this is because of disclosure differences. One paid user pays more money and enrolls in more subjects at the same time—better than before. Secondly, we do have some seasonal or timing differences. I suggest you look at enrollment, deferred revenue, and GAAP revenue over a longer term. That is why we gave the whole-year guidance this year. The trend for the K-12 business works, and in Q4 I believe revenue growth will be very healthy and we will continue to grow the business in Q4 and the new year. Operator: Thank you. We will now take our next question from Charlotte Wei of HSBC. Please go ahead, Charlotte. Your line is open. Charlotte Wei: Thank you, Stephen and Sisi, for taking my question, and congrats on a really strong quarter. My question is regarding AI impact. On one hand, we can see AI clearly improves operational efficiency and supports margin expansion. On the other hand, how do you expect AI can change the core tutoring format the company is currently offering? Over the next 12 to 24 months, what kind of opportunities and risks do you see from AI? Thank you. Stephen Yang: I will ask Sisi to answer your question. Sisi is an AI expert. Sisi Zhao: We are excited about the opportunity to implement AI technology into our business. It is a big opportunity for companies like us with capital advantages; we can hire top people and we have the best educational experience in this industry. We are well positioned to implement AI in our area. Three things we are doing and making progress on that I want to share. Firstly, we are implementing AI technology into all key business lines. Not only online products or hardware products like our intelligent learning device—we have AI functions embedded in it and keep monetizing it and enhancing students’ learning experience and improving learning efficiency—but even offline classes for young students and all ages can implement AI functions in class. We are collecting data and combining it with our teaching and learning experience to create more value and product opportunities in the future. Existing products are enhancing quality and competitive advantage using AI. Secondly, we use AI to enhance overall efficiency to bring healthy growth plus profitability enhancement. AI can help in each step of our daily work. For teachers, salespeople, teacher assistants, and functional department staff, the whole working process can implement AI technology to enhance efficiency. We have already seen in some businesses that labor costs or labor hours have been reduced. We are doing some restructuring for certain businesses, for example the overseas-related business and others as well. We want to implement more AI in the working process to benefit from efficiency improvement. This is ongoing; we will closely follow the trend of AI technology and keep using it across processes. Teachers are saving more time so that utilization can also improve. Third, we have several piloting teams working on new products implementing purely AI technology so we can depend very little on human resources, combining AI with our teaching and learning experience and certain content to create innovative educational products. These are different from current offline offerings but use AI to bring students a learning experience similar to offline face-to-face teaching. We are exploring opportunities here now, and hopefully in the coming several months we can see some new products. The company is devoting a lot of resources to AI. It is an ongoing process, but together with our strategy we will implement more AI, keep catching up with the trend, and benefit more going forward. Charlotte Wei: This is very helpful. Thank you, Sisi. Stephen Yang: Thank you. Operator: We will now take our next question from Timothy Zhao of Goldman Sachs. Please go ahead, Timothy. Your line is open. Timothy Zhao: Great. Hi, Stephen. Hi, Sisi. Thank you for taking my question, and congrats on the solid results. My question is regarding your longer-term margin profile. You have discussed a lot about new initiatives, the full life cycle of customers, and how AI can help improve operating efficiency, including the overseas test prep and integration. Could you share your view on the longer-term operating margin of the EDU business and the education business? Thank you. Stephen Yang: Thank you, Tim. On margin, as I said, in the coming new year we are optimistic about margin expansion because of higher utilization rates, better operating leverage, and cost control reducing fixed expenses. Next year, margin will be up. I believe we will get margin expansion in the next three years. We hope to get a better margin step by step in the next three years and even long term. Next quarter, I will give detailed margin guidance for next year. We are quite optimistic about long-term margin expansion going forward. Thank you, Tim. Operator: Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental Education & Technology Group Inc.'s executive president and CFO, Stephen Yang, for his closing remarks. Stephen Yang: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect your lines.
Operator: Hello, and welcome to the Akzo Nobel Q1 Results 2026 Earnings Call. My name is Alex. I'll be coordinating today's call. [Operator Instructions] I will now hand it over to Jan Willem to begin. Please go ahead. Jan Willem Enhus: Good morning, and welcome to Akzo Nobel's investor update for the first quarter of 2026. I'm Jan Willem Enhus, Head of Investor Relations. Today, our CEO, Gregoire Poux-Guillaume; and CFO, Maarten de Vries, will take you through our results. We'll refer to the presentation, which you can follow by webcast or download from our website at akzonobel.com. A replay of the webcast will also be made available following the event. There will be a Q&A session after the presentation. For additional information, please contact our Investor Relations team. Before we start, a reminder of our forward-looking statements disclaimer on Slide 2. Please note, this also applies to the conference call and answers to your questions. I'll now hand over to Greg, who will start on Slide 3 of the presentation. Gregoire Poux-Guillaume: Thanks, Jan Willem. Good morning to everyone on the call. In Q1, we delivered a clear beat with EBITDA of EUR 345 million, coming in 7% ahead of the EUR 323 million consensus. Organic sales were 1% lower year-on-year with a 1% pricing gain offset by 1% declines in both mix and volumes. Profitability improved meaningfully. Adjusted EBITDA was up 7% at comparable scope, while adjusted EBITDA margin rose to 14.5%, up 80 basis points. This marks the fourth quarter of margin expansion year-on-year, driven by disciplined pricing and strong execution on our cost actions in soft end markets. Operationally, our industrial transformation will be completed by year-end. We closed a further 3 sites in Q1, bringing the total to 15 since the program's inception. We've done all of this without business interruption. We also delivered a key milestone to our ongoing portfolio review in Deco Asia, signing the sale of our business in Pakistan at 14x EBITDA for an enterprise value of about EUR 50 million. Close is expected in the second half of the year. It's not a very large transaction, but it's another proof point after India that Deco assets are valuable, particularly to the right owner. On financing, we issued a EUR 1.1 billion bond dual tranche in March, extending our maturity profile and reinforcing liquidity ahead of the proposed Axalta merger, which is on schedule. We enter the rest of the year from a position of strength, well equipped to navigate the raw material headwinds ahead. Turning to Slide 4. In Q1, volumes were down 1% year-on-year, reflecting a mixed regional picture. We saw strong growth across Asia and South America, while North America and Europe remains slow. In Coatings, volumes declined 2% in Q1 against the backdrop of continued macroeconomic uncertainties. Powder, specifically, Powder demand improved in both architectural and automotive. And the strong momentum in Asia continued. Marine, Protective delivered a lower quarter driven by project phasing and tougher comps in Marine, while Protective continued to grow, particularly in Asia. Automotive and Specialty remained sequentially flat. Aerospace is a clear growth engine, while Refinish grew in Asia and stayed at trough levels in North America as expected. Industrial Coatings declined low single digit with growth in coil, more than offset by lower volumes in packaging. Moving to Deco, Q1 was a solid quarter. Volumes grew strongly across Asia and South America, offset by lower volumes in Europe, Middle East and Africa, where the season started more slowly but accelerated through March and is also doing well in April. Latin America volumes were low single digits up, driven by Brazil's return to growth together with Colombia. In Asia, growth accelerated sequentially with continued outperformance in China and Vietnam, while Indonesia is showing signs of recovery. I'd add as a comment in reaction to some of the questions we got this morning and some of the headlines that we saw that we don't see a whole lot of evidence of prebuying in either Deco or Coatings. I mean they're very different businesses. But once again, there's no evidence of significant prebuying in any part of our business at this point. Take us to the next page, Maarten. Maarten de Vries: Yes. Thanks, Greg, and good morning, everybody. At group level, organic sales declined by 1%. Volumes were down 1%, while 1% price was offset by a negative mix impact of 1%. The divestment of India had a negative 3% impact on revenue. Finally, FX translation reduced revenue by 5%, resulting in a reported revenue decline of 9%. Coatings were impacted by geopolitical uncertainty with volumes down 2%. Growth in Asia and South America was more than offset by lower volumes in North America and Europe. Deco delivered strong price mix of 2% on flat volumes. Group adjusted EBITDA was EUR 345 million, representing a 7% increase at comparable scope excluding our India disposal and in constant currencies. The EBITDA margin improved to 14.5%, up 80 bps year-on-year. This improvement was driven by 300 bps margin expansion in Deco on strong pricing and structural cost savings. In Coatings, softer volumes and negative mix weighed on profitability. Next slide. We delivered another quarter of free cash flow improvement by EUR 39 million at minus EUR 144 million versus minus EUR 183 million in Q1 last year. The first quarter is seasonal quarter with inventory build and related outflows. Working capital also improved, ending the quarter at 16.8% and 20 bps below prior year. Notably, this was achieved while we closed 3 sites as part of our industrial transformation program, which requires inventory buildup to support volume redistribution. Return on investments rose to 13.6%, up from 13.1% last year. And finally, supported by the improved cash generation, we maintained our leverage ratio at around 2x. Now handing back to Greg. Gregoire Poux-Guillaume: Thanks, Maarten. Moving to Slide 7, I think, tensions in the Middle East have pushed oil prices higher and caused significant disruption across the chemical value chain, driving expected high-teens raw material inflation for the remainder of the year. In response, we moved decisively to protect margins and have announced price increases ranging from the mid-single digits to the low teens. The announced price increases will fully offset raw material and logistics inflation based on current market conditions. We'll execute further pricing actions if conditions worsen. So once again, these price increases have been announced, they've been discussed with customers, they're being implemented. The last cycle demonstrated the strength of our ability to pass through inflation. If you think back to that time, '21, '22, EUR 2.3 billion of cumulative pricing to fully offset the EUR 2 billion of raw material inflation, although pricing took time to catch up. This time around what we're building on that experience and we've acted faster, bringing pricing and inflation into closer alignment in the early stages of the cycle. We're not executing at pace with the P&L impact of our pricing actions ramping up in Q2 and the full effect visible in Q3. Beyond pricing, we're actively managing input cost inflation contractual terms and competitive sourcing are limiting cost increases from suppliers, while our regional-for-regional sourcing model keeps supply continuity and act and provide resilience against further destruction. In short, we've navigated this before, our response is in motion, and we believe we have the track record to back our confidence. Turning now to our outlook on Page 8. Looking ahead, our 2026 adjusted EBITDA target of at or above EUR 1.7 billion remains unchanged. The EUR 100 million step-up continues to be driven by what we control, EUR 90 million of net savings from our industrial program, with SG&A carryover and productivity offsetting inflation. We remain firmly focused on completing the industrial program by year-end while maintaining strict cost discipline. Although the Middle East conflict has limited impact in the first quarter, raw materials and logistics costs will ramp up throughout the year. The exact impact is still evolving, but additional pricing has been announced, as I said, and we'll fully offset this inflation we see. And therefore, we believe that the actions that we have in place have neutralized that impact and we'll take further actions if needed. For Q2, we expect adjusted EBITDA of around EUR 400 million. Volumes are forecasted to be broadly flat against comps that are less challenging than in Q1. And pricing will build progressively throughout the quarter, offsetting raw material inflation, while OpEx savings will be delivered as per plan. Moving to Slide 9, the merger preparations with Axalta are progressing as planned with three critical work streams running in parallel. On integration, the management office is up and running with a strong cooperation between the teams, focus is on day 1 readiness and accelerating synergy capture. The shareholder preparations continue to advance. The PCAOB audit is complete. The confidential F-4 filing was submitted end of March, and the EGM is expected to be held in early July. Separately, the regulatory process is underway with active dialogue across many jurisdictions, including the U.S., the EU and the U.K. We remain firmly on course to close by the end of the year or early next year. I'll now hand over to Jan Willem, who will close with information about upcoming events, and then we'll start the Q&A session. Jan Willem? Jan Willem Enhus: Yes. Thank you, Greg. Before we start the Q&A session, I would like to draw your attention to the upcoming events shown on Slide 10. Our AGM that will be held tomorrow, April 23, the ex-dividend date on our 2025 final dividend, April 27, and the record date is April 28, followed by payment on May 6. This concludes the formal presentation, and we'll be happy to address your questions. [Operator Instructions] Operator, please start the Q&A session. Operator: [Operator Instructions] Our first question for today comes from Thomas Wrigglesworth of Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Firstly, around the volume outlook that you have I mean clearly an evolving picture, but obviously, you've kept the volume picture flat and you're pushing through pricing. Are you expecting to see some demand erosion? Or do you think that is too early to tell or there are mitigating factors within there that mean that, that doesn't -- that shouldn't arrive this time around? And secondly, just on the -- you successfully -- you very successfully passed through pricing in the previous cycle. But one of the issues we found was in the coatings industry, less so Akzo, was kind of unique components that were missing or became short. Just in terms of your total inventory picture, how does that vary by region? How many weeks, how many days of inventory do you have in terms of visibility and in terms of lead time to get -- to enable you to get prices up? Gregoire Poux-Guillaume: Thanks, Thomas. I'll take the first question. Maarten will take the second. From a volume perspective, we've kept the outlook flat. When we look at -- so when we look under the hood, we're not really seeing -- we didn't see any prebuying of any significance, we are not seeing a slowdown either. We're essentially seeing a trend that is -- seems to be fairly stable. So will -- if we stay in a world of higher inflation because that [indiscernible] inflation creates price inflation and creates inflation overall, would that have an impact on demand overall? I mean I think economic theory would tell you it would. But it's -- one, it's not visible today. Two, it's too early to tell. Three, we're playing against easier comps starting in Q2. You have to remember, you had Liberation Day last year and all sorts of things that made our life exciting. So I'd say so far, so good. And March was healthy. April was healthy, too. We announced price increases that we discussed with our customers without seeing them ramp up their orders or -- I think there's a view in the market that there's potentially a resolution on the horizon. But whether that's correct or not, we're not seeing anything that would lead us to change our volume outlook for the time being. Maarten, do you want to take the second question? Maarten de Vries: Yes, on the pricing dynamics and maybe a few points to make. First of all, this is really a very abrupt price increase. But of course, there is a different picture per region and also per business or per business segment. So we use differentiated pricing, of course, in that context. And on your question on lead time, what you see in general that in Asia and particularly in China, supply chains are significantly shorter compared to, for instance, Europe. So that's why in Asia, within shorter supply chain, but also a more material increase, you see also there a faster reaction to compensate. Gregoire Poux-Guillaume: It's really interesting, by the way, because Asia structurally has a higher impact from what's happening in the Middle East and the Strait of Hormuz just because where these oil and some of these refined products go. And as Maarten said, it's a shorter supply chain. So you should say, well, there's going to be more of an impact in Asia and that impact will be felt earlier. But actually in Q1, what really pulled the performance is Asia. So it's holding up well at this point in terms of demand, once again, to link Maarten's answer on the second question to the first question. Operator: Our next question comes from Laurent Favre of BNP Paribas. Laurent Favre: Greg, how much of the pricing that you're targeting for the rest of the year is underlying pricing rather than surcharges, which I guess is a way of trying to understand how much carryover we get into 2027 as things are now? And then the second question is on the Asia disposals in Deco. So you did Pakistan and obviously at a good valuation, but I guess the process there started before the war. So I'm wondering, to what extent you think the current Middle East situation is just going to push back all your, well, I guess, expectations around announcing more deals either from a valuation standpoint or just because just too much uncertainty and people don't want to [ move ] capital now? Gregoire Poux-Guillaume: Yes. Thanks, Laurent. I'll take your questions in reverse order. You're right, Pakistan, we started discussions before the war in Iran. But the war in Iran did not lead to a value erosion of that process or a fragilization of that process. So there was no time when potential buyers try to use that as a reason to either take down the price or push things back. And if you look at what we have in mind for the rest of Asia, it's really interesting. I mean we're in this world where people WhatsApp you stuff all the time. And while we were getting ready for this call, I got a WhatsApp from a senior executive of a well-known company that asked me about the availability of one of our Deco businesses in Asia. So this is like real-time stuff. So I -- what that tells you is that people look through the crisis. These are really good businesses. Nobody is trying to figure out whether -- what's the impact for 3 to 6 months. They're buying for the long term. And these are franchises, these are well-known brands with entrenched positions in countries. And I don't want to be cynical that things -- this too shall pass, but that's not how buyers look at assets. And once again, a few data points, no change on Pakistan despite events and people actively knocking on our door pretty much in real-time for anything else that we might have in mind in Deco in Asia. Your question on the price versus surcharges is -- I think it's a really good one. And we've explained in the past that about 25% of our business -- 25% of our revenue is based on formula indexes. So take Akzo overall, there's about 25% of our revenue where prices adjust based on the formula. In Industrial Coatings, for example, that's a significant part of it, but there's other places, too. Those formulas, they're not very effective for small variations, but they're really effective and really impactful for big variations. And we're in big variation land. So essentially, I was touching base with the Industrial Coatings business. And essentially, they told me yesterday that these formulas have already been agreed to the impact, and it's already being passed on. So that's being rolled out in invoices in April, in May. I think the tail end of that is things that go in on the 1st of June, no later than that. So it's kind of actually spread out between 1st of April, 1st of May, 1st of June. So that's about 25% of our revenue base. And everywhere else, in some cases, we have longer-term contracts, but a lot of it is spot essentially. And there, you have the option of going with price increases or surcharges. Our preference is to go for price increases because these -- the surcharge stuff is -- you're right, it's less sticky, but it has an advantage, though, that usually you can implement it faster. So overall, we've gone proportionally more for price increases, but there are certain areas of the business where we've gone for surcharges, usually in areas where that's the acceptable or accepted practice. But once again, that's not our preference, but that's something we do when that's the market practice and when we believe that speed is the essence. Operator: Our next question comes from Matthew Yates of Bank of America. Matthew Yates: A couple of questions. The first one just around cash flow and working capital management. If I think back to the prior cycle, you ended up consuming the best part of EUR 1 billion in additional working capital. Can you talk about sort of how you're thinking about the impact this time around and any lessons learned? I think with the benefit of hindsight, I think you yourselves were prioritizing security of supply that then led to quite a prolonged effort to unworking that. How are you engaging with your raw material suppliers at the moment to balance what you need versus not buying too much at perhaps what is the top of the market? And the second question, I'd like to follow up on what Laurent was asking around the process for Asia, and I'm a bit confused as to what the strategy here. I was under the impression that you were reviewing positions where you did not have a pathway to being a market leader. Based on recent press reports, it suggests that you're taking a more holistic look at whether keeping any Asian business would be worthwhile if it has a lack of scale. And I'm just curious, how you're thinking about this process? Is it going to be piecemeal? Or are you looking at a total exit of your Asian Deco franchise? Gregoire Poux-Guillaume: Matthew, I'll take the second question. I'll start with that, and then Maarten will take the first one. To clarify, our strategy hasn't changed. We love our Deco businesses, we believe that our capital is better allocated to leadership positions. And if you take Deco specifically, the part of the world where we don't always have a leadership position is actually Asia. So hence, the fact that in September, I think, 2024, we announced a review of our Deco Asia position. So it's not coatings at all, it's just Deco Asia. We sold India. India was a great business with 5% market share. We sold Pakistan. And we're looking at some of these other positions. And to your question of is that wholesale or retail, is that -- are we looking at potentially selling as a package? Or are we looking at assets individually? Right now, we're just having discussions in general. We're not -- we haven't decided anything, but we've been clear that if we're not the leader and we don't have a path to leadership, we will consider options. And that -- these are the options that we're talking about. By the way, that discussion does not include China. China is a really good business that is recovering ahead of the market that we're excited about for the years to come. But it's -- the scope that we are looking at from a strategic perspective is essentially the rest of Asia, which once you've taken out India and Pakistan is about EUR 300 million of business at a profitability, which is a little bit higher than the Deco average. So hopefully, that answers the question. But I don't have anything else to communicate on this at this point beyond the fact that we're continuing with the exact same strategy, taking a critical look at these assets, and we are having a bunch of conversations because it's not like we've been discrete about it. So people are calling up or to allude to my answer to Laurent's question, people are WhatsApping me. We're very modern. Maarten, do you want to take the first question? Maarten de Vries: Yes. Yes, Matthew, it's a very good point. And obviously, we have taken the lessons learned from the previous cycle. We are operating at the moment end of Q1 at an inventory level, which sits just above 100 days and is in line with last year Q1, by the way, despite the massive transformation we are doing as part of our industrial footprint. Clearly, we will -- and we are and we will manage our inventories at a tight level because it doesn't make sense to start to buy when prices of raw material have spiked already because the spike is already there in terms of raw material prices. So we manage it tightly, not buying at the highest level to make sure that we manage our working capital in a proper way. And as you know, yes, in value, inventory goes up, but payables will also go up. So that compensates each other, and that underpins kind of the trajectory we see from -- for working capital throughout the year. Gregoire Poux-Guillaume: But Matthew, you're correct. Last time around in '21, '22, we did really well in terms of pricing to mitigate the impact. We did really badly in terms of anticipating raw material prices and availability, and we had a tendency to hoard. And when the situation started normalizing, we had 2 or 3 quarters of relative underperformance because we were still working down higher-priced inventories. So in terms of lessons learned, that's lesson learned, which is we're going to keep a very close eye on days of inventories. And we haven't given our people relief, we haven't told them that target of getting under 100 days of the [ IO ] is suspended. Let's go out and buy whatever we can. That's absolutely not what we're doing. It's business as usual, but it's business as usual in a more dynamic way because the market is a little bit stretched. Operator: Our next question comes from Katie Richards of Barclays. Katie Richards: Two questions from me, please. The first, I just want to understand, to what extent the positive margin momentum in the Deco side was driven by the higher inventory backlog you've been describing? Because you were talking about ahead of site closures, you are building inventories ahead of that. And secondly, you mentioned earlier that now the market has a view that there's a resolution on the horizon, so I'd just be interesting to understand whether you're finding it more difficult to push through price increases now that the news headlines are focused on a ceasefire. Gregoire Poux-Guillaume: Thanks, Katie. The second question is -- I'm not trying to be a geopolitical commentator. I was explaining why -- I was giving a reason or an explanation of why we're not seeing a lot of prebuying. People are fairly calm in the value chain. But I think we all understand that even if there's resolution tomorrow, oil prices will remain at a higher level for the quarters to come and the chemical value chain will take some time to resorb. The moment you open the Strait of Hormuz, in all likelihood, the ships that will be given priority are the VLCs, the very large crude carriers. And all the stuff that has chemicals on them will be at the back of the queue. So I think we all understand that whatever happens, this impact is going to be carried for the rest of the year. There's no magic wand to go back to pre-Iran quickly. So no, whatever is happening is not impacting our price discussions. And also, I think people have gotten used to the fact that those discussions are a roller coaster. So no specific impact from that perspective. Your point on Deco margins, you saw that our margins were up 300 basis points in Q1. And actually, your question is a really good question because you're essentially -- if I phrase it differently, you're asking whether that performance is supported by positive inventory revaluations. And the answer is that it's not. The inventory revaluations have not impacted Q1. And therefore, that performance was achieved the old-fashioned way. And the old-fashioned way has been specifically to this, this industrial transformation that we undertook where we're closing a lot of factories, we're streamlining the business, we're taking out some of the overheads. Over time, it pays off. And what you're seeing is those actions paying off. You're not seeing any kind of weird one-off accounting impact of raw [ mats ] go up and therefore, we do an inventory revaluation that's positive that underpins the Q1 performance. That's not the case. I can confirm that. Operator: Our next question comes from Tony Jones of Rothschild & Co. Tony Jones: I've got two. On site closures, you have reported you've taken out 3 in this quarter, and I think you said that's 15 in total. Could you remind us what the target is for this calendar year and how that might split by division and region, if that's possible? And also, what are the criteria now with -- we're at the end of April, you have the Axalta merger hopefully on track for the next 6 to 12 months. Is that also starting to take effect? And then in terms of the divestments, sort of circling back to early questions, how much of the divestment strategy, particularly Asia, is now starting to also consider the combined footprint with Axalta? Or is that just not relevant at this point? Gregoire Poux-Guillaume: Thanks, Tony. The site closure question, we said we've done 15. We never gave an overall target. But if you go back to where we were last year, we were at 12. And we said that we've done 6 for the year, and we said there were at least as many in 2026 as in 2025. So at least as many, it means above 18. I'm sorry to be coy and to -- but you understand these things are sensitive. But roughly 18 plus, and all of those are going to happen. And none of that is changed by the impending Axalta merger. These are all things that we believe makes sense regardless of whether we merge with somebody else or the market environment. So we're going ahead with those. And there was a divestment question, I think, Maarten? Maarten de Vries: Yes, there was a divestment question. And again, we are going ahead, as we mentioned earlier. And there is no relationship to the Axalta merger, also not related to the footprint. We are executing our stand-alone strategy. And we are focusing on this year, and the merger will come from early next year onwards. Gregoire Poux-Guillaume: And I think if I may add something to what Maarten said, it ties to a question we've been asked multiple times by investors, which the merger, there's really good investor support. But if they have one gripe, it's -- this pushes returns out into the future because a lot of people look at this and go like, "Well, you're going to be busy with regulatory until closing. So that takes care of 2026. And in '27, you're going to spend $600 million to generate EUR 600 million of synergies. So that means that the earlier I can start seeing returns is 2028." But the reality, if you read the merger agreement is that we've maintained the right to monetize some of our assets in Deco Asia. And as you can tell from what we're saying, we're continuing, which means that some of those returns are being brought forward by whatever we do with those assets specifically. And once again, no change, no change because of Axalta and no change because of the market. If anything, that those processes are generating quite a bit of interest. Operator: Our next question comes from Chetan Udeshi of JPMorgan. Chetan Udeshi: The first question I had was, Greg, you mentioned the local sourcing for local region strategy. But I mean, correct me if I'm wrong, I sort of remember in Europe, about 12% to 30% of your raw material requirement is actually typically imported from China. And I'm just curious, is this going to change how you look at importing from China in the future? Of course, the prices from China tends to be much lower. But then if you have these sort of supply shocks like COVID, wars, does that make sense or does it make sense in your view to double down on local sourcing in Europe or rest of Asia, even if that means you have to pay higher prices to local suppliers? The second question, just going back to the pricing, it seems to me at least that these are the price increases that you are pushing through. Can you give us any color on how the acceptance has been so far from your customers? Are they -- do they understand? Are they pushing back? Is it a kind of war? Because we all take the price increases on the face value, but of course, what matters is how much will stick. Maarten de Vries: Let me take the first question on regional or local sourcing. In fact, what happened post-COVID, we have focused more and more on local sourcing. And if you look at specifically Europe, and our local sourcing versus what we source from Asia, particularly China; that is, in fact, a very low piece. So it is significantly lower versus what you are mentioning. Currently, we are more or less at a 10% level. So our model has more change to regional/local sourcing. Gregoire Poux-Guillaume: Which, by the way, we talked about, I think, maybe 18 months ago or 2 years ago because the question was, are we taking advantage of the exceptionally low prices in China at a time, if you remember, it was when Europe was passing on tariffs on Chinese [ TiO2 ], antidumping. And what we said at the time is that we had derisked our flows. We realized that there's a geopolitical risk associated to having too many eggs in the same basket and that we were willing to absorb a little bit more cost to have more certainty. So it's exactly what Maarten said. And if you kind of go back to what we said at the time, you'll see that it's very consistent. The second question, Maarten? Maarten de Vries: It's on the price increases and customer acceptance. Gregoire Poux-Guillaume: Customer acceptance. It's -- I go back to my answer to Laurent's question. There's about 25% of our revenue, which is formula-based, and then that takes away a lot of the emotion. On the B2B side, so the other coating businesses, it's been -- the industry reaction has been fairly kind of consistent across the board. If you look at the announcements that came out from different players, we're all pretty much saying the same thing. And our customers are also B2B players. So they're also looking to see how they pass on. So those discussions have been constructive. On the Deco side, it really depends. In some Deco markets, we are still on the tail end of discussions for the annual price increase for 2026 because these things have -- they have a tendency to be settled at the beginning of the high season, and the beginning of the high season is essentially now. So it puts a lot of things on the table at the same time, but everybody understands that this phenomenon is something that has to be mitigated. And actually, a lot of our customers are -- have already increased their prices in Deco. And any discussion that they have with us is more about margin expansion for them than it is about whether there's a logic to the price increases. But I'd say so far, so good, Chetan. Operator: Our next question comes from Georgina Fraser of Goldman Sachs. Georgina Iwamoto: I wanted to just ask a bigger-picture question, just revisiting the strategy to shrink Deco and consolidate and get bigger in the Coatings business. Are there actually any dis-synergies to owning both of these businesses? Or how do you present the value-creation strategy behind this idea to shareholders? Or is the disposal strategy in Deco just about the fact that you haven't been able to delever organically? Looking at the balance sheet, it's -- we're kind of just stuck and have been for some time. Gregoire Poux-Guillaume: Thanks, Georgina. It really is not about the balance sheet at all. Our cash flow generation was really solid last year. We are delivering at a higher level also in Q1. We're -- we've been actively managing working capital. We're not worried about our ability to generate cash, and we're certainly not worried about the balance sheet. And it's not at all about wanting to shrink Deco. It's about wanting to make sure that we are fighting battles that we can win, meaning that we have -- we want to focus in Deco on businesses, on countries where we have a leadership position because Deco is a local game, and it's a relative market share gain. We're very strong in Latin America. We're the market leader in Colombia, we're the market leader in Argentina. The impact of having Colombia on Argentina is pretty much zero and vice versa. These are not different brands, the products don't travel from one country to the next, production is local. So the way you win in Deco is by having the strongest brand and the best distribution. So it's a relative market share gain. So once again, if you look at the profitability of our businesses in Q1, I mean, Deco is at like 17.3%. It's 400 basis points higher than Coatings almost. Now it's a moment in time, Coatings is more impacted than Deco by what's happening in the world. But these businesses are really good businesses. But once again, we want to be in the countries where we have a winning hand. And we are -- we've also demonstrated with India and Pakistan that in countries where we're not necessarily the leader, these businesses are way more valuable to people other than us. So I don't know that any investor will look at me strangely if I sell a business where we have 5% market share and the market leader has 50%, and we sell that business at 24x EBITDA, which is exactly the situation in India. So once again, not about the balance sheet, it's about focus, it's about making sure that we are not to -- spread too thin. And to your question of are there dissynergies to owning both? Not really. I mean, I think the -- there's complexity, which is that it makes -- it forces investors to have conversations ranging from the weather in the U.K. to aerospace travel to whether people are crashing their cars in North America. So it makes the story a little bit more complex. And from a management perspective, we're essentially within Akzo, we're running a B2B business, and then we're running a smaller version of Unilever. Deco is essentially an FMCG business, although it's -- the F is a small F, but it's very similar to those businesses and -- which means that you manage them and you allocate capital to them in a very different way as you would for the Coating businesses. So that's all it is. It's not -- it's pretty straightforward, not about balance sheet, a little bit about complexity and a lot about capital allocation and value. Operator: Our next question comes from Sebastian Bray from Berenberg. Sebastian Bray: There on the Refinish business, please, can you give an idea of the geographic distribution of sales at Akzo Nobel within Refinish? And any comments on both the underlying market development, given that volumes have been weaker in recent quarters? And the relative performance of Akzo's own business would be welcome. Gregoire Poux-Guillaume: I don't think we've ever given the geographical split of the Refinish business. What I would say is that we're top 4 in the U.S. and in Europe. We have a stronger position in Asia. Our Refinish business in Asia did very well in Q1. Refinish in the U.S., as you know, was impacted by that sort of tension between higher insurance premiums and lower disposable income, and that stabilized at a trough, but it hasn't picked up yet. And Europe was less impacted, but is not rebounding yet. So if you run a Refinish -- if you own a Refinish business these days, what you have is growth in emerging markets, you have -- you're stabilized at a trough in Europe and the U.S. And -- but with an impending rebound that the bigger guys, PPG and Axalta, we're forecasting for the second half of the year, which might shift a little bit if gas is $4 per gallon at the pump in the U.S., maybe that has an impact on driving season. But it's a business that continues to have significant pricing power because it's a business that differentiates on technology. For the body shops, the cost of the paint is not a big cost item. What makes a body shop profitable or not is essentially throughput and labor costs. So if you offer a product that achieves a better result in less time, you're going to make good money and you're going to have pricing power. Hopefully, I've answered your -- I didn't give you percentages, but hopefully, I gave you some color. Operator: At this time, we currently have no further questions. So I'll hand it back to Greg for any further remarks. Gregoire Poux-Guillaume: Thank you. Well, look, strong Q1 in a market that is a little bit distracted by what's happening in the world. The market was soft in the first place that is always a source of concern. But as we look at how our business unfolded, January, February, small months; March was actually a good month, April is looking pretty good, too. There doesn't seem to be any signs of panic or significant disruption in the market, no significant prebuying, no changes in consumer patterns that we can see at this point. Once again, we're keeping a close eye on that for the rest of the year. But keep in mind that we're forecasting flat and our comps get easier. Our cost structure is really under control. We continue to take cost out, and it continues to have a positive impact, as you can see from the performance of Deco in Q1 as just one data point. And then we were pricing up before Iran, and we've stepped up one level because of the raw material impact, once again, in the high teens in our basket for the rest of the year, but mitigated by already announced price actions that we believe will neutralize the effect. So that gives us some level of comfort for the rest of the year. Once again, volumes are always the question mark, but so far, so good. We expect EBITDA to be about $400 million in Q2. And once again, you'll see progressively, you'll see the raw material impact materializing in our P&L, but you'll also see the corresponding price increases making their way through our P&L at the same time. And our aim is not to capitalize to expand margins. Our aim is really to price to neutralize the impact. Merger is making good progress. And we thank you for your time and your attention today. Thanks. Operator: This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to AT&T's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Treasurer and Head of Investor Relations. Please go ahead. Brett Feldman: Thank you, and good morning. Welcome to our first quarter call. I'm Brett Feldman, Treasurer and Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our Chairman and CEO; and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information, as well as our earnings materials are available on the Investor Relations website. I also want to note that the quiet period for FCC Spectrum Option 113 is in effect. During this period, applicants are required to avoid discussions of bids, bidding strategy and post-auction market structure with other auction applicants. And finally, I want to note that the discussion of our operating results and outlook during this call will be on a continuing operations basis. With that, I'll turn things over to John. John Stankey: Thanks, Brett, and good morning, everyone. I appreciate you joining us today. We executed well in the first quarter, delivering results that were consistent with the outlook we provided, while implementing several key strategic initiatives. Last quarter, we told you that we had positioned AT&T for improved growth with our investment-led strategy in fiber and 5G. There's clear evidence of this in our first quarter results. We reported 584,000 total fiber and fixed wireless advanced Internet customer net additions. This is our best ever first quarter result in the sixth consecutive quarter with over 0.5 million consumer and business net adds. We also continue to see accelerated pace of our customers' purchasing through wireless and Internet connectivity together. 42% of our advanced home Internet customers also choose AT&T Wireless. But when excluding the transaction with [ Lumin ], this convergence rate approached 45% on an organic basis during the first quarter. This is more than a 3 percentage point increase compared to last year, which is our fastest ever year-over-year convergence growth rate. These results are encouraging but not surprising. It is exactly what customers have told us they want. They're increasingly choosing what we believe to be the best combined fixed to mobile Internet service in the market. When our customers choose AT&T for their wireless and Internet connectivity, they consistently express stronger brand love, higher Net Promoter Scores and ultimately stay with us longer. During our Analyst and Investor Day in 2024, we shared a few data points highlighting the relative improvements that we see among our converged customers in key operating metrics such as customer lifetime values and churn. These benefits remain robust, and we expect [ that as ] a greater portion of our customers purchase their wireless and Internet connectivity from AT&T will demonstrate improved trends in churn and additional improvement in account growth. During the first quarter, we made further progress at positioning AT&T as the preferred provider for connecting consumers and businesses to the Internet. We closed our transaction with Lumin, ahead of schedule, adding 1.1 million fiber customers, and over 4 million fiber locations. We're pleased with the progress we're making as we integrate [ these ] assets in several major metro areas and position the business for faster growth. Early indicators are positive. We now offer fiber services throughout our distribution channels in these areas, which has driven sales activity well above pre-transaction trends. We're executing the steps to scale engineering, construction and service delivery in the acquired geographies, expected as we move into the back half of the year, will achieve steady improvement in fiber and wireless customer growth in these areas. When we focus on customers' needs and invest in the experience and products they want, we find success, and in the first quarter, we gave customers more reasons to choose AT&T. We expanded the AT&T guarantee to cover Internet Air and launched a new flagship app to deliver a simple digital-first experience to customers. We also launched AT&T [ OneConnect ], which enables customers to easily connect all their eligible devices at home and on the go, and eliminates the need to buy Internet access twice. We refreshed our Unlimited Your Way plans to deliver more value. All these moves are based on a consistent set of principles that drive our approach to serving customers the way they want to be served, with offers that deliver simplicity, value and choice and converged connectivity. After years of industry-leading investments in our fiber and wireless network, we believe that we have now established a structural advantage that others will not catch. We reached more than 90 million customer locations across the country with our advanced Internet services, over either fiber or 5G. We believe this provides us with more scalable reach and converged connectivity than any of our peers, including a meaningful scale and performance advantage in fiber. This is an advantage we're growing as we ramp our deployment at a faster pace than anyone else. Today, we reach over 37 million customer locations with fiber, and we're on track to reach 60 million plus locations by the end of the decade. As I discussed last quarter, when we complete our work at a fiber location, we believe we're able to offer that customer access to the Internet on a lower marginal cost structure than any competitor, with superior performance and an industry-leading experience on America's best and fastest home Internet. This positions AT&T to compete on performance and value by putting our service at the center of our converged offers and shifting the focus away from expensive device subsidies. You saw us lean into this advantage with the launch of AT&T OneConnect, the industry's first ever single subscription service for fiber and wireless with a flat monthly price. This is how you should expect us to go to market as we accelerate the expansion of our fiber availability, with offers and marketing strategies that yield attractive returns by driving deeper fiber penetration and growth in converged customer relationships. Running these plays has not only strengthened our performance in the consumer market, but they've begun to demonstrate that the same strategy can strengthen our business enterprise operations. During the first quarter, Advanced Connectivity business service revenues stabilized on a year-over-year basis for the first time ever. This reflects improved growth in fiber and 5G that is now offsetting declines in transitional services such as VPN, as we drive better sales execution [ across an ] expanding footprint of business locations that we can reach with fiber and fixed wireless. We're operating from a position of strength as we lean into the strategic foundation we've built. Our investments have positioned us to accelerate and scale the execution of our strategy in 2026. And through the course of the year, you can expect to see the momentum in our operating trends build. As we continue our journey forward, our strategies and capital allocation will remain focused on meeting the Advanced Connectivity needs of consumers, businesses, the public sector and first responders they adopt and rely on AI-enabled tools and applications. We expect AI to fundamentally transform network requirements beyond download speeds to the ability to support [indiscernible] capacity, ultra-low latency and session control across multiple access technologies under sustained load. And that's how we're architecting our converged network. We've committed to greater investment than any of our peers in the U.S. connectivity infrastructure. And by the end of this decade, we expect to operate the most advanced and open communications network in the U.S., built on a foundation of dense metro fiber and deep nationwide spectrum. With the opportunity to reach more end users than our competition, coupled with our historically scaled metro and long-haul core, AT&T is well positioned to lead our industry in AI-ready connectivity. Investment in high-performing networking is a critical component of a competitive American AI ecosystem. We continue to appreciate the leadership of SEC Chairman [indiscernible] in the commission's continued efforts to modernize America's networks. What we see transpiring on the federal policy front are the absolute right moves for the U.S. to sustain leadership in communications infrastructure at this [indiscernible] moment and the birth of the AI economy. I reflect on this moment within the context of AT&T's milestone celebration of the 150th anniversary of the first phone call. For a century and a half, we've adjusted this in markets, technology and the evolution of public policy. It's a story of many chapters over 150 years shared by proud and dedicated AT&T employees and retirees, consistently rising to our long-standing call of the spirit of service. While all the chapters are important, some turn out to be more consequential than others. And I believe we're entering one of those chapters that will be exactly that. I couldn't be more optimistic given how this company is positioned itself as we enter this defining moment, that our best days are ahead of us. With that, I'll turn it over to Pascal. Pascal Desroches: Thank you, John, and good morning, everyone. At a consolidated level, total revenues were up 2.9% year-over-year in the first quarter, and service revenues were up 1.4%. Our growth is increasingly driven by gains in fiber and fixed wireless Internet customers, as well as our success at growing customer accounts that choose AT&T for both Internet and wireless connectivity. We continue to expect we will grow consolidated service revenues in the low single-digit range for the full year, driven by growth in wireless service, fiber and fixed wireless revenues, partially offset by declines in transitional and legacy revenues. Adjusted EBITDA was up 2.3% year-over-year in the first quarter, and adjusted EBITDA margin decreased 30 basis points to 37.4%. As a reminder, our first quarter 2025 results included a benefit to adjusted EBITDA of approximately $100 million related to the resolution of vendor [indiscernible]. During the first quarter, we made good progress executing against our ongoing transformation initiatives as we work towards achieving our target of $4 billion in annual cost savings by the end of 2028. These include force optimization and federal rationalization, efficiency gains from further AI enablement, accelerated digitalization efforts and reductions to our legacy operations and support costs. We expect improved growth in adjusted EBITDA in the second quarter as comparisons normalize. Service revenue growth improves and as we implement further cost actions. And we continue to expect consolidated adjusted EBITDA growth in the 3% to 4% range for the full year. Free cash flow was $2.5 billion, which is at the high end of the $2 billion to $2.5 billion outlook we bought in January. Free cash flow declined by roughly $600 million compared to last year, which was driven primarily by higher capital investment of $5.1 billion as we accelerate the pace of our fiber deployment. For the second quarter, we expect free cash flow in the range of $4 billion to $4.5 billion, and we continue to expect $18 billion plus of free cash flows for the full year. Adjusted EPS of $0.57 in the first quarter was up nearly 12%, and we continue to expect full year adjusted EPS to be in the $2.25 to $2.35 range. Under our new segment reporting, over 90% of our consolidated revenue and nearly all of our adjusted EBITDA is generated by our Advanced Connectivity segment. We believe this new reporting format improves transparency into the growth we are achieving from our investments in fiber and 5G, as well as our progress at powering down our legacy copper network. Focusing first on Advanced Connectivity. Service revenues were up 3.6% compared to a year ago. Wireless service revenues grew 1.7% year-over-year which is consistent with our guidance [indiscernible] growth in the first quarter would be below the run rate we expect for the full year. Our wireless service revenue growth was primarily driven by growth in our customer base, including 294,000 postpaid phone net adds in the first quarter. Postpaid phone ARPU was flat versus a year ago. This is consistent with the outlook we provided for relatively stable ARPU as we gain customers in underpenetrated categories such as the value segment and grow our base of converged accounts that receive discounts, but typically stay with us longer. We expect second quarter year-over-year wireless service revenue growth to improve from growth reported in the first quarter and maintain our full year outlook for growth in the 2% to 3% range. This is driven by our outlook for customer gains from our new unlimited and converted subscription plans, and our expanding opportunity to sell wireless and home Internet services together. It also reflects our recent pricing actions that take effect during the second quarter. Advanced home Internet service revenues grew 27.3% year-over-year. This includes 2 months of revenues from fiber customers in geographies we acquired from [indiscernible], which added about 650 basis points to our reported growth rate in the quarter. Similar to wireless, our organic growth in Advanced home Internet service revenue was primarily driven by growth in our customer base. Advanced home Internet net adds were 512,000, which does not include the 1.1 million customers we acquired from [indiscernible] in early February. This was our best ever first quarter, and included 273,000 fiber net adds and 239,000 Internet Air net adds. We continue to expect that our fiber reach will grow by about 8 million locations in 2026, including over [indiscernible] new locations we acquired from [ Lumen ]. As we ramp our fiber reach, we expect to see improved trends in our fiber net adds over the course of the year while still considering typical seasonality. We are also seeing strong growth in our business fiber and advanced connectivity service revenues, which include business fixed wireless and value-added services. In the quarter, these revenues grew 7.2% year-over-year which is consistent with the trend last quarter and improved from mid-single-digit growth a year ago. As John noted, total Advanced Connectivity business service revenues were essentially flat year-over-year for the first time ever. Based on our improved sales execution and expanding fiber reach, we expect total business service revenues within Advanced Connectivity segment to remain stable in the near term and continue to grow at a low single-digit CAGR through 2028. Advanced Connectivity EBITDA grew 5.6% year-over-year, and we improved EBITDA margin by 30 basis points despite a few notable headwinds. These include high single-digit growth in low-margin equipment revenues, as well as the inclusion of revenues and geographies acquired from [ Lumen ], which did not make a material contribution to EBITDA in the quarter. In addition, about 40% of the adjusted EBITDA benefit from the vendor settlements we called out in the first quarter of 2025 was incurred in the Advanced Connectivity segment. So the improvement in Advanced Connectivity EBITDA margin was driven by service revenue growth, as well as the durable benefit of cost actions that I discussed earlier. Our outlook continues to anticipate immaterial EBITDA contribution this year from the operating regions acquired from Lumen. This reflects increased spending within these geographies to stand up a business that is positioned for faster growth in fiber and wireless customers, as fiber deployment accelerates and as we leverage our existing distribution in these regions. We're really pleased with how the business is positioned coming out of the first quarter and continue to expect Advanced Connectivity service revenues to grow 5% plus this year with EBITDA growth of 6% plus. Legacy service revenues declined about 25% year-over-year, which is consistent with our outlook for 20% plus decline in 2026. We stopped taking new orders for legacy services last year in most of our wireline footprint, and we now have approval to discontinue legacy services in more than 30% of our [indiscernible]. We're actively working with customers in these areas and helping them upgrade to more advanced services like Internet Air and [ Phone Advance ]. There is a lag between when customers migrate to more advanced services and when we are able to discontinue operations [indiscernible] infrastructure. This is the primary reason why the decline in legacy EBITDA of about 40% was greater than the decline in revenue. And we expect this dynamic will persist for the next several quarters. We ended the first quarter with net debt to adjusted EBITDA of 2.71x, which is up from 2.53x at the end of the fourth quarter last year. This was primarily due to the close of the transaction with [ Lumen ]. We continue to expect that our net leverage ratio will increase to approximately 3.2x following our transaction with EchoStar, then declined to approximately 3x by the end of 2026, and return to a level consistent with our target in the 2.5x range within approximately 3 years following the transaction. We ended the first quarter with $12 billion in cash and with $19 billion available to draw under term loans. So we are in a strong liquidity position as we prepare to close our transaction with EchoStar. We also continue to expect that we will close the transaction with an equity investor for the acquired Lumen fiber assets during the second half of the year. We returned $4.3 billion to shareholders in the first quarter through dividends and share repurchases. We continue to expect to repurchase approximately of stock this year and to maintain a consistent pace of buybacks through 2028 as we execute against our plans to return $45 billion plus to shareholders over this time period. I'm really proud of the team's ability to successfully balance our investment in fiber and 5G, while maintaining consistent return to shareholders. To wrap up, we continue to execute well, and I'm confident that we're positioned to drive improved growth and consistent capital returns through 2028 as we execute on our strategy. Brett, we're now ready for the Q&A. Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question. Operator: [Operator Instructions] The first question comes from John Hodulik from UBS. John Hodulik: Two if I could. First on OneConnect. Can you talk about sort of how widely it will be rolled out? What kind of support you have from an advertising standpoint, maybe the target market? And then, do you think it can drive subs in the near term? Just sort of your view on what the impact that could have? And then secondly, the phone churn trend definitely improved up 6 basis points. You have been seeing double-digit increases. Can that, kind of, improvement in [indiscernible] that we've seen continue despite the increases from the [indiscernible] pricing? John Stankey: On your first question. Look, if we didn't think it was going to have an impact, we wouldn't have started down this path. But to get to maybe the root of your question, and I think as we indicated, when we rolled it out, this is going to be kind of an iteration rollout. We've established a platform now with OneConnect that allows us to start looking at the segments and the customers differently. I think you can pretty well understand by how the plan is tailored, the kind of customers that it is targeted towards one of the things that we see is, first of all, the BYOD segment is increasing more broadly. That's one reason why we started with it. We see customers more willing to hang on their devices a bit longer, and they're certainly becoming more accustomed to porting them from one carrier to the next. And so we want to tailor this plan to make sure that we can receive those customers and then attach them to a network construct that drives churn down. And our belief is that by allowing them to have the simplicity of taking a number of devices and not thinking about how -- whether it's the WiFi in the car, or the watch or anything else that they carry around. We think that, that starts to provide the network as the basis for driving customer loyalty and relationships which plays into our strong suit. And that's also bolstered by the fact that as you notice, it requires [indiscernible] fiber broadband. And one of the best things we have to drive customer retention and customer lifetime value is by pairing fiber broadband with wireless. And so this is a plan to allow that to happen. It also tailors well into those account sizes that maybe are less than family plan sizes today that can grow over time. And I think you should expect that this platform that we've now laid out there can iterate over time, it can evolve. And over the course of this year, you'll see more variants of that plan come out that start to open the aperture more broadly in the market, for customers that can qualify under the construct and work into it. It will be one of several offers in our portfolio. We just redid all of our rate plans if you notice, and this is a particular plan that's targeted in a particular segment group of customers that we think will help with convergence and drive churn in a better direction over time. But we also have done some rework on our other base plans that will hit other portions of the market. And I think these are just natural evolution that you see, one, given the maturity of the wireless [indiscernible], given the shifts that are occurring in convergence in the market that allow us to play offense and go out with something that's pretty important. So I don't expect right now, sitting here today, I can tell you massive amounts of volume on it in the first couple of weeks. We didn't expect that to be the case. But we do expect the platform to evolve to become an important part of the portfolio as we move forward. An important part of the portfolio of putting the network first as a basis to attaching the customer and minimizing other constructs of how people have maybe chosen their service provider over time. And related to your second question on churn trend and can it continue? I mean, I don't mean to [ be flip ] about it, but I think this is -- over time, the churn dynamic is just math. And as we shared, and what I tried to articulate in my opening remarks, the best way for us to manage churn is to converge customers. And when we get through the repositioning and the shifting that's going on in the industry right now, which is aligning customers to asset basis, I believe you're naturally going to see that churn dynamic improve. And so we said we're at 45% converged on kind of our [ non-Lumen ] base you've been getting those numbers in the last several quarters that we've been sharing with you to show that acceleration. We've given you guidance out for several years where we've gone and done the math on where our fiber footprint is, where our [ AIA ] footprint is, the cohorts of customers we're going to target in those particular areas, the ones that we think we can hold over time, and we believe that, that's what builds a sustainable franchise, and leads us to service revenue growth in growth and leadership in the industry by the time we exit this decade. And that reordering of convergence along those asset bases that's going to make that happen. It's going to take a little bit of time for that reordering of customer base to asset base to occur. And I think there's going to be a little bit of the accelerated churn dynamic that you've been seeing in the last couple of quarters as that shakes itself out. But just like any math equation, you hit that tipping point where you start to get the benefits of the strategy. And I think you're going to see it ultimately come back in the line. And when we tell you that we've got fantastic converged lifetime values, for example, fiber and wireless, then we'll have a dominant part of our portfolio that represents that base, and that's when profitability looks good. And the franchise looks like a really strong franchise move forward. Operator: The next question comes from Michael Rollins with Citi. Michael Rollins: John, in your opening comments, you described that AT&T operates the most advanced and open communications network by the end of the decade. Can you unpack how AT&T is defining the term open, including how that impacts your go-to-market? And how you look at further partnerships, or acquisitions to maximize the TAM and your return on capital? And then just secondly, if I could, on the account growth sequentially in consumer and mobility. Can you share what's working for you and how you're balancing growth in accounts ARPA relative to what you were just describing in convergence, versus kind of the core mobility services that you offer? John Stankey: Michael, so when I think about open and what we're driving toward the thrust, I would articulate in that regard are one, you know what we're doing in our wireless network. And the purpose of us opening aspects of our wireless network is to manage supply chain costs and performance of equipment and the architecture over time. And I think we're leading the industry in that regard, and I would expect it shortly as we begin to get to a point where we start to deploy some new spectrum as we close the EchoStar transaction, you'll see the first instantiation of that as we move forward and work our process of deploying that spectrum, and how we build our network and what we're able to gain [indiscernible] associated with that. And so that's one aspect of it. The second aspect is the complete reengineering of the core of the network that we're doing that I think sometimes is overlooked a little bit. As I've shared with you before, we have multiple routing infrastructures that support different product lines in this business or different segments. What we use for routing infrastructure and consumer broadband fixed services is different than what we do, for example, for our business enterprise services, which is different than how we ship around our wireless packets and services, and we've been investing very aggressively to re-architect that network, flatten it, integrate it so that it's one solid routing network that handles all traffic. In doing that, it does a lot of things. One is it opens up the opportunity, given the software stack and how we build that to begin to offer a much broader set of APIs out into the public domain that allows people to manage and control their traffic differently. And that's going to allow for a tremendous amount of flexibility. And if you want to think about it in the context of just as hyperscalers opened up, the ability to spin up compute and storage through touching parts of the terminal. There's no reason why our routing infrastructure, and what we turn out to customers shouldn't have that same software-based capability that is digitally driven through API structures and allow not only our end users, but partner network customers to be able to control aspects of the network moving forward at a much lower internal operating cost that's all software-driven, and as that core becomes software-driven, it allows us to also use AI as a basis of us administering and managing that network. So instantiating those APIs out to the broader domain of our customer base is what makes the network flexible around it. And so I would say that those are the two most fundamental aspects of opening the network that allow for us to be effective moving forward. And if we have great preferred access technology, meaning we can get bandwidth in more places than anybody else, hence, a deeper fiber network, or a denser spectrum footprint and better wireless network, then that attracts traffic onto that network. It's the software control and programming of it and the dense access capillaries that allow people to say, I can get to more places with better bandwidth and better performance than anybody else and therefore, that's why I want to be on that network. When it matters, it must be AT&T, and that's how you drive returns over the long haul on that investment strategy and that aggregation of capabilities. In terms of account growth and what's working, it should be, I think, fairly apparent from what we shared. What's working is converging customers. And so when you look at the step-up in the convergence levels that you're getting, and I look at what's happening now, we're getting account growth. And if you looked at like average line sizes, for example, on our wireless account base, those accounts that are coming in tend to be below average for what we might have in the embedded base. And that's an indicator that we're picking up. One and two line accounts that are new to us. They're new, new. They're new fiber, they're new wireless. And that's really good because ultimately, those 1- and 2-line accounts become the 3 and 4 line accounts of the future. And as I said earlier during John's question, if we get them anchored in on a fiber base when they come in, the highest brand [indiscernible] any product in the market. It's the best performing product in the market. They have great positive brand perceptions. They're more likely to stay with us longer. They're more likely to buy more from us in the future. That's what all the data sets on the customer base that's out there. And so those new, new customers, those kind of accounts are the ones that I want to grow. And then secondly, we're getting some lift from Internet Air and the ability to converge both wireless and Internet Air with new customers on a combined basis, and we're being more specific in targeting that in places, for example, where we know we will have fiber in the future, so that we can grow that customer base today and ultimately meet them with a very, very good, robust, sustainable offering over time. And those two things, I would say, are probably the biggest impact on the consumer side. And then I would also tell you, look at the business revenues and look at the business performance and what we've been able to demonstrate to you that doesn't happen without some new business account growth that's occurring in order to stabilize the advanced connectivity service revenues that you've seen in the quarter, very proud of what the team has done, on that and obviously optimistic that we can carry that momentum forward and there's more that we can do there as we fine-tune our distribution even further. Operator: The next question comes from Sean Diffley with Morgan Stanley. Sean Diffley: I was curious how you assess and plan for the perceived threat from satellite more on the fiber and broadband side. But anything you would add on direct to sell. Clearly, you have an AST space mobile partnership? Would you ever consider doing [ MVNOs ] with emerging players? And how would you compare and contrast satellite versus the fixed wireless learnings? John Stankey: Sean, sure. Let me -- it's a long question, but let me start by reiterating kind of what I just said and what our direction is. Our direction is to build the best converged network offering in the United States. And that means in order to do that, you have to have great foundational assets that you own and operate to do that. I just shared with you, for example, why is it important to have a core switching architecture, routing architecture that allows you to see every packet on a network, because that's the way that you're able to manage service performance, security, offer the kinds of capabilities across heterogeneous access technologies like wireless, fixed fiber, Wi-Fi, other technologies that allow you to ensure the quality of service of delivering a packet over those heterogeneous architectures. And we start from a fantastic place with assets. We have great fiber. We've got a great wireless network. We have a great customer base that we know, that we know how to manage their accounts. We know how to manage the billing. We can build trust with them over time on the relationships that we have. And so when you start to think about more access technologies becoming available, such as right to sell, which we're going to see an opportunity to close out white spaces, I think we're naturally positioned to add those capabilities on to the great integration we've already done to be a converged access provider. And I don't mean to harp on fiber, but once you get that in place with the customer, it's a really good place, not only because it's the lowest marginal cost to carry a bit of any technology that's available out there, but its performance is superior. And when you get top end performance, the best performance coupled with low marginal costs in the networking business, that's typically a really good combination for the long haul. So we're going to continue to move to integrate partners. And I think when I think about [ LEO ] and satellites, you've heard me say it before. I think it's going to be great innovation for consumers. I think it's going to open up applications that none of us expected or knew about, and they're going to be new and different and they're going to help grow the market in total. I think that when you look at where we are right now, what's really on the horizon that maybe a couple of years ago, we all would have said, could this really happen, the 12 to maybe 18 to 24 months from now, we will have always on connectivity in the United States. And that's going to be really, really important. And I think our customers are going to want that. And I think it's natural that we work with LEO providers that have the capabilities to solve that problem to integrate those offerings into our services. We have a great position with those customers. And as you've heard me say, my ideal outcome for the satellite space is that there's more than one satellite constellation up there. And I've offered that at some point, I'd expect that there's probably at least 3 serving the United States with capable products and services. We're working with one closely right now to make sure that they get off the ground and they're viable. That's AST SpaceMobile mobile. We've been putting most of our R&D and our work on bringing product out with what they will be matching to the market, but I fully expect that SpaceX will ultimately have a robust direct-to-device capability I would expect that Amazon [indiscernible] will have a robust direct-to-device capability and who knows, maybe even a force shows up. My goal would be that I have a good strong wholesale relationship, and it may not just be one of them, it may be with more than one of them. And that we architect this in a way that we can continue to manage the traffic on our network and control packets, so that we are able to offer that end-to-end integrated service on a heterogeneous network, and that's the direction that we're taking. Now if you're thinking about the threat of a directed device approach. Look, there's a lot to be done in getting LEO constellations up and working on directed device. I think it will happen, but I don't think it's going to be a straight line from here to there. There's all kinds of challenges to work through these things. One is getting satellites up in the air. And two is getting them up and keeping them up. It's getting the right spectrum portfolio in place and working through all the issues of power levels and interference that are driven from it. It's getting the devices tuned so they work properly. Satellite works really good outdoors. It doesn't work very good indoors. It sometimes lost on people that we have spent literally decades investing in communications infrastructure in this country to raise service levels and performance for end-user customers that they become accustomed to. And the landscape is littered with those that have come in and tried to kind of get into the business on the cheap, or get into the business without understanding what the level of performance is necessary to have a minimally viable offering. Customers don't tolerate much interruption anymore. And there's decades of that infrastructure that's built. A lot of it is built on the interior buildings. I know in our company, we put about $1.5 billion a year into doing things to make sure hospitals and stadiums, and hotels and universities all work really well and you can't just flip a switch [indiscernible] done. When I think about an [ MVNO ] construct, my approach in terms of how AT&T looks at it is we like to think about [indiscernible] in a way where it gets to a part of the market that we can't get to. It's an extension in a segment that maybe we're not doing a good job of penetrating, and somebody can do it in a more creative way. And we also think about it in the context of we ensure that our network capabilities are used in a way that's consistent with our long-term goal to be the best converged operator in the U.S., which means that we don't just give traffic away without certain conditions and capabilities and requirements as to how they do business with us, and how that capability is instantiated in the market. So it's just not a wide open [indiscernible] connection to the network, do what you want with it. And within that context, do I think that I'm looking at satellite LEO right now and saying that, that's a place that an MVNO relationship would open up access to customers, I don't have today. No, I don't think that's the case. I think I've got a way to bring the right value to customers broadly and what I just articulated. And look, I don't know that I'm worried about taking on any comer in broadband right now when I've got fiber in a home. As I said, lowest marginal cost, best performance. That usually does pretty well in the market. And I like our investment strategy and where we're going to have 60-plus million fiber homes by the time we get to 2030, and living off that base and being very successful with it. Operator: The next question comes from David Barden with New Street Research. David Barden: So I guess two, if I could. The first would be, John, the EchoStar Spectrum acquisition, could you kind of elaborate how that's going to augment the business and how we generate a return off of that opportunity? And then second, could you update us on the copper retirement program and some of the advancements that you guys have been able to generate at the FCC along that front? And what that means from a cost savings and return standpoint? John Stankey: Sure, Dave. So on the EchoStar side, look, there's two fundamental things that come here. One, the improvement of performance in the network is noticeable, and there's markets where because of the deployment of the spectrum and I'm not speculating on this, as you know, we have a lease on a portion of the spectrum that we're acquiring, that we've shared with you that we've put a large percentage of that already in service. And when we do that, we are already testing network perception in those markets that we felt like it was [indiscernible] we are seeing that perception shift. And as a result of that perception shifting, it will help our wireless business just by nature, it will help in terms of customer growth and retention and all those things that drive value on that. As you know, when we can buy spectrum, there's economic value created that is capital efficiency. It avoids us from having to build growth and capacity in other ways that are more expensive than that has been since the start of time and that still plays into the factor. And then as you are seeing, it's also allowed us to expand and increase our [ AIA ], our Internet Air penetration and distribution. And I'm very happy with where we stand on that right now. As I said earlier, it's a fantastic tool for us to use, one, to get businesses that we haven't had before. And I think it's a very sustainable technology for certain types of businesses that are out there. Again, I'll go back to where you're seeing some improvement in our business performance. AIA is part of that. It's what's helping us get into customers, or maybe we didn't have fiber before that have a little different broadband portfolio, or profile that they need. And we can be relevant and we can go into large multi-location bids for customers and now we can do 100% of the bid in many instances rather than just 65% or 70% of the bid on fixed infrastructure for broadband. So that's an important way that it helps us. And I think in particular, with our strength in the Business market segment at AT&T. It's a natural pairing for us to be able to do that. And then in the consumer space, preceding in markets where we know we're going to have fiber and being aggressive about our deployment to hold converged customers. That growth is really good growth because the transition is from a broadband connection ultimately to a fiber connection, and that transition is a very profitable connection when you have a converged customer in that situation. And then in the markets where we know we're not going to be in fiber in the near term, finding the right segments to attack that we can hold for a long haul with fixed wireless and wireless together as a converged customer. That's not every customer in those markets. There are clearly what I would call the scaled broadband profiles [indiscernible] going to probably use terrestrial connections to ultimately sustain themselves, but there's good places we can hunt in those markets that I believe a fixed wireless with wireless combination is a good combination. We've been able to open up and expand that market and grow in that space to drive some return of the -- that spectrum as well. On your second question about copper retirement. Look, I -- probably 5 years ago, if I were letting you in on the inside baseball and started to kind of set the direction on where we're going to go on aggressively shutting down legacy infrastructure in this business. I would tell you I probably got some looks across the table from individuals within the business and said, never going to happen. We're going to be with it a long time. And a big complement to the team. It's like that's not an acceptable outcome. And went to work on what we needed to do to literally get to a path to shut down the infrastructure. And to sit here today, 5 years later and to have what we have in front of the FCC today is absolutely fantastic. It's the right moves to this country because the old copper infrastructure does nobody any favors. It sucks a ton of power. We've got buildings being cooled and switches and are running with a nominal number of customers on it. It's stuff that was built decades ago. It's not as secure as robust from a cybersecurity perspective as today's technology can be when built properly, it doesn't offer the same level of resiliency and services that we're building into networks today. Our capabilities putting resilience in the wireless network that is actually able to withstand other problems Copper is actually [indiscernible] copper can't withstand is clearly there and advanced features that are available on these networks are better. So this is a good thing for the customer. It's a good thing for U.S. competitiveness, and it's a good thing for AT&T, because we need to get those costs out. We need to get that infrastructure shut down, and we need to remove the distraction from the business. All the mainframes that go with it, and all the business processes that have built up over decades of regulation that have been layered on that. And as you heard Pascal mention, 30% of our wire centers are on a definitive schedule for shutdown right now. And we have a path to do more. And I think you're going to see in the next couple of months, even more activity moving forward. This FCC order that came out as a very strong order in my view. It gives a very good road map for how this should work out. We have a very receptive commission to getting this work done. We are mobilized at AT&T to take advantage of these things. We have a good organization built around it. The leadership of that organization has been doing a nice job getting the company in tune with everything we need to do. It's not what I would call really sexy work to shut this stuff down. But it's essential work and that includes what do you do with the copper when you're done with it? And how do you get it out and make sure that you monetize it, do all the things you need to do? And we are planning all the way through that and have every intention of being in a really great place by the time we get to 2030. And those cost improvements in that structure is all forecasted in our going-forward guidance that we've given you. Operator: The next question comes from Mike Ng with Goldman Sachs. Michael Ng: I have two, if I could as well. First for John, in prepared remarks, you talked about shifting away from device subsidy competing more on service. Will that be more gradual as OneConnect gains traction? Or do you expect a harder shift away from subsidies that we may see across 2.0 plans as well? And then for Pascal, it was encouraging to see the reiteration of the guidance. You talked about accelerating growth in 2Q. I was just wondering if you could provide some color on key drivers for the EBITDA acceleration throughout the year. How do you expect the [ Lumen ] opportunities, cost efficiencies and kind of new planned traction just impacting the curve of growth throughout the year? John Stankey: Mike, the short answer to your question is it's a balancing of the portfolio is the way I think about it. Our portfolio right now is over-indexed on device. And it's not the devices aren't important to customers into certain segments of [indiscernible], they'll continue and remain to be important, but I think we need a more balanced portfolio, that make sure that the customer understands the inherent value of the network underneath the relationship. And the true amount that they're paying for that fantastic service that they depend on every day. And that they're not clouded by the difference of what they're paying for device versus network. And I think we have an opportunity to really help people understand the inherent value of what's in the network and what's the difference between what they need to do to access the network. And there are other things besides devices that customers get value out of. And putting that at forefront to ensure that customers have choice about how they choose to allocate those products and those benefits and things that are important to their loyalty over time. I think we can do a job of balancing that portfolio, and I think we will gradually work our way through this over time. I don't think this is throwing the switch. But you've got to get a foundational capability out there in which to work from, and OneConnect is a foundational capability that we can iterate on and work from in the coming quarters to continue to work to balance that portfolio. I could probably answer your second question for you because everybody in the company is laser-focused on this particular issue, but my voice is tired, and I'm going to let Pascal do it for you. Pascal Desroches: Sure. Mike, pleasure to talk to you. Going into Q2 and improving for the rest of the year. We expect both service revenues and EBITDA to accelerate gradually. There are a few factors at play. One, for -- in our wireless business, we expect to continue to drive growth in converged relationships, including wireless. That should drive improvement plus we have pricing action that begins to take effect in April. For Q2, it's going to be not the entire quarter that benefits, but most of it. And it will [indiscernible] for the rest of the year, full quarter benefits of those pricing actions. Also, we're scaling [ Lumen ]. We said coming into the year that movement early on, we're going to have to invest significantly in order to stand up that organization in order to drive incremental fiber penetration into their footprint and to really set up ourselves. That process began in earnest in Q1, we'll continue. But I expect every month that passes the performance of the [indiscernible] will continue to get better. We're going to continue to see improvement in fiber net adds and converged relationships. Also, as you get through, in terms of free cash flow, Q1, as a reminder, is always seasonally low for a couple of reasons. One, you have our annual incentive comp payment in Q1. That's a meaningful cash flow in Q1. Two, the majority of the devices from the holiday season are paid in Q1. Those headwinds go away. And you also saw in this Q1 that we stepped up our -- we began to step up of our capital, and that was also a headwind. As we get through the balance of the year, I expect pretty much the same seasonal patterns that we've seen in free cash flow, and we remain confident. All in all, look, even at Q2, I think you should see meaningful improvement in our service revenue trajectory as well as our EBITDA trajectory. So I feel really good about where we are and the pacing for the rest of the year. Operator: Our last question today comes from Peter Supino with Wolfe Research. Peter Supino: Question about the broadband market. AT&T reported 2.5 million DSL subs, and that's been a really valuable feedstock for the fiber business over time. It's a great thing that you have a long-term declining business that is going to stop diluting your growth rate over the next couple of years. I'm wondering if the fade of the DSL business in general, including in beyond our own -- affects your view of the [indiscernible] market over the next couple of years. Whether that relates to fiber volume growth or fiber pricing or FWA pricing, all of the above? John Stankey: Peter, I don't know that the fate of the DSL base in and of itself causes me to think differently about things. I probably offer a couple of observations on the market. One is that pace is getting pretty tiny at this juncture. And I think one of the things that we should inherently understand is our fiber growth numbers have been relatively consistent over the last number of years. Our ability to find DSL customers that want to be fiber customers is much more difficult prospect these days because there really aren't many DSL customers left. And so when you look at our growth numbers on fiber, the question that was asked earlier about new accounts. They're new accounts. They're customers coming in, and that's that new new dynamic I talked about. And we're getting better at picking up those new new customers. And I think that the other observation I would give is in you've got certain parts of the DSL base that, in some cases, customers self-selected. They may be in a situation where it's the best that they can get in a not very good set of choices. Some of that's being taken care of today. That's what satellite serves well. That's what [indiscernible] addresses. But there's also a price-sensitive segment because in many cases, people can buy [ out that ] be at a little bit lower price than other broadband alternatives in the market. And so the place I think about where we naturally need mature at AT&T that I want to make sure we do well is we should be able to be a man for all seasons. We should be able to handle every customer, one that wants a premium high-powered, most capable service around and one that wants efficient, more cost-effective, more value-driven offering. And fiber, when we head in there certainly allows us to do that given the marginal cost structure, I'm profitable at any point, and that's maybe different than DSL. I mean, DSL is a high-cost infrastructure to manage. And I've shared with you that when we get fiber and our operating costs are dramatically reducing in these geographies now. And when we get the copper turn down, it's going to be even more. So we should be a little bit better on making sure we're hitting all segments of the market with our offerings. And hence, the question earlier about why OneConnect and why these things, we can drive value into some of these segments and make sure that we're monetizing it effectively on those price options for customers. And I think we can be a little bit better picking up some of that price sensitive segment, not only with a better portfolio of fiber pricing, as well as what we do with fixed wireless in places where that performance is adequate, given the nature of the household or the size of the household, the demands of the particular customers in those households. And you can maybe drive a little bit more of a value profile and what you're offering in that customer base to match that as well. And then -- and finally, I'll say this also lines up with the reality of where the broadband market is, in my view, which is getting from 0% to 40% penetration as we build fiber is really important. That's a really good return when we do that, and we're doing that incredibly well, and very effectively that hasn't changed as we've opened up new footprint, accelerated our build. We see our half to 40% as being really good, really strong. We continue to even refine it, get a little bit better. Although I'm pretty impressed, I've shared with you before that we're probably a year faster than what we expected we would be in the original business case, and that helps drive returns up higher. But getting from 40% to 50% is different. It's a different set of plays that are required than getting from 0% to 40%. And the reason I bring that up is because I think it's that value segment from 40% to 50% that's an important segment for us moving forward to add new accounts that we can do on an accretive basis. And so for those of you that are looking at new accounts, that's a driver of it. For those of you who are looking at ARPU temperament. Look, it's entirely economically rational and value creating and the right thing for AT&T to do to get from 40% to 50%, even if it means we take some ARPU to dilution to do that. And I think in the size of our base today and what's going on, you're going to see a little bit more of that. And some of that directs to that customer base that was that DSL holdout base that you're referring to, you need to get really good at figuring out how to pick up with the more value-sensitive price-sensitive parts of the base. Brett Feldman: Operator, that's it. You go ahead and close out the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Mike Beckman: Welcome to the Texas Instruments Incorporated First Quarter 2026 Earnings Conference Call. I am Mike Beckman, Head of Investor Relations, and I am joined by our Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael R. Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. This call will include forward-looking statements that involve risks and uncertainties that could cause Texas Instruments Incorporated's results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in the earnings release published today as well as Texas Instruments Incorporated's most recent SEC filings for a more complete description. Today, we will provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into first quarter revenue results, with some details on what we are seeing with respect to our end markets. Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for second quarter 2026. With that, let me turn it over to Haviv. Haviv Ilan: Thanks, Mike. Before I go into the results, I want to highlight that in the first quarter, we announced an agreement for Texas Instruments Incorporated to acquire Silicon Labs. This transaction enhances our global leadership in embedded wireless connectivity, expands Texas Instruments Incorporated's portfolio, and leverages Texas Instruments Incorporated's internally owned technology and manufacturing and reach of market channels. We expect the transaction to close in 2027 subject to necessary approval. Now let me provide a quick overview of the first quarter. Revenue was $4.8 billion, an increase of 9% sequentially and an increase of 19% year over year. Analog and Embedded both grew sequentially and year over year. Analog revenue grew 22% year over year and Embedded Processing grew 12%. Our Other segment declined 16% from the year-ago quarter. Let me provide a few comments about the current market environment. In the first quarter, revenue came in above the top of the range as we saw continued acceleration in Industrial and Data Center. The overall semiconductor market recovery is continuing, and we remain well positioned with inventory and capacity that allows us to support our customers with competitive lead times through the cycle. Now I will share some additional insights into first quarter revenue by end market. First, Industrial increased more than 30% year over year and was up more than 20% sequentially, growing broadly across all sectors and regions. Automotive increased mid-single digits year over year and was about flat sequentially. Data Center grew about 90% year over year and grew more than 25% sequentially. Personal Electronics was flat year over year and grew low single digits sequentially. And lastly, Communications Equipment grew about 25% year over year and grew more than 30% sequentially. With that, let me turn it over to Rafael to review profitability and capital management. Rafael R. Lizardi: Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, first quarter revenue was $4.8 billion. Gross profit in the quarter was $2.8 billion, or 58% of revenue. Sequentially, gross profit margin increased 210 basis points. Operating expenses in the quarter were $974 million, about as expected. On a trailing twelve-month basis, operating expenses were $3.9 billion, or 21% of revenue. Operating profit was $1.8 billion in the quarter, or 37% of revenue, and was up 37% from the year-ago quarter. Net income in the quarter was $1.5 billion, or $1.68 per share. Earnings per share included a $0.05 benefit for items not in our original guidance, primarily due to discrete tax benefits. Let me now comment on our capital management results. Starting with our cash generation, cash flow from operations was $1.5 billion in the quarter, and $7.8 billion on a trailing twelve-month basis. Capital expenditures were $676 million in the quarter and $4.1 billion over the last twelve months. Free cash flow on a trailing twelve-month basis was $4.4 billion, up from $1.7 billion in 2025, trending up as growth returns and CapEx begins to moderate. Free cash flow in the trailing twelve months includes $965 million of CHIPS Act incentives. This includes a $555 million payment received in the first quarter as part of our direct funding agreement related to the start of production at our newest 300-millimeter wafer fab in Sherman, Texas. In the quarter, we paid $1.3 billion in dividends and repurchased $158 million of our stock. In total, we returned $6 billion to our owners in the past twelve months. Our balance sheet remains strong with $5.1 billion of cash and short-term investments at the end of the first quarter. Total debt outstanding is $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.7 billion, down $109 million from the prior quarter, and days were 209, down thirteen days sequentially. Turning to our outlook for the second quarter, we expect Texas Instruments Incorporated's revenue in the range of $5.0 billion to $5.4 billion and earnings per share to be in the range of $1.77 to $2.05. We expect our effective tax rate to be about 13% in the second quarter. In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term. With that, let me turn it back to Mike. Mike Beckman: Operator, you can now open the line for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator? Operator: Thank you. We will now be conducting a question-and-answer session. You may press 2 to remove your question from the queue. For participants using speaker equipment, please pick up your handset before pressing the keys. Please hold for a moment while we poll for questions. Our first question is from Timothy Arcuri with UBS. Timothy Arcuri: Thanks a lot. Haviv, I wonder if you can comment on the behavior of customers. I know you are guiding up a little better than seasonal off of a number in March that was very strong. So it sounds like it is mostly Industrial, but can you comment on whether there are rush orders? We are seeing signs of price increases and things like that. So is this impacting the customers' behavior? Thanks. Haviv Ilan: Yeah, thanks, Tim. In general, I think Q1 was a continuation of what we saw in Q4, similar behavior, meaning growth coming from two main areas, led by Industrial, as you mentioned, and also supported by the Data Center market that we have seen secular growth in for the last couple of years. This was the eighth quarter of sequential growth, just off of a higher number, so that also helps the overall growth of the company. I will say that the Industrial signal was a little bit broader this time, so I would say all sectors, all geographies grew sequentially, and it continued to accelerate through the quarter. If you think about January, February, and then you always want to see how the exit from the Lunar or the Chinese New Year break is going to look, but it continued in March. So just a continuation. I would say it is our five or six months of continued growth in Industrial. We want to keep watching it, but I would say that is what guides our forecast into the second quarter. Mike, anything to add on that? Mike Beckman: I think on behavior, just want to be mindful of the overall macro backdrop and want to see how sustainable the growth is, and that was factored into the guide. Tim, do you have a follow-up? Timothy Arcuri: I do. Mike, maybe you can comment on, I know typically you do not break the guidance down by segment, but just given how different it was in March, and given that we are hearing some choppiness in Autos, particularly in China, I would think that most of the sequential growth will be Industrial, but can you give any comments for what is being thought of in the June guidance for those two? Mike Beckman: Thanks. Haviv Ilan: Let me take that, Tim. I think I can help you a little bit on the Automotive side. First, I think as you said, we are not seeing a change from the previous quarter, so I expect growth to be led by Industrial and Data Center. I will not break it out between the two, but we see strength in both. Regarding Automotive, you are right that Q1 was, you know, it is always the same in Q1 in China. The overall quarter was flat sequentially, but China was down. The rest of the world was up. I want to see Automotive and see how it develops in Q2. It is too soon to call it. I will remind that during the COVID cycle, even Automotive was the last to join in, also the last to peak. So I am not surprised by the behavior of this market. I will say that secular growth in Automotive continues for the foreseeable future, and that is what gives me encouragement. We are seeing cars adding features. We are seeing more content added to vehicles across the powertrain, whether it is BEV, ICE, or hybrid. Anything to add on that, Mike, in terms of the guide? Mike Beckman: No, I think you have characterized it well. And as you know, Auto has been steady at an elevated level for some time. It did not really have that steep correction that we saw in the other end market. So as we have called out, these markets in the past have been transitioning out of phase. I do not think it is unrealistic to assume that could happen again. So we will have to see how it plays out. Haviv Ilan: I think it is an important point. As Mike said, Q1 was a flat quarter, but very close to peak levels, maybe a point or two below its peak. So it is holding very nicely at a high level. Mike Beckman: Alright. We will move on to our next caller. Operator: Thank you. Our next question is from Vivek Arya with Bank of America. Vivek Arya: Thanks for taking my question. On this Industrial growth, up 30% year over year, this is obviously well above the long-term trend line. Could you help us dissect which applications, which end markets are driving this? Is this still inventory replenishment? Is this pricing? Is it share gains? What checks and balances do you have in place that this is not any kind of double ordering or hoarding of your product? Haviv Ilan: No, I do not see it that way, at least I do not have the evidence to show that, Vivek. But remember, for one quarter, that is a lot of growth. If you look at the long-term trend line, we are still below the trend line. I just did the math in Q1: our Industrial had a very good quarter growing at the rate that you mentioned, but still 15% lower than the peak that was back in 2022. And as I say many times, there is secular growth continuing in Industrial, so we deserve a higher peak four years later. I think there is a lot of room to grow. The encouragement I would have this time is that I see it at a broader application level. Not only the data-center-related energy infrastructure or power delivery, not only Aerospace and Defense—given the geopolitical tensions the market is establishing new peaks every quarter—I saw it across all sectors in Industrial and also across all customers in terms of regions, and also the size of customers. It is the first quarter where we saw the broad market, typically the tail, starting to wake up again after a long hibernation period, I would call it. So I am encouraged about the fact that we are seeing growth there, but I think there is room to go. I would like to see secular growth in Industrial continuing and then higher peaks establishing in 2026 or later versus the 2022 peak. So in that sense, trend lines are suggesting we still have room to go. Hopefully, that helps. Do you have a follow-up with that? Vivek Arya: Thank you, Mike. So last year, we saw the overall Analog industry do very well in the first half, and then there was some level of deceleration in the second half. I realize every year is different. I know you are not guiding to the second half. But from what you see today, what are the puts and takes as you look at the second half versus the first half? Is there anything that could be different just given all the macro trends, memory price inflation, and whatnot? And as part of that, if Rafael could also help chime in with how you are managing fab loadings as you look towards the rest of the year. Haviv Ilan: Yeah, let me start and Rafael will follow. So first, Vivek, you are spot on. We had a similar strong beginning of the year last year. Maybe the year-over-year growth last year was a little lower, but it was still in the teens, and it looked like it was getting stronger. But it was, whatever you