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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.
Operator: Good day, and welcome to the Crown Castle First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead. Kris Hinson: Thank you, Chloe, and good afternoon, everyone. Thank you for joining us today as we discuss our first quarter 2026 results. With me on the call this afternoon are Chris Hillabrant, Crown Castle's President and Chief Executive Officer; and Sunit Patel, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website at crowncastle.com that will be referenced throughout the call. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the company's SEC filings. Our statements are made as of today, April 22, 2026, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the company's website at crowncastle.com. I would like to remind everyone that having an agreement to sell our fiber segment means that the fiber segment results are required to be reported within Crown Castle's financial statements as discontinued operations. Consistent with last quarter, the company's full year 2026 outlook and first quarter results do not include contributions from what we previously reported under the Fiber segment, except as otherwise noted. With