want to call it, a head fake, a false start, or whatever. We had a good year in Analog, but it did not accelerate in the second half. It actually slowed down a little bit. So I think we need to be, as Mike mentioned, mindful. There is geopolitics. There is the macro that we are watching. On the other hand, there is secular growth in our markets. So in the long term, I am still very optimistic. We want to play it quarter by quarter. That is part of the way we have guided to $5.2 billion at the midpoint. Let the second quarter play out, and we will call it as we see it. I remind you that the way we support our customers and the way we go to market, we serve our customers direct. We have very friendly customer terms. So we see the build-up of demand as we go almost real time. I want to see the second quarter play out and see if this growth is sustainable. That is the biggest question I have for myself for the second half. But at least the fact that Industrial is still trending below previous peaks and the secular growth in Data Center and, of course, the content growth in Automotive, makes me feel optimistic about the long term. Rafael, can you comment about loading? Rafael R. Lizardi: Yeah. I will just add that we have the capacity and the inventory, and we are well positioned on both of those to handle a wide range of scenarios in the upturn. Mike Beckman: Alright. Vivek, thank you so much for the questions. I will move on to our next caller. Operator: Our next question is from Joe Moore with Morgan Stanley. Joe Moore: Great, thank you. Yes, on the topic of fab loading, can you talk about what is going to happen with inventory over the course of Q2? And are you seeing incremental gross margins off of Q1 that are better than normal, worse than normal, or just normal? What are the dynamics around that transition? Rafael R. Lizardi: Yeah. Again, we are well positioned on inventory. The objective of inventory is to maintain high levels of customer service, keep lead times short and stable, and we are accomplishing that. So we feel very good as to where those are, and we will continue to determine what makes sense from a loadings and inventory standpoint throughout the quarter to handle any scenarios. Haviv Ilan: And Joe, just to add on that, you and I talked a month ago, we saw rapid growth in Q1 and inventory served us well. We depleted some of it. We filled our customers in real time according to their demand. And we just want to see how sustainable that would be. But as Rafael said, if indeed the market wants to have very rapid growth and maybe catch up to the trend line even quicker, we are well positioned. Of course, we are in this phase three on the fab, and we can modulate wafer starts there. We have the capacity. We may make some incremental investments on the ATs because we are seeing, on the assembly and test side, a little bit of a tighter environment, at least externally. So as you know, we have brought most of our supply internally, and we have that knob as well. We are very excited about the fact that we are prepared. If the market wants to grow at the same rate as Q1, we mentioned 19% year over year, we are ready. If it wants to accelerate, we are ready as well. Mike Beckman: Joe, do you have a follow-up? Joe, do you have a follow-up? Joe Moore: Well, just on my follow-up, on the gross margin aspect of that. Is the incremental gross margin going to look normal, or is there some part of inventory management that makes it lesser or more? Rafael R. Lizardi: Yeah, no. The fall-through that you should expect is in the 75% to 85% that we have guided. That is excluding depreciation over a long term. But on a year-on-year basis, if you look at our midpoint on EPS and revenue, and make the right assumptions on OpEx and other lines, you should get to a reasonable assumption on gross margins, and it will be in that fall-through that we have guided. Operator: Okay. Thank you. Thanks for these questions. Moving on to our next caller. Our next question is from Stacy Rasgon with Bernstein Research. Stacy Rasgon: Hi, guys. Thanks for taking my question. Maybe just to dig into that gross margin point, if I typically think of your OpEx up, what, a couple of points in Q2, I come out with a gross margin implicit in the guidance maybe low to mid 59%, up from 58%. And it is up, I do not know, 100 or 150 bps year over year on a pretty material revenue growth. Part of me would almost expect the incremental gross margin to be higher given the revenue. But maybe it is differential, like the increase in depreciation. How should I be thinking about the different drivers of gross margin into Q2? Qualitatively, if not quantitatively, if you do not want to give us a quantitative? Rafael R. Lizardi: Yeah. So, Stacy, to help you out a little bit, your OpEx assumption was not a bad one. So you should expect some growth in OpEx first to second. Maybe what you are missing is the acquisition charges line. You should expect to continue to have charges there every quarter at the tune of what we just reported in first quarter. We will continue having those there every quarter until we close, at which time it will be a lot higher at close, and then they will be steady after that for a number of years. But for now, for second quarter, just assume somewhere in the range of what we just reported on the acquisition line. When you do that, you will get a gross margin assumption that should make sense. Operator: Alright. Do you have a follow-up, Stacy? Stacy Rasgon: Thanks. Maybe to ask about the acquisition itself. Again, not the deal specifics, but I know you have talked about it being accretive. You are one of the few, if not the only company in my coverage that still does pure GAAP earnings. And I even remember when you bought Nat Semi, you did pro forma for a little while and then said this is stupid, we are going back to GAAP, and told us to make whatever adjustments we want to make. What are your intentions for how you are going to report once you do close Silicon Labs? Because I have a hard time getting it accretive on a GAAP basis. Are you going to be going to a pro forma, or how should we be thinking about that? Rafael R. Lizardi: Our thinking right now is we will do GAAP, and we will give you all the pieces that you need to do your own non-GAAP in whichever way you want to do that. So we will have the acquisition charges line, for example. You can take that out if you like and not count it. Once we are on a run-rate basis, all those will be noncash. But initially, some of those are cash charges. They are charges to advisors: bankers, lawyers, regulatory fees, etc. There will be other things. For example, the first quarter will have some transition impacts in gross margins and inventory as we write off the inventory that we are buying. We will give you all those pieces. That way, you can do the non-GAAP analysis yourself. Operator: Thanks for the question. Thank you. Moving on to our next caller, please. Our next question is from Ross Seymore with Deutsche Bank. Ross Seymore: Hi, guys. Thanks. Let me ask a couple of questions. I guess the first one is the strength that you saw—what was the biggest surprise versus the midpoint of your guide in the first quarter? And was pricing part of the strength in either the quarter or the guide? Haviv Ilan: Yeah. Let me start with pricing and then we can chat a little bit more about what happened in the quarter. I think we answered it, but I will repeat the same messages. In terms of pricing, I think we said in the last quarter, we do not expect pricing to help the growth, at least not sequentially or year over year, and that was the case. But it was better than our model. Usually, Q1 pricing is a couple of points down—call it low single-digit down year over year and also sequentially—because price agreements typically kick in at the beginning of the year. So the quarter behaved a little better. We had pricing that was stable, flat if you will, like-for-like, both sequentially, Q4 to Q1, and also year over year, Q1 2026 versus Q1 2025. So that helped a little bit. And I expect Q2 to be very similar, Ross. Just the way we work with our customers, these are discussions that are not happening immediately. We serve them direct, and I will mention that as I look at the year, if demand—and right now, the demand signals are strong—continues to be strong, and we are monitoring the market price and there is definitely at least an average price increase in the last several months across the Analog market, I think it is likely that prices may go up in the second half of the year. Again, this is going to be a case-by-case discussion in our case, but that is the pricing environment as I see it right now. And, again, it is always a function of supply and demand, and the unknown for me right now is the sustainability of demand. So I want to see it play out one more quarter, and then we will figure out for the second half. So high level, not immediate support on growth sequentially and year over year on pricing. Now what we have seen is just breadth of demand—multiple sectors, all sectors, all regions, all types of customers, small and large—and supported by a Data Center market where we do pretty well. I think our portfolio is growing. I believe we are fulfilling customer demands at the highest level. We have no shortages, and it allows us, I believe over time, to take market share there. That is what drove Q1. I expect a similar behavior in Q2, and the second half of the year is still unknown. We are seeing, as I mentioned before, a higher tension on the Analog side. I think we see strength there. And I think we are unique in the setup in the sense that we have the capacity, we have the inventory, and we are well positioned to support customers at the highest level. Mike Beckman: Do you have a follow-up, Ross? Ross Seymore: Yeah, I do. One of the concerns people have, and it does not sound in the strong report and guide that you are seeing it, but one of the concerns people had was more consumer-oriented end markets seeing demand destruction with higher memory costs, memory availability, those sorts of things. Are you seeing any evidence of that? Your Personal Electronics segment seemed like it was well better than normal seasonal in the first quarter. I suspect that is where it would arise if it were to arise. So I just wondered if you have seen any evidence of that across your business. Haviv Ilan: High level, we have not, although customers are very aware of it, but I think they are doing well preparing themselves. And I will let Mike comment about the Personal Electronics market. Mike Beckman: Yeah. I think it is also important to remember that fourth quarter last year was a pretty easy compare for the sequential transition for PE. And on a year-on-year basis, it is about flat. So, again, if that was happening, I do not know if you could point to those results as evidence of that. But, again, you cannot rule that out. We will move on to our next caller. Thank you, Ross. Operator: Our next question is from Tore Svanberg with Stifel. Tore Svanberg: Yes, thank you and congrats on the strong results. Haviv, I was hoping to zoom in on Data Center and specifically Power. It is a great market and great opportunity. It is also very competitive. I am wondering if you could talk a little more about some of the moats here as we go into the next few years that Texas Instruments Incorporated has. I assume your manufacturing footprint will be an important element of that, but any other color you could add on Texas Instruments Incorporated's positioning in power semis, especially with Data Center over the next few years? Haviv Ilan: Yeah, Tore. Power in general is very important to Data Centers, and specifically power density. Think about the amount of power or energy you have to drive into these systems—you need a lot of silicon to withstand it. So that implies the importance of power electronics, and Texas Instruments Incorporated is well positioned there. What I like about our position is the combination—true for every market—but in Data Center there is a lot of attention to what I call application-specific sockets. You can call it stage one, stage two, the VRM, the last VCORE that these GPUs need for power delivery at the highest level—very complex parts, multiphase power delivery, etc. And there is also a lot of general-purpose parts in a rack. I would say tens of thousands of them, lots of different SKUs, and this is where our general-purpose portfolio is amazing. We can fulfill almost every Analog socket on these racks. I think we are very unique in that point, not only because of the breadth of the portfolio, but also because of our ability to supply. We have seen cases where our customers needed help because they had supply shortages from their other suppliers, and we come in and solve the problem. I think that is part of the reason our growth has been so high. I mentioned 90% year over year, and I am very excited about the future there. So that combination of a broad portfolio and the ability to support customers with capacity and inventory is unique. The second point, which I have touched upon in many calls or conferences, we are also investing more and more R&D in Data Center, and we are going to be one of the competitors on the application-specific sockets, whether it is VRM stage two, or high-voltage conversion—800 to 12 or 6 at stage one—and we are well positioned there as well, both with the GaN technologies that we have invested in for the past fifteen years and also now very advanced BCD nodes that not only have the capability needed, but are also built in North America, here in Texas, and customers care a lot about it. So I think that combination of broad portfolio, both on general purpose and ASSPs; ability to support the rack, not only the board; and ability to supply at scale with the volume that this market demands is very unique, not to mention that it comes from a geopolitically dependable location. All of that is a unique combination, and that is part of what we like to talk about as our competitive advantages. Maybe one of them is easy to replicate, but trying to replicate all—in this case, all three—is not easy. This is why I am very encouraged about our opportunity to continue to grow in this market. I will just add that our application-specific sockets are seeing momentum as well on the design-in phase right now, and I do expect that they will kick in more in the second half of the year and into 2027. So my bar for the team and my expectations are high here. Mike Beckman: Thanks. Tore, do you have a follow-up? Tore Svanberg: Yeah, that is great color. Thank you, Haviv, for that. And then as my follow-up, thinking about another new upcycle in Analog and comparing this to the last one. In the last one, capacity got tight pretty quickly. Lead times started extending pretty quickly. I know it is a different cycle, but now that you have made all the CapEx investments and you have the big manufacturing footprint, are you starting to see share gains pop up in your design wins since you are much better positioned with capacity now versus back then? Haviv Ilan: I believe we are, yes. We gained share in Analog in 2025, but I think we have a lot of room to go. We are still below previous peaks. The question, Tore, is can we do it quickly—meaning, does strong demand continue, or is it going to take more time? From our perspective, we hope demand continues. We have the answer for customers, and in many cases, we are unique. I gave the Data Center example a minute ago, but we are starting to see other areas where our availability is allowing us to win back market share. I mentioned pricing before. Our pricing is very competitive. I think we have an opportunity there as well for the second half of the year. So it all depends on the sustainability of demand. Vivek mentioned before, we had a very unique 2025 where it started strong and then took a breather. I want to see it play out in 2026. Obviously, if it continues, our opportunity just grows. Mike Beckman: I will just add that we spent the last several years preparing with capacity and inventory, as you know, and our lead times have been stable over the last several years, especially the last several months. We are really happy with the delivery performance. If we look at what the future holds, we want to make sure we can service our customers' needs, but also their growth as well across a broad customer base. We are really happy with the systems we have in place to allow that. Alright. I will move on to our next caller. Thanks. Operator: Our next question is from Analyst with Cantor Fitzgerald. Analyst: Guys, thanks for taking the question. You previously talked about spending about $2 billion to $3 billion CapEx in 2026. First, is that still the right number? And then as we think about the modular buildouts within this ongoing recovery, can you help walk us through when you would need to start to add the incremental equipment and how you are thinking strategically about your capacity today, as we are starting to see some foundry capacity at custom mature nodes and now tier-two foundry pricing increases? Rafael R. Lizardi: Yes. I will start. First, the answer to your question is yes. We are looking at $2 billion to $3 billion of CapEx for this year. In that number, there is capacity for what we call phase three, which is incremental capacity that you are alluding to. That is both on the fab side and also on the assembly test side. That is where a growing proportion of our CapEx is going, to the assembly test side, to address growth. Beyond that, what I would tell you for CapEx beyond 2026 is to think of the 1.2 times rate that we have talked about before for the long-term CapEx intensity. So, for example, if you take 5% growth, that would translate into 6% CapEx as a percent of revenue, and that is how you would want to model it. Haviv Ilan: Matthew, just one more point. I think Rafael touched upon it. So again, $2 billion to $3 billion is very valid. Remember, we gave a framework that is still very valid—I think it was a couple of years back during Capital Management—on revenue scenarios and CapEx. I think those are also very valid. I will say that, as Rafael alluded to, we are seeing right now, even at the midpoint of the second quarter—and again, I want to see how it plays out—we are looking at 17% to 18% growth year over year for the first half of the year. That is stronger than last year. So, of course, we want to be prepared in case it continues. No one tells us what the future will be; we just have to support a range of scenarios. In that sense, we are taking the opportunity to divert some of the focus because we have enough wafer capacity. I think we are well positioned with our 300-millimeter wafer fabs. We have the brick and mortar. We have the installed equipment. But on the AT side, I think there is an opportunity, and we are very happy that we have internalized our supply because we are seeing more and more bottlenecks in the market that are popping up. The fact that we control our destiny here and we can move more stuff internally is a benefit. So some of the $2 billion to $3 billion of CapEx that you are seeing this year is going to support a faster internalization of our back end into our own assembly and test, and that allows us to support customers at a higher level. Mike Beckman: Do you have a follow-up, Matt? Analyst: Yeah, that is helpful. Thanks. I guess as a follow-up, is there any update to your messaging around depreciation expectations versus three months ago? Then maybe how to think about timing of when Texas Instruments Incorporated will receive the remaining CHIPS Act direct funding? Thanks. Rafael R. Lizardi: Yes. I will take that. No change to depreciation. The expectation for this year is $2.2 billion to $2.4 billion. And then for 2027, continued upward pressure, but likely at a slower rate. On the CHIPS Act, first, I will tell you the more interesting one is ITC. We have been talking about that one. That is the one that is going to give us more money over the long term, and that is 35% of qualified manufacturing investment. We have been getting that ITC and will continue to get ITC. On the direct funding, we have just received over $500 million. In total, what we received in fourth quarter and first quarter is $630 million out of the up to $1.6 billion of direct funding. The remaining should come over the coming years as we continue fulfilling the various milestones stipulated in the contract. Mike Beckman: Thanks, Matt. Move on to our next caller, please. Operator: Our next question is from Analyst with Wells Fargo. Analyst: Yes, thanks for taking the question. I was curious if you could help us understand, given the resegmentation of revenue especially on the Industrial side, what is normal seasonality now for June? Mike Beckman: You could look back and model out what our revenue has done over history. I do not have a by-end-market specific percentage, but overall, what you will typically see is the second and third quarter are stronger quarters, and fourth and first are typically lower compared to second and third. A follow-up? Haviv Ilan: I will just add on that, just on seasonality. Our guide is, I would describe it as, a little bit above seasonal. I think we have guided at about 8% sequential. That is a little bit above. The combination of the market is changing—Data Center, as we know, is now a bigger part of our revenue. But overall, my view on Q2 is it is a slightly above seasonal guide. Hopefully, that helps. Mike Beckman: Do you have a follow-up? Analyst: Yeah. As a follow-up, you had a really strong quarter in the first quarter out of the gate for free cash flow and cash flow from operations. Any update on how to think about free cash flow per share for this year? Any change there? Haviv Ilan: Yeah. I think I mentioned during the Capital Management call that as long as revenue is growing mid- to high-single digits, that $8 free cash flow per share is very probable, highly probable. Now, as I said before, first half of the year at the midpoint is somewhere between 15% to 20% growth. So there is definitely an upside. I am not going to say what the number is, but go back to our framework that we provided in the Capital Management call. You will see, I think at $20 billion we had $8 to $9, and at $22 billion we had $9 to $10. So it gives you how every extra billion dollars of revenue helps free cash flow per share. It gives you a very high-level framework. But right now, assuming we do not have another false start, I think it is very likely we will easily be at $8 free cash flow per share for 2026. Again, we need to see how the year continues, but I would say the probability is high. Mike Beckman: Thank you. Move on to our last caller. Operator: Our last question is from Chris Caso with Wolfe Research. Chris Caso: Yes, thank you. First question will be about fab loading. Given what appears to be a strong start to the year, what are your plans for fab loadings, and what do you expect to do with inventory as we go through the year? I know you have been building inventory in order to be responsive to customers. Do you expect to keep inventories at these levels, or let that dip a bit? Rafael R. Lizardi: Yeah. We feel very comfortable with our position with both capacity and inventory. Inventory is there to support customer satisfaction and keep lead times short and stable. So we will continue to do that, and we will adjust loadings throughout the quarter to handle whatever comes at us in a number of scenarios in this upturn. Haviv Ilan: I would just add on that, Chris. We talked about all these phases of our investment—phase one, phase two, phase three. Right now, the surge of demand is in Analog, and in Analog we are at phase three. So we are modulating starts. We have the capacity. We are moderating starts in real time. We are looking at daily consumption, and this is where Rafael guides the team on how to start wafers. Of course, we have the opportunity. Now in terms of inventory, it all depends on the rate of consumption. If demand continues to be very strong, we will continue to deplete inventory. Obviously, it takes time to build these parts. Some of the parts get built in three months, but some can take six to nine months. That is why we have inventory. Inventory allows us a quick surge of customer support if they have strong demand. That is what happened in Q1. We have a strong guide for Q2; at the midpoint it is 8% sequentially, above seasonal, as I mentioned. So I think inventory will play a role there. Then the machine catches up. To me, all these questions are related to what the second half of the year of demand will do. Based on the macro environment and based on what happened last year, when the market was jittery, I want to see it play out. The good news is that we are prepared for every scenario that will be presented to us. Rafael R. Lizardi: Taking a longer view than just the next quarter, when you think of our range of inventory days—150 to 250—during an upturn, we should be draining that number. Right now, we are at 209. It should drift towards the lower end. And then during the downturn, that is when we build inventory and it moves upward. So high level, in an ideal scenario, that is what you would see in terms of days of inventory. Chris, do you have a follow-up? Chris Caso: I do. For my follow-up, I want to return to some of your comments about pricing. We have heard from others in the space who were a little more explicit on what they were doing with pricing. Is Texas Instruments Incorporated simply following the market right now with your comments of potentially some better pricing in the second half? And then as a follow-on to that, to what extent are your customers—what percentage of your customers—on annual price contracts such that if there was a reset in pricing, that would more likely happen toward the end of the year into next year? Haviv Ilan: I think it is a good question, and I think we touched most of it. Just to clarify, Texas Instruments Incorporated follows because we want to see sustainability. We do not want to be changing prices every quarter. Of course, prices go up and down every quarter. It depends on the portfolio and where customers need more demand and what supply is. But let us look at 2025. In 2025, our pricing behaved as we expected. It was down, this low single-digit number. That was the actual number in 2025. In 2026, it was stable. It was a good start of the year. If demand continues to behave like that and we see stronger and stronger requests from our customers, that opens up a discussion, and that is what we are going through right now. We are definitely seeing that the price agreements we did last year—agreed upon in Q4 when the demand environment was very different—are being revisited. We are seeing higher numbers in terms of demand. We will have to invest in our capacity. I mentioned back-end capacity investment to support all of that. There is a tightness on the outsourced world. So, of course, there is a discussion. I think customers are very thoughtful, and most important for them is not to have a $0.30 part stopping their production. They need to have a high level of customer support, and that is what we are offering. Not only in supporting the parts we promised them, but also sometimes solving problems they have with other suppliers. That is the opportunity we have in 2026. But it all depends on the sustainability of the demand signal. So we will continue to watch it. We are discussing with our customers as we speak. And we will report back during the July call. Mike Beckman: Thanks, Chris. Haviv, do you want to close us out? Haviv Ilan: Yes. Let me wrap up what we have said previously. At our core, we are engineers, and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate value to owners is the long-term growth of free cash flow per share. Thank you all, and have a good evening. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Thank you for holding. Your conference will begin in five minutes. Thank you for your patience. Thank you for holding. Your conference is about to begin. Good day, ladies and gentlemen, and welcome to GE Vernova Inc.'s First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides refreshing or there appear to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today’s conference, Michael Jay Lapides, Vice President of Investor Relations. Please proceed. Michael Jay Lapides: Thank you. Welcome to GE Vernova Inc.'s first quarter 2026 earnings call. I am joined today by our CEO, Scott L. Strazik, and CFO, Kenneth S. Parks. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today’s Form 10-Q, press release, and presentation slides, all of which are available on our website. Please note that unless otherwise specified, our year-over-year commentary or variances on orders, revenue, adjusted and segment EBITDA and margin discussed during our prepared remarks are on an organic basis, which includes the removal of the impact of our Prolec GE acquisition. In addition, we realigned the reporting of certain business units to reflect how we are managing the company. Notably in Power, we integrated the Steam business primarily into our Nuclear business. In Electrification, we realigned the segment into four distinct business units to provide investors with greater visibility. This included revising our former Grid Solutions and Electrification Software business units into three separate business units: Power Transmission, Grid Systems Integration, and Grid Automation and Software. A portion of our Electrification Software was also moved to Gas Power. Finally, in Wind, we simplified our reporting by integrating LM Wind into Onshore Wind. These changes are reflected in our first quarter 2026 10-Q and throughout our slide deck. We have posted a financial supplement on our IR website reflecting our realigned 2025 segment results, and please note, there were no changes to our 2025 total company results. We will make forward-looking statements about our performance. These statements are based on how we see things today. While we may elect to update these forward-looking statements at some point in the future, we do not undertake any obligation to do so. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I will hand the call over to Scott. Scott L. Strazik: Thank you, Michael. Good morning, and welcome to GE Vernova Inc.'s Q1 2026 earnings call. We have had a solid start to 2026. As global electrification accelerates, the structural drivers underpinning demand for our solutions continue to strengthen. The growth is just starting, and there is no company better positioned to serve and transform the global electricity system than GE Vernova Inc. Since our spin, we launched with a $116 billion backlog. We have grown this backlog to $163 billion with an 80% increase in our equipment backlog at considerably better margins. In the last 90 days, we have added $13 billion to our total backlog and now expect to reach $200 billion in backlog in 2027, versus our previous expectation of 2028. In Power, we delivered strong results and further margin expansion in Q1, even with the continuing investments in capacity expansion and SMR. In Gas Power, we continue to see significant demand and favorable pricing trends for both equipment and services. This demand is global and spans a diverse set of customers. We saw continued strength in new gas turbine agreements in Q1, signing 21 gigawatts in countries like the U.S., Vietnam, Mexico, Brazil, and Canada to grow our total gigawatts under contract from 83 to 100 gigawatts sequentially. Backlog grew from 40 to 44 gigawatts, and slot reservation agreements increased from 43 to 56 gigawatts. Approximately 80% of our total gigawatts under contract are with traditional customers with the remaining 20% explicitly supporting data centers. Our momentum has continued into April. Quarter-to-date, we have booked more Power equipment orders in terms of value than we did in all of Q1 2026. On pricing, we expect our orders in 2026 to be priced 10 to 20 points higher than our Q4 2025 orders on a dollar per kW basis. We now expect to book 10 to 15 gigawatts of contracts in Q2 and to end 2026 with at least 110 gigawatts under contract. On production capacity, we now have installed over 280 new machines in our Gas Power factories and remain on track to reach 20 gigawatts of annualized output by March. Delivering on our growing backlog in the second half of this decade will lead to a larger, and even more profitable, service book that will benefit us in the 2030s and beyond. On the nuclear front, let us start with our operational progress in Canada on Unit 1 of the SMR project at OPG’s Darlington site. With the recent regulatory approvals received by our customer, installation will soon begin on the 2 million-pound basemat, a pedestal that will serve as the reactor’s foundation. This is a critical milestone and serves as a great illustration of the progress we are making on the first SMR in construction in North America. We also continue to make progress on our commercial pipeline in North America as well as Europe. We are inspired and appreciative of the U.S. and Japanese governments’ announcement of up to $40 billion for GE Vernova Hitachi to build SMRs in the U.S. This represents the best of government leadership to reindustrialize an industry that matters to the world’s future, and we continue to work hard to advance next steps with both governments. In parallel, we continue to work with TVA and the Nuclear Regulatory Commission, and we expect the NRC to issue the license to construct for Clinch River in Tennessee as soon as 2026. In Electrification, we achieved significant growth and margin expansion in Q1 as customers work to keep pace with increasing electricity demand, grid stability needs, and national security interests. This is a large and growing market where we continue to see strong demand for our portfolio of solutions. We will approach $14.5 billion in revenue this year and project an annual addressable market by the end of the decade of approximately $300 billion based on what we offer today. Point being, there remains substantial opportunity for us to grow. The first two months of running the Prolec business since closing the acquisition have only reinforced the substantial opportunity ahead. I will talk more about Electrification shortly. In Wind, the team is executing with discipline and is focused on the factors within our control. After successfully completing installation of the remaining wind turbines at Dogger Bank A and Vineyard Wind in Q1, we have now moved to the remaining commissioning activities for both projects. We are off to a very strong start on the installation of Dogger Bank B and continue to expect Dogger Bank B and C to take us through the better part of 2027 to complete. In Onshore, we continue to drive a more profitable service business with double-digit margin expansion versus the prior year for the second quarter in a row. While the U.S. market for new Onshore equipment remains soft, we are monitoring the outcome of Section 232 wind and solar tariffs, which could lead to more orders clarity in the second half of the year. As our total company backlog builds, we remain focused on driving even stronger execution. In Q1, we held a CEO Kaizen Week with almost 2,000 team members doing roughly 200 Kaizens with a focus on improving safety, quality, delivery, and cost. Coming out of the Kaizen Week, we see the opportunity for over $100 million in EBITDA improvement in future years driven from lower costs and better quality performance. For example, we held our first series of Kaizens at Prolec post-acquisition. In one Kaizen, we focused on improving our subassembly process for transformer tanks, decreasing our rework hours by nearly 70% and delivering a nearly 40% output improvement. In another, we used lean manufacturing methods to reduce cycle times in the winding process for transformer production. These advances are helping us meet the growing demand for transformers as we accelerate the ramp in capacity to grow this business. We are also deploying AI to enable our employees to improve how we run our businesses and accelerate innovation. We entered the year with 13 AI-based process transformations we were focused on executing, and the team is now working to double the transformations to 26 across GE Vernova Inc. Let me make this real with two examples. In our Gas Power business, where we have the largest installed base of gas turbines, steam turbines, and generators of any OEM in the world, one of our real challenges is to project demand and timing of needed investments in our customer fleets and ensure we have the right parts and resources available when a customer needs us. We utilize our decades’ worth of data and are building AI tools to automate our ability to match installed base demand with our planning to deliver better performance for customers as well as a higher scope per outage for GE Vernova Inc. We also see substantial opportunity with Sourcing, as we leverage AI to drive parts rationalization and more intelligent bidding while further automating manual processes like invoice matching. We expect to save tens of millions of dollars every year going forward with these new tools, while freeing up tens of thousands of hours of manual work. I give these two examples to reinforce that when you think about AI and GE Vernova Inc., do not just think about AI as a demand driver for our equipment and solutions. We are running this company with a very determined focus on meeting the demand for growing electricity for AI, while simultaneously incorporating the technology into how we work to transform our company. GE Vernova Inc. is operating from a position of financial strength and executing our capital allocation strategy with discipline. In Q1, we invested approximately $700 million in R&D and CapEx combined, with R&D growing by roughly 25%, including work to commercialize new technologies. We also further simplified the organization with business dispositions that generated approximately $900 million in pretax cash. We also returned approximately $1.4 billion to shareholders, including the dividend and $1.3 billion in share repurchases. Turning to first quarter financial results, we are executing well in the growing long-cycle electric power industry. We booked $18 billion of orders in Q1, up 71% year over year and a book-to-bill ratio of approximately 2. We also grew revenue by 7% year over year with growth in both equipment and services, while increasing our adjusted EBITDA margin by 390 basis points. We generated $4.8 billion in free cash flow in the first quarter, meaningfully above our full-year 2025 free cash flow of $3.7 billion. This robust performance was driven by strong orders and slot reservations at Power and Electrification as demand continues to accelerate. Regarding recent conflicts in the Middle East, the safety and well-being of our employees and partners in the region remains our top priority, and we continue operations in the region where it is safe to do so. We are monitoring the situation closely and have seen minimal impact to our business and financial performance to date. Given the strength of our first quarter performance and confidence in our full-year trajectory, we are raising our revenue, adjusted EBITDA, and free cash flow guidance for the full year of 2026, reflecting higher revenue growth in Electrification as well as further margin expansion at Power and Electrification. I want to spend some time on Electrification. This segment is the biggest beneficiary of how we are operating GE Vernova Inc. today as one focused and integrated company. Electrification’s growth trajectory has been significant. Since year-end 2022, its backlog has grown from $9 billion to $42 billion, and we expect substantially more growth moving forward. This is being driven not just by traditional customers, but also data centers, which accounted for approximately $2.4 billion in orders in Q1—more than the full year of 2025. Just to repeat that, our Q1 Electrification orders to data centers were more than full-year 2025 results. Additionally, Electrification’s backlog in North America is now nearly as large as its backlog in Europe, following a strong Q1 and the addition of Prolec. This growth is underpinned by our integrated, diverse product offerings and productivity-driven capacity expansions to fulfill rising demand for grid infrastructure. Let me expand on these business units for those less familiar with our Electrification segment. Grid Systems Integration, the largest part of Electrification’s backlog, delivers integrated solutions for large-scale electrification. This business sells HVDC systems and substations, including key data center solutions—all areas which have driven significant backlog and revenue growth as well as margin accretion. Today, our HVDC backlog represents approximately $10 billion to be delivered over the coming years and is located primarily in Europe, but we are seeing increasing momentum in other regions, including Asia, where we booked another large HVDC order this quarter. We expect to continue growing this portion of our backlog as we benefit from accelerating demand and investment in new products to expand our offerings for data centers. Power Transmission produces high- and medium-voltage transformers as well as switchgear and capacitors to modernize the grid and expand global electrification. We continue to drive productivity to increase volumes into this attractive market with healthy margins. With our acquisition of Prolec, this business now has increased offerings, scale, and strategic flexibility in transformers, a product category seeing robust demand and a backlog that is approaching the size of GSI. This includes $5 billion of backlog from Prolec, up $1 billion since we announced the transaction at Q3 2025 earnings. This 25% growth in the Prolec backlog since announcing the acquisition well illustrates the customer enthusiasm for this acquisition and the opportunity ahead. Power Conversion and Storage helps customers to improve grid resiliency and industrial power stability through advanced electrical solutions, including rotating machines, power electronics, and battery systems. Within PCS, synchronous condensers are a critical product needed for markets experiencing increased intermittency, representing a $5 billion-plus annual market opportunity. Overall, we see industry demand for grid resiliency products as growing low double digits through the end of the decade. Finally, we have combined our businesses to provide asset intelligence, monitoring, and grid software into Grid Automation and Software. Real synergies exist between our GridOS software and GridBeats that can help improve how the grid thinks, learns, and acts to enable utilities to move from reactive operations to predictive, autonomous grid management. We are also making investments in technologies that will define the next chapter of this segment’s growth. For example, our historical business with data centers has been the substation electrical equipment outside the data center, which remains the majority of our Q1 orders for this customer type. However, we also closed our first Energy Management System, or EMS, order in Q1. EMS incorporates solutions from Power Conversion and Storage with substation equipment and Grid Automation and Software to seamlessly integrate GE Vernova Inc. assets with load requirements in the data center. This first order is part of a larger project that also includes our Gas Power equipment and substation electrical equipment. In dollars, EMS is a small part of this large order, but it illustrates well the unique opportunity we have as GE Vernova Inc. to provide integrated solutions that span power generation, electrical equipment, and automation and software solutions. With that, I will turn the call over to Ken for more details on our Q1 performance as well as our financial outlook. Kenneth S. Parks: Thanks, Scott. Turning to slide six, we delivered a strong start to 2026 with robust orders, growing backlog and revenues, margin expansion, and significant free cash flow generation. In the first quarter, we booked orders of $18.3 billion, a 71% increase year over year and a book-to-bill ratio of approximately 2. Equipment orders more than doubled, while services orders increased 25%. All three segments delivered significant orders growth. As Scott mentioned, our backlog expanded to $163 billion, a significant year-over-year and sequential increase. Equipment backlog increased to $76 billion, up approximately $12 billion sequentially and 67% year over year, driven by both Electrification—which now incorporates Prolec backlog—and Power. Equipment backlog margin remains healthy, reflecting favorable price and our continued focus on disciplined underwriting. Our services backlog grew $9 billion, or 12% year over year, to $87 billion led by Power. Revenue increased 7%. Equipment revenue rose 10% year over year as 39% growth at Electrification and 25% growth at Power more than offset anticipated lower Wind revenues. Services revenue increased 4% year over year, led by Power and Onshore Wind. Price remained positive. Adjusted EBITDA grew 87% year over year to $896 million, led by Electrification and Power. Adjusted EBITDA margin expanded 390 basis points, with higher price, more profitable volume, and further productivity more than offsetting inflation, including the impact of tariffs which started in 2025. We remain on track to achieve our $600 million G&A reduction target by 2028. We are executing on our roadmap to drive simplification and reduction of data platforms through numerous Kaizens. For example, in Q1 2026, we launched a comprehensive company-wide data lake that enables us to retire 15 legacy data platforms, which we expect will reduce costs by approximately $15 million annually and significantly upgrade our technology to position us well for AI-enabled solutions. The strong adjusted EBITDA and working capital management drove $4.8 billion of free cash flow in the first quarter. Working capital was a $5.3 billion cash benefit driven primarily by higher down payments on increased orders and slot reservations at Power as well as higher orders at Electrification. Year-over-year free cash flow increased $3.8 billion driven by higher positive benefits from working capital and stronger adjusted EBITDA, partially offset by higher taxes and CapEx investments supporting capacity expansion. As Scott mentioned, we completed the acquisition of the remaining 50% ownership stake of Prolec for $5.3 billion. We also made further progress in simplifying our portfolio. We completed the sale of our manufacturing software business for approximately $600 million of pretax proceeds. We also sold an additional ownership stake in our China XD Grid business and our interest in a merchant transmission facility, which together resulted in approximately $300 million of pretax proceeds. Collectively, we recognized $4.5 billion of gains from M&A transactions, primarily resulting from the acquisition of Prolec, which were excluded from adjusted EBITDA. In addition, we issued $2.6 billion of debt in Q1 and remained below 1x gross debt to adjusted EBITDA. Importantly, we are committed to maintaining a strong investment-grade balance sheet. We ended Q1 with a healthy cash balance of approximately $10.2 billion after returning $1.4 billion of cash to shareholders through share repurchases and dividends in the quarter. We are encouraged by our strong financial performance to start off the year. Our growing backlog with healthy margin provides an excellent foundation for continued improvement in our financial performance moving forward. Turning to Power on slide seven, the segment delivered another strong quarter with robust demand, continued revenue growth, and significant EBITDA margin expansion. Power orders grew 59%, led by Gas Power equipment more than doubling year over year on higher pricing and units ordered. Power Services orders increased 29%, driven by Nuclear Power given orders for upgrades as well as continued growth at Gas Power. Revenue increased 10%. Equipment revenue increased from higher volume and price, driven by both heavy duty gas turbine and aeroderivative growth at Gas Power. We shipped a total of 25 gas turbines in the quarter, a 32% increase year over year. Services revenue also increased due to growth at Nuclear Power. EBITDA margins expanded 500 basis points to 16.3%, mainly driven by favorable price and higher volume more than offsetting inflation as well as additional expenses to support capacity investments at Gas and R&D at Nuclear. Looking to 2026 at Power, as Scott mentioned, we expect continued strong growth in Gas equipment orders. We also anticipate 15% to 17% revenue growth driven by both higher equipment and services, and EBITDA margin of approximately 17% to 18% as volume, price, and productivity should more than offset inflation as well as additional expenses to support capacity and R&D investments. Year-over-year EBITDA margin expansion should be less than Q1 2026 largely given the timing of planned outages relative to last year. Turning to Electrification on slide eight, we had another quarter of significant orders and revenue growth and EBITDA margin expansion. Orders remain strong at roughly 2.5 times revenue and increased 86% year over year to approximately $7.1 billion due to growing grid equipment demand, partially to support data center development. We saw significant growth in substations, HVDC, switchgear, and transformers. Equipment orders growth was particularly strong in North America and Asia, both roughly tripling year over year. Electrification equipment orders continued outpacing revenue, which, combined with Prolec, further increased our equipment backlog to $39 billion, up 75% or roughly $17 billion compared to 2025. Revenue increased 61% on a U.S. GAAP basis, inclusive of Prolec, and 29% organically with growth across all regions. We saw increased volume at Power Transmission, primarily from switchgear and transformers. Prolec also delivered solid performance with nearly $500 million of revenue at just over 20% EBITDA margin since the acquisition that was completed in early February. Grid Systems Integration revenue increased due to higher substation and HVDC equipment volumes. Electrification segment EBITDA more than doubled in the quarter, with margin expansion of 590 basis points to 17.8%. Margin expansion was led by strong volume, productivity, and favorable pricing. Looking to 2026, we anticipate continued solid equipment orders with healthy margins. Second-quarter Electrification revenues should be between $3.3 billion and $3.5 billion, a significant year-over-year increase. We also expect strong year-over-year EBITDA margin expansion from higher volume, productivity, and favorable price, with a margin rate modestly above Q1 2026 levels. Turning to slide nine on Wind, we continue to focus on what we can control. In the first quarter, the team delivered stronger performance in Onshore Wind services and successfully completed installation of both the Dogger Bank A and Vineyard Wind offshore projects. Wind orders increased 85%, mainly due to improved Onshore equipment orders, primarily in North America, off of a low year-over-year comparison. However, for now, it is still difficult to call an inflection point in U.S. orders as customers still face permitting delays and tariff uncertainty. Wind revenue decreased 25% in the quarter given lower Onshore equipment deliveries as a result of soft orders in 2025, partially offset by higher Onshore services and Offshore revenues. Wind EBITDA losses were $382 million in the quarter, in line with our expectations. The anticipated year-over-year increase in losses was primarily a result of lower equipment deliveries and the impact of tariffs at Onshore Wind, as well as higher contract losses at Offshore Wind, partially offset by improved Onshore services. For Q2 2026, we anticipate Wind revenue to decline at a mid-teens rate year over year due to lower Onshore equipment deliveries. We expect EBITDA losses to be between $200 million and $300 million. The year-over-year increase in losses is primarily the result of the lower Onshore equipment volume, partially offset by higher services profitability. We continue to expect significant improvement in Wind revenue in the second half of the year, given only 30% of our expected Onshore turbine shipments are in the first half, as almost 70% of our 2025 equipment orders came later in the year. Also, the volume we are shipping in the first half has fewer contractual protections for tariffs since we signed these orders before their implementation. As a result, we expect EBITDA losses in the first half to be partially offset by profitability in the second half. Moving now to slide 10 to discuss GE Vernova Inc. guidance. For 2026, based on our expectations for the segments as outlined, we expect continued year-over-year revenue growth and adjusted EBITDA margin expansion. We also expect to deliver positive free cash flow in Q2 2026 given our ongoing focus on aligning the timing of inflows and outflows along with the impact of down payments which correlate with the timing of orders. For the full year, we are raising our guidance based on the strong Q1 results and the continued momentum we see in our business. For revenue, we now expect to be in the range of $44.5 billion to $45.5 billion, up $500 million compared to our previous expectation due to additional growth at Electrification. We are raising adjusted EBITDA margin by one point at both ends of the range to 12% to 14% driven by Power and Electrification. Given the accelerating strength in orders and down payments, in addition to the higher adjusted EBITDA, we are increasing our 2026 free cash flow guidance to between $6.5 billion and $7.5 billion, up from $5.0 billion to $5.5 billion. We are generating significant margin expansion and cash flow this year while still investing in the business. Our 2026 guidance includes an approximately 30% year-over-year combined increase in R&D and CapEx to support innovation and growth. By segment for 2026, we continue to expect 16% to 18% organic revenue growth in Power driven by Gas Power. We now anticipate Power EBITDA margins to be between 17% and 19%, up from our previous range of 16% to 18%, as we continue to see the benefits of our productivity efforts. In Electrification, we are raising our revenue expectations from $13.5 billion to $14.0 billion to $14.0 billion to $14.5 billion as the team continues to deliver its growing, more profitable backlog. We continue to expect Prolec to contribute approximately $3.0 billion of revenue this year. Given higher top-line expectations, we are increasing Electrification EBITDA margin to 18% to 20%, up from 17% to 19%. In Wind, we continue to anticipate organic revenue to be down low double digits due to decreased Onshore equipment revenues given the softness in orders. We still expect EBIT losses to be approximately $400 million in 2026 as improvement in Onshore Wind services and Offshore Wind offset the lower Onshore equipment volume. We continue to expect 2026 GE Vernova Inc. adjusted EBITDA to be more second-half weighted than 2025, with the highest revenue and EBITDA in Q4 2026. We expect higher second-half Gas Power revenue as we ship more gas turbines in the second half of the year and as we increase annual production capacity to approximately 20 gigawatts starting in midyear 2026. We also anticipate typical Gas Services seasonality, with the highest outage volume in the fourth quarter. We continue to expect Electrification EBITDA to increase sequentially through the year, even while we invest in our ongoing capacity expansions and new potential products. As mentioned earlier, in Wind, we expect higher second-half Onshore turbine shipments given our recent orders profile and better services profitability. At Corporate, costs are typically uneven across quarters due to compensation timing and portfolio activity at our financial services business. We continue to expect full-year 2026 Corporate costs to be between $450 million and $500 million as we continue investing in AI, robotics, and automation to drive productivity over the medium and long term. Overall, the combination of rising demand, consistently stronger execution, investments into our business, and the completed acquisition of Prolec sets us up nicely going forward. With that, I will turn it back to Scott. Scott L. Strazik: Thanks, Ken. We have had a solid start to 2026. But it is just that—a start. We see significant opportunity to continue to improve how we serve our customers and expand our margins. I shared just a few examples of this earlier in the discussion with Lean and AI. With over $10 billion in cash and our updated 2026 guide, and a team just starting to get their feet under them with the significant opportunity ahead of us, we continue to make investments for the short, medium, and long term. We talked earlier about nuclear SMR and our Electrification EMS solutions for data centers as two examples with tangible Q1 progress. But there are many more. As the opportunity for us to serve this growing market expands, our humility and hunger to meet this moment only becomes a larger and more important part of who we are. This is just the beginning, and I look forward to our Q&A discussion. With that, I will hand it over to Michael. Michael Jay Lapides: Before we open the line, I would ask everyone in the queue to consider your fellow analysts and ask just one question, so we can get to as many people as possible. Please return to the queue if you have follow-ups. With that, operator, please open the line. Operator: Please press 11 on your telephone. If you wish to withdraw your question or your question has already been answered, please press 11. Our first question comes from Mark Wesley Strouse with JPMorgan. Please proceed. Mark Wesley Strouse: Yes, good morning, everybody. Scott, I wanted to start maybe with your latest thoughts on Gas Power capacity. You are talking more and more about AI, about automation. Just curious how we should think about that compared to the 24 gigawatts you are targeting over the next several years. Is AI and automation something we should think about measured maybe in hundreds of megawatts, or is that potentially in gigawatts? And then your latest thoughts on the lead times that you think might be needed before you would consider adding further physical capacity? Thank you. Scott L. Strazik: Sure, Mark. I think if I work backwards from the question on lead times, we are directionally at about three years’ lead time today. We are sitting in 2026, and we do still have capacity in both 2029 and 2030. If I compare where we were in our January earnings call in the fourth quarter, we talked then about having about 10 gigawatts of capacity remaining in 2029. What has happened in the first quarter is we sold a lot of 2030 slots, because the reality is we had a lot of customers that, looking at planning with EPC schedules and other dynamics, needed the 2030 slot more than 2029. So what has changed is we still have about 10 gigawatts remaining cumulatively in 2029 and 2030 together, whereas in January we had 10 gigawatts in total for 2029. We need to keep seeing where this market takes us. At the end of the day, in many of the cases with these projects, the gas turbines are really not the gating item when you are talking about a three-year cycle from when a project starts—the EPC buildout, the permitting, the fuel availability. We will keep working with our customers, and we are also going to learn a lot more on the first part of your question. We have installed 280 new machines in our gas factories over the last roughly 15 months. We will have added about 1,800 production workers in the U.S. between 2025 and 2026, with the largest portion of them being in our Gas Power factories. I do expect that we will drive more productivity as we start to execute with those new machines and those new production workers that we will start to see in the third quarter of this year. So quantifying that productivity opportunity—we need time. But as we continue to learn how much more we can get out of the investments we have already made, we will also learn more about where this market takes us as we sell out of 2029–2030 and the timing of when the incremental equipment gas turbines are really needed. Operator: Our next question comes from Julian C.H. Mitchell with Barclays. Julian C.H. Mitchell: Hi, good morning. My question is on the Electrification segment where you provided some additional, welcome color this morning. A couple of follow-ups. In the Power Transmission part that you call out on slide five, it does seem like you are very well placed and are taking a lot of market share. We met with a number of your competitors there at Data Center World yesterday, so maybe help us understand why you think you are so well placed to continue to take more share in that Power Transmission sleeve of the segment. Also wondered across the segment if you could flesh out the capacity expansion plans in any detail. And lastly, on Prolec, any issues or major tariff mitigation needed in light of the Section 232 changes? Thank you. Scott L. Strazik: Thanks, Julian. I would say at the start, we do not really internally talk a lot about taking share per se when we are thinking about where we are with the Power Transmission business. This is really about continuing to do good business. What is very clearly playing out is that where we are doing really good business is where we are attaching that equipment to the power generation solutions, and that integrated solution—this is why in the prepared remarks we talked about a project where we are getting the power generation, the electrical substation, and the EMS solution. We are clearly gaining momentum with integration of our products, and in that regard I expect a lot more to follow. On capacity, we are investing in our existing factories. We have the $5.3 billion we just spent to add three more factories in the U.S.—in Shreveport, North Carolina, and Wisconsin—through Prolec, in addition to factory capacity in Mexico and Brazil. That allows us to serve this market more effectively. A few months into the acquisition, we continue to see more operational opportunity to get more out of those factories just applying lean, and that is why I included in my prepared remarks a few of those examples that will bear fruit for us. On the tariffs, I am going to hand it to Ken to give a little bit of incremental context. Kenneth S. Parks: A great question. The tariff landscape has continued to move both with the changes in country tariffs as well as those in February. Our total number of tariffs last year, we said, was about a net $250 million impact on the company. We guided to $250 million to $350 million net impact on the company in 2026. The structure of those tariffs has moved around, but the absolute number is about exactly where we thought it would be. To your specific question on Prolec, certainly, how the Section 232s have been defined, there is a little bit more impact on the Prolec numbers, whereas we have seen lesser impact on some of the other businesses. But where we sit today, that outlook for $250 million to $350 million is fully built into our outlook. We will continue to work on mitigating plans through alternate sourcing and through contractual provisions where we have the ability to work with our customers to pass a piece of this along. We are managing through the landscape just like we did last year. Operator: Our next question comes from Nicole Sheree DeBlase with Deutsche Bank. Nicole Sheree DeBlase: Good morning. I would like to go back to Gas Power. Could we get a little bit more color on what you are hearing through customer conversations and pipeline growth—if the demand outlook remains as robust as ever? And then just an update on the pricing environment as well. It was really helpful, the pricing data point of 10 to 20 percentage points that you provided about 2026. What are the expectations for pricing to continue to move higher beyond that? Thank you. Scott L. Strazik: Nicole, I would say through the first four months of this year now on new bidding activity, which is probably a forward-looking indicator, we continue to be in that 10% to 20% growth in price on new bidding and winning activity today relative to where we were in the backlog in the fourth quarter of last year. You are going to start to see that cutting through in orders in the second quarter, and that is why we included that context on the 10% to 20% improvement in dollars per kilowatt through 2026 inclusive of Q1 and Q2, which is really telling you that the dollar-per-kilowatt growth is going to be very healthy in the second quarter of this year. From a pipeline perspective, we continue to be very actively iterating with a very diverse set of customers to meet this moment. It is important to contextualize that the 100 gigawatts we have under contract today is with almost 90 distinct customers in 24 different countries. There is a need for incremental electrons for many different applications and many different countries, which has us continuing to work hard to figure out how, in a very capital-efficient way, we meet this moment and serve this market. Kenneth S. Parks: Maybe I will just add one data point, because I know I did this last quarter to help you size the pricing on the Power orders. We disclose Power orders; we do not specifically disclose Gas Power orders. We show you the Power orders and we also give you gigawatts. The gigawatts obviously relate to Gas Power orders. It is important, as you are doing the math based upon the information we provide in the earnings release, to know how much there is to back out of those Power orders that are not Gas Power. Last quarter, it was about $500 million related to Hydro and Nuclear. This quarter, it is a couple of hundred million dollars to back out there. If you take those pieces of data, you will see exactly what Scott outlined, which is that our orders now—pricing in our orders—look relatively consistent to what we had in the fourth quarter, maybe up just a little bit. But we have the opportunity, as these SRAs continue to convert that are 10 to 20 full points above what we have in the orders book already, to see incremental pricing start to flow to our backlog. Operator: Our next question comes from Andrew Kaplowitz with Citigroup. Andrew Kaplowitz: Good morning, everyone. Scott, focusing on your comments that Electrification-focused orders on data centers in Q1 were larger than all of 2025, I know you said in the past you have a $200 million to $300 million per gigawatt entitlement in Electrification per data center. I think you are probably already higher than that now, but maybe you can talk about your progress on entitlement and what you see going forward. Scott L. Strazik: You bet. Philippe Perron, the business leader, and his management team are doing an excellent job systematically building a string of pearls here of incremental products from power generation right through to the data center. That is where the EMS solution is an example that we were able to cut in orders in the first quarter. We have already secured a second order with that product in April and expect more there, which is taking our entitlement per gigawatt up. But we are not stopping there. We are making progress with a stability block solution that complements what we are doing—that is an MV UPS solution, a combination of medium-voltage electrical equipment with storage and software that we are gaining real traction on within customers. We have talked in the past about the solid-state transformer investment that remains on track. We will deliver the first product to a hyperscaler in the fall of this year, after which they will have six months of testing of that product before it can play into a potential order really in 2027. Operationally, we are making progress there, and the SST would be the first example inside the data center of scope for us. When you take a step back—and it is why we have invested real money into the EMS solution—when you are doing the power generation, the substation equipment, and you are providing a lot of the software solutions to help the hyperscaler manage the load requirements they want with our equipment, it is giving you the enablement to then attach more Lego blocks, or that string of pearls I am referencing, to give them a more integrated solution. It does not come at once. EMS good wins are in the year. The stability block with MV UPS is something we could see incremental orders on in the second half of this year if things go our way. SST would be next year, and there is more stuff we are working on. When you see that 25% R&D growth in the company, the largest proportion of that R&D is in Electrification, because we see real opportunities to organically invest in this business and serve this customer need, and we are very determined to do that. There is a lot more to come in this business, but I continue to have more conviction—with humility—that we have a very unique shot to deliver integrated solutions over time that few companies in the world could do. Operator: Our next question comes from David Arcaro with Morgan Stanley. David Arcaro: Hi, thanks so much. Good morning. I was wondering if you could comment on your progress and the customer appetite for framework agreements around turbine orders, especially as you are getting booked farther and farther out. And is there any pricing trade-off that might come in those conversations? Scott L. Strazik: Thank you, David. Conversations have generally centered on securing long-term commitments at today’s pricing through generally a five-year period of time during the first half of the decade that would give us volume clarity in that period of time to continue to sustain our investments to meet this moment. We have not closed one of those transactions to date. Admittedly, we have been having these conversations for a period of time, and what continues to happen is incremental orders—let us call it by the drink—and that was the reference to a lot of 2030 contracts that were signed in the course of the first quarter, including with the hyperscalers. About 20% of our 100 gigawatts are direct to the data centers. The conversations continue on roughly 30 to 35 framework agreements, but we have not closed one to date and are continuing to iterate both strategically on the gas turbine content but also the attached potential with the electrical equipment and some of the other solutions we are talking about. In some fashion, that expanded scope, including Electrification in some of the discussions, is further elongating the iteration that is happening, but it is a productive iteration we are going to keep working hard on. Operator: Our next question comes from Joseph Alfred Ritchie with Goldman Sachs. Joseph Alfred Ritchie: Hey, guys. Good morning. Obviously, a big uptick in SRAs. One of your biggest competitors has talked about not taking orders beyond 2030 because they want to make sure that the supply chain can deliver on anything beyond 2030. What is your approach? Are you planning on limiting any type of order intake? Scott L. Strazik: We feel better and better, Joe, about our ability to meet this moment for the long term. We continue to invest in our suppliers and our partners that are making very good progress. I spend a substantial amount of time within that supply chain, and we do continue to expect to take on orders for 2031 and beyond. We referenced earlier we have about 10 gigawatts remaining of 2029 and 2030 capacity, and generally speaking, we do not find our heavy duty gas turbines to be the gating item on a directionally three-year cycle time right now. We will continue to invest to meet this moment, sustaining the demand. In our case, the dynamic will be different than our competitors because our base is so much larger. When you have an exponentially larger installed base than the other OEMs, we have to continue to partner with our supply chain to support a growing fleet. We have 231 units on order right now; over 100 of those have not been commissioned yet. That number is going to grow substantially through the rest of the year. That very large installed base relative to anyone else—whether we talk new units or total gas turbines—is a luxury because it provides a financial floor of demand we already have contracted in our service book that gives us a little bit more optionality to play to win and to serve this market, which is exactly what we are going to do. Kenneth S. Parks: The other thing that is really important as you think about GE Vernova Inc.—we talk about lean a lot. We do that not just for the words, but because it is a part of our culture. We told you last time that we were going to reach approximately 20 gigawatts of capacity in the middle of this year and then that would step up to 24 in 2028—a couple of gigawatts from lean, a couple of gigawatts from some incremental capacity. To your question about what we do past 2030, lean is not something that we do only in events; it is something that we do continually, and we will continue to add capacity at a very attractive value by continuing to grow our lean initiatives. There is opportunity there as well, Joe. Operator: We have time for one last question. This question comes from Alexander Virgo with Evercore ISI. Alexander Virgo: Thanks very much for squeezing me in. Good morning, gentlemen. I wondered if you could clarify your comments around April in terms of the Power turbines that you have already signed in April. And could you touch on the Vietnam order for us, Scott? I think you also referred in your comments about some questions over availability of fuel. There has been a little bit of debate over the complexion of that Vietnam order with one of the slugs of the 4.8 gigawatts being questioned over whether or not they change it to renewables. Any color would be appreciated. Thank you. Scott L. Strazik: You bet, Alexander. When I am iterating with our Asian customers right now—and you think about LNG opportunities in a place like Vietnam or Japan, I was with one of our largest Japanese customers last week—you are talking about gas turbine deliveries in 2030 and beyond right now and commissioning projects for 2032 and 2033. For those customers, the LNG dynamic in the moment with the crisis in the Middle East is not really changing their underwriting assumptions for LNG economics in 2032 today. We are not seeing a change in buying behavior, I would say, in LNG-oriented markets like that in Asia, at least to date. We have talked in the past about the fact that we have commissioned our first LNG-to-power project in Vietnam, 1.6 gigawatts. We have an incremental three projects on contract that are more in SRA category right now that will evolve into orders over time. I have seen—and we have been iterating with our customers on—some of what you could be citing in the press on one of the customers evaluating gas relative to a shift to renewables. I would just tell you there are more projects that our customers are talking about than what we have on contract today. Our 4.8 gigawatts that we have cited in the past are all continuing to progress. Frankly, there are more than those three projects that are being negotiated with the government in Vietnam. We will continue to work with our customers in Vietnam and throughout the world on the dynamics that they are facing to get projects done and are highly confident that we can do that. Kenneth S. Parks: A quick one just to answer your first question. The clarification on April orders was that in April we have booked Power equipment orders at a value equivalent to what we booked in the full first quarter. Michael Jay Lapides: Got it. Before we wrap up, let me turn it back to Scott for closing comments. Scott L. Strazik: Everybody, we appreciate you giving us the time this morning. Similar to our Capital Markets Day in New York City in December at the end of last year, we talk a lot about giving being an important part of the culture we are building at the company. In December, we had done the STEM toy drive that led to 80,000-some-odd toys ultimately contributed. We have a team at the New York Stock Exchange this morning announcing a $4.5 million commitment to the Engineering of Change program that is going to touch 6,000 students over the next four years in some important markets for us in the U.S. and the U.K., and I wanted to reinforce and share that that will be made today through our foundation. It is just an important part of who we are and the company and culture we are building. For our customers, we continue to appreciate their trust in us. For our employees, I personally thank each and every one of them for their work every day, and I am proud of the team that we are building. We need our partners and are appreciative of them. And for all of you, our investors, thank you for your continued commitment to GE Vernova Inc. and continued interest in the company. We are appreciative and proud of our start, but it is just that—a start. This is just the beginning, and we have substantial opportunity ahead. Thanks, everyone. Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
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.
Operator: Welcome to BONESUPPORT Q1 2026. [Operator Instructions] Now I will hand the conference over to CEO, Torbjorn Skold; and CFO, Hakan Johansson. Please go ahead. Torbjorn Skold: Thank you, operator. Welcome, everyone, to BONESUPPORT's Q1 2026 Results Call. My name is Torbjorn Skold, CEO of BONESUPPORT. With me here today is our CFO, Hakan Johansson. And together, we will use the next 25 minutes to guide you through the Q1 presentation and then open the line for questions. Before starting the presentation, I would like to draw your attention to the disclaimers covering any forward-looking statements we will make today. So let's look at the financial and operational highlights of the quarter. Q1 was another strong quarter with solid execution across the business. Net sales came in at SEK 324 million, corresponding to a growth at constant exchange rates of 31% versus Q1 2025. Reported growth was 14%, showing that there was a continued strong currency impact on our figures for the quarter. Our adjusted operating result, excluding incentive program effects, was SEK 85 million, corresponding to an adjusted operating margin of 26%. Reported operating result was SEK 72 million. We saw another quarter of solid cash generation with operating cash flows reaching SEK 75 million, resulting in a cash position of SEK 455 million at quarter end. We continue to see strong traction for CERAMENT G in the U.S. with sales reaching SEK 222 million for the quarter compared with SEK 178 million in Q1 2025. The sequential CERAMENT G growth quarter-over-quarter of USD 2.6 million was the strongest ever. In Europe and Rest of the World, we saw strong momentum across all markets with a growth of 16% at constant exchange rates compared to a very strong Q1 2025. Notable was also that our first CERAMENT sales in India were achieved during the quarter. During the quarter, the regulatory process for CERAMENT V progressed according to plan within the framework of the De Novo process. As communicated in early December, the FDA submission for CERAMENT V was transferred from a 510(k) pathway to the De Novo process in close dialogue with the FDA. If granted market authorization, CERAMENT V will constitute an entirely new product category like CERAMENT G did in 2022. Just as in the review of the De Novo application for CERAMENT G, both CDER, FDA's Center for Drug Evaluation and Research and CDRH, Center for Devices and Radiological Health are involved and the lead review team, which sorts under CDRH remains the same as during the 510(k) process. BONESUPPORT has received questions within the scope of the De Novo process and is working purposefully to address the requested details and clarifications. Responses are to be submitted no later than end of August. We are progressing with the early-stage launch of CERAMENT BVF for spine in the U.S. in line with plan. The introduction in spine is an important step as we continue expanding our portfolio of indications and applications. Now let's move on to the sales development. Next slide, please. The chart shows total last 12 months reported sales in Swedish krona by quarter since 2019 in stacked bars per region and product category. As you can see, the launch momentum for CERAMENT G in the U.S. is exceptionally strong. Given that we keep bringing new strong clinical studies and opening up new market segments and new indications, a product like CERAMENT G will remain in launch phase for many years to come. However, throughout 2025 and in the first quarter of 2026, we have seen strong influence from the U.S. dollar to Swedish Krona depreciation, which influences the optics of the graph, but not the end market performance, as you will see in Hakan's slides later in the presentation. Last 12 months growth in Q1 of 22% in the graph corresponds to an even stronger 35% at constant exchange rates. So the quarter-over-quarter slowdown in last 12-month sales is mostly due to strong currency impact. U.S. CERAMENT BVF last 12-month sale was flat year-over-year at constant exchange rates. In total, antibiotic eluting CERAMENT grew with 48% last 12 months in the quarter at constant exchange rates. Next slide, please. In U.S., sales amounted to SEK 267 million, representing growth of 35% at constant exchange rates. We continue to experience strong growth of CERAMENT G, driven by both increased access through new accounts and new surgeons as well as wider adoption among existing users. We see growth from all 3 prioritized platforms, foot and ankle, trauma and arthroplasty. At the American Academy of Orthopedic Surgeons Congress in March, presentations and discussions confirm the strong clinical interest in the CERAMENT platform and the commercial momentum in the U.S. Dialogues with surgeons and distributors show that CERAMENT G is perceived as a clinically relevant and practically useful solution in a broad range of procedures where there is a need for combined bone healing and effective infection control. During the quarter, clinical evidence was further strengthened through the publication of positive data for CERAMENT G. In February, the first U.S. clinical pilot study in trauma was published describing surgical technique and treatment results with CERAMENT G. The study conducted at the U.S. Level 1 Trauma Center and published in OTA International provides practical and real-world insights into how CERAMENT G is used in clinical practice in the U.S. Additional support was added in March through the first U.S. clinical case series focused on infection prevention in open fractures. By demonstrating how local antibiotic release can be combined with existing surgical techniques, the study highlights the clinical relevance CERAMENT G has within a segment with a high risk of infection. Despite the limited scope of the studies, they are of great practical importance as they provide concrete support regarding application techniques and expected outcomes for surgeons introducing CERAMENT G into their daily clinical practice. As part of our ambition to modernize an outdated standard of care in the U.S., we have successfully opened one market segment after another, starting with foot and ankle, followed by trauma and now moving into arthroplasty. Interest continues to grow for CERAMENT G in revision arthroplasty and periprosthetic joint infections, 2 areas where the clinical needs remain substantial and where the evidence supporting our antibiotic eluting technology has resonated strongly with surgeons. We have built a solid foundation for our spine strategy over the past quarters by establishing distributor coverage and preparing the market. In Q1, we continued the early-stage launch of CERAMENT BVF in spinal procedures with distributors now actively engaging spine surgeons across both existing and new partnerships. The surgeon access and early stages of adoption in spine follow plan and indicate the strength and potential of this segment. As this is a new clinical segment for us, more clinical data is needed to support broader market penetration. Importantly, the performance of CERAMENT BVF in spine will help confirm the value proposition for the CERAMENT platform, which will pave the way for the future antibiotic eluting CERAMENT launch. We've made strong progress in evaluating and preparing the regulatory pathway, and we'll share more on the path forward at our Capital Markets Day this spring. After Q1, U.S. CMS, Center for Medicare and Medicaid Services announced a proposed ruling, full year '27 IPPS in-patient prospective payment system, including changes that improve payments for the use of CERAMENT G in the treatment of complex orthopedic infections, such as periprosthetic joint infection, fracture-related infections and diabetes-related bone infection. In parallel, CMS proposes the introduction of more specific procedure and identification codes for CERAMENT G and CERAMENT V consistent with the company's submission. CMS also proposes new technology add-on payment, NTAP reimbursement for CERAMENT V effective October 1, 2026, provided that FDA grants the company's De Novo application by April 30, 2026. If FDA approval is obtained at a later point in time, we plan to submit a new NTAP application with a potential for additional payment from October 1, 2027. Although this is a proposed ruling, this is very positive for BONESUPPORT as it validates the uniqueness and value CERAMENT brings and reduces the potential financial barriers for using CERAMENT in daily clinical practice. The company intends to submit additional clarifications to the CMS during the ongoing 60-day public comment period. A final decision from CMS is expected in late summer 2026. Now let's turn to Europe. Next slide, please. Sales in EUROW came in at SEK 57 million, representing 16% growth at constant exchange rates. This is compared to Q1 2025, where we saw strong growth in EUROW, thus a very strong comparative quarter. We saw strong development across our 3 market structures, direct, hybrid and distributor markets. In our direct markets, the U.K. continued the recovery we saw during the fourth quarter of 2025. Our investments in hybrid markets developed well, underlining clear continued potential ahead. In our distributor markets, CERAMENT was launched as planned in India with a focus on the private market. We note some uncertainty in the Middle East, where geopolitical unrest is affecting market presence and logistics in the short term. Now I'll leave a deep dive into the numbers to Hakan. Håkan Johansson: Thank you, Torbjorn. Net sales improved from SEK 284 million to SEK 324 million, equaling a growth of 14% in reported sales growth or 31% in constant exchange rates. Torbjorn has already spoken about the solid performance in especially the U.S. and the major drivers behind the sales growth. But as the large movement in U.S. dollars compared with the first quarter last year somewhat hides a continued strong trajectory in the U.S., I would like to share the U.S. sales performance in U.S. dollars. CERAMENT V is the growth driver in the U.S. and this slide shows the quarterly CERAMENT V sales in the U.S. in U.S. dollars. And what we can note is an all-time high sequential growth resulted in accelerated growth in sales per workday. The contribution from the U.S. segment improved by SEK 25.5 million versus Q1 2025 and amounted to SEK 122.7 million. The improved contribution relates to increased sales after the effect of increased costs. Selling and marketing expenses during the quarter amounted to SEK 128.4 million compared with SEK 121.6 million previous year, of which sales commissions to distributors and fees amounted to SEK 85.1 million compared with SEK 78.8 million in the same quarter last year. From the graph at the bottom of the screen, showing net sales as bars and gross margin as the orange marker, it can be noted that the gross margin remains stable and strong at 94.5% with a minor decline in the period following a gradual impact from tariffs. In Europe and Rest of the World, a contribution of SEK 12.7 million was reported to be compared with SEK 15.4 million previous year. Selling and marketing expenses increased by SEK 6 million, mainly related to the previously communicated commercial investments in the so-called EUROW Booster program. From the lower graph and the orange marker, a minor improvement in gross margin can be noted, mainly impacted by market mix. Selling expenses, excluding sales commission and fees, increased by SEK 11.6 million, following commercial investments in both the U.S. and Europe, but also related to high intensity in terms of marketing activities. Research and development remained at a stable level and focused on the execution of strategic initiatives such as the application studies in spine procedures and the market authorization submissions for CERAMENT V in the U.S. And finally, administrative expenses, excluding the effects from the long-term incentive programs, remaining stable with an increase of SEK 1.4 million in the period. The adjusted operating result amounted to SEK 84.9 million with only minor currency effects impacting. I will come back to this on a later slide. The newly introduced tariffs in the United States had gradual impact on costs in the quarter. The full effect of a 15% tariff will equal an impact of 0.8 percentage points on U.S. gross margins, and this will come gradually with full effect later in '26. The difference between adjusted and reported operating results are costs regarding our long-term incentive programs amounting to an expense of SEK 12.8 million in the quarter compared with an expense of SEK 10 million previous year, as you could see on the previous slide. The increase in expense include SEK 1.6 million related to the long-term incentive program approved by the AGM in May '25, which was included in the accounts for the first time this quarter. Operating cash flow was strong in the period, partially supported by inflow of customer payments deferred from December to after the holiday season. During the period, the Swedish krona has experienced volatility against the U.S. dollar with a minor weakening towards the end of the period and with only minor exchange gains and losses reported as other operating income and expenses. The graph on this slide shows with gray bars how the relationship between the U.S. dollar closing rate and the Swedish krona has varied over time. This is read out on the right I axis. The blue dotted line read out on the left I axis shows adjusted operating result. The adjusted operating result, excluding translation exchange effects is the orange line and gives a more comparable view on the underlying trend in operating results. In the table below the graph, you can see that the FX adjusted operating margin of 25.5% in the period compared with 22.6% in the same quarter last year. In the shorter term, the operating margin is impacted by the commercial investments made in both EUROW and in the U.S. A gradual return to improvement in operating margin is expected as these investments are assumed to have positive impact on future sales growth potential. The relation between the U.S. dollar and Swedish krona has been stabilizing over the last 4 quarters, which becomes visible when comparing the adjusted operating result, including and excluding translation exchange effects on a rolling last 12-month basis. By the reported figures in Q1 this year, it is noticeable that the difference between including and excluding translation exchange effects is becoming narrower following a more stable relation to the U.S. dollar. The strengthening of the Swedish krona over time impacts both net sales and operating results as visible in the graph. A solid cash conversion has been reported continuously since third quarter 2024 with an average cash conversion of 81%, visible as the dotted line in this graph. Q1 this year reported ahead of the average, mainly due to the previously mentioned timing effects from customer payments. And with this, I hand back to you, Torbjorn. Torbjorn Skold: Thank you, Hakan. So to summarize Q1 2026, sales grew by 31% at constant exchange rates, reflecting steady and consistent progress. Highlights were sequential CERAMENT G growth in U.S. of USD 2.6 million, EUROW growth versus a strong prior year of 16% at constant exchange rates and record strong cash flow of SEK 75 million, underscoring the strength of the business and its scalability. I'm convinced that the most exciting part of our journey in BONESUPPORT still lies ahead of us. And as I said, to provide a clearer view of what that journey will look like, we will host a Capital Markets Day in Stockholm on the 26th of May this year, which you are, of course, all welcome to join. Now with that, we're opening the line for questions. Thank you. Operator: [Operator Instructions] The next question comes from Kristofer Liljeberg from DNB Carnegie. Kristofer Liljeberg-Svensson: Three questions. First, on the increased selling expenses here in the quarter. Would you say that you have reached a new level now? Or should we expect them to continue to increase sequentially? And related to that, how you think about the operational leverage here going forward? I noticed underlying EBIT has been more flat here sequentially. So would you expect it to pick up again here in coming quarters? My second question relates to the sales commission in the U.S. that seems to be down as a percent of sales. I noticed they are flat sequentially despite higher sales. If you could explain that? I know there's other variable costs included in that maybe as well. And then when it comes to the De Novo process for CERAMENT V in the U.S., if you could maybe explain a little bit what type of questions that FDA has and why you sound so confident that the product will eventually be approved and the risk of not receiving an approval? Håkan Johansson: Thank you, Kristofer. I will start answering the first 2 questions, and then I will hand over to Torbjorn to answer the question on the De Novo process. So let's start with the increased selling expenses. And again, as we have communicated also previously, we will continue to do gradual commercial investments if we believe that this is beneficial to sales growth. And on that theme, we have been both investing in the so-called EUROW Booster program, but we have also continued to strengthen our U.S. organization in terms of medical education activities, national accounts management and also more sales-related functions, et cetera, to continue supporting the growth and the aspirations in the 3 main segments in the U.S. So again, a gradual increase can be expected. But as we also mentioned in the call, we expect this to have beneficial impact also on sales and sales growth going forward, and we also expect that to come back with a gradual improvement in operating margins. When it comes to sales commission and fees, I'm glad that you noted that there is a reduction in the percentage to sales in Q1. And there is one main driver in this, and that is an activity that we've been running in the U.S. in the theme of balance sheet and process efficiency. And it's been a program to move customers from paying with credit cards to pay electronically over our bank systems. And this is an activity that has resulted in a lower cost for credit card fees and that is moving down sustainably, the fee is down with a percentage point. So that's the main driver by the reductions. There are some other reductions in the quarter, but they are more seasonality driven than anything else. But the main impact comes from reduced credit card charges. Kristofer Liljeberg-Svensson: And what did you say that impact as a percentage of sales? Håkan Johansson: It's 1% saving. Kristofer Liljeberg-Svensson: Okay. So this is a sustainable effect? Håkan Johansson: Yes. Torbjorn Skold: Okay. And then to the third question that you had around De Novo. So the way that we look at this and interpret this is, first of all, the De Novo process compared to a 510(k) process. It sets a higher bar. It sets a higher standard. That is not only a negative. It's actually also a positive, meaning that it strengthens the moat. What we also see is the pattern that we see from the FDA is very, very similar to the De Novo process that we had for CERAMENT G. What I said on the call, and I think it's also important to highlight is that as part of the 510(k) process, the department of the FDA that was involved was the CDRH, so the Center for Devices and Radiological Health. They were involved. They are still involved and they are still leading the audit. As we move to a De Novo process and as this product is a combination product, so it's a device with drug-eluting properties, then the CDER, so the Center for Drug Evaluation and Research is also involved. They're brought into the process. The questions that we have received are more of the nature of being explanatory, clarifying rather than anything else. The 3 areas, which is also fully expected and planned for are in the areas of preclinical, clinical and biocompatibility. Now we're working on these questions diligently, and we want to answer them in a disciplined and robust way to make sure that we properly inform, educate, if you will, the FDA to understand what this technology does with CERAMENT V, what it already does with CERAMENT G, which is FDA approved. And also this is a product. CERAMENT V is a product that has been approved outside of the U.S. for many, many years. It is used every day in patients. So with that, I feel comfortable that it's more of not so much if we get approval, it's more of when we get it. And having said that, we control what we can control, how FDA reacts and responds that is outside of our control. But I feel comfortable that we're on the right path, and we will get it to market. It's more a question of when. Kristofer Liljeberg-Svensson: Could I ask -- sorry, but just it's not that they're requesting more data similar to what happened with CERAMENT G. Torbjorn Skold: So far, it's more explaining and more details of the existing data that we have already provided. Operator: The next question comes from Mattias Vadsten from SEB. Mattias Vadsten: I have a few. So I think, as you pointed out, a solid quarter-over-quarter sales growth for CERAMENT G in the U.S. So if you could just tell me if there is something nonrecurring or extraordinary supportive in the quarter or if this is purely better penetration? And if so, what are the key contributors? You mentioned all of the areas, but anything to point out there? That's the first one. Torbjorn Skold: Okay. So boring answer. No, it's no one-timers. It's no nonrecurring. It is more of the same that we've seen in the past. And the growth comes from all the 3 segments: foot and ankle, trauma and arthroplasty. And in absolute numbers, all 3 contribute positively. Of course, there's a lot of excitement internally and externally in our 2 newer segments, so trauma and arthroplasty, but all 3 segments contribute in a meaningful way in the quarter. When we look at existing and new accounts, it's very much the same trend that we saw in 2025 throughout the year and also at the end of the year, meaning that we get meaningful growth from both existing accounts increasing their adoption as well as we see meaningful growth coming from shifting from awareness to access with access on many different layers. So yes, unfortunately, there's no -- there's nothing more exciting than that, Mattias, to your first question. Mattias Vadsten: That helps. My next one -- or can I just follow up in terms of working days, were they the same in Q1 vis-a-vis Q4? And what do you see here in the second quarter coming up? Håkan Johansson: So it's correct. So it's on the same level as Q4. So it's 61 days. And the number of work days is increasing in Q2, despite now starting with Easter holiday and with the risk of remembering wrong, but I believe it is 63 days in Q2. Mattias Vadsten: I have a few more. In terms of CMS proposing changes that improve the payment for using CERAMENT G, as you mentioned also in the presentation here, can we say anything on magnitude? And can you refresh us just how important the CMS exposure is for both [indiscernible] and so on? Torbjorn Skold: Yes. No. So first of all, it is a proposed ruling. So it is not -- it has not been approved. It's not been decided on yet. That's one piece. Number two, this full year '27 IPPS document, fully public, so all of you can go ahead and read it, knock yourself out. It's 1,600 pages of text of a very small portion of that, but still quite a bit of text related to CERAMENT. As it's complex, as it's many different codes impacted and several indications impacted. And when we look at it and when we also have advisers looking at it, it also -- there is a bit of interpretation in it. So we don't want to draw too many conclusions and too many specific conclusions yet. However, on a total level, on a high level, it is very, very positive. And pretty much everything that we requested in our submission pretty much went through. We have a couple of clarifications on how we should interpret it. But overall, it's very, very positive. And there are many layers in this proposed rule. And I think some of them you can sort of peel out or take out separately. One is the proposed NTAP for CERAMENT V. It's pretty standard. We would have been disappointed if we didn't get it. So that's one thing. The other thing is the extension of NTAP for CERAMENT G for open fractures. That is also sort of expected and you can strip out. What remains -- so if we strip those out, and those are very positive for us, what remains still is, in my mind, even more sort of strategically important for BONESUPPORT because it highlights a couple of things. Number one, it highlights that CMS continues on the path to pay more for outcomes rather than activities. Why that is important for BONESUPPORT is that, yes, we have a very expensive product. But the whole value proposition with CERAMENT is to avoid infections, avoid revision surgery, avoid readmissions. It is clear, not specifically only to CERAMENT, but in general, in this proposed rule that CMS is going in that direction. So that is very positive. And then you can see in diabetic foot infection, you can see it in also fracture-related infection and also periprosthetic joint infection. CMS proposes to incentivize technologies like CERAMENT and also, to a certain extent, almost use CERAMENT as a trigger point for a higher reimbursement because CERAMENT is very much linked to cases that have higher complication, higher comorbidities. So -- and I know you guys want a specific number, how much will sales go up? We cannot provide that. We don't know yet. It's complex material. We're analyzing it. But we're very, very pleased and satisfied with the proposed ruling and look forward both to the clarifications that we expect in the next couple of weeks and also the ruling to come into effect later this year with full effect next year. Mattias Vadsten: But that's helpful. Lastly, I have a follow-up to Kristofer's question regarding CERAMENT V in the U.S. So if I catch this correctly, the 150-day review period will pause and it will resume when you submit your answers or call it, clarifications. So with this in mind, what kind of delay do you think we're looking at here in the process? Is it a couple of months or and also August, is that sort of a formal last date, not necessarily means that BONESUPPORT will resubmit in August, I guess. Torbjorn Skold: So I'll answer it. Number one, Yes, you're correct in your first statement about the timing and the clock there. That's number one. Number two is knowing how and what -- how FDA and what CERAMENT -- what FDA will do is impossible for us to guess. So whether it's the delay or not, it depends on who you ask. Now what we want to do and want to make sure is that we answer the questions in a disciplined, robust way so that we get the approval in a way that we wanted to, not only as fast as possible, but in as a robust way as possible. So that's what we're doing. But again, you never know with the FDA. Now the end August time line that we communicate, that's the formal deadline. I mean, we will use that if we feel that it is necessary and we feel that it is good for the process. If we feel that we can submit it faster than end August without risking the quality of the material and the outcome of the process, we will, of course, do that. But end August is the latest formal deadline that we have. Mattias Vadsten: But it's still reasonable to expect it to be cleared in 2026 with all of this in mind. Torbjorn Skold: Well, it's always difficult to guess what FDA does. I feel comfortable that we're on a good path. It's not so much a question. If it could be in '26, that's my best guess. But if it needs to be extended to '27, it's worth waiting for, for sure, if we put it that way. Operator: The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: Just sorry for going back to this CERAMENT V. I'm not sure if I got it right here, but could you please confirm that you do not need to carry out any additional clinical studies in order to be able to answer the questions from FDA. Is that correct? Torbjorn Skold: That is our current hypothesis and current assumption. So yes, that's correct. Sten Gustafsson: Perfect. My second question is regarding sort of the -- if you look at the sales split of CERAMENT G and CERAMENT V in Europe, is it possible for you to see in how many cases you use both products at the same time, i.e., where there's a super broad infection, whether doctors use it in combination? Torbjorn Skold: So just so I understand the question, are you referring to OUS? Sten Gustafsson: Yes. I mean in Europe, for example, where both products are approved and being used CERAMENT G and CERAMENT V, do you have a feeling for how many procedures doctors use both products at the same time? Håkan Johansson: We know anecdotally that it happens, but we have no somehow data-driven substance that we can lean towards, et cetera. But we know anecdotally that it happens. By that, it is not extensive somehow in terms of using both. Sten Gustafsson: I get it. Excellent. And the sort of the split do you have a feeling for that in terms of procedural usage? Håkan Johansson: With some volatility, it's somewhere between 25%-75%, 20%-80%, where some of the largest use is on CERAMENT G. So roughly 25%-75%. Sten Gustafsson: Okay. Perfect. My last question is regarding Germany. I'm not sure if I missed it in the report, but are there any comments on how Germany is developing for you? Håkan Johansson: So Germany is, in a way, somehow positive because it's stable. And what do I mean with that is that somehow it feels like somehow it's trending on the same level as previous quarter, meaning that we don't see a decline. And I think that's a first good sign that again, as we have commented, we're still focusing on Germany. We still have strong relations to German hospitals and German surgeons, et cetera. And I think that for Q1, we're glad that we see that the development is stabilizing. Operator: The next question comes from Erik Cassel from Danske Bank. Erik Cassel: I wanted to focus a bit on the trauma centers in the U.S., which you gave figures for in last quarter. I mean, penetration rate was obviously quite high. But is it possible to now that -- I mean, they've done pilots potentially up to a year ago to talk a bit about the current, say, conversion rates from pilots to continued use? And then also if you can say anything on how high, say, the continued use is as of now and how many of those are still in sort of an evaluation phase? Torbjorn Skold: Okay. Thank you, Erik. I mean we don't provide -- we will not provide any numbers to answer your questions, but we can provide a bit more color on your question related to trauma in the U.S. So as I mentioned, we saw that all 3 segments contributed in a meaningful way for the quarter. That includes also trauma. So we see that the journey that we're on in trauma follows the plan and follows the expectations. I also said that there's a lot of excitement internally as well as externally around trauma and arthroplasty. That speaks to it. I think what creates internal and external excitement and helps us on this journey that you referred to are the 2 studies that we talked about earlier. I know that actually, you didn't really -- you quoted that those were not really meaningful studies. I would argue against that and say that they are very meaningful for us from a commercial perspective, and they get traction because it's a great way for us to talk about our product in a practical evidence-based way. So we're seeing in trauma, there's continued excitement. We continue to move from awareness to adoption -- sorry, from awareness to access to adoption. So now we're becoming more in the access and adoption phase with many, many more years to come in trauma, partly supported by the evidence that we provided. But we don't really give on a quarterly basis any data that you're asking for, Erik. Erik Cassel: Okay. That's fair enough. And then I also wanted to sort of repeat a question from Kristofer and see if we can get a bit more detail on it. I mean, you said in the report that the commercialization costs are going to peak this year sort of. But is it possible to maybe quantify or frame it in a bit more detail the implied cost ramp we're going to see this year and how that also transitions into '27? Because it makes it sound like the incremental margins this year might be a bit worse than what we normally see. So I just want to make sure that we get the expectations right on this. Håkan Johansson: It's a fair question, Erik. And again, I think that has been a repeated theme from our side is that we will -- and I promise you, we will continue to do commercial investments if we believe that this will be beneficial for continued sales growth. And on that team, we have the EUROW Booster as we've communicated, I think it's more than a year ago. And that the EUROW Booster is adding SEK 10 million in incremental cost, and it will take at least 18 months until that program is returning somehow sales that covers the cost. In the U.S., we have been gradually strengthening the organization. And if we just look at current plans, that means that from during second half of last year and going into this year, we are adding 10 heads into our U.S. organization because we believe that this will be beneficial for the U.S. sales growth. That will create in the shorter term, a reduced positive trend in terms of operating margin. But as we said on the call, we are strong in our view and believe that this will come back to continued gradual improvements in the operating margins. Torbjorn Skold: Absolutely. And on top of that, I mean, if we look at this case on a more of a couple of years basis, there's plenty of operational leverage in this business with what we're doing. We've taken quite substantial investments, both in EUROW as well as in the U.S. So if you take a more longer-term perspective, there's no change in the potential of the operational leverage of this business on the contrary, when we look at that internally and strategically in the more longer-term horizon. Erik Cassel: Okay. And then I wanted to touch upon the U.S. BVF sales. That was, I guess, a soft point in this report. Previously, you've more talked about the BVF products perhaps becoming an add-on to CERAMENT G, so that you get new accounts doing CERAMENT G and then they also start to use the BVF product. Now it more looks like that there's cannibalization on the BVF product. Have you changed the -- what you're seeing for BVF and sort of the, say, longer-term implication of that? Or are you actually seeing any CERAMENT G accounts also picking up BVF? Håkan Johansson: So I think that in the longer term, we stay firm with that view because again, we continue to see that surgeons that has been -- that we're bringing on somehow thanks to CERAMENT G are also using the BVF product for surgeries that -- where there is none to very low infection risks. I think that what we've seen in the first quarter is, in a way, not negative for the longer term because what we've seen that somewhat explains some of the softer sales of the BVF in the U.S. is surgeons that has been traditional and solid BVF users have converted and increased its use of CERAMENT G. We believe that is positive, even though it may have a short-term impact on the BVF sales. But again, statistics shows that somehow with CERAMENT G as a growth engine, bringing in new surgeons, we also see that those surgeons are using BVF. So over time, we believe the BVF first will stabilize, but then we will see low-digit annual growth coming back. Erik Cassel: Okay. But on the timing of that, it now looks like it's cannibalization. Do you think that will continue? Or is this sort of a stable rate do you think for that product? Håkan Johansson: I think it's too early to say because it was really visible this quarter in a stronger way than what we've seen, et cetera. So Erik, I'm sure let's come back to that question after Q2 and see somehow if that trend remains. Erik Cassel: Okay. Just the last one, if I may. On the gross margin headwind from tariffs, I understand that as you're, of course, manufacturing the products with contract manufacturers. Is it possible to say in the medium term, transfer production locally to the U.S. to sort of offset this? Or is the relative cost in the U.S. basically too high, so it wouldn't be enough of an offset to actually do that? Håkan Johansson: From a purely practical point of view, that could be a consideration. But from a regulatory point of view, to move production is a very timely and costly process. So we will continue to -- as the business in the U.S. grows to look at various options when it comes to manufacturing. But here and now and to offset tariffs, somehow, it's not a helpful strategy. Operator: The next question comes from Oscar Bergman from Redeye. Oscar Bergman: Thank you for very interesting report as always. I have a few questions left. I think maybe the first one, if you could just sort of clarify the constant exchange rate growth for CERAMENT G in the U.S., I think it would be helpful. Håkan Johansson: Yes. So explaining in terms of? Oscar Bergman: The constant currency exchange growth for U.S. CERAMENT G in Q1. Håkan Johansson: So again, as we showed in the graph, somehow, the sequential growth of CERAMENT G in the U.S. was USD 2.6 million. And that is somehow what's supporting the statement and the numbers reported and made. So sorry, maybe it's too early morning for me, but I think you have to clarify really what you're after, Oscar. Oscar Bergman: Yes, I was just thinking -- okay, maybe I have to check the report again, those numbers maybe was too early morning for me as well. I think we can just move on to the other question instead. Håkan Johansson: Yes. Oscar Bergman: I know CERAMENT BVF for spine is still very early stage, and you don't report this separately. But could you just give some sort of ballpark figure or anything that helped me sort of decipher the sales contribution so far? Torbjorn Skold: Yes. So the spine BVF launch follows plan. And the plan, just to remind everyone, but this is very important. It is that we take a very, very focused approach on spine BVF. And we've said that from a revenue perspective, it will not have any material impact on the overall numbers on the total or even on the BVF side. So we're really -- it's really small numbers for spine BVF. And the reason for that is simply we're not in spine. We're not going after spine to sell BVF. Our hypothesis on spine is that it's a very attractive segment for us offering a product that does the 2 things that CERAMENT does perfectly, meaning healing bone and in a very controlled, predictable way, elute antibiotics. So from a sales point of view, spine BVF, I wouldn't put any material numbers in that, if that's what you're going after. However, what is very positive to see in Spine is that our hypothesis and assumptions about that segment in terms of the strength of the value proposition is being confirmed in the quarter. So -- but also just to manage expectations, to come with a product, an antibiotic eluting product into spine is a couple of years out. We need the clinical evidence. We need the regulatory approval. So that still remains the same. So no change really. But Q1 in spine with BVF confirmed at least what we see that we're on the right track and our assumption and hypothesis so far remain valid. Oscar Bergman: But can you share any numbers on maybe a number of customers that have tried out the product or...yes. Torbjorn Skold: I mean, no, we don't provide any specifics on that. But these are -- we have wanted to keep it low. That's how we want it, and we're being very selective in which accounts we're going after. And to be fair, we could have gone for more accounts if we wanted to and actively promoted it more, but we want to keep it very strict, very disciplined, very controlled so that we do it in the right steps for the long-term case of CERAMENT in spine. Oscar Bergman: And I guess it's a fair assumption that you are targeting customers where you already have some experience with CERAMENT G for extremities? Or are you going for hospitals outside your sort of current customer base? Torbjorn Skold: We're doing both, to be honest, because, I mean, again, it comes back to that you want the right surgeon, you want the right hospital that believes in our hypothesis of CERAMENT in spine, that believes and acknowledges the fact that infection is an issue and that also believes and buys into the characteristics of CERAMENT. Sometimes they come in already existing partnerships with our independent sales reps in extremities. Sometimes they come outside. So we're not fundamentalistic that they have to come from the existing distributors. But -- so we see a combination of both. Oscar Bergman: And I know you have a CMD in about a month's time. And I guess we'll hear more about the Spine segment there. But do you still expect it to be registered as a medical device and not having to go through a drug registration process? Torbjorn Skold: Yes. I mean -- so our approach here is that we're a medical device company. We want to remain a medical device company, similar to what we have done with CERAMENT G and CERAMENT V. And that's also our plan and thinking on spine. Oscar Bergman: Okay. And just maybe a final question. The launch in India, I'm very happy to hear that you have first sales there already, but I suspect it's very small numbers still. Can you give some words on the progress here and maybe what we should expect for the full year? Torbjorn Skold: Yes. No, absolutely. I mean, I sit here next to our CFO. He's super excited because it's not like we've only launched and we've only also sold it. We've actually done cash collections. So for once, Hakan is on good mood when it comes to India. So that's great, which is positive. But you're absolutely right. It's just the start. And in Q1, it's small numbers. And it's going to be small numbers as it always is when we enter a new country. With India, it's very exciting for a couple of reasons, meaning that if you look at the size of the total population, it's massive. We're not going after that. We're going after a niche segment of that population. So private pay and closely sort of managed with private hospital chains where we have a good collaboration and good trust. But even in our smallest estimates, the segment that we're entering, it's a sizable country in -- or it corresponds to a sizable country in Europe with margins that are similar to distributor margins in Europe. So that's why we are excited. But it's early days. It takes time, but so far, very pleased with what the team has done there and the progress that we've seen. But again, small numbers in Q1. And hopefully, we'll work to make those numbers grow fast in the couple of years. Operator: There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Torbjorn Skold: Okay. We have a couple of minutes left, and we still -- we also have a couple of questions on the chat. And then we'll just quickly read through. One question is -- and I'll leave this to Hakan. So I will read Hakan and then you'll prepare. So Hakan, could you please help us on the R&D spend for 2026? Should we expect a similar ratio versus sales as seen in Q1 and 2025? Håkan Johansson: So again, I think that what we've seen is a very stable run rate the last 4 quarters. And I think that's a good baseline to start from. The uncertainty that we have is some pending the discussions with the FDA and the regulatory pathway to get an antibiotic eluting product approved for spine. And we believe that, that will include and involve clinical studies and the absolute cost levels and the timing of these costs remains to be clarified, and that will add to the run rate. Torbjorn Skold: Okay. Good. Another question we have is around dividends and capital allocation. And I'm going to read it and then Hakan, you will answer it. So why do you not consider a dividend appropriate at this time? What do you intend to do with the assets and the cash position of nearly SEK 500 million? Håkan Johansson: It's a good question. And again, some, it is good to have a solid underlying cash flow because that builds also confidence in the business for any future investments, et cetera. But also saying that, we understand and we see that we are generating more cash than the business needs in short to midterm. And there is also a good reason why the Board proposed to the AGM, the upcoming AGM in early May to get a mandate to buy back shares in the market as one way to allocate the funds that the business is generating. Torbjorn Skold: Okay. And then we have another question related to CERAMENT V on the chat, and it goes like this. Do you expect that you will reply to FDA's questions regarding CERAMENT V before summer? So what we've said is that we -- the deadline that we have end August, we will reply to the FDA questions before end August. So we confirm that what we already said. And then I believe there's one last question on the chat, and it relates to the SOLARIO study. And it says, when will the full report of the SOLARIO study be fully published? Or won't it be? So we -- I mean, again, we don't manage the submission to the scientific journal. This is done by the lead authors. But we have good reasons to believe that the SOLARIO study will be published in the near term, exactly when and exactly which journal remains to be seen, but we have good reasons to believe that it will be published as per plan, and we also have we believe that it will confirm this paradigm shift that we see and hear about related to using systemic antibiotics versus local antibiotics. So we feel we have a good and positive outlook on the SOLARIO study. So hope to see something there in the short to medium term. I believe that is it. That concludes. That concludes. So with that, right on time. Thank you all for dialing in. And again, a warm welcome to the Capital Markets Day in Stockholm on May 26. Thank you very much.
Michael Green: Good morning, and welcome to this presentation of Handelsbanken's results for the first quarter of 2026. We can conclude that the bank reported yet another solid quarter. Operating profit increased by 9% compared to Q4 and the ROE amounted to 14%. The main income lines, NII and fee and commissions were stable. While the lending growth in Sweden was held back a bit by a general slow Swedish economic growth, it was again very encouraging to see that the lending growth trend in the U.K. and the Netherlands continued both on the household and on the corporate side. This has now been a consistent trend for more than a year. The savings business continued to perform well with market shares of net inflows into mutual funds far exceeding the market share in our books in both Sweden and in Norway. Cost efficiency is always a top priority in the bank. And again, we saw expenses declining. The net asset quality remained very strong with more or less insignificant credit losses once again. The capital remains robust. The anticipated dividends for the quarter earnings were increased a bit in order to calibrate the CET1 ratio to 17.2% or 250 basis points above the regulatory requirement compared to the 285 basis points in the previous quarter. The anticipated dividends amounted to SEK 2.93 per share or 91% of the earnings generated in the quarter. When we look at the longer-term value creation for our shareholders, this solid Q1 report fits well into the picture of the bank's resilient business model. As illustrated in this graph, the growth in equity per share plus dividends has not only been consistently stable over the past decade, but also growing with an average of 14% per year. And if zooming in on the past 5 years, the average growth rate has been even higher at 15%. And not to forget, this has been achieved in a decade, which includes everything from negative interest rates, Brexit, a pandemic, war then in the Ukraine, inflation and interest rate spikes, stresses in the real estate sectors, et cetera, et cetera. This is what we strive at always generating for our shareholders and also what the shareholders should expect from a bank like us. This stability is, of course, not achieved by coincidence and not just of our way of working. It's a result of the chosen markets and geographies. Our four home markets share the following common traits. They are all stable democracies with large economies, rule of law applies and the political and regulatory landscape are stable. It also helps if there are culture similarities and shares of values. Not only the assets, but also the cash flow from our customers are stemming from stable Western European economies. In such markets, the Handelsbanken model has a chance to stand out with a unique offering and a higher customer satisfaction than our peers. It is, of course, also essential that there are large bases of potential customers with the right risk profile and that we have a demand -- and have a demand for our offering, hence, offering material scope for long-term profitable growth at a suitable risk level in stable markets. And just to add a small remark, given the recent themes into the financial markets, we have no exposures to private credit. Before going into the financials for the first quarter, just some comments on the recent business development in these four home markets. Starting with Sweden, which accounts for 76% of the profits in our home markets. Handelsbanken is the largest lender in Sweden when summing up household and corporate lending. It's therefore fairly natural that the soft general economic growth in Sweden translates into fairly flat lending volumes in the past quarters. Deposits are growing somewhat, but the key growth is seen -- clearly seen in the savings business, where we consistently for the 1.5 decade, have seen market share of net inflows into our mutual funds far exceeding the market share of our outstanding volume by more than 2x. In the U.K., we had a long period after Brexit with declining lending volumes, mainly due to customer amortizations exceeding new lending. Since more than a year, the trend has clearly shifted to a consistent lending growth quarter-by-quarter on both the household and the corporate side. Also, deposits have increased over the past years as well as the savings business. The U.K. is a market where the customer satisfaction really stands out the most when comparing with our peers in the market. In Norway, we stated 2 years ago that we needed to see a better balance between lending, deposits and savings, and the situation has improved since. While lending volume have dropped over the past year, mainly due to intense competition, growth has been seen in deposits and in particular, in the savings business. Over the past 2 years, the market share of the net flows into mutual funds in Norway has been more than 2x the market share of the outstanding volumes. This means that we are deepening the relationships with existing customers and adding new customers, which bodes for improved profitability over time. And finally, the Netherlands. Just like in the U.K., the distance to peers in terms of customer satisfaction is particularly large. Lending growth has been very strong, as you can see in deposit -- and despite the drop in deposit last year, the longer trend has also been positive. And what is even more positive is that we now see also -- we now also register a sound growth in the savings business with steady growing assets under management. Now if we look closer at the financials of the fourth quarter compared to the previous quarter -- the first quarter, sorry. ROE amounted to 14% and the CE -- cost/income ratio was 39.5%. In Q1, a VAT refund of SEK 1.1 billion was booked. An adjusted basis, the ROE was 11.7% and the cost/income ratio 42.8%. Operating profit increased by 9%, but declined on an underlying basis by 3%. NII and fee and commission were marginally down, headwinds mainly related to day count effects and FX. Income increased by 3%, but declining by 3% on an underlying basis. Credit losses amounted to SEK 35 million or 1 basis point. Regulatory fees decreased as the previous quarter included a booking of a charge for the interest-free deposits at the Central Bank. Now if we switch over and look at the quarter compared to Q1 last year. NII declined by 13% and 10% adjusted for currency effects. The decline is related to lower margins in the wake of lower short-term market rates. Net fee and commission income, on the other hand, increased by 7% adjusted for FX effect. The key driver was again the savings business and strong inflows and positive market developments. All in all, total income dropped by 6% on an underlying basis. Underlying expenses dropped by 1% despite the annual salary revision that comes into force on January 1 each year and also the general cost inflation. Last year, we had a net credit loss reverses and the regulatory fees were flat year-on-year. All in all, the underlying operating profit was down by 12%. Now if we take a closer look at the NII development compared to the previous quarter, we see that NII dropped by 1%. Volume growth contributed with SEK 20 million in the quarter due to lagging effects on interest margins from lower short-term market rates in the previous quarter, the net of margins and funding contributed negatively by SEK 67 million. Deposit guarantee fees were lower this quarter, the decline being explained by fees being elevated last quarter as the final bill for that year was received and paid. The day count effect due to 2 less days in the quarter and the currency effects due to a stronger krona on average has created some headwind, as you can see. Net fee and commission income dropped slightly in the quarter. The bulk of fee and commissions related to the savings business, especially in the mutual funds business. The positive effect on fees from the strong net inflows were, however, offset in Q1 by a negative day count effect as well as negative mix effects with an increased share of the AUM asset under management in lower fee funds. Other fees were seasonally down. The high market share of net inflows into mutual funds have added significant customer asset under management under -- to the bank over time. As illustrated in this slide, the bank has now accumulated net inflows into Swedish mutual funds at almost 2x the run up over the past decade. This success comes not only from appreciated offering and strong performance in the funds over the years, but also the bank's distribution capacity where advisers are close to and have deep relationship with our customers parallel to an appreciated offering and distribution in our digital channels. Now over to the expenses. A trend of increased cost was broken in 2024. And since then, the expenses have trended down despite annual salary revisions and general cost inflation. The bank is now in a good position in regards to cost efficiency. As illustrated in Q1 when costs continued down on both quarter-on-quarter and year-on-year, it's deeply rooted in our culture and among our employees to always look at new ways of becoming even more efficient. Next slide show our asset quality and credit losses. Over the past decades, credit losses have been very low, which they should be in the bank with our risk appetite. Since the outbreak of the pandemic in 2020, the sum of all credit losses has been SEK 50 million or on an average, SEK 2 million per quarter. And that includes the period from the pandemic, sharp savings -- sharp swings in policy rates and inflation, the disruption of supply chains following years -- following the war in the Ukraine and Middle East, et cetera, et cetera. Still more or less no credit losses. If we compare the credit losses to our closest peers, the bank also stands out over the decade. In particular, in volatile times, difference in underlying asset quality has shown. In Q1, the credit loss ratio was 1 basis point. Perhaps needless to say, asset quality remains very strong. The bank is in a very solid financial position. Credit risks, funding risks, liquidity risks and market-related risks are prudently managed and the capital position is strong. The anticipated dividend in the quarter of SEK 2.93 per share equals to 91% of the earnings in Q1 and is yet another step to gradually adjust the capital position in the bank. The CET1 ratio now stands at 250 basis points above the regulatory minimum compared to the 285 basis points in the previous quarter. The bank should, however, always be considered one of the most trustworthy and stable counterparts in the industry. This is also the view by the lending rating agencies who rate the bank the highest among comparable rates globally. And this view was again confirmed and further enforced last evening by Moody's, who upgraded the bank's baseline credit assessment rating to A1 from A2. This put the bank in a very exclusive group of only a handful of privately owned banks globally with the highest BCA rating by Moody's. Finally, to wrap up, Q1 was a solid quarter with increased operating profit and ROE, although including a positive contribution from a one-off VAT refund. Q1 NII and fee and commissions were stable and costs declined. We see lending now growing consistently in the U.K. and the Netherlands and also in the savings business broadly over the markets. Our way of doing bank is appreciated by customers where they experience close relationship with us, and it's also seen in the external surveys in all of our well-chosen home -- stable home markets. Asset quality remains just as strong as it should for a bank with our risk appetite and the capital position is very strong, and we took another step down in the target range by anticipated dividend equaling to 91% of the earnings in the quarter. Finally, I'm also happy for our shareholders that has seen share price reached an all-time high during the quarter. And with those final remarks, we now take a short break before moving into the Q&A session. Thank you. [Break] Peter Grabe: Hello, everyone, and welcome back. This is Peter Grabe, Head of Investor Relations speaking. And with me, I have Michael Green, CEO; and Marten Bjurman, CFO. As always, we would like to emphasize that we appreciate that if you ask one question at a time in order to make sure that everyone gets a chance to ask their questions. With those words, operator, could we have the first question, please? Operator: [Operator Instructions] And your first question today comes from the line of Magnus Andersson from ABG Sundal Collier. Magnus Andersson: I was just wondering regarding the -- in total, SEK 6 billion in AT1 capital you issued late in Q1 '26, whether the main reason was to be able to go down further in your management buffer or if you expect the higher volume growth going forward or a combination of both? And related to that, also, if you could confirm that the coupon will be taken directly in other comprehensive income rather than in NII... Marten Bjurman: Magnus, this is Marten speaking. Yes, I had a little bit of a difficulty hearing your first part of your question, Magnus. But I assume that you talked about the AT1 that was issued late in the quarter and booked in Q2. And it's fair what you said, it's correct what you say that this is an equity instrument. It will be booked in the equity and the interest rate, if I may call it that, the coupon, that will be booked also in the equity, yes. Magnus Andersson: Okay. And also the reason for it that you have your next call in March 2027 of USD 500 million. What was the main reason for doing this now? Was it to be able to go down the management buffer volume growth? Or... Marten Bjurman: Well, there are various components into that equation, Magnus. But obviously, we didn't have a full box of the AT1, if I may call it that. This provides flexibility to the bank. And as you know, the 2 outstanding AT1s, they are in U.S. dollar. This one is in Swedish krona. So yes, it's -- and then we take it from there. We'll see. But the main reason is that it provides flexibility for the future. Operator: Your next question today comes from the line of Markus Sandgren from Kepler Cheuvreux. Markus Sandgren: I was thinking about you, Michael, you mentioned that you're going down gradually in terms of capital buffers. Can you give some guidance on -- I know that the Board is deciding what you will pay out. But since you have gradually reduced this buffer in your accrual of dividends, where are we heading within the range, please? Michael Green: Yes. This is Michael speaking. I don't think you should read that much into the adjustment this quarter. But it's -- the bank is in a position where we are running the bank very operationally strong and we have a cost -- the cost in place and all that. So we have gradually come down in our target range. And when we look at the world outside and we compare what's going on there with how our customers behave in terms of risk, we don't see anything that really sticks out. So our customers, they are in very good shape. And the risk we allocate for is taken care of in our internal risk models. So I don't see the need for having SEK 285 million now. So we will -- we just take it down to SEK 250 million. And then as you just said, we decide where to go when we come into the -- what we anticipate now for the year, and then we take the decision in the Board for how we recommend the -- for the shareholders to -- on the dividend side when we come into the Q4 report. Markus Sandgren: Yes, so I understand. But what do you mean by that, you shouldn't read too much into that you change it because you do change it because you think it looks good. So there must be some message in that. Michael Green: Because it looks good. Marten Bjurman: So but let me underline a little bit also. Again, I think bear in mind where we're coming from. We have -- we're coming from SREP plus 5% or 6% and then we took it gradually down, as you know. And we felt the need to guide a little bit to say that reinforce that the message that, yes, we have this interval, it is set, and we are slowly moving into that. Now as we are within the interval, we don't feel the need to guide that much further on a quarterly basis. So you shouldn't expect us to draw the line anywhere within the range. Now we are in the range, it feels great. Operator: Your next question today comes from the line of Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: On your cost outlook, please, could you walk us through the key moving parts in your cost base for the next 3 quarters that we should be aware of, specifically, where do you see flexibility for further cost reductions versus what could be the areas of additional cost pressure? You previously mentioned that you have completed the centralized cost-cutting program, but do you expect more efficiencies to come through from elsewhere, for example, from the local branches? And if you look at your headcount, it's down 1% quarter-on-quarter. Do you expect any further reductions in the number of employees to come through? And how should we think about your Oktogonen contributions going forward? Marten Bjurman: Okay. Well, maybe my answer will be a little bit disappointing to you because we will not guide on the costs going forward. But it's very true what you say. We have that initiative behind us now. We have no plans of broadcasting yet another of those initiatives. But rather, we are staying very true to our culture, our model where every employee within the bank is extremely cost cautious and very sensitive to increases in costs. And this quarter was extremely successful when it comes to cost as well. It was even to me, a little bit surprising actually. But again, I think that you shouldn't expect it to go further down. We are at a level now where we are extremely confident that we can run the bank the way we want. We have resources to spend and invest where we want to spend and invest. And -- but this model is extremely decentralized. We will not interfere with our home markets. We will not interfere with our branch office managers. So ultimately, they decide. So therefore, we cannot guide any further. Gulnara Saitkulova: And what about the headcount? Marten Bjurman: Headcount number is basically the same, maybe a little bit boring answer. But still, if a home country wants to expand in terms of number of employees, they are free to do so if they have good reasons to do it. So I don't foresee any big shifts either upwards or downwards in terms of full-time employees. Michael Green: And just to add on, when Marten says we -- the decision-making for resources, both in headcounts and other cost initiatives that they could happen throughout branch networks and product or whatever. It's not that we don't guide and we don't steer, but we follow them closely. So it's a very sharp following up in terms of cost efficiency and the returns on the investment we do. So it's not do as you like. It's do what you think is necessary, and we will keep a very close track on what's going on. Operator: Your next question today comes from the line of Andreas Hakansson from SEB. Andreas Hakansson: So a little bit of a follow-up here on costs. I mean you've been reducing cost continuously now for, it feels like 8 quarters roughly. And I mean, when we speak to quite a few banks, they see that there's a lot of IT investments relating to AI and whatnot. And when we speak locally and we hear people gossiping or talking, it doesn't sound like you are clearly ahead of the pack in terms of those investments. So is it a risk that you have underinvested now over the last years because a lot of the savings have come from IT, if nothing else? Marten Bjurman: The short answer is no, I don't think so. I think it's more of a matter of how you're running your development within the IT space. We were heavily dependent on consultants for a very long time. We have now -- we are now at another place in terms of that mix between employees and consultants. So that's one thing. But the other thing is that we are running our IT development in another way now. We have much more control, generally speaking. In terms of AI, are we lagging behind? Are we the first mover? I don't think it's in our nature to be the first mover in terms of trying out different AI solutions. That being said, though, I'm extremely confident that we have navigated through these challenges and opportunities the right way so far. It's a broad area. It opens up a lot of opportunities, not only for the bank, but also for our customers. We're following it closely. We have quite a number of initiatives that are all the way from ideas to fully implemented and up and running successfully. So it's a broad range of initiatives. So I'm not worried for that matter. Andreas Hakansson: So as a CFO, it's not that you want more resources, but Michael thinks you need to slow it down still? Or what's the balance between you? Michael Green: No, no. We don't -- the balance is very good between my CFO and myself. So -- but just for the record, I totally embrace the technology and the development of that, and that's a very wide area, and we invest largely in things that we need -- that we see could fit well into our customers and also for ourselves in terms of efficiency reporting, whatever. So I'm very interested in that, and we have a quite good pace actually. So I don't really have the feeling that you described in your first question that we lag. I don't think we lag. I think we do it in a very balanced way in the way we see it from my perspective. Operator: Your next question comes from the line of Shrey Srivastava from Citi. Shrey Srivastava: My first is actually on the positive side, you've got the second consecutive strong quarter for loan volumes in the U.K. What is the profile of the new customers you're attracting versus the U.K. incumbent? Has it materially changed versus your existing customer profile? Marten Bjurman: Thank you. No, no, it hasn't changed. It's basically the same. It's the corporate lending growth that you see in U.K. is very pleasing and the trend is continuing. So very pleased with that, generally speaking. In terms of our customers, it's no new mix of customers. We are very true to our model in terms of providing financing to businesses that we understand that have strong cash flows, a strong repayment capacity and all that. So no, the short answer is no. We don't have any new features into our model in providing financing to our customers. Shrey Srivastava: Right. And my second one is, can you explain this 50 basis points negative impact on the CET1 ratio from other factors, including claims on investment banking settlements and rounding on? I don't believe it's ever been called out before explicitly. So I'm wondering why it was so large this quarter? Marten Bjurman: Well, it is large this quarter due to natural reasons because I think that, that business where this derives from is typically slowing down in Q4. So when you compare the 2 quarters, this looks quite hefty. But it's not. I think if you take this level, it could be a natural level for the coming quarters. And I think you touched upon it in your question where it comes from. This is coming from the market making in the capital market side of the bank. So this is really short-term claims. These are coming from market making and deals that are between settlement date and trade date basically. So very short-term claims on our customers, majority in the fixed income space. Shrey Srivastava: Okay. So this was a bit larger than you'd expect given the seasonality if you look versus the past few years? Marten Bjurman: No. I mean, this portion that I just explained is maybe 1/3. The other 2/3 are so many items in so many parts. So it must be considered a regular quarterly volatility, many, many smaller items in that. So I'm not surprised where we are. But again, you have to compare with a regular quarter. And in this case, Q4 might not be that one. Operator: Your next question comes from the line of Namita Samtani from Barclays. Namita Samtani: I just wondered, it's just another quarter where Nordea is growing its Swedish corporate lending by 4% quarter-on-quarter and Handelsbanken volumes are flattish. So I just wondered why you're allowing another bank to take market share from you so much so that you're not even growing the Swedish lending book in the quarter? And just a follow-up to that. I just also wondered why there's appetite to grow in commercial real estate in the U.K. and Norway, but not in Sweden just based on how you grew this quarter. Are the competitive dynamics different in Sweden versus Norway and the U.K. Michael Green: Yes. So the -- first of all, we don't allow competitors to take business from us. We compete every day and you win and you lose some. In our -- from my perspective, the volumes that we've seen leaving the bank has mainly -- or absolutely the vast majority is -- it goes to the capital market side. So it's not that any other bank is competing with us, and we do not have the capacity to compete that. So that's how it is. And I'm not going to comment on Nordea's growth. That's -- I don't know what they do there. But I think growing the lending book, it comes -- when you have market shares like we do in Sweden, you tend to grow, as we've said before, in line with the real economy growth in this country. If you want to grow more over time, you need to be very aware of pricing and risk, and we are conservative in that sense. So we follow our customers. If they invest, we will grow with them. And we will gladly compete and take business from our competitors. But in general, we grow in Sweden with our very, very strong corporates and private individuals. And if you look at the market right now when it comes to corporates, what we see from our perspective when we talk to our customers is that they are a bit reluctant now to invest both when it comes to investing in factories and production, but also invest in real estate right now. So it's a bit on a standstill due to the uncertainty in the surroundings. And when it comes to the private individuals in Sweden, we see a small pickup when it comes to buying new houses, and we have quite a strong inflow when it comes to that market, when it comes to the transition market when they buy houses. So we don't see a problem with this. We -- in Sweden, we follow our customers when they grow and when they're not growing. When it comes to the -- as you probably noticed in the U.K. and the Netherlands, we have the opposite. We have a quite strong growth there because the market share we have is quite low. And that's what you should expect, and that's what I'm expecting with high ambition in these countries. Namita Samtani: Sorry, could you just comment a bit on the differences in the commercial real estate U.K. and Norway versus Sweden? Is it more competitive in Sweden? Michael Green: No, I think there are competition everywhere we are because we're very strong and transparent countries with strong competitors. So I don't think any -- there is any difference there. Operator: Your next question today comes from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. I was just wondering how we should think about the net interest income in the other division, given that it was up 41%, I think, quarter-on-quarter. Could you just comment on kind of what's the normalized run rate? Are there any headwinds or tailwinds we should kind of be mindful of? And also, I know you don't guide on rate sensitivity, but if you could just help us kind of think about how we should model potentially higher rates in Sweden and also elsewhere in Europe, what the kind of moving parts are? Marten Bjurman: Yes. A number of questions there. And the sensitivity to policy rates, yes, obviously, when we have -- as we had in this quarter, policy rates turned down late in the previous quarter, we will have an effect. And generally speaking, as you know, we benefit from higher rates rather than lower. So -- but in the meantime, we have lag effects that you know of when these rates are cut. And it varies a little bit between countries. But yes, generally speaking, we should expect now that, okay, policy rates were expected to go down further in U.K. and in Norway. Now we don't -- we're not so sure anymore. Some say flat, some say even a little bit of a pickup. Obviously, we will have an impact of that. It will take a little bit of time to bleed through that effect through the books as with all banks, I guess. So that's where we are, and we don't guide any further than that. Sofie Caroline Peterzens: But in terms of the other division, like -- yes, do you have any guidance on how we should think about the contribution from there because it's very difficult to model on a quarterly basis, plus 40%. So is there any way we could kind of think about how to think about the kind of volatility in this division going forward? Peter Grabe: Yes. This is Peter speaking. You can say that there are mainly two reasons. One is within the treasury department where actually both of these two items are within the treasury department. And it goes up and down in between quarters and it's connected to what's allocated to the different segments. On a group basis, everything, of course, nets out. But occasionally, you allocate out more from Central Treasury and sometimes you allocate out slightly less. And then furthermore, it's also a result of the -- of what you generate in our liquidity portfolio, i.e., the returns on the assets we have in the liquidity portfolio, which means that it can go up and down somewhat in between quarters. But I think overall, you should see it as more of relating to components that generally are sort of intertwined with the allocations out to the respective segments. Operator: Your next question comes from the line of Riccardo Rovere from Mediobanca . Riccardo Rovere: Sweden loss cut rate in September, so say, around 6 months ago, would you say that now the balance sheet on the assets and liability side has absorbed the loss cut made by the Riksbank 6 months ago? Or should we expect a little bit more tail in the coming months? Marten Bjurman: Yes. Generally speaking, yes. I think we have seen most of the effect, not all, but most of the effect for sure. So that's the short answer. Riccardo Rovere: And let's assume for a second that short-term rates remain where they are. I mean, STIBOR goes up a little bit in the quarter. That I suppose nothing of that is eventually visible in these set of numbers, I would say so. Am I right in saying so? Marten Bjurman: I'm very sorry, I didn't catch your question fully. Would you be able to repeat... Riccardo Rovere: Yes, yes, sure. The STIBOR month was a little bit higher in the -- especially in the month of March. Let's assume for a second that, that remains. I think it was 9 or 10 basis points higher in the month of March. Let's assume that, that stays for a while. Is it fair to assume that in set of numbers, we have not seen anything from this 9 or 10 basis points higher level on STIBOR 3 months. Michael Green: I think it's what we usually say. I mean the reason for us being with silent here is that it's difficult to give you a straight answer on that question. I mean, obviously, as we always say that there are tons of factors that play in when we talk about the development of net interest of funding and margins. STIBOR is, of course, one component. But how a particular STIBOR movement in between months or quarters directly will affect the NII is very difficult to guide on. And as you know, we prefer to stay away from guidance -- sorry, Marten, please go ahead. Operator: Your next question today comes from the line of Emre Prinzell from Nordea. Emre Prinzell: I know you touched upon this, but just to double check here, what do you need to see for Swedish lending growth to meaningfully pick up in the next few quarters? I mean we're expecting Swedish GDP to grow maybe 2.5%. Should we therefore see a read to you that you ought to grow 2.5% in Sweden? Or what's a reasonable way of looking at this going forward? Marten Bjurman: Yes. Great question. Yes, I would love to grow 2.5%. That would be perfect for us. And as Michael alluded to earlier, we have seen 1 or 2 tickets leaving the book in this quarter, not to other banks, but to the bond market. That happens, it can happen. And what will it take for us to really set off the corporate lending? Well, I think -- and we've been talking about this quite a bit also during previous quarters that generally speaking, we will need the economy to pick up speed in terms of the recovery phase that we are in. And everything that is disturbing that picture is obviously not good for business. So if we have globally, even if it's not evident in our books, but the appetite or the demand for credit needs to pick up speed. That's where we are. We are not growing on our own. We are growing with our customers. So if they have a need, then we support them, obviously, it's not more fancy than that. Operator: Your next question today comes from the line of Johan Ekblom from UBS. Johan Ekblom: I just wanted to pick up on some of the earlier comments you made around costs and AI, right? So I think in response to one question, you said, look, the staffing decisions are made at the branch level. And at the same time, you feel like you're doing kind of enough in terms of technology and AI. But when we think about that, I mean, surely, technology and AI are investment decisions that had to be made at a central level and the benefits of AI are expected to largely come through in the -- in the form of lower staff needs. So does that create a tension in your decentralized model? Do you think you are as well equipped to reap the benefits of AI as maybe some of your peers that run more centralized business models? Michael Green: So Johan, thank you for the question. I appreciate that because this is actually a very good point. When it comes to decentralized way of working and resources, that refers mostly to the branch business. And when it comes to decision-making in terms of infrastructure program, AI investments, which is obviously a larger ticket. that's been taken care of within the management of the different areas, but also, of course, with the Head of IT, sorry. And we discuss that both me and Marten when it comes to these large investment programs that we run to make sure that we don't have any problem with holding back on time when it comes to develop new facilities, new prospects for doing business or creating efficiencies. So this is not a decentralized way of working. The -- what we should do comes from business and from IT. And then Marten and I and Head of -- Anton Keller, Head of IT, makes decision when it comes to the more heavy investments in this. So there's not a decentralized way of doing what you like when it comes to IT investments. Johan Ekblom: But do you not need full buy-in from the organization on adoption to make the investments work. Michael Green: Yes. But that's not a problem because if the reason is correct and right and logic and good for the bank, everybody will buy in. That's up to us to really make sure that the people understand why we do this. And I don't have any -- not once have I felt or heard that there is going to be difficulties in explaining the rationale when it comes to IT investment and spending because that puts the bank in a strong kind of competition position, which will be necessary all the time for a company to grow. So I don't think there is any problem with that, actually. Operator: Your next question today comes from the line of Max Jacob Kruse from Bernstein. Jacob Kruse: Just one question then. So this quarter, you hiked your mortgage rates very late in the quarter and STIBOR moved earlier. Could you just talk a bit about what you saw in the quarter in terms of timing effects? And maybe you could touch on as well any kind of balance sheet hedge offset you have there? Marten Bjurman: We saw none of those effects is the short answer. So yes, that's it. Jacob Kruse: And sorry, how is that -- I thought your list price would be determining the kind of role of the negotiated rates or the rates on mortgages. And obviously, your STIBOR, any kind of swaps into STIBOR would have moved. So why would you not see any impact? Marten Bjurman: We reset the interest rate for mortgages the 1st of April to start with. So it's first every month is the cycle, if you will, where we reset these interest rates. Michael Green: I'll just add that the price we get from the business when we do business with our private customers when it comes to mortgages is not -- it's -- the discussion stems from the list price, but it's not where we do business. So the cost for our branches when it comes to -- the funding costs for our branches, that it's volatile. It comes from where the market rates are. And they will then push and they do business where they find there is a profitability. So this -- the list price is just the way we start with the list price. We never do business on list price. So the volatility in short rating -- short interest rates are taken care of in the day-to-day business on the branches. Jacob Kruse: So just to clarify then, so the STIBOR moves are -- the STIBOR moved in the quarter, you say your pricing on the list price changed on the 1st of April because I guess your list price changed at the end of March. But I understand that your front book is a negotiated rate. But surely, as people roll towards -- if I have negotiated the rate, that will move with the list price. I think it will not move, but that plus the discount will be the role. So I don't quite understand how you can have STIBOR moving up and list prices staying stable without having any impact in terms of... Michael Green: So when you roll your 3 months interest rate period, we have another discussion with the customers. And then we set the new price for the next coming 3 months. So I don't really understand your concern there. Jacob Kruse: Maybe I'll catch up with you. Yes. Operator: We will now take our final question for today. And the final question comes from the line of Andreas Hakansson from SEB. Andreas Hakansson: And sorry, some follow-ups since we could only ask one question. So a follow-up and a real question. And it's back to, I think it was Namita asked about the commercial real estate exposure. I mean you're one of the most commercial real estate heavy banks around. And if we look in this quarter, the only growth is coming from commercial real estate, I think, in all markets, while other corporate banking is declining. Is that a strategy that you're happy with given that, I mean, the profitability of a CRE loan is normally lower than other types of corporate banking given what you can do around it and so on. So are you steering the bank in this way? Or is it just happened to work out like this? Michael Green: So Andreas, we don't steer the bank in which customer to pick and choose. That's for the branches to do. If they find it suitable or they find the risk suits us well. We have products that could solve problems for a corporate or real estate company, we do that. So it's the steering from my side. This is the way the bank is run. We make sure that our branches are in a position to compete and then they choose which counterpart they want to do business with. And this is how the balance sheet will ends up in that case. So it's not a -- it's not a choice from my perspective on where to do business. We try to compete on all segments. We compete on industrials or we compete on commercial real estate business. It's up to the branches to do that, to choose. Andreas Hakansson: Yes, that's fine, but the branches is quite significantly steered by a cost/income ratio and want to keep costs low, as you discussed earlier. But if they would then go after some other types of corporates where the margin could potentially be thinner and the cost-income ratio would be higher and then the benefits of doing some other type of business could be taken in the markets division in Stockholm. So is the branch really the ones that would drive a higher profitability type of lending since they are driven by costs? Michael Green: Yes, I say they are because what we do when we do business on the ancillary business, for example, within FX or other parts of the Investment Bank, that's been taken care of by refund, if you put that way to the branches. So everything comes down to the branches P&L anyway. So that's just good. So we do... Andreas Hakansson: But eventually... Michael Green: Sorry. Andreas Hakansson: But eventually, but you might have to live 2 years with a low margin until you do that business because you have to be committed to the company and so on. Michael Green: No, no, that's not how it works. So you get instantly repaid from the investment bank when they do their trades or their interest rates derivatives or whatever. That comes the month after. So that's not the way it works when we steer the bank. Andreas Hakansson: Okay. Then finally, on your loan-to-deposit ratio in Norway at around 300%. If rates now start to go up in Norway, which seems to be expected, is that a positive or negative for you guys? Marten Bjurman: It will eventually be a positive thing, Andreas, but it will take a little bit of time to adjust, obviously. So yes, but it's positive long term, yes. Michael Green: We will immediately benefit from the deposit side, of course. So that will give a boost. But then it's all about adjusting the lending book as well to the new market rate. Andreas Hakansson: Yes, I was thinking that some of a very deposit-rich bank could afford to compete on the margin on the lending side, given that it makes so much more on the deposit side, will you guys have flipped the other way around. Michael Green: Yes. But that's the way it has been for many decades now when it comes to the business and how we compete in Norway. So that's nothing new. Operator: That was our final question for today. I will now hand the call back for closing remarks. Peter Grabe: All right. Thank you, everyone, for all the questions and for those of you who listened in. And as always, you know you can always reach out to the Investor Relations department for any further questions and follow-ups. With those words, we wish you all a very good day. Thank you very much.
Operator: Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. The management discussion and slide presentation, plus the analyst question and answer session are being broadcast live over the Internet. [Operator Instructions] At this time, I am turning the call over to Mr. Eric Hill, Vice President of Investor Relations, for opening remarks and introductions. Mr. Hill, please go ahead. Eric Hill: Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg. Robert Ortberg: Thank you, Eric, and good morning, everyone. Thanks for joining in today's call. As we reflect on our first quarter performance today, we're off to a really good start and headed in the right direction. We remain on plan and are building momentum from solid performance across all 3 of our businesses. Our Commercial Airplanes team continues to integrate our safety and quality plan into its operations, which has enabled us to increase production rates and deliver high-quality airplanes to customers around the world. Our Defense & Space team continues to stabilize operations and after 2 years of hard work and development, we're starting to achieve inspiring milestones like the recent Artemis II launch that carried NASA astronauts to space on the Boeing-built core stage rocket. The launch and landing were a truly profound moment as humans reached farther into space than ever before and serves as a great reminder of what Boeing, our industry partners and our country can do. In Boeing Global Services, our team is off to a strong start, adding further orders to its record backlog, meeting customer demand and continuing to deliver solid operating results. While we are seeing some regional instability as a function of the Iran war, we remain confident in the long-term future of our industry. Aviation has seen moments like this before, whether it be a recession, pandemic or conflict. The resilience of our industry has always led to a recovery and return to growth trends. Our market remains robust and the Boeing portfolio of versatile, fuel-efficient airplanes, defense platforms and services is built for the dynamic environment of our time. So far, we have not seen any impact on our airplane deliveries. As always, we stay close to our commercial customers if they make adjustments to their plans, in which case, I think the strength and diversity of our backlog gives us a lot of flexibility. And I should note, we're already seeing higher demand in our defense business given the increased operational tempo, which over time will be a good offset to any potential commercial MRO weakness that results from these higher fuel prices. We are confident in our business, customers and markets, and our team remains squarely focused on safety and quality, disciplined execution and elevating operational performance so we can profitably deliver on our record backlog of nearly $700 billion. As I mentioned last quarter, one of the biggest focus areas for our team in 2026 is completing the certification work on our development programs. This is where I'll spend a few moments before discussing our first quarter accomplishments. In BCA, we continue to move forward on certification work for the 737-7 and the 737-10. In the quarter, we began the final phases of the certification and flight test for the 737-10, which includes autothrottle, autopilot, enhanced Angle of Attack as well as engine anti-ice solution. We are pleased with the progress so far and remain on plan for the newest members of the 737 MAX family to be certified later this year with deliveries expected to start in 2027. On the 777-9, we continue to advance our certification testing. Last month, we received approval from the FAA for the next phase of testing called TIA 4a. While it's a smaller package focused on natural ice testing, it's an important step in moving this development program forward. You'll recall last quarter, we discussed a potential durability issue on the 777X engine that was discovered during an inspection. Since then, we worked closely with our supplier. As they've said yesterday, they believe they have identified root cause and they're working on finalizing their modification. We are working together with the supplier and the FAA to fold this into our certification plan, and we remain on track for schedule of first delivery in 2027. In the quarter, we also achieved an important milestone on the 787 program. We obtained FAA certification for an increased maximum takeoff weight for the 787-9 and the 787-10, enabling those models to fly further or carry more cargo, creating additional value and revenue-generating opportunities for our 787 operators. In BDS, work to reduce risk across our development programs using active management is leading to win-win outcomes for our customers and Boeing. This means we're proactively working challenging programs by looking more closely at risk, requirements, schedules and customer needs. Combined with stronger focus on program management rigor, we're seeing good progress here. For example, on KC-46 Tanker, we recently approached our best-ever factory performance going back to pre-pandemic levels of productivity, and we remain on track this year to deliver the most tanker aircraft since 2019. We also achieved an important milestone on MQ-25 with completion of high-speed taxi tests and the first flight is imminent. The Stingray is our first unmanned aerial refueler for the U.S. Navy. We are now one step closer to providing this first-of-its-kind capability to further enable the U.S. to project power worldwide. Overall, I'm pleased with the progress our BDS development programs are making, and there are no major EAC adjustments. Let's turn now to the first quarter accomplishments. As we start the year, we continue to drive stable operations across our factories, enabled by a focus on safety, quality and performance. Our team is more engaged in embracing our values and behaviors, which we first shared with our team around this time last year. That increased commitment is helping drive process improvement ideas. As an example, I just reviewed one from Renton where the team developed a new drill jig, resulting in more than 30% reduction in defects for 737 wing tip. In BCA, Stephanie and her team are methodically increasing production rates across our key commercial programs. The 737 program has stabilized at a rate of 42 airplanes per month. And in the quarter, we also delivered the final 737 MAX from storage. As previously discussed, some first quarter 737 deliveries slid into the second quarter due to a recent nonconformance finding on aircraft wiring. As part of our root cause corrective action process, we fully understand the issue, and we have reworked all of the 25 airplanes affected and most of these have already been delivered. Importantly, this is evidence of our safety management system working to identify issues early and drive continuous improvement and avoid these issues in the future. To be clear, the wiring issue will not affect our full year delivery goals or plans to increase production to 47 per month this summer. We believe our internal and external supply chains are well positioned for this next rate increase. To support further planned rate ramps above 47 per month, we are readying the new Everett North line. I recently walked the factory where I saw construction complete and tooling in place. Our team setting up the line are eager to get started, and we started hiring and training. Employees for the North line will complete structured on-the-job training, which will pair new mechanics with experienced teammates from our existing Renton line. On the 787 program, we did see some impact to deliveries in the quarter due to delays of premium seat certifications, but we still expect to meet our full year delivery range of 90 to 100 airplanes. We're staying close to our customers, suppliers and regulators to work through these seating issues, and Jay will talk a little bit more about actions we're taking to better manage these impacts going forward. On production, the program continues to stabilize at 8 per month as we work through selected supply chain delays, including the interiors and engines. Overall, the factory is performing well, and the program continues preparations to increase production to 10 airplanes per month later this year. Like the 737 program, the 787 team will use the same disciplined process guided by our safety and quality plan with data from the 6 key performance indicators to assess readiness ahead of planned rate increases. Turning now to BDS, where our defense platforms are providing unique value and capability to our customers, particularly in the current threat environment. Over the past 2 months, we've seen much of our defense portfolio support key missions in-theater. For example, the AH-64 Apache has proven its potent anti-drone capabilities and the Patriot Advanced Capability-3 interceptor with its Boeing-built seeker has intercepted ballistic missiles and drones threatening civilians and military forces. Boeing systems remain central to air superiority, precision strikes and electronic warfare, while long-range strike and airborne command and control extend reach and situational awareness. Our aerial refueling, reconnaissance and strategic airlift sustain high tempo operations, and we're proud that our Combat Survivor Evader Locator system and the Little Bird helicopter played a key part in the heroic mission that safely returned down pilots. We continue to make investments in our people and facilities to meet the evolving need of the United States and our allies. Those investments helped secure wins like the recently announced agreement to expand PAC-3 seeker production in our Huntsville factory. The framework agreement with the [ Department of War ] enables a massive increase in the supply of seekers needed to expand the protection provided by the world's most advanced air defense system. The current demand environment for defense extends into services as well, and BGS has had several notable wins, including Boeing Defense U.K.'s largest ever maintenance and support contract for the U.K.'s rotary wing enterprise, which was announced last week. Our global services team also signed the largest Landing Gear Exchange contract in Boeing's history with Singapore Airlines. That agreement will provide landing gear exchanges for more than 75 airplanes across Singapore's 737 MAX and 787 fleets. With these recent program wins and operational improvements in all of our segments, we're well on our way to fully putting the recovery behind us. So before I wrap up my prepared remarks, I want to thank all of our employees for delivering another quarter of improved performance as we continue to turn the corner. Their dedication to safety and quality, embracing our values and behaviors and continuous improvement have enabled a solid start to the year. While there's more to do in 2026, we're making measurable progress. We're restoring trust with our customers, we're increasing production rates, and we're on track to generate a full year of positive cash flow. And our commercial defense and service portfolios are well positioned to meet the market demands and restore Boeing to the iconic company we all know. So now I'll turn it over to Jay to discuss our operating results before we move on to questions. Jesus Malave: Thanks, Kelly, and good morning, everyone. As Kelly mentioned, a good start to the year and a clean quarter. Consolidated revenue was up 14% to $22.2 billion, driven by solid growth across all 3 segments. Of note, the revenue impacts from last year's Spirit acquisition and Digital Aviation Solutions divestiture largely offset each other in the quarter. Operating margin was 2%, down primarily from lower FAS/CAS pension adjustment as compared to last year, partially offset by higher segment earnings. The core loss per share of $0.20 improved from last year on segment growth and other nonoperating earnings improvements. Free cash flow was a usage of $1.5 billion in the quarter, driven by seasonal corporate expenditures in addition to planned CapEx increases as we continue to make progress on our growth investments in Saint Louis and Charleston. Free cash flow was notably better than expectations I shared last month largely driven by the solid recovery from the 737 wiring issue and favorable collection timing late in the quarter. Turning to BCA on the next page. BCA delivered 143 airplanes in the quarter. Revenue of $9.2 billion was up 13% as Stephanie and her team continuously drive quality improvements while increasing delivery volume. Operating margin of negative 6.1% improved compared to last year, primarily driven by higher delivery volume and a favorable accounting adjustment, partially offset by the dilutive impact of the Spirit AeroSystems acquisition that we highlighted last quarter. Regarding our customers in the Middle East, as Kelly noted, at this time, we have not seen any request for delivery deferrals nor have we encountered material supply chain disruptions that would impact our delivery or production rate plans. In fact, we delivered 4 airplanes as planned to customers in that region since the conflict began. That said, we will continue to monitor the situation. Importantly, backlog continued to grow and remains at an all-time high of $576 billion, including over 6,100 airplanes. Now clicking down to the commercial programs. Starting with the 737 program, where we delivered 114 airplanes in the quarter, which included the final shadow factory airplane built prior to 2023. As Kelly mentioned, we completed the rework on all 25 airplanes impacted by the wiring NOE, and we remain on track to deliver 500 airplanes this year. In the quarter, production stabilized at a rate of 42 per month, and the team drove a nearly 20% reduction in final assembly rework hours as compared to the first quarter of 2025. We continue to expect a production increase to 47 per month in Renton this summer and will benefit from buffer inventory during the transition. As we discussed previously, production rate increases above 47 per month will be enabled by activating the 737 North Line in Everett. The North Line is expected to begin operations later this year at a low rate of initial production to demonstrate conformity to the FAA that will allow operations under our current production certificate. Following completion of these initial units, we will be led by our safety and quality plan to increase rate to 52 per month when the entire production system is ready. On the 787, we delivered 15 airplanes in the quarter, in line with expectations shared last month and remain on track to deliver 90 to 100 airplanes in the year. Although seat certifications impacted deliveries in the quarter, we are working with the FAA and our customers to address these risks by partnering earlier in the development process and creating contractual off-ramps to avoid delivery delays in the future. In Charleston, the factory is performing well and continuing to make progress at stabilizing the production rate at 8 per month. In the quarter, our rework hours improved by more than 25% as compared to the first quarter of 2025. These gains in the factory come even as our stability is being paced by the supply chain, where we don't enjoy the same buffer we have on 737. We are closely working with our suppliers, including forward deploying resources to support their recovery plans. We continue to expect an increase to 10 per month later this year. Finally, on 777X, Kelly highlighted TIA 4a approval as well as progress made with GE on a solution for the engine durability issue we highlighted last quarter. During the quarter, we successfully completed flight testing associated with handling qualities, lighting and stability and control. We remain on track for first delivery in 2027 and continue to focus on managing the production system for increased rates. We also have a dedicated team performing the change incorporation statement of work for built airplanes, which will be completed over a number of years. All right. Let's shift over to BDS on the next page. BDS delivered 29 aircraft and 1 satellite in the quarter. Revenue grew 21% to $7.6 billion, primarily driven by higher volume on KC-46 Tanker, missiles and weapons and classified programs. Spirit contributed approximately $150 million of sales in the quarter. Operating margin increased 60 basis points in the quarter to 3.1% on improving operational performance. BDS booked $9 billion in orders during the quarter, including notable awards to continue E-7A Wedgetail development and additional international demand for KC-46 aircraft. Backlog grew to a record $86 billion. As I mentioned last month, I have continued my reviews of BDS and have come away impressed with the teams leading these programs. I've also generally found reasonable assumptions in our EACs. They're not without risk and many assume improvements in front of us, but the estimates have a solid basis. On many of these legacy-challenged programs, the teams have made excellent progress in retiring risk and moving these programs forward. Steve Parker and the team are building on this progress, utilizing active management and increased program management rigor to drive continued gains and improved financial stability. As Kelly has previously said, you're never done until you are done, but the team has made great progress here. As I also mentioned, a key part of our ongoing reviews of the BDS portfolio is focused on strategy and growth. It's clear to me that our defense portfolio is well positioned to capture upside from increased operational tempo and rising defense budgets among the U.S. and our allies. We see incremental growth opportunities from our missiles and weapon systems, including PAC-3, small diameter bomb and JDAMs as well as exquisite capability offered by platforms such as P-8, F-15EX and other proven solutions where we are investing to ramp up production. While we pursue additional growth, new opportunities are now subject to tighter underwriting to account for risk and our ability to deliver on our commitments. This approach, combined with continued operational improvements, support steady progress towards high single-digit operating margins as we execute against a record $86 billion backlog. Moving to Global Services on the next page. BGS continued to perform well and again delivered strong financial results in the quarter. Revenue was up 6% to $5.4 billion, primarily reflecting increased government volume. Excluding the impact of the Digital Aviation Solutions divestiture, revenue was up 13%. Operating margin of 18.1% was down from prior year, primarily related to the impact of the Digital Aviation Solutions divestiture and less favorable mix. Both commercial and government businesses delivered double-digit margins in the quarter. Also in the quarter, BGS received FAA and EASA qualification for 777-9 training devices, an important step forward in support of the airplane's entry into service next year. Chris Raymond and the BGS team remain focused on continuous improvement. For example, the business has implemented automation and AI to reduce proposal cycle time by approximately 25% year-to-date, enabling faster response times to our customers. BGS received $8 billion of orders for a book-to-bill of 1.6 in the quarter, led by a strong intake from its government business. BGS ended the quarter with record backlog now at $33 billion and remains a high-performing business focused on profitable, capital-efficient service offerings and continues to execute very well. Okay. Let's shift over to cash and debt. Cash and marketable securities ended at $20.9 billion, primarily reflecting debt repayments and free cash flow usage in the quarter. Debt balance ended at $47.2 billion, down $6.9 billion in the quarter on the paydown of maturing debt, consistent with our debt reduction plans. There are $1.4 billion of maturities left in the year. We also maintained access to credit facilities of $10 billion, all of which remain undrawn, and we remain committed to strengthening the balance sheet and supporting our investment-grade rating. Regarding our cash flow outlook, we continue to expect positive free cash flow of $1 billion to $3 billion this year, aligned with the expectations I shared last quarter. As I said previously, we benefited from order timing in the first quarter. We expect second quarter free cash flow to improve with the second half of the year turning positive. Of note, we assume the expected DOJ payment to occur in the second half of the year. Beyond 2026 and consistent with what we've discussed previously, cash flow is expected to grow primarily driven by higher commercial deliveries, steady performance improvements at BDS and continued growth at BGS. We continue to view the $10 billion free cash flow figure as very attainable with significant growth beyond that into the next decade as we execute on our record backlog and benefit from continued strong market demand. Okay. Let's sum it all up. A good start to the year as we continue to build on the momentum from 2025, and we're focused on steadily elevating our performance in 2026 to deliver on the long-term potential of this business. With that, let's open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: Congratulations on getting rates stable and looking up. I wanted to ask your thoughts on the conflict in the Middle East and potential impacts to deliveries, your commercial services and weapons businesses and free cash flow and just how we think about scenario planning if the conflict drags another 3 months, 6 months or 9 months? Robert Ortberg: Yes, Sheila, as we said in the prepared remarks, we have seen no impact so far. No customers are requesting changes in their deliveries. And as Jay said, we made deliveries in the first quarter into important customers there in the Middle East. I think the broader thing for us to watch is the overall impact of fuel prices and jet fuel price impact and whether that hits the aftermarket. As you know, we're less susceptible to aftermarket. It's a less -- a smaller part of our overall portfolio going forward. But let me come back and give you a feel for how we're exposed on OE. So 14% of our unit backlog is in the Middle East for customers. But 2/3 of that backlog delivers out in 2030 and beyond. And we have pretty good ability to resequence airplanes in the 12- to 18-month time frame. So I think we'll be okay. We'll manage through that. If someone has some issues, we'll be able to resequence their airplanes. I have received calls from airline customers letting me know that they're willing to pull forward if there's any opportunity. So I think the overall market dynamic will be okay for us in terms of OE deliveries. It's going to be very dynamic. I think we just need to watch, particularly the flight hour and the services business that's flight hour dependent. That will be the first indicator of any impact in our aftermarket. I'm encouraged with the near-term performance in our defense aftermarket. So hopefully, as I said in my remarks, we'll see some upside there, probably offset some of the downside if we see it in commercial. And we'll see the relative timing of those ups and downs. I'm not too worried about it right now. Obviously, the big question is how long does the war last. And I can't answer that. We'll just have to watch it and manage as things happen. Operator: Your next question comes from the line of Ron Epstein from Bank of America. Ronald Epstein: You both spent a fair amount of time on the call talking about the defense business. I was wondering if we could maybe dig down deeper on the defense portfolio, both in terms of new product sales and in the services business, what you're seeing there? And where are other potential areas of growth that you didn't highlight in your prepared remarks? Robert Ortberg: Yes, Ron. So I'd put it in 2 categories. One is our product lines and portfolio are very much being utilized in the current war environment. So any time you see that kind of op-tempo, we're going to see service uptick associated with servicing those platforms. And by the way, we're very proud of our platforms. We've got teams of people in the Middle East supporting our customers in very dynamic situations. So we're really proud of those folks as well. And then you look at the overall, just I'll say, the defense budget increase, and I look at our portfolio, and we're really well positioned for that. Let me give you a couple of examples of areas where I think this new defense budget is going to benefit as well. F-47, we see $5 billion in the budget for F-47. KC-46, increasing KC-46 production, $4 billion; F-15EX, $3 billion, enhanced -- the enhanced SATCOM, strategic SATCOM of $2 billion. So massive increases in weapon systems as well. And if you look at the backdrop of this, while it is funding new capability, it's really funding additional production of existing systems, which should be low risk for us. So our focus is really making sure we underwrite this growth properly with the right contract structures. We have our supply chain costs under control so that we get an opportunity here as we see increased production to actually make money on these opportunities. So that's our focus. I feel like the portfolio is well positioned. And there's no doubt that as we look at our 5-year outlook for defense, we're going to see upside from what we had planned last year. Jesus Malave: Yes, Ron, maybe just a couple of. If you look at the first quarter results, the tanker program, the classified programs as well as missiles and weapons, we expect that to continue to drive growth this year. As a reminder, we're expecting to increase our deliveries on the tanker from around 14 last year to about 19 this year. And then as you know, on the classified programs, we've got some pretty significant content there. And going back to Kelly's comments, the beauty of our portfolio is that we participate and have exposure on shorter cycle defense platforms as well as longer term. And the missiles and weapons would be what I would categorize as more shorter cycle, and we certainly see some upside over the next few years in that area. Operator: Your next question comes from the line of Myles Walton from Wolfe Research. Myles Walton: Jay, could you speak to the free cash flow profile for the rest of the year, particularly if the second quarter can get close to breakeven? And then is there any free cash flow downside risk on requests for progress payment deferrals, either from Middle East or other carriers? And is there upside free cash flow risk from the Chinese orders if those were to come to pass? Jesus Malave: Sure. Let me just take you through the profile first part of your question there, Myles. Just to reiterate the guide in terms of $1 billion to $3 billion for the year. As I mentioned during the prepared remarks, we benefited from some timing as well as the good recovery at BCA. So it's just timing in the year. We are a little bit back-end loaded, as you would expect, in the back half of the year, we'll expect to see some advances on the KC-46 program like we have seen in previous years. We'll see a little bit higher weighting towards aircraft BCA deliveries, which will come in with higher delivery payments in the back half of the year. In the second quarter specifically, somewhat similar to last year, an outflow, but in the range of, say, low hundreds of millions of dollars. So as I mentioned in my prepared remarks, an improvement from where we landed here in the first quarter, continued ramp throughout the year, and we still feel very confident in that guide. As far as variability on the upside, we had a really good start at BDS and BGS. You look at the revenue growth there, to the extent that we can continue to have strong growth, have that convert into net income and we can keep a lid on working capital, there could be some upside in those businesses. As you know, we're highly dependent on the BCA delivery profile. So that's -- those are things that we're keeping an eye on. And those -- as Kelly mentioned in his prepared remarks, that we're pretty much right on track on those. As far as experiencing any specific requests, nothing meaningful. To get back to Kelly's comments as far as Middle East customers, nothing meaningful in terms of request that would cause right now any variability to our cash flow outlook. So it's pretty much on track, and we'll monitor, obviously, throughout the rest of the year, but a very good start to the year. Operator: Your next question comes from the line of Doug Harned from Bernstein. Douglas Harned: Kelly, I wanted to go to the 737 and you stabilized production at 42 a month. But I'd like to see what you can say about the process and time line to get to 47 and 52. And I'm highlighting 52 because that had been a challenge in 2018 for Spirit. And now that you're integrating Spirit, what are your thoughts on the timing of these next 2 rate breaks? And where beyond Spirit do you see some potential supply chain challenges? Robert Ortberg: Yes. Thanks, Doug. So first of all, let me reiterate, we've done a really nice job of stabilizing at 42. That was our plan, and we've done a nice job of that. So the rate increase from 42 will be done by this summer. That's our current plan. And I feel pretty good about that. We still benefit, as you know, from high levels of inventory. So I kind of look at the rate 38 to 42 and then 42 to 47 kind of a similar rate increases. We'll go through the same process that we've gone through in the prior rate increases. When we go from 47 to 52, there's a couple of important dynamics that are a little bit different. That's where we bring in the North Line our fourth line of 737 production. We call it the North Line because it's in Everett as opposed to in Renton. We're in the process now, as we talked about in the prepared remarks, of bringing that online, the capital is all in place, the facility is ready to go, we're hiring people, we're going to bring those people through the Renton production system so that they get experience in a stable environment. And then we're going to be moving some folks from -- experienced folks from Renton up to Everett. So we've got to get that and all stabilized and also get the FAA authorization on that line. So that will be happening while we're producing here at 47 a month. And as I've also said, once we burn down inventory and we'll be burning that down at 52 and further rate increases beyond 52, that's where the supply chain needs to be more in line with our production rate. We won't have the levels of inventory that we had. And so continuing to watch the supply chain there, and we have areas that we continue to work will be a focus when we move to that next rate. So hey, let's get to from 42 to 47 here in front of us. And as we've done on this previous rate increases, just continue to work the constraints where we see them to allow us to move to the next rate. Douglas Harned: Can you say anything about Spirit on this as you integrate? Robert Ortberg: So Spirit has done fine. We're very pleased with the performance and the rate increases. We do still need to see some improvements in Spirit, but everything is tracking to our plan. And I would say the integration has gone well so far. So things are looking up with our Spirit integration. Jesus Malave: Yes, Doug, just some of the quality improvements that I mentioned on my prepared remarks have been enabled by the better quality performance that we've seen coming out of Spirit. From an integration standpoint, we have biweekly meetings with the functional teams and go through the status of those teams and everything is progressing well. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Seth Seifman: I heard the comments earlier on 787. And I'm wondering if we could dig in a little bit deeper there. First on what gives you the confidence in kind of overcoming the supply chain challenges there. It seems like the line in Charleston is doing quite well, but waiting on some suppliers, particularly with seats. And then on the financial profile of the program and bringing in Spirit, and we can see some increase in the deferred during the quarter, but how that moves from here and gets to the kind of healthy financial profile that we're looking for? And then lastly, maybe the long-term opportunity there with the new capacity that you're adding? Robert Ortberg: Okay. Seth, let me talk about production and I'll have Jay talk about the financial performance. So as you commented, we've done a good job of stabilizing as we've moved from 5 to 7 to 8 per month. A good example is, in this case, rework has improved significantly in the final assembly line, 25% improvement year-on-year. We have, as we've talked about throughout the past year, we've been struggling with getting the seat certifications complete for the new cabin configuration. So if it's a new seating configuration, typically with doors, this has been an area that we've struggled. It has less impact on our factory production because we can essentially build the airplanes, it's that we can't deliver them. And so we've got a fair number of 787s that are held up -- that are actually built that are held up now to get seat certification. So this is something we're just kind of getting the pig through the python. We've got to work to get this done. I don't see any showstoppers in these certifications, but it's just taking longer than we anticipated. In terms of the supply chain -- other supply chain performance, it's been a tough quarter in terms of engine deliveries for us. They've fallen behind a little bit. We do have a recovery plan on engines. So we've got to stay on that recovery plan to allow us to get to the next increase of 10 -- to 10 later on in the year. So it is a little bit different scenario than on 737 because we don't have the inventory levels. So we have resources forward deployed in our supply chain where we have constraints. And that's not unusual. We'll continue to do that to help the suppliers where they have issues, resolve those issues to support our rate increases. So a lot of work yet ahead. I think getting these -- some of these near-term seat certs behind us will unlock our delivery. And as Jay said in his prepared remarks, we're still -- there's no change in our forecast in terms of number of aircraft delivery in the full year. It's going to be -- I wish it was a little more linear than what it is, but we're working through those issues. Jesus Malave: As far as the financial profile and deferred production, Seth, we had a cost base extension. So we added to the block, which is a good thing at higher margin additions to the block. It will take us maybe a year or so to stabilize that and start working it back down, but all good news in terms of improving financial profile in that program. Operator: Your next question comes from the line of Peter Arment from Baird. Peter Arment: Nice way to start the year. Kelly, on the 777X, you mentioned the FAA last month cleared Boeing to continue to kind of advance the program in this fourth phase out of the total of five. Can you maybe update us on your thinking on how this current certification phase and what milestones any investors should be kind of tracking? And then just related, long term, just given the complications that you've seen on seating and everything else, any reason to think the production system here couldn't deliver at a much higher rate than what it's averaged in the last 8 years of 2.5 aircraft a month? Just trying to get a better handle on the long term, just given the program delays and kind of the wide-body replenishment cycle you guys kind of see out there. Robert Ortberg: Okay. Well, let's talk about the certification first, important. So we continue to make progress on the certification. I guess a couple of milestones. We got the TIA 4a authorization, which was not a super large package, but it was a really important package because it had deicing and we want to get that deicing done while there's still ice available in Alaska. So that was a really good important one for us to get so that we don't have to search for weather. The next one will be TIA 4b. We're expecting that very soon, and that's a pretty large package. So I think watch for that milestone, achieving 4b will be important for us to continue the flight test. As I've talked about, we had the engine issue that we identified. GE has got a fix that they're working for that. And so that's not impacting our flight test program now. We're having to do periodic inspection, but we're able to incorporate that and keep the airplanes flying. So we just have a lot of work yet to do here with this program. This is going to be a big focus area for us in the balance of the year. GE is also working the -- with this mid-seal issue that we've identified, it will require an update to the engines before delivery. So to your production point, we're still working through the industrial plan to get those -- to get all the engines upgraded to support delivery. So no real change in our forecast. And then the second part of this question was around capacity. Peter Arment: Just long term on the production system, just the ability to deliver at a higher cadence than you currently have been running. That's all. Robert Ortberg: Look, we're targeting 5 a month. And I think that's a reasonable -- with the overall market demand and our capacity, I think that's a reasonable goal and where we expect to be. Operator: Your next question comes from the line of Noah Poponak from Goldman Sachs. Noah Poponak: Jay, you made an interesting comment on longer-term free cash flow that you think you could have significant growth beyond the 10. I wondered if you would just talk about that a little more. I mean, I think we hear skeptics say, can they get to the 10 and then the 10 is peak because there has to be a downturn at some point or there has to be new aircraft investment at some point. I think people who are more bullish would say the production rates are still below demand, and there's some pieces in there that are moneymaking eventually that are still breakeven in the 10. The 787 math is interesting. I'd just be curious to hear you talk about what gives you the confidence to make that statement and what some of the key pieces are? Jesus Malave: Sure. Again, Noah, first things first, let's get to 10. That's a bogey that's been out there for quite some time. And so we got to first get to that before we can go beyond it. But again, the building blocks, whether it's 10 or even beyond that, are pretty much the same. A lot of it depends on the BCA recovery. And first things first, as Kelly mentioned during his prepared remarks, is achieving certifications on the 737 variants as well as the 777X program. And so we're on track to do that. That helps us enable the higher production rates. And Kelly just talked about what our path is for rate, just as an example, on the MAX from 47 into 52. And so we have -- that is a significant enabler to these types of cash flows we're talking about. When you think about that for a second, these delivery profiles, in the first -- or in January, on the fourth quarter call, I talked about these drags that we're bringing our cash flow down and weighing it down. What the increased production rates enable us to do is burn that off. At the same time, you get the compounding benefit of stepping into the higher-priced backlog. And a third compounding element to that is with the higher volumes, you're also going to see cost reduction through absorption and productivity. So all those elements together are really driven by our ability and the timing of which we drive to these higher production rates. Beyond BCA, you've got BDS recovery, and they've done a good job. You see here in the quarter, they delivered 3.1% on the margin. So we're on the right track in our march towards high single digit. The way I look at that business, I spent a fair amount of time talking about what I've seen thus far. And to me, I kind of simplify it into 3 elements, which I refer to as the 3 Ps: performance, process and price discipline. And I think Steve Parker and his team are employing that exactly right now as they march up to this high single digit. And then the last piece of it is BGS and their continued march up. They're performing exceptionally well through any environment and continue to drive growth there. So those are the 3. It's a question of timing, whether it's 10 and beyond that. But this is all underpinned by a nearly $700 billion backlog that Kelly mentioned. We talked about kind of perturbations that can occur, but it's such a strong backlog that we have the flexibility to manage these rates and still deliver on them. So it's up to us as a management team, obviously, to execute, but it's all sitting there in front of us, and we're confident that we can deliver that. Noah Poponak: Do you see 1Q as the low watermark for the BDS margin for the year? Jesus Malave: It's in that ballpark. I think for the year, it could -- yes, I mean, it could be a little bit better, kind of think about 3.5% for the year. So I would slight better from here on out. Operator: Your next question comes from the line of John Godyn from Citi. John Godyn: I wanted to maybe just ask about BCA margins, the trajectory from here. We've gotten a lot of interesting commentary on the call on 787, 737, delivery production outlook, certification trends. But intra-quarter, it felt like there was a couple of chances where you guys wanted to just level set people on BCA margins. So I wanted to just ask a question where perhaps we could kind of get it in one place, BCA margins this year, next year, kind of how do you see the play-by-play evolution with so much going on with the 737 and the 787. Jesus Malave: Yes. Thanks, John. Let me just baseline you, again, in the quarter, BCA had 6.1% margins, a little bit better than what I talked about in March, and that was largely due to this onetime benefit that we received. Having said that, we still expect progressive improvement sequentially throughout the rest of the year. And that will, again, go carry over into next year where we expect the margins to turn positive mid next year. So I think they're on the right track. That is basically dependent on the delivery volumes and us continue to increase deliveries. It's also dependent on cost base extensions. And again, we have such a strong backlog that's well priced, high confidence there. And so we've got, I think, over this time period, over this next 18 months or less, a solid path to get back to positive booking margins on that program. Operator: Your next question comes from the line of David Strauss from Wells Fargo. David Strauss: Kelly, 2 quick questions. First, I guess, on Spirit, I think, Jay, you've talked about $1 billion kind of cash drag from Spirit this year. How do you see that progressing into '27? That's the first one. And then 777X change incorporation, I hear change incorporation. It sounds a bit scary based on past history when we hear change incorporation. What exactly is involved in terms of change incorporation? And how many aircraft kind of built aircraft are we potentially looking at where there -- where change incorporation is going to be necessary? Robert Ortberg: Let me start with the change incorp. So we've -- what change incorp is, is basically for the airplanes that we have built to incorporate all the changes that have happened since they've been built. So things that result from the certification program, things that happen as a result of productivity improvements or process improvements. So we go back in and we incorporate all those changes before we make the delivery. So it is a pretty massive activity that we have underway. We've got a dedicated team within BCA focused specifically on the change incorporation of the airplane. So we've got roughly 30 777s that will go through this change incorp process over several years. Jesus Malave: On your question on Spirit, this year, we talked about $1 billion of negative cash from Spirit, partly due to just operating performance and the other part being related to CapEx. As we head into next year, probably similar types. And then beyond next year, we'll start to see that improve with the benefit of performance and productivity as well as synergy capture. So that's the way to think about it, David. David Strauss: Okay. And Kelly, are there any major -- in terms of that change incorp, is it structural software? Kind of any color on kind of the big things that need to be done? Robert Ortberg: Yes. The answer to that is yes. And actually, it depends on when the airplane was built. The older the airplane, the more change incorporation and the more structural related changes that are needed, and they'll take longer. The newer the airplane, the more it's likely more minor upgrades. And each -- actually, each airplane has a different change of corp work scope. So that's what the team is doing right now is going through defining the statement of work. We're actually going to bring all those airplanes down to a common configuration level and then incorporate the changes. We think that's going to be the most efficient way. Now this isn't new, David. This is something we've always planned. It's a part of the production process. Unfortunately, when you build the airplanes early to get all the learning, but then in order to make the final delivery, we do have to bring them all up to the latest configuration. So it's in our EAC, it's in our operating plan, and we're in the early stages of that change of corp effort. Eric Hill: Rob, we have time for one more analyst question. Operator: Your final question comes from the line of Gautam Khanna from TD Cowen. Gautam Khanna: I wanted to just -- you touched a little bit about demand and no erosion in demand yet. I'm curious if you could just talk about the big order campaigns you're pursuing on the BCA side. I know we talked a little bit about the China order, but how big could that be? When could it happen? And what are your expectations for kind of airplane orders this year? Robert Ortberg: Well, let me specifically address the China order. I think that's 100% dependent on the U.S.-China negotiations and relations. As you know, there's a big summit coming up between Trump and Xi. I'm highly confident that, that will result if there's an agreement at the country level, as I said in my comments, I'm highly confident that, that will include some aircraft orders. President Trump has been very focused on supporting us in international campaigns, and he's been very successful in doing that. So I think that's a meaningful opportunity for us. I'm not going to give you the number of airplanes, but it's a big number. Operator: And that completes the Boeing Company's First Quarter 2026 Earnings Conference Call. Thank you for joining.
Operator: Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the First Quarter 2026. My name is Regina, and I will be your conference facilitator today. [Operator Instructions] This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Kristina Edwards, Managing Director of Investor Relations. Please go ahead. Kristina Munoz: Thanks, Regina. Good morning, everyone, and welcome to United's First Quarter 2026 Earnings Conference Call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations and are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call, and historical operational metrics will exclude pandemic years. Please refer to the related definitions and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures at the end of our earnings release. Joining us today to discuss our results and outlook are Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Mike Leskinen. We also have other members of the executive team on the line available for Q&A. And now I'd like to flip the call over to Scott. Scott Kirby: Thanks, Kristina, and good morning, everyone. I'd like to congratulate the United team on a strong first quarter. We're building the #1 brand loyal airline in the world, and our financial results are indicative of the structural, permanent and irreversible changes that have happened at United and across the industry. Our first quarter results are just the latest proof point in our strategy to build a decommoditized brand loyal airline that's setting a new standard for what is possible for customers in air travel. We've proven that the winning strategy is to make travel easier and better for all customers, and while all of us at United are deservedly proud of the brand we've built, we aspire to go farther, and we want to set a new higher standard by revolutionizing air travel for our customers. More immediately, of course, we're managing through the impact of jet fuel prices that have doubled. Industry stress events seem to happen every 5 to 6 years. While we didn't know exactly what or when it would be, we knew something would happen. The best thing we could do was to prepare United in advance. To that end, we have, one, tripled our cash balance; two, moved to the top of the industry and profit margins; and three, strengthened our balance sheet. In fact, we ended 2025 with our highest credit rating in almost three decades. Advanced preparation allows us to stay focused on the long term while making near-term tactical adjustments to account for elevated fuel prices. At the moment, our goal is to do whatever it takes to recover 100% of the increase in jet fuel prices as quickly as possible and to achieve double-digit pretax margins next year. Oil is incredibly volatile right now, but because we think we're moving towards 100% pass-through, it allows us to have confidence in both our near- and medium-term earnings trajectory enough so that we can still provide guidance. For United, here's how we're thinking about our goals to get to 100% pass-through and achieve double-digit margins in 2027. One, to recover 100% of fuel costs, yields need to increase by about 15% to 20%, and we are assuming that fuel may remain higher for longer. Two, as yields increase, there will be an elasticity effect on demand that we're estimating will lead to less overall demand. While we haven't actually seen that decline yet, [ ECON 101 ] makes us believe it's coming. Three, less demand means that we should be supplying fewer seats to the market. For United, that means we're targeting capacity to be flat to up 2% for 3Q and 4Q on a year-over-year basis. It simply doesn't make sense to fly marginal flights that will lose cash in a higher fuel price environment. Mike will provide more details behind our 2026 outlook, but our view for 2027 is that we're targeting a pretax margin of at least 10%. We obviously have some time to see what happens, but if jet fuel remains elevated compared to our pre-war levels as we think it might, we'd once again expect to require less capacity growth in 2027 than we were planning just two months ago. Realistically, there probably isn't enough time to make up 100% of the fuel price increase this year. But I feel very good about 100% recovery and getting to double-digit margins in 2027. And because we've positioned United for success, we can make tactical adjustments to manage what we need to in the short term while also staying focused on our long-term plan. I'm also more convinced than ever that our decade-long strategy to build a great brand loyal airline that is obsessively focused on making travel easier and better for all customers is the winning strategy. Finally, there's been a lot of press coverage regarding consolidation rumors. We've not commented specifically on those reports and aren't going to start today. So you can ask me about it if you'd like, but you won't be getting anything new from me on it today. And with that, I'll hand it over to Brett. Brett Hart: Thank you, Scott, and good morning. During the first quarter of 2026, United carried a record number of passengers while also navigating a challenging operating environment. The quarter experienced elevated weather events and geopolitical disruptions, but our teams remain laser-focused on recovering from these events swiftly and delivering top-tier reliability for our customers. In the first quarter, we continued our streak of ranking first in on-time departures among the 8 largest U.S. carriers. During the quarter, United's per seat cancellation rate averaged 44% lower than the next two largest U.S. carriers. Solid operational performance is the backbone of the airline and helped drive our highest first quarter on-time Net Promoter Score since the pandemic. During the quarter, customers increasingly engaged with our self-service tools, allowing us to drive more personalization throughout their journey. Day of app usage reached a record 86%, supported by continued mobile enhancements such as improved bag tracking and live TSA wait times. Additionally, I would also like to take a moment to thank the TSA employees, who showed up to keep us safe during the government shutdown. We have also improved our disruption communications by embedding live maps directly within customer messages. These tools and redesign help us recover faster and make it easier for customers to navigate disruptions. Another reason United remains differentiated and why we continue to build brand loyalty. Late last week, the FAA issued an order regarding the summer 2026 schedule at Chicago O'Hare. We are currently reviewing the FAA order and we'll share additional information, including any next steps as soon as our review is complete. We are pleased to reach a tentative agreement during the quarter with our flight attendants represented by the Association of Flight Attendants. This agreement includes well-deserved industry-leading wages and other meaningful improvements for our flight attendants who play an essential role in caring for our customers and representing United every day. Voting concludes on May 12. On April 6, United celebrated its 100th birthday, a meaningful milestone for our airline, the generations of employees who have built it and our loyal customers who continue to choose to fly the friendly skies on United. I want to thank all of our employees for the care and commitment they bring each day to our customers and to one another. As we recognize this milestone, we remain firmly focused on the future and on building an even better airline through continued investment in our product, our people, our network and our operation. With that, I will hand it over to Andrew to discuss the revenue environment and our other industry-leading commercial initiatives. Andrew Nocella: Thanks, Brett. Consolidated total operating revenue in Q1 increased 10.6% year-over-year to a record first quarter of $14.6 billion. TRASM increased by 6.9% year-over-year. All regions had positive PRASM in the quarter. I'd like to -- I'd describe the start of the year as strong for all customer types and all regions. For January and February, prior to any impact from the war, we saw ticketing for business revenues up approximately 12%, while leisure was up a healthy 6%. Looking back at Q4, business ticketed revenues were up 6% and leisure was up only 2% year-over-year, creating a nice sequential increase in the first 2/3 of the quarter. Premium demand remains strong with Q1 premium revenues up 13.6% on 4.4% increase in capacity. Premium RASMs were up 8.9% year-over-year, leading main cabin by 4 points. It is clear that consumers continue to seek elevated experiences. Business demand was strong in Q1 with revenues up 14% year-over-year and strength across all verticals. Headlines about TSA wait times did suppress demand between March 23 and April 1, but they have fully recovered since. Our loyalty business continued to outperform and total loyalty revenue was up 13% in the quarter. Acquisitions and spend were both very healthy and supported by updates we made to the MileagePlus program. Late in the first quarter, we implemented 5 broadly successful price increases, along with an increase in baggage fees that began to offset the increase in the price of jet fuel. Price increases in response to the increase in jet fuel have been significant and across the board. However, global long-haul increases have been a bit stronger than domestic. In January and February, United's selling ticket yields were up 4% year-over-year. In the first half of March, that increased to 12% and further increased to 18% for the second half of March. So far in April, this trend has continued in the last week, sell-in yields for all future travel are now up 20% year-over-year. As you would expect, we sold 23% of our Q2 and 8% of our Q3 capacity at lower price points prior to the rise in jet fuel costs. We remain confident in our ability to fully recapture the fuel cost increases over time. And in 2Q, we expect to recover between 40% and 50% of the current increase. In response to higher fuel cost environment, we've begun to adjust capacity downward by approximately 5 points throughout the rest of the year. We now expect Q3 and Q4 capacity to be flat to up approximately 2%. Our adjustments removed marginal capacity on off-peak days and flight times such as red eyes, which we believe will fuel our recovery of fuel price increases in the second half of 2026. Our current sell-in schedule is up just over 4% in the summer, but those capacity adjustments will be loaded in the next week or so to get the capacity out there selling appropriately. On our January call, I hinted about new commercial initiatives that we believe will drive brand loyalty, choice and increase revenue for United over the medium and long term. We have now formally announced these initiatives, and I will summarize them today for you. To be clear, these changes have been in the works for years and they were made across all aircraft, all cabins and in many different areas of the commercial business. First and maybe of greatest importance, we've made the largest change in a decade to how we display and sell products on united.com and in our app. Internally, we described this change as nested selling. Nested selling took years to research, program and test and is now active in our digital channels. We can now properly merchandise our grown product lineup. We have already seen large increases in upselling because of these website changes. We simply were unable to show all of the products we had for sale easily on the old website display. Second, as part of the website evolution, we've introduced base fares in our premium cabins, Base fares come with less checked luggage, no early seat assignments and different club access features. To be clear, everyone on a base fare will be able to secure a seat assignment at any point via an ancillary purchase or for free during the check-in window. These base fares allow consumers more control over their experience by choosing what services they want to include on their journey and were a tremendous success in the economy cabin with basic economy. Third, we announced that 50 A321 Coastliners are planned to join our fleet. With the Coastliner, we can extend our award-winning Polaris brand for the first time on all United flights from New York to Los Angeles and San Francisco. Fourth, we unveiled United's new Airbus A321 XLR onboard products. These products on each XLR are consistent with the Coastliner. However, we've modified certain aspects of each XLR for the unique needs of an 8-hour Atlantic Crossing versus a transcontinental flight, including the larger snack bar, more lavatories, more galley space and less main cabin seating density. Combined between the Coastliner and the XLR, we expect to have a fleet of 100 A321s equipped with 20 lay flat beds and 12 premium plus seats, a commitment to this unique narrow-body platform unmatched by others. Premium plus seats will be for the first time deployed on domestic routes at scale. Fifth, to be a premium brand, we needed to have a consistent product no matter what plane you fly on or where you're going. United redefined service to smaller communities a few years back with the CRJ550, and we've now extended that idea into what we're calling the CRJ450. Sixth, we announced Relax Row, our latest product innovation for young families on global routes a few weeks ago. Relax Row is a main cabin product that transforms three seats into a flat surface and includes bedding and pillows. And seventh, we said we would change MileagePlus to accelerate United's earn-in, and we have. Members will now be awarded more miles when they fly if they hold our co-branded credit card versus members who do not hold the card. We also announced discounts for redemption only available to credit card holders. All these actions will increase the value of being a MileagePlus member and holding our credit card. While we continue to work under a long-term co-brand contract with our partners from Chase, we're making changes to what we can control today. In due course, we expect to have a new contract optimized for all stakeholders to the current market dynamics. Turning to our fleet. We have taken delivery of four high premium Boeing 787-9s with up to 16 more expected to be added in 2026 and a total of 33 planned over the next two years. The interior of our new 787-9 has something for everyone, and we believe further strengthens our premium brand. All of our commercial initiatives announced over the last few weeks have been years in the making, tested with countless customers and employee focus groups and are ready for prime time. Our launch plan is bold, quick and designed to increase customer choice, revenues and brand loyal customers. These new initiatives plus previous initiatives like Signature Interiors and Starlink are additions expected to be largely rolled out in two years. The future is now. United is now on final approach towards our product and premium vision that it completely transformed United versus pre-pandemic for all customers. I could not be more proud of the United team that has spent countless years and hours planning these product changes. These are the type of changes and product improvements across all cabins and for all customers that we believe genuinely differentiate United. We will continue to watch the demand and pricing environment very carefully in the coming weeks and quarter to refine as necessary our approach to this rapidly changing environment. With that, I'll hand it over to Mike to discuss our results and our outlook. Mike? Michael Leskinen: Thanks, Andrew. The first quarter has been a reminder that successfully managing the airline for the long term requires being prepared for short-term shocks. We've accomplished that at United by earning brand loyal customers. That strategy has led to margins at the top end of our industry and the best balance sheet we've had in almost 30 years. The financial strength that's created reinforces our ability to make the right long-term decisions. The latest challenge in our industry is the massive run-up in fuel prices created by the conflict in Iran. Fuel prices remain volatile, and we're monitoring the situation closely. We delivered resilient results with first quarter earnings per share of $1.19 within our initial guidance range of $1 to $1.50 and up 31% year-over-year, even with a $340 million higher fuel bill in the quarter. Our pretax margin was 3.4%, a 40 basis point expansion versus the first quarter of last year. Demand for the United product was already robust going into this heightened fuel environment. We believe we have the ability to pass on the increase in fuel due in large part to our brand loyal customers, continued demand strength and preference to fly United even at higher fares. In this elevated fuel environment, we began to swiftly adjust capacity in addition to pulling our Tel Aviv and Dubai flights, which together were 1.5 points of our capacity. These close-in cancellations from low CASM markets, along with significant storm-related capacity reductions throughout the quarter, pressured our unit costs. And as a result, our CASM-ex for the first quarter was up 5.9% year-over-year. As discussed, we are also proactively removing about 5 points of capacity for the rest of the year that we don't believe can cover the elevated cost of fuel. We expect capacity in the back half of the year to be flat to up 2%, several points lower than our original plan. That will continue to pressure our CASM-ex, but we expect it will improve profitability and cash flow for the remainder of the year. This is precisely why we don't manage to CASM-ex but to long-term profits and cash flow. Looking ahead, we expect second quarter EPS to be between $1 and $2, anchored by an all-in fuel average price of approximately $4.30 per gallon. For the full year, we are providing an updated and widened guidance range to encompass multiple scenarios. As we've experienced over the last two months, the world can change quickly, but in both higher and lower fuel price scenarios, we expect to recapture 40% to 50% of the increased fuel cost in the second quarter, 70% to 80% in the third quarter and 85% to 100% by the fourth quarter. We expect to deliver full year 2026 EPS in the $7 to $11 range. The demand environment to date remains strong, and we expect will support a double-digit increase in RASM in the second quarter and for the full year. If fuel prices remain on a downward trend, we expect to be in the upper half of the guidance ranges. And if fuel reescalates, we would expect to be in the lower half of the guidance ranges. With that said, United remains in a strong financial position. Our resilience in a high fuel price environment as well as our relative position in the industry provides further confidence in our long-term target of achieving double-digit pretax margins as soon as next year. Our proactive approach to managing the network in this environment is helping us achieve this outcome. Turning to the balance sheet. We continue to march towards our goal of being investment grade. In the quarter, we took actions to make further progress towards this goal and paid down more than $3.1 billion in debt, unencumbering more assets by accelerating our repayment of $2 billion of our notes that were secured by our slots, gates and routes while also prepaying $400 million of near-term maturity or higher cost aircraft debt. Additionally, the first quarter marked United's return to the unsecured market as we raised $2 billion across two unsecured bonds, our first unsecured issuance since 2019. The 5-year bonds priced at [indiscernible], while the 3-year bonds came in under 5% at [indiscernible]. We successfully reset the credit curve for United, compressing the gap in our credit spreads with investment-grade peers to historically low levels. This was the first high-yield bond issued with a coupon below 5% since Ford did it 4 years ago. Our execution exceeded our initial expectations as the market responded with incredible demand. This is the strongest evidence yet that the buy side appreciates that we're knocking on the door of investment grade. In the first quarter, we generated $2.9 billion in free cash flow. And while our free cash conversion in the near term will be pressured as fuel prices remain elevated, we remain committed to generating durable and growing free cash flow. To wrap up, our first quarter performance remained resilient. We are managing the business with the expectation that jet fuel remains elevated in the medium term. We're nimbly adjusting the network and cutting capacity that doesn't cover fuel costs, all while continuing to invest in our people and our hard product. As we look to the future, United is positioned to deliver stable double-digit pretax margins, strong free cash conversion and strong EPS growth on the other side of it. I'll now turn it to Kristina to kick off the Q&A. Kristina Munoz: Thanks, Mike. We will now take questions from the analyst community. [Operator Instructions] Regina, please describe the procedure to ask a question. Operator: [Operator Instructions] Our first question will come from the line of Jamie Baker with JPMorgan. Jamie Baker: So Scott, the CNBC interview where you articulated the idea of a larger brand that would capture passenger flows that are currently flying foreign competitors. It sounds like this is an idea that's still under development at United. But I'm curious, could you envision a world where United might operate its own hub in Europe the way that Pan Am once did? And second, do your existing partnerships with Star Alliance members, do those relationships factor in at all to your thinking in this regard? I mean, I think the idea of capturing foreign flows is fascinating. I'm just trying to think through how you might get there and maybe consolidation is the only way. Scott Kirby: Well, thanks, Jamie. I thought you were going to get through that without saying the C word. You almost. But first, I think it's extremely unlikely that we'll open a foreign hub anywhere in the [ foreign. ] Our Star Alliance partnerships are great. They enable global reach and breadth. They enable us to fly to lot -- give our customers the ability to fly to lots of cities around the globe that are never going to be big enough for United Airlines on our own to fly to and use frequent flyer miles to go to those kinds of places. And so those are all great. And really, everything that I've said today are -- I said on CNBC and Bloomberg this morning are all things that I've said in the past, I know people are now viewing it in a different light because of the rumors that came out last week. But everything that I said are things that I have said in the past. And it really comes from -- we've had this vision to build a great brand loyal airline, and it just worked incredibly well. Like you look at our first quarter results like with this kind of increase in fuel prices to deliver those kind of results to be able to look through to the full year with fuel prices doubling and still have reasonable confidence in $7 to $11 of earnings and stay focused on the long term. It's just -- it is dramatically different here at United than it was in the past. In the past, this would have been furloughing and deferring aircraft orders and cost-cutting exercises and just all kinds of stuff to try to manage through the near-term noise. And it's dramatically different. And we've won by winning customers in all classes of service, by the way. We invest nose to tail. Like most of our investments apply to all customers, Starlink, seatback entertainment and every seat, WiFi, the best app in the world. They apply to every single customer on the airplane. And because that strategy has worked, I thought it would work, but it's worked even better than I thought. And you can see in our financial results, you can see it in the market share data and in all of our hubs where we had big competitors, same things happened everywhere. It's not unique to competing with any one airline. It's happened everywhere. You can see it in the data. And it's worked even better than I thought, which -- because it's worked even better than I thought it would, it allows us to raise the bar on ourselves and aspire to something even bigger. And I think there is this big global trade deficit in the U.S. We compete with some really good airlines in the Middle East and Asia, and they have some advantages that we don't have. And like I actually haven't said what it takes to do it, and I don't even know the answer. Anything that it might be an answer comes with complications, and there's no certainty that any of them get there on their own. But it's an aspiration that we have at United. I've sort of talked about it and hinted at it at least in the past. It is an aspiration that I think United uniquely is in a position to take a run at. Dream big. That's the way you accomplish big things. Jamie Baker: Okay. And for my quasi-related follow-up, it's on the tape that the administration is readying a $500 million rescue package for Spirit. I've been with you for the last couple of years in terms of permanent and irreversible structural change. But how does the industry continue to evolve if the government chooses to prop up failing businesses whose failures have nothing to do with fuel? Scott Kirby: Yes. Well, first, I don't know what's going to happen there. And I think that we're proving right now that well-run airlines like United Airlines can even be profitable and certainly don't need bailouts in a time like this. And to your point, Spirit was -- I feel bad for the people of Spirit, but it's been pretty obvious that Spirit's business model was fundamentally flawed and the airline was not going to be able to make it or ever cover their cash operating costs. So I hope that doesn't happen. But if it does, we're going to keep focused on winning brand loyal airlines like -- this is brand loyal customers. For us, I don't think that this is nearly as big a deal as for others that are in the more commoditized space. If I was working at one of the airlines that depended on more commoditized travel, I'd be irate probably about this. But for us, like I think we've so distanced ourselves from the rest of the industry that I [indiscernible] policy. But I don't think it's going to have -- whether Spirit fails or keeps flying, I don't think it has much effect on United one way or another, to be honest. Operator: Our next question will come from the line of Conor Cunningham with Melius Research. Conor Cunningham: I'm pretty happy that I don't need to ask the Spirit question. In a world where fuel remains elevated for a long period of time, just curious on how that changes your management style of a hub or just like your general view on profitability to the overall system. I assume you're refreshing that analysis for yourself all the time. Are you doing that for your competitors as well as you look for opportunities more broadly? Andrew Nocella: Yes. I think the answer is affirmative on all the above. We look at this daily, weekly, quarterly, monthly, you name it. As fuel prices go higher, the question is how will demand react. And at this point, we can tell you that the price increases are going well and demand is hanging in there really strong. What we've done is proactively canceled flights, particularly on off-peak days and off-peak times, expecting that there could be some demand weakness in those channels. We'll see. So we think we're ahead of the curve here, and we'll continue to watch it and monitor it. But so far, so good, and demand is hanging in. Conor Cunningham: Perfect. And then maybe just on the demand destruction commentary a little bit. I'm trying to unpack it a little bit because in the past, you've talked about demand being somewhat inelastic to price. And I realize you're not seeing it fall off now, but there's a lot of speculation that may happen. So as you run your scenarios, like can you just talk a little bit about like how you expect premium, maybe the business traveler to change? Or I assume that the demand destruction really comes from the leisure side of the equation. So if you could just talk about how you -- how the scenarios kind of play out within your 2026 guidance. Andrew Nocella: I think we're a bit in uncharted territory. I think we can tell you right now that all types of customers remain particularly strong. Like just in the last week or so, our yields are now up 20% year-over-year. But even more importantly, the business part of our business, business traffic is over the last two weeks, up 25%, business revenue up 25%. And that's accelerated from up 16% in quarter one and 9% late last year. So these price points are being absorbed and passed through and volumes are increasing. And for United, you'll recall, we had the unique headwind last year related to [ Newark, ] which we're going to lap in about 10 days, I believe. So it will create easier comps for at least United and maybe harder comps for others. But the numbers look really fantastic over the last few weeks. Now we'll have to keep watching it, particularly as summer ends. And like in order to maintain these type yields at United, I felt like we needed less capacity on Tuesdays, Wednesdays and Saturdays and off-peak times, and we've done that. But look, business traffic is strong. Leisure traffic is bouncing in the mid-single digits right now, which I think I'm happy with. And so we'll continue to watch it. It is uncharted territory given the massive amount of changes we've done, but we've had 5 broadly successful price increases. And right now, we are passing on yields that are up 20% year-over-year. Michael Leskinen: Conor, this is Mike. I just want to pile on because you asked about the guidance policy. We've long had a guidance policy of building in an act of God into the guidance. And so we -- what you're hearing from Andrew, what you're hearing from Scott, there's nothing in our bookings that suggests there's demand destruction. But I believe it's prudent to be prepared for that. But we are not seeing it. We're hopeful that we won't see it. The economy seems robust. The stock market is indicating the economy is robust. And it may be that, that is an act of God we did not need to be prepared for. But that is our policy, and we need to be prepared for lots of scenarios. Operator: Our next question will come from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Just on fuel, it appears -- the debate appears to be moving from fuel inflation to fuel availability. Just trying to get a sense of what kind of visibility you guys might have, especially out in Asia or Europe regarding potential fuel shortages and what the plan B might be in that case? Michael Leskinen: Ravi, it's a great question. We've got really good visibility for 4 or 5 weeks. And you are right to say that this issue is centered on Europe and Asia. It's much less of an issue in the U.S. We don't see a lack of availability being an issue at all in the U.S. It's a price issue. However, even in Europe and Asia, as we sit here today, we think it is a price issue, not an availability issue. We think that as prices rise, and you're seeing the price of jet rise much more than the price of Brent as crack spreads widen out. And so we think that price is going to be a rationing function. That means there will not be spot outages, but we're watching it closely. The longer the strait remains closed, the more that is a risk, and it is of risk in the regions you noted, Asia and Europe, not so much the U.S. Ravi Shanker: Great. That's very helpful color, Mike. And maybe as a quick follow-up, Scott, your first response, you said that you compete with some really good airlines in the Middle East. Obviously, they're having a little bit of an issue right now. Do you see any structural share gain opportunities in transatlantic or even longer haul from some of those challenges? Or vice versa, do you expect them to be aggressive when the situation settles down? Scott Kirby: I think it's temporary. And I think you look at like what Dubai, not just Emirates, but Dubai, City State of Dubai have accomplished is remarkable and impressive. And if I had to make a bet, I'd bet on Dubai. I think it's going to come back fully. It won't come back immediately. It's temporary, but we'll come back fully. Operator: Our next question comes from the line of Scott Group with Wolfe Research. Scott Group: So Scott, maybe this is a naive question, but why does the industry need a crisis to start pushing through such higher yields? Why can't we do it more sustainably? And then maybe just I'll lump it on to like one question. When I take your 10% pretax margin for next year, it sort of gets you to roughly $18 of earnings. I know you don't want to get into specifics, but just at a high level, as fuel hopefully starts to normalize lower, do you assume you hold on to this higher yield? Or do we have to give some of that back? Scott Kirby: So I will actually answer that first question. Maybe I'll try the second one. I've watched this for at least 25 years now and have come to the conclusion that -- I guess I'll start with the conclusion. Every airline CEO should have to have spent two years at a reasonably senior position in revenue management, understand it. And it's core, most of them haven't. That's the reason it's harder to get fares up. And I think what happens at airlines is the math geeks that are really smart that run revenue management. I'm looking at one of them in the room, sorry to call you geek, Dave, he's awesome. But I'm one of them, too, know that air travel demand is inelastic and that there's room to price more appropriately for our cost of capital and to return our cost of capital. But the people in marketing and government affairs are better at telling the CEO, like that's a bad message. And so they're much better communicators to CEOs. And so the pressure internally in the organization is really hard to raise fares. I mean it's even crazy right now. A couple of airlines that are raising fares like crazy and then they run a fare sale every week. Like just the marketing team disconnected from the revenue management team and the marketing team are better marketers. And so they tend to win is really what happens. And so you see it in a crisis. And by the way, like another like sure bet -- almost sure bet is in late October, November every year, there's going to be fare increases. And I eventually figured this out 20, 25 years ago that in October, the teams finished the budget and they rolled up to the CEO and the CFO who pound the table and say that's an unacceptable result. And they say, go raise fares, which they do. But it takes -- that's not exactly a crisis, but it takes something like that. And it's goofy to me that that's the way it happens. It's nonsensical. But I actually think that's the reason that it happens, and I thought that for a long time, and a crisis caused it to go up more. Now as to the question of does this hold next year? I think actually that this -- a situation like this at least has the potential to be different and for pricing to hold more. First, like as I said earlier, I think -- or I said somewhere today, I forget where I've talked, that airfares in real terms are down 27%, 2025 versus pre-pandemic. And that had put a bunch of airlines either losing a lot of money or sort of breakeven is really kind of only a couple of airlines returning their cost of capital. And everyone has to eventually return your cost of capital. And so I think it is more likely than not this time. And certainly, the longer this lasts, the higher the probability goes that the pricing increases hold. And we probably won't hold 100% if we normalize as I told the team earlier today, and it's just my guess that if things went back to mid-February normal, I think we get -- keep 20% of the price increase next year. And I think that's going to move towards 80%. And every day, it's ticking up longer as this goes on. So we're not going to give guidance for next year, but I do think that we'll be double-digit margins next year. And your analysis is not unreasonable. Operator: Our next question will come from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Scott, I'm wondering if you could elaborate on winning brand loyal share and specifically as it equates to your Chicago O'Hare hub, especially now that there's a proposed FAA summer cap on operations there. I guess, A, how are you faring versus your competitor? And then, B, how do you anticipate complying with that? Scott Kirby: So I'm answering more questions today than I like, but I'll do it. In Chicago, we're still reviewing the order, but it does appear that we're not going to get to grow as much as we and our customers would like. But the real point is one you make, like we've won brand loyal share here in Chicago, and it's never been about the number of flights or the number of gates. Number of gates and flights were the output of what was happening with brand loyal customers. And we have by far the best technology. We have by far the best service, the best reliability, by far the best product. And customers have overwhelmingly voted -- not -- this isn't unique to Chicago, by the way. This has happened in all of our hubs. Customers in all of our hubs have voted overwhelmingly for United. We got three big hubs where we have three different big competitors. Each of which we've won about 20 points of market share. And here in Chicago, we've actually won 38 points of market share with business travelers. So customers care about quality. Quality really matters. And we give great value to all customers and so the brand loyal customers have switched. And absolutely nothing about that changes here in Chicago. But it does look like the FAA is going to not let us grow as much as we and our customers would have liked. And I wish we could grow more, but we can't. We've got other places we can grow, and I look forward to someday being able to grow more here. But nothing changes about the sort of structure here in Chicago and the decade that we've spent winning brand loyal customers by creating a great airline for them. Operator: Our next question will come from the line of Andrew Didora with Bank of America. Andrew Didora: Maybe changing gears a little bit, throw this one out for Mike. Just diving into cost a little bit more on the maintenance side. Just trying to think about how this kind of trends. I know it can be lumpy throughout the year, but particularly as it trends as you cut 5 points of capacity throughout the rest of the year. I would think you get some leverage on the maintenance side? Or am I not thinking about that the right way? And just from a long-term kind of maintenance cost perspective, is this something we should think about growing maybe a couple of points more than your capacity growth? Just curious on that line item. Michael Leskinen: Thanks, Andrew, for the question. And I'll make a few points. Firstly, you should broadly expect our CASM-ex trends to move inversely with the amount of capacity that we take out. I think that's maybe obvious, but that's what happened in Q1. That's what you should expect for the remainder of the year. Number two, the sooner you take out flights, the further out those flights are, the more you can variabilize the cost. There's no doubt about that. But at United, we're winning brand loyal customers by investing in this business. And nothing about this crisis is long term, and so you can expect us to continue to invest in the business. The final point I'll make, you made around maintenance. I think at United, we have some unique opportunities to fight that trend where maintenance cost is expanding as a percentage of our costs. Part of that is gauge, but part of that is what we're doing in global procurement and how we are working with the great tech ops team that we have. So I'm very optimistic we will not face that same trend that much of the industry faces. Andrew Didora: Got it. And then just my second question, certainly it seems like you were busy at the start of the year on the balance sheet. But just on the buyback, you had stepped it up this time last year in all the market volatility, but 1Q this year, very similar to the last few quarters. Just curious your thoughts on how you thought about the buyback. Michael Leskinen: Look, I think it's a great question, and it's valid. But we have two objectives with our buyback and our capital management. Number one, we are committed, absolutely committed to getting to investment grade. And so we need to balance our buyback and our opportunism around buying shares when they're below intrinsic value with our commitment to getting investment grade. And so what you saw in the first quarter was another example of how we're balancing that. I'm really proud of the team for what we did with the two unsecured offerings. And I just want to reiterate that we are going to get to investment grade in all scenarios. Operator: Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe another question for the revenue management geeks out there. You're removing 5 points of planned capacity through the end of the year. How do you think about what range fuel would need to settle in for United to return to that mid-single-digit capacity growth in the second half? And how do you think about irrational capacity coming back online? And how do you manage costs in that environment as well as you continue to invest? Andrew Nocella: That's a lot of questions. Sheila Kahyaoglu: Sorry. Just take one, if it's okay. Andrew Nocella: Look, I think we're going to watch demand really carefully. We know how price is created in the business, and we've cut this off-peak capacity because we want to make sure that we can sustain these type of yield increases that we see right now. And we'll continue to watch demand, and we're going to manage the business to hit the financial targets and margins that we have out there. And so if we can do that with more capacity, we'll gladly bring it back online. But where we are today would just -- and the economic lesson that Scott gave you at the opening would say that there should be some level of demand reduction related to a 20% fare increase. We haven't seen it yet. And if we don't, it's a really great outcome, but we're planning for that. If it doesn't turn out to be the case, we'll appropriately adjust our plans. Operator: Our next question will come from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I just want to ask a multipart question of Andrew about the commercial initiatives. If we bucket them into maybe merchandising, fleet and MileagePlus, would you mind just walking us through the margin uplift you're kind of contemplating over the longer term from some of these initiatives that they pan out? Like just in terms of thinking of putting some of those Airbus aircraft on those routes, like how they compare to the aircraft they're replacing, things like that? Andrew Nocella: Yes. I'll keep it really high level, but -- and I'm glad you asked the question because the current conditions are super interesting. But we've been working literally years on the 7 initiatives that I had in my script earlier, and we are really proud of all of them. We think all of them are material. But properly merchandising our products and being able to sell them, like we were unable to sell certain products is valued in hundreds of millions of dollars per year. And the new aircraft we bring on that are optimally configured for the premium demand that we're seeing is also a gigantic number. I'm going to avoid assigning values to each of them individually. Maybe we'll do an Investor Day someday where we can talk about it in more detail. But all of those initiatives, and there are 7 of them, and they're really all 7 of them were very, very significant, are about setting our future up to reach not only double-digit margins, but ultimately mid-teen margins as we've talked about. And we are well on our way. We've got it dialed in. We've, I think, figured this recipe out. We've segmented really effectively, and we're not done is also what I would tell you. We have other ideas in the works and plan another media day next year to talk about. Because we're really proud of all this. And the RM stuff, the segmentation stuff, the willingness to pay, all of it giving customers in all cabins more choices is incredibly effective, and we're winning share all the time. So hopefully, that answers your question appropriately, but I'm going to say it's just really materially significant to lay the proper foundation for the future. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Just one question here. Just on revenue recapture. I mean, thanks for outlining the progressions for the year. What gives you confidence that you're going to get to 100%? And do you actually need maybe outside help, whether it's other carriers cutting capacity? And maybe just give us a sense of how you recovered Russia, Ukraine, how quickly you were able to recover it back in 2022 when we had the last major fuel spike. Andrew Nocella: I'm not going to count on other airlines for anything, that's for sure. But from our perspective, the fact that we've already gotten to a 20% yield increase. And what we've done is we've cut off the capacity to make sure that we can sustain these higher yields. I feel really confident. And I would -- look, before this fuel situation happened, I would tell you, fuel is a pass-through. And so I feel really confident we're passing it through. Demand is hanging in there. We've made the appropriate capacity adjustments for United to make sure that we can get to full recovery by the end of the year, and we're well on our way already between 40% and 50%. And -- but the most optimistic thing is the fact that within a matter of 7 or 8 weeks, we went from yields being up 2% to 3% to yields being up 18% to 20%. It's pretty darn remarkable. Michael Leskinen: Mike, the underlying point is that for a growing portion of our customer base, this is a decommoditized business. The brand loyalty at United. You get a better experience, you get better value. And I think the results speak for themselves. Operator: Our next question will come from the line of John Godyn with Citigroup. John Godyn: I wanted to just follow up on the fuel pass-through. I think that commentary and that guidance was great. If we could maybe get a little bit of geographic color kind of how pass-throughs are evolving in your opinion, internationally versus in the domestic market. The capacity trends are very different. The fuel surcharge activity is very different. The hedging of the competitors is different. Maybe a little bit of color there would be helpful. Andrew Nocella: Look, I think the color I would add is I thought that the domestic would be quicker to move than international, and I was wrong. The international environment pricing -- well, both are strong. I want to be really clear. But the international environment is actually better than domestic that the price increases have been more substantial and are covering more of the fuel burden than they are domestically. And I think that's really remarkable. I think there's been changes in the overseas pricing behavior that have actually surprised me, quite frankly, given that -- I don't want to go into every detail, but given what I know about the industry. So I'm really pleased with that. And I do think these fares are going to be up. And as Scott said, depending on how long this lasts, the longer it lasts, the higher they'll be up and the longer it will stick, in my opinion. But the international environment is better than the domestic environment at this point. Michael Leskinen: John, I can't help myself, but you mentioned hedging by foreign carriers. If they hedge Brent, they're not hedging jet fuel. The biggest portion of the move in jet fuel has been crack spreads. So I think this experience has proven once again that hedging is a poor policy. John Godyn: That's great color, guys. And if I could just follow up with one more on the pass-through through the end of the year. It sounds like the assumptions embedded in that are status quo. Like you're not expecting all the other carriers to slash capacity or something like that driving your pass-through. Is it safe to say that? Or are there other kind of industry dynamics that you're looking for to kind of drive 100% pass-through by the end of the year? Andrew Nocella: Look, I can't speak for other airlines. We've engaged in self-help. We know what it takes to pass on these price increases by what we're going to fly. And we're out here to hit our financial targets and hit a double-digit margin next year, as Scott said. So I don't know what the goals and motivations and missions of the other airlines are. I won't speak for them, but that's ours, and we're going to manage our capacity to achieve our goals independent of what the industry does. Operator: Our next question will come from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe just sort of sticking on the theme of the fuel pass-through and ultimately, retention rates. You talked about holding on to 20% and maybe that going to 80% over time. I just want to understand the mechanism behind that. Is it just simply duration? Is it the sort of competitive actions around capacity that others take? Is it other price actions you could use like bag fees or other ancillaries that kind of stick even when fuel prices come down? I just want to understand that dynamic of how you can hold on for longer. Andrew Nocella: Well, I think the longer the price of fuel remains in this range and the longer consumers pay these prices and airlines get used to this revenue stream, the more likely it is to stick. That's the simple perspective on it. I do think that international is running really well above domestic, as I said a few minutes ago. So it will be interesting to see if that normalizes. But the environment right now, I think airlines want to return their cost of capital and particularly here in the United States, most don't and that is unsustainable in the long run. So something had to change. It's unfortunate it had to be an oil crisis, but here we are. Operator: Our next question will come from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just on the mileage plan changes, which seem like they were motivated to get more people to sign up. Can you speak to the changes you're seeing in credit card uptake since you've made those? And I wonder if you could give us your current thinking about the time line for a new comprehensive agreement. Andrew Nocella: Look, we've been working on the MileagePlus changes for well over a year. We thought we would engage in whatever activities we could control outside of a new contract. And the numbers, the uplift, the spend has been incredible. We're really, really happy with that. Let's -- it's really new. So hopefully, in a few quarters, I can still describe it as incredible. I expect I will be able to do so. But these are changes that I think are really motivating for our frequent flyers, and we're at a record penetration rate of cardholders that are premier members at United. So I'm really happy with it. I think the details regarding our deal with Chase are largely confidential, but I think you can Google the expiration date and know that it's not tomorrow, but it's not that far off. And we're working with Chase. They're a great partner and run a really sophisticated program, which is required by United given the size and magnitude of our co-brand portfolio. We look forward to what the future brings. Operator: Our next question will come from the line of Michael Goldie with BMO Capital Markets. Michael Goldie: By the end of the year, your aircraft count will be up some 8%. How do you think about the operating leverage of these assets in a recovery versus the decremental drag if flight activity remains constrained? And then related, how are you thinking about managing labor requirements as you take on this new equipment while managing capacity? Michael Leskinen: Michael, I'll take the fleet question, and I'll try to answer the labor question. In an elevated fuel environment, it only exacerbates the advantage of new fuel-efficient equipment versus older equipment. And so you can see in our fleet plan, we expect to continue to take delivery. We're really pleased with Boeing increasing production rates on the narrowbody. They've been a great partner to us. It is financially advantageous to take the new aircraft, both from a margin and a return on invested capital standpoint. So you will see that. Now at the other end of the spectrum, our older aircraft. There's an opportunity to fly those aircraft in a capital-efficient way by managing the maintenance at the end of the life to maximize the value we get out of those aircraft. You can bring the utilization down, have extra spares and have additional flexibility to fly the golden hour and to manage peaks. So I think we're in an enviable position from a fleet standpoint. You shouldn't see us change anything. When it comes to managing labor and labor efficiency around that fleet, we've got a very sophisticated team, and we make sure we are hired across all work groups at the appropriate level to make sure that we're managing -- while we invest in the customer, we're investing in the hard product, we're investing in our people. We need to make sure that we manage the workforce very efficiently. And I think we do that very, very well here at United. Operator: And we will now switch to the media portion of the call. [Operator Instructions] Our first question will come from the line of Leslie Josephs with CNBC. Leslie Josephs: Just on the Spirit potential bailout, I guess, at this point, it looks like the administration is moving towards that. One, what's your comment on that? And two, does that change any of your assumptions for capacity? Or do you think there's going to be more capacity than you expected out in the market just because there was a liquidation risk earlier this year or in recent weeks? And then second, just had a demand question, if there's any geography where you are seeing a pullback. I think you mentioned that international was a bit stronger than domestic, at least on yield. So curious if there's been any softness in any area. Scott Kirby: Leslie, I'll briefly -- I just said earlier in the call, you may not have been on, but it's a more fulsome answer, I suppose. But in brief on Spirit, well-run airlines are still solidly profitable even in this environment. As you can see from United, I don't think this crisis is anywhere near big enough to cause the need for an airline bail out. And my record, you got lots of quotes from me over the past several years going back into the last administration that the Spirit business model is fundamentally flawed and it's going to fail. And I feel bad for the people. A lot of them will land jobs of the airlines every time that we have a new hire flight class and I go talk to them, I ask where people are from, and there's a lot of Spirit hands that get raised in the room. But I don't think it's necessary -- I also don't think it's terribly relevant to a brand loyal airline one way or another like United. Andrew Nocella: On demand, look, putting the Middle East aside, we're seeing strength everywhere. But what I'll point out is we're really seeing strength in premium cabins going forward into Q2, particularly across the Pacific and across the Atlantic. We're teeing up to, I think, a really strong performance. And United had already gone into the summer season with a pretty conservative global long-haul capacity number, I think, actually down year-over-year. So I think we're actually really set up to produce some very good numbers, and we have very good business demand going into the Polaris cabins is my answer. Operator: And I will now turn the call back over to Kristina Edwards for closing comments. Kristina Munoz: Thanks, Regina. As always, we don't control the environment, but we do control how we perform in it. I appreciate your interest today, and we will see you next quarter. Operator: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
Travis Axelrod: Good afternoon, everyone, and welcome to Tesla's First Quarter 2026 Q&A Webcast. My name is Travis Axelrod, Head of Investor Relations, and I'm joined today by Elon Musk, Vaibhav Taneja and a number of other executives. Our Q1 results were announced at about 3:00 p.m. Central Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to 1 question and 1 follow-up. [Operator Instructions] Before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk: Thank you. So I think we've got a very exciting year ahead of us with 2026. We're going to be substantially increasing our investments in the future so we should expect to see significant -- a very significant increase in capital expenditures, but I think well justified for a substantially increased future revenue stream. And obviously, Tesla is not alone in this. I think you've seen most, if not all, certainly the major technology companies substantially increasing their capital investments. And we're going to be doing the same. I think it's going to pay off in a very big way. So we're investing in and improving our core technologies, battery powertrain, AI software, AI training, chip design, manufacturing -- laying the groundwork for significantly increased manufacturing production. We are also strengthening our supply chain across the board, batteries, energy, AI, silicon, everything, and laying the groundwork, like I said, for what we expect to be a significant increase in vehicle production in the future and, of course, a very significant increase -- well, actually releasing Optimus. But increasing our internal production for testing and then probably being able to have Optimus be useful outside of Tesla sometime next year. As you've heard me say a few times, I think Optimus will be our biggest product -- not just Tesla's biggest product ever, but probably the biggest product ever. And I remain convinced of that conclusion. So on our vehicle side, it's always, I think, worth noting that a Tesla car is incredibly -- incredible value for money, and they're all autonomy-ready depending on what part of the world you're in. The supervised full self-driving is getting extremely good. We have just started production of Cybercab, and we'll begin production about SemiTruck soon. And I should say, whenever you have a new product with a completely new supply chain, new everything, it's always a stretched out S-curve. So you should expect that initial production of Cybercab and Semi will be very slow, but then ramping up and going kind of exponential towards the end of the year and certainly next year. And in fact, we'll be ramping up production of all vehicles and all factories to the best of our ability through the balance of this year. On the energy front, the United States and the whole world will need a lot of energy storage to meet growing electricity demand. Demand for our Megapack is very strong, and we're excited to begin production of Megapack 3 later this year in our new world-class factory outside Houston. For full self-driving and Robotaxi, version 14.3 was a major architectural update. And we have a whole pipeline of major improvements to full self-driving that, we believe, will lead to unsupervised full self-driving being available anywhere in the world that it is legal to do so. And then there's a version 15, hopefully later this -- hopefully by the end of this year, but certainly by early next year. And that will be a complete overhaul of the software architecture, and will run on AI4. That's -- and at that point, we're really just increasing the safety level of FSD above human safety level, even more. Meaning I think even within version 14, we're significantly safer than human, but v13 will take that to another level. We've expanded Robotaxi to Dallas in Houston using the same software source in the Bay Area. And the limiting factor for expansion is really rigorous validation, making sure things are completely safe. We don't want to have a single accidental injury with the expansion of Robotaxi. And we have, to the credit of the team, not had a single one to date. And Optimus, we're preparing Fremont for starter production later this year with Optimus. Again, totally new supply chain, totally new technology. So therefore, the production S-curve is always very slow in the beginning, but we'll ramp up to significant numbers next year. And we're constructing a second Optimus factory in -- at our Giga Texas location. And that will probably start production around summer next year. The V3 Optimus design is almost ready to demonstrate. I think we want to just make sure it's like polished. Like it works functionally, but there's some aesthetic elements that need to be finalized. And I think probably middle of this year, we should be able to show it off. We're also a little hesitant to show V3 off because we find our competitors do a frame-by-frame analysis whenever we release something and copy everything they possibly can. So I think there's some value to not showing new technology until it's close to production. The -- congratulations to -- again to the Tesla AI chip team for taping out AI5. That's going to be a great chip. I think probably the best AI inference chip for edge compute that exists. And certainly, I think the best value for money. The team did a great job. And we already have a lot of momentum for designing AI6, and we've begun to discuss ideas for Dojo 3. So this is all very exciting. We've also finalized plans for the chip fab -- the research chip fab on the Giga Texas campus, and we'll start construction of that this year. In conclusion, Tesla is working on a lot of large, ambitious projects. They're all very challenging, but I think they're going to be revolutionary. And that's what the team does best, solve the hardest problems and build amazing products. And I'd like to thank the Tesla team for all the hard work and thank you to all of our supporters. Travis Axelrod: Great. Thank you very much, Elon. And Vaibhav also has some opening remarks. Vaibhav Taneja: Thanks, Travis. So 2026 has had an interesting start not just for us, but I think the world in general. On the autos business, we have seen a resurgence in demand in EMEA, in certain countries like France and Germany showing over 150% quarter-over-quarter growth in deliveries. In APAC, we witnessed growth in South Korea and Japan, again, in terms of deliveries. Even out here in the U.S., we have seen a slight growth in terms of [ quarter-quarter ] deliveries. On the order backlog front, we ended the quarter with the highest Q1 order backlog in over 2 years. Whilst the recent increase in gas prices has had a positive impact on the order rate, this improvement started before the uptrend in gas prices. This is due to the work done by the Tesla team in bringing more compelling and affordable vehicles to market. 10 years back, when we launched Model 3 in the U.S. with a promise of $35,000 starting price, which if you adjust today for inflation, translates to about $48,000 in today's dollar terms, the starting price of Model 3 today is way less than that when the product is way more compelling from where it started. Given this setup, we're focused on increasing our overall production volume, something that we already started in Q1. This volume increase is evidenced by the Giga Berlin reaching a record output of over 61,000 units in Q1. We plan to keep growing volumes further, not just in Berlin, but across all our factories. Our biggest limiter continues to be our battery pack capacity, and we are actively working on resolving that. Auto margins, excluding credits, improved sequentially from 17.9% to 19.2%. Note that we have had certain onetime benefits from warranty true-downs around $230 million and some relief on tariffs. We have not realized any benefit from the recent Supreme Court ruling on IEEPA tariffs as there is still a lot of uncertainty around the final outcome. Both tariffs and sustained high interest rates continue to add to our automotive cost. Interest rate subvention costs are recognized upfront. If interest rates continue to rise, our cost of subvention will continue to impact auto margins. On the FSD adoption front, we continue to see improvement, reaching nearly 1.3 million paid customers globally. The bulk of the growth came from subscriptions, while upfront purchases only increased 7% as we remove the purchase option in some markets in Q1. We recently received approvals for our FSD in Netherlands. This sets up us well for an EU-wide approval later in Q2, and we're just gated by how the regulators go about it. Additionally, we've also received approvals in China. The broader approval is still not there, but we're working with the regulators in the country, and we're hoping that we can get approval by Q3. With these approvals coming through, we expect the broader adoption of the software in the existing fleet and incremental demand for our vehicles. With all this in mind, we have evolved our vehicle sales strategy, where we now emphasize FSD as a product and vehicle as only the delivery mechanism. As we have noted previously, the energy storage business is inherently lumpy tied to customer deployment time lines. In Q1, we deployed 6 -- 8.8 gigawatt hour of energy storage, a 38% sequential decline. However, we still expect 2026 deployments to be higher than 2025. We set yet another record with gross margins in this business over 39.5% due to some onetime benefits from certain tariff recognitions of more than $250 million from certain tariffs which we had paid in prior quarters. On a normalized basis, we continue to expect energy compression from here with increasing competition and tariff impacts. As previously discussed, tariffs in this business can have outsized impacts as most of the battery cells are procured from China. Our order backlog for this business is robust, and we're doing our best to build not based on -- not just based on existing demand but also unexpected demand. Services and Others improved sequentially from 8.8% to 9.2%. This includes a collection of efforts meant to support our customers like service centers, used cars, spare supercharging, part sales, insurance and even our Robotaxi business. We're making deliberate investments in the infrastructure to help the Robotaxi in the future. We grew the Robotaxi fleet quarter-over-quarter, and we expect to keep ramping the fleet as we accelerate and get into other geographies. On operating expenses side, we did increase sequentially from a full quarter stock-based compensation expense for the 2025 CEO compensation plan for which one milestone is still deemed probable. Additionally, our spend on AI-related initiatives, including expense on development of our own AI5 chip and new products like Cybercab, Semi, Optimus and Megablock, et cetera, continue to be at elevated levels, and we expect this trend to continue for the full year 2026. Net income was impacted from mark-to-market charges on our Bitcoin holdings, which depreciated 22% as compared to the last quarter and the unfavorable impact of FX, primarily from our large intercompany ForEx. On free cash flow, we ended the quarter with just over $1.4 billion. As Elon mentioned, we are in a very big capital investment phase, which is going to start now and would last a couple of years. So based on that, our current expectation for 2025 -- 2026 is over $25 billion of CapEx. And just to remind you, we are paying for 6 factories which we're going to go into operation. Some have already started, some would go into operation later part of this year. We're further increasing our investment in AI-related initiatives, including the AI infrastructure to support Robotaxi and the launch of Optimus. We've already started placing orders for the research semiconductor fab in Austin and for solar manufacturing equipment. While this may seem a lot and will have the impact of negative free cash flow for the rest of the year, we believe this is the right strategy to position the company for the next era. We'll make such investments in a very capital-efficient manner. We are actively working on our mission of building a future of amazing abundance. However, that requires not just a lot of investment, but an immense amount of execution. The future is going to be great, and the whole Tesla team is rising to the occasion to make this a reality. I would like to end by thanking the Tesla team, our customers, investors and vendors for having confidence in us on this journey. Thanks. Travis Axelrod: Thank you very much, Vaibhav. Now we're going to go to investor questions, starting with questions from say.com. The first question is, when will we have the Optimus 3 reveal, which we already touched on. But the rest of the question is, when will Optimus production start since we ended the Model X and S production earlier this -- the midyear? And then what's the expected Optimus production rate exiting this year? And what are the initial targeted skills? Elon Musk: Well, as I was saying, what we found is that when we've unveiled various Optimus versions, we found out our competitors literally do a frame-by-frame analysis and copy everything we're doing. So I think we want to push the Optimus 3 unveil maybe closer to production. Start of production is -- we're assuming is somewhere around the late July, August time frame. And I mean just to inject some reality into these questions since these questions are not -- if I were to describe those questions, it does not fully understand what happens with the production line. The last S and X production will be in early May. But you have to look at the entire upstream portion of the production line. So you start with sales, battery packs, motor production, all the parts production. And so we've been dismantling the S, X production line from the more base-level parts -- more basic level parts to -- as you get to more larger subassemblies, you start dismantling the line from the small parts first, not from the final assembly first. So the final assembly line will -- that will be dismantled next month and after the last of the S X vehicle is done. You can't dismantle some gigantic production line like overnight. It takes at least a few months to do so. And then you've got to install a new production line, and you've got to provide all of the wiring and communication, test out the machines of the new production line for Optimus. So that also takes several months. So frankly, if we're able to go from [ suffering ] production on one line, dismantling that entire line, reinstalling a whole new line and turning that on in a matter of 4 months, that is an insanely fast speed. I don't think any other company on earth has ever done that before, just to put things into perspective and inject some reality into the situation here. I don't know what the production rate of Optimus will be this year. It is impossible to predict these things. The -- when you have a brand-new product in an entirely new production line and you have 10,000 unique items, all of which have to go right into ramp production, it will move as fast as the least luckiest, lowest, dumbest part in the entire 10,000. And this is a Optimus -- it's a completely new product with completely new production line. So it's just literally impossible to predict, except that I think it will be quite slow for us as we iron out the 10,000-plus unique items that have to be sold for Optimus to reach volume production. Initial skills will be -- obviously, we're going to start with simple skills in the factory and then build up from there. Travis Axelrod: Great. Thank you, Elon. The next question is, what milestones are you targeting for unsupervised FSD and Robotaxi expansion beyond Austin this year? And how will that drive recurring revenue? Elon Musk: Well, we certainly hope to be -- have unsupervised FSD or Robotaxi operating in, I don't know -- it does [indiscernible] states by the end of this year. Initially, we're taking it very -- we're taking a very cautious approach to the rollout here. Like we haven't had any injuries and certainly no fatalities to date with the unsupervised FSD and Robotaxi expansion. We want to keep it that way. And so I don't -- I think probably unsupervised FSD or Robotaxi revenue would not be super material this year. But I do think it will be material -- it will be material probably in a significant way next year. Travis Axelrod: Great. Thank you very much. The next question is, when do you expect FSD unsupervised to reach customer cars? Elon Musk: I'm just guessing here, but probably in the fourth quarter. It's difficult to release this like to everyone everywhere all at once because we do want to make sure that they're not unique situations in a city that particularly complex intersection or actually, they tend to be places where people get into accidents a lot because they're just -- perhaps there's -- and like I said, an unsafe intersection or bad road markings or a lot of weather challenges. So I think we would release unsupervised gradually to the customer fleet as we feel like a particular geography is confirmed to be safe. Travis Axelrod: Great. And the next question is, how will hardware 3 cars reach unsupervised FSD? Elon Musk: Unfortunately, hardware 3 -- I wish it were otherwise, but hardware 3 simply does not have the capability to achieve unsupervised FSD. We did think at one point, it would have that, but relative to hardware 4, it has only 1/8 of the memory bandwidth of hardware 4. And memory bandwidth is one of the key elements needed for unsupervised FSD. And it's just generally a thing that's needed for AI. If you're doing order aggressive transformer memory bandwidth, it's the [indiscernible] point. So for customers that have bought FSD, what we're offering is essentially trade in -- like a discounted trade-in for cars that have AI4 hardware. And then we'll also be offering the ability to upgrade the car to replace the computer, and you also need to replace the cameras, unfortunately, to go to hardware 4. So to do this efficiently, we're going to have to set up like kind of micro factories or small factories in major metropolitan areas in order to do it efficiently. It's -- because if it's done just at the service center, it is extremely slow to do so and inefficient. So we basically need like many production lines to make the change. And I do think, over time, it's going to make sense for us to convert all hardware 3 cars to hardware 4 because that's what enables them to enter the Robotaxi fleet and have unsupervised FSD. Vaibhav Taneja: And for what it's worth, in the meantime, we are going to also release a V14 version for Hardware 3. This will be a distilled version of the same V14 software that we released for Hardware 4, and people should be able to start the drive from park state and basically have all the features that V14 for Hardware 4 has. And that's expected to come end of June. Travis Axelrod: Great. The next question is what enabled you to finish the AI5 tape out early? And were there any changes to the original vision? Last week, Elon said AI5 will go into Optimus and the supercomputer, but 1 month ago said it would go into the robotaxi. Has AI5 been dropped from the vehicle road map? Elon Musk: Well, the reason AI5 tape-out finished early was because the team worked incredibly hard to make it happen. And just over time, we gathered a lot of momentum. But we did have to work every weekend for 6 months straight, including every holiday. So it was a lot of sacrifice by our team, and I was there, of course, myself, every weekend. And fortunately, we didn't encounter any major -- we didn't make any major mistakes, at least that we're aware of that required pushing out the tape-out. So the team just did a great job and worked incredibly hard is the reason. Yes, I do expect that AI5 will go into Optimus and into the data center because it's looking like we'll be able to achieve unsupervised self-driving with AI4 that is far greater than human safety levels. So -- which means it's not -- certainly not immediately needed in the car. At some point, I think it will make sense for us to switch to AI5 in the car, but that's -- but there's not a pricing issue to do so. So -- but at some point, the AI4 hardware is going to get like so old that it's like, okay, the only reason they're keeping the factory open is for AI4. We are planning an AI4 upgrade to use newer generation RAM. So it will go from 16 gigabytes to, I think, 32 gigabytes per SoC. It's a total of 64 gigabytes, and probably a 10% increase in compute in sort of into [ trillions ] of operations per second and in memory bandwidth. So that's AI4.1 or AI4+ probably goes into production middle of next year, I think, depends. It depends on -- Samsung is doing the modifications for us. So it sort of depends on when they're able to finish that -- finish those modifications and bring it to production. Travis Axelrod: Great. The next question is now that FSD has been approved in the Netherlands and is expected to launch across Europe this summer, can you discuss your Robotaxi strategy for the region? Elon Musk: Well, we're probably jumping a gun here on Robotaxi in Europe since it is -- it took us an immense amount of time just to get supervised self-driving approved in Europe. And these -- we don't control the regulators. It's -- we push as hard as we can, but that's -- it's ultimately up to the governments in Europe and the EU to decide what to do. So yes, as it is, we've only been approved in Netherlands, we expect to be approved in a lot of other countries. And I think the supervised FSD goes to Brussels for EU review in May, yes. So -- and obviously, the next thing beyond that is to aim for unsupervised self-driving or Robotaxi in Europe. I actually don't know what the time frame for that is and would be somewhat at the most of the regulators as to when that approval would take place. Ashok Elluswamy: And from a technology standpoint, what we deployed in Netherlands and Europe is the same exact architecture and the training procedure and so on, except we had more Europe data. And I suspect that same thing will be true for unsupervised FSD as well. Whatever we use to solve in the U.S. will work in other places and the rest of the world, too, probably that we were able to add the data from the local regions. Travis Axelrod: Great. The next question is, given the recent NHTSA incident filings, can you update us on the Robotaxi safety data? If safety validation remains the primary bottleneck, why not deploy thousands of vehicles to accelerate removal of the safety driver? Elon Musk: Ashok, do you want to take that? Ashok Elluswamy: Yes. We are increasing the amount of our QA fleet, but we also want to use the customer fleet to give us the useful metrics back so that we can scale it safely. Like Elon mentioned, we are absolutely focused on safety. And so far, we have 0 incidents, and that's why the NHTSA filing also shows. In addition to safety, we are also solving some of these so-called scaling issues. For example, you do not want the Robotaxi to be stuck, blocking intersections or don't want to be dropping people off at slightly incorrect locations and so on. So we are simultaneously solving the long tail of safety by monitoring the metrics across the entire Tesla customer vehicle fleet, which is close to driving 10 billion miles on FSD in the next few weeks and also scaling up the amount of QA fleet that we have across the entire U.S. to accelerate our safety validation while also scaling the rest of the factors that can throttle the increase of unsupervised vehicles. Travis Axelrod: All right. The next question is, is v14.3 still the last piece of the puzzle to enable large-scale unsupervised FSD and Robotaxi? Or do we have to wait until V15? Elon Musk: Well, I think 14.3 is last piece of the puzzle for unsupervised FSD. Now the question is like degrees of safety. Like how -- safety and convenience, I suppose. We have a lot of known improvements like major architectural improvements that we know would improve the probability of safety significantly. So I think it's not going to make sense for us to deploy unsupervised FSD Robotaxi large scale when we know that there are major architectural improvements to the software that can improve safety. So I think we're going to want to finish writing that software, validate it and release it before going to large-scale unsupervised FSD. Depending on what large scale means. I mean we are, of course, as I mentioned earlier, doing unsupervised FSD in 3 studies, and we'll expand to, like I said, probably a dozen states or more later this year. So it kind of depends on what your definition of large scale is. But I do think it wouldn't be right for us to go to like very large scale unsupervised FSD when we know that there are software improvements in the pipeline that would improve safety. Ashok Elluswamy: Yes. And I'd like to note that the version of Robotaxi that's running in Austin and Dallas, Houston, et cetera, those are essentially 14.3 variants, and it's obviously safe that, that's why we're able to launch in those cities, and we continue to expand based on the v13 -- v14 base for a while until v15 lands. And v15 is going to be a major upgrade. Elon Musk: Yes. Travis Axelrod: Great. Thank you. The next 2 questions, we've already answered about Robotaxi rollout and the data that we're observing. So we will end on the last question, which is what is Tesla doing to scale the energy generation business with solar? Residential roof deployments have stalled. Will Tesla move to regional solar and battery farms, perhaps coupled to superchargers? Will we deploy solar through utilities? Micheal Snyder: Yes. The overall U.S. residential solar market is going through a bit of a correction after the loss of the homeowner tax credit last year, but we still see strong demand shaping up for the second half of the year. Tesla introduced a lease product this year that allows us to capture the tax credit ourselves and offer competitive pricing for homeowners. We have also debuted our own solar panel with superior performance in aesthetics as well as our own best-in-class mounting system that gives us a fully integrated home energy ecosystem. We believe -- we strongly believe that solar and storage markets globally will continue to grow at both residential and utility scale, and we will continue to invest in that growth. Travis Axelrod: Great. Thank you, Mike. So now we're going to move on to analyst questions. The first question is going to come from Will Stein at Truist. Will, please feel free to unmute yourself when you're ready. William Stein: Can you hear me? Travis Axelrod: Yes. Yes, we can. William Stein: Considering the various parties involved in the Terafab project, I'm hoping you can provide some details for investors about which party is going to take responsibility for each aspect of that project, funding it, designing it, building it, operating, taking production and the like. I would love to hear some more details. Elon Musk: Yes. So we're still working out the details of the Terafab deployment. In the near term, Tesla will be building the research fab on our Giga Texas campus. This is something we expect to be probably a $3 billion-ish initiative and capable of maybe a few thousand wafers per month, but it's really intended to try out ideas. The research fab, it was in terms of maybe -- we have some ideas for improving the fundamental technology of how chips are made and some of some new physics we'd like to test out, but we also want to test out the ability to -- to see if something is working in production. So you need kind of like a few thousand wafer starts a month to make sure that a production process is sound. And then SpaceX is going to take care of like the initial phase of the scaled up Terafab. And that's what we figured out thus far. Any kind of intercompany thing has to be approved by both the SpaceX and Tesla Board of Directors. It has got to go through a conflict resolution. It's going to have a lot of, unfortunately, a lot of complexity because we've got to make sure Tesla shareholders are served and SpaceX shareholders have served and strike the right balance there. So it takes a while to work through the kind of independent director reviews on this. So that's basically what we figured out thus far is Tesla doing the research fab, SpaceX doing the initial part of the large-scale Terafab. And then we got to figure out the rest. William Stein: Yes. And what about Intel's involvement? Elon Musk: Yes. So Intel is excited to partner with us on some of the core manufacturing technologies. So we plan to use Intel's 14A process, which is state-of-the-art and in fact, not yet totally complete. So -- but given that by the time Terafab scales up, 14A will be probably fairly mature or ready for prime time. 14A seems like the right move. And we have a great relationship with Intel. A lot of respect for the CEO, the CTO and the new team there. So we think it's going to be a great partnership. Ashok Elluswamy: Yes. And the other thing on the research fab, I think we've said it before, we plan to do memory logic, everything in the same place, including mask because we want to have a quick iteration loop so that we can see and basically scale the technologies, which we are trying to bring up. Elon Musk: Yes. I think this will be unique in the world, or at least I'm not aware of any a place where you have the lithography mask creation, the -- and then logic, memory and packaging in under one roof in one building. That's about the fastest I could possibly imagine doing [ recourse ] of research and development and being able to try out some pretty radical ideas, some of which have -- it's kind of long-shot stuff, but if some of these long shots pan out, it would be radical improvements in the way [indiscernible] work. Travis Axelrod: Great. The next question is going to come from Pierre at New Street. Pierre Ferragu: A quick one first on FSD adoption. So you have 180,000 new users, paying users this quarter. And I compare that to your overall installed base, it might be 15%. But then if I shrink that to the U.S. or to North America, where most of them are, it's probably more like 30%, 35%. And I'm trying to -- and I compare that you probably sold about 100,000 cars in North America in the quarter. So you're winning twice more FSD users and you're selling cars. And then if I add to that picture the fact that, I guess, it's mostly Hardware 4 owners who subscribe to FSD, it sounds like most drivers in North America who have Hardware 4 would already be using FSD. Is that the right way to think about it and the kind of like success FSD is meeting today? Is that the right way to think about it? Ashok Elluswamy: Yes. I think you're thinking about it the right way, Pierre. And the other thing which I'll share is that you can't just look at 1 quarter versus the other quarter in terms of churn, but we are actually seeing churn of subscribers also coming down, which again is a reflection of the product is getting better. And obviously, if subscriptions are going up, that is a good metric. The other thing also to note is that we are seeing customers actually drive longer which, again, you could correlate it. That's why you have lesser churn because people are liking the product. And if -- I mean, I've said this before, if I just use my own personal behavior, right, I literally get in the car, I press a button and it just goes. Earlier, I used to park. Now I don't even have to park. And that is the experience which we want everybody to [ grade, ] and that's why you're starting seeing it in the numbers come through. Pierre Ferragu: Excellent. And if I maybe a quick follow-up, completely difference, it's more on the Optimus architecture. And you talked about the partnership with xAI and Grok, and I was wondering if you can share with us anything about how the system to intelligence is going to be implemented? Is that going to be onboard on chips inside Optimus? Or if we should think that like your fleet of like 1 million Optimus being produced a year actually driving very significant inference demand in data centers as well for system to thinking. Elon Musk: Well, we think we can put a lot of intelligence locally in the robot. And it certainly needs enough intelligence that if a robot gets disconnected like if it's a bad cellular signal or there isn't WiFi, Optimus can't just get stuck. It needs to have enough local intelligence that it can still do useful things even if it loses connection kind of like the car. Like the car does not need any cellular or WiFi connection to be able to drive safely. Now I guess you can think of like Optimus needs kind of a manager to be told what to do, broadly speaking, like if otherwise going to keep doing the same thing it did before. So I think you need kind of an orchestration AI, which Grok would be good for orchestration. And then for Optimus' voice, having a low-latency intelligent voice AI, Grok is actually very good for that. So if you want to talk to Optimus and have kind of a Grok-level conversation, you kind of need to connect to a Grok-level AI for that. But I would expect the amount of interaction, apart from like the voice stuff and asking complicated questions of the robot that necessarily needs a large AI model to answer, the -- Grok will probably have about as much interaction with Optimus as a manager would have with the people on their team. So meaning Optimus could probably work for several hours without any management oversight. Travis Axelrod: Great. The next question is going to come from Dan at Barclays. Dan Levy: Great. Elon, your chip suppliers generally generate pretty good economics on the chip they sell. Your approach has historically been on vertical integration, part of that has been to get better economics. So I know the longer-term goal of Terafab is to get the supply you need, but how much of Terafab is also motivated to get better economics on your midterm chip purchases? And how long is it going to take to ramp to get to a yield that achieves that type of economic parity? Elon Musk: No. I mean Terafab is not some sort of mechanism to generate leverage over our chip suppliers. It's just literally, we don't see a path to having enough efficient quantity of AI chips down the road. As we scale production to high levels, just the rate at which the industry is growing in logic, but even more so in memory, it's just doesn't -- we just anticipate hitting a wall if we don't make chips ourselves. So that's the reason for the Terafab. I think that we do have some ideas for how to make maybe radically better AI chips. And these are kind of research ideas there -- which means like long shot, but if long shot pays off, it's maybe a giant improvement. And it's just easier to do that if we have our own research fab and are developing our own production technologies. So -- and if you look sort of long term at, say, having AI satellites, making chips for those, they're just -- there's just no way in how the existing industry can keep up with that. It's impossible. Travis Axelrod: All right. And our next question is going to come from Mark at Goldman Sachs. Mark Delaney: Yes. I recognize the importance of FSD and that FSD can help to drive vehicle sales and see some of the improvements in the FSD technology more recently with version 14. However, I'm also hoping to understand if the companies you on new vehicle models has evolved. And I ask given that you, Elon, posted on X recently that Tesla could develop a family vehicle, and there's also been some past discussion about a compact vehicle. Elon Musk: Well, I mean, Cybercab is compact. It's actually -- I mean, it's very roomy, but it's a 2-person vehicle. And we do think probably most of our production long term will be Cybercab because 90% of miles driven are with 1 or 2 people. So it would mean that you'd want to the vast majority of your production to be Cybercab. Then over time, it's going to make sense for our whole lineup to be autonomous vehicles of different sizes. And I did talk a bit about this when we did the kind of AI Day in L.A. at Warner Bros. and showed like -- this is our current lineup, and this is what some idea of what our future lineup will be, which is that it's going to be almost entirely autonomous. In fact, long term, the only manually driven car will be the new Tesla Roadster. Speaking of which, we may be able to debut that in a month or so. It requires a lot of testing and validation before we can actually have a demo and not have something go wrong with the demo. But I think it will be one of the most exciting product unveils ever. I'm not sure -- I don't think it moves the needle massively from a revenue standpoint. So -- but it is very cool. I think it might be one of the most spectacular demos ever. Travis Axelrod: All right. Mark, did you have a follow-up question? Mark Delaney: Yes. My other question was on batteries, and the company mentioned battery is a constraint on its growth. Can you speak more to how Tesla expects to resolve this? And to what extent that might come from ramping up your own LFP and 4680 battery cell manufacturing? Or is this something that you would expect to resolve primarily with increased sourcing from suppliers? Vaibhav Taneja: Yes. So at the moment, I think the limiter is not the cells itself. It's the battery pack capacity. And we're -- like I said in my opening remarks, we're actively working on resolving this. There's more capacity being added as we speak, and I'll let Lars add a few more -- thanks -- to it. Lars Moravy: Yes. Thanks, Vaibhav. As you guys may have seen in Berlin, we started launching model battery pack with our in-house 4680 cells a few months ago, and that is ramping up nicely, adding to Berlin's output and helping with the demand surge that we've seen in Europe as well. We're adding additional capacity in our Reno facility, sort of retooling it as it's been building packs now for almost 10 years. And in order to put in some more efficient lines and get additional output out there. And then we continue to have growth in China as well, ramping in-house LFP module production and battery packs associated with that. So all of those things are happening now in the next months and that's really plans we laid out a few months back to increase that output with the growing demand. Travis Axelrod: All right. Thank you guys. And our next analyst is going to be Colin from Wells Fargo. Colin Langan: Great. You moved the safety driver in Austin, and you're now expanding into Allison, Houston. What are the key safety metrics that you're tracking that gives you confidence that Robotaxi is safe enough to expand? Is it sort of miles per intervention, miles per accident, per fatality? And where do you stand on that now? Elon Musk: [ Ashok? ] Ashok Elluswamy: Yes. We track basically all the metrics that you mentioned. We have a pretty large QA fleet spread across all of the United States, and then we look at any intervention that could happen and then sort of simulate both in practice and also in our simulators that are very, very good nowadays using neural networks as what would have happened. And then based on all these analysis, we then make the call to expand. And so far, all of the expansions have gone according to our expectations. Elon Musk: Yes, a lot of the limiting -- a lot of what limits wider deployment of Robotaxi are actually not safety issues, but convenience issues or the car basically gets paranoid and get stuck, like sometimes it gets -- because it's programmed for maximum safety. So the problem is that then it sometimes just gets scared to do things. So like get scared across railroads, for example, or it will get stuck at a light where there's -- the light number changes from red or I mean there was one kind of amusing situation where a whole bunch of Robotaxi got stuck in the Lifton land in Austin because, I kid you not, a Waymo had crashed into a bus. And so they could not turn left because the Waymo crashed into the bus. And so you have this like long line of like, I don't know, a dozen or more hit Robotaxi that were waiting for the bus to move, but the bus was never going to move because the Waymo just crashes the bus. So that obviously drives people crazy if there's a whole bunch of Robotaxi is blocking the whole road. So it's a ton of things like that. That's the single biggest thing is just the car being scared to move or getting kind of stuck in situations like that. We've also had literal infinite loops where the car might want to make a turn into a road, but there's construction and then it goes around the block, tries to turn into the road to construction, goes around the block, tries to turn on the road. And so you have to stop the infinite looping, literal infinite looping. So those actually -- those are, by far, the issues that we have to resolve as opposed to direct safety issues. Colin Langan: Got it. Great. Elon Musk: And then your follow-up. Colin Langan: Yes. Just last year, I asked about FSD and camera and the issues with sun glare, and you noted that there was a breakthrough with direct photon counting that address this issue. But a month ago, there was a NHTSA filing saying that they haven't received an update when the solution was deployed in the number of vehicles. Is this -- did it require a retrofit of the camera? Is this fully deployed? And I guess I was just curious since the filing mentioned it. Lars Moravy: Yes. First, I want to say, we did change the cameras some months ago, and those are out. And the NHTSA is referring to like older vehicles. We always work directly with NHTSA on all of the issues that they raised with us, and they're asking for quite a bit of information, and we're complying with that in as timely manner as possible. And so we expect to resolve that in any of the other investigations in short order. Unknown Executive: Yes. And we have also implemented stricter measures for the visibility of the camera. So in recent software, if the camera is not able to see things clearly because of residual buildup or what have you, then the FSD won't be available for those cars. Elon Musk: It just means you have to clean the inside of the windscreen. Travis Axelrod: Great. That, unfortunately, is all the time we have today. We appreciate everyone's questions, and we look forward to talking to you next quarter. Thank you very much, and goodbye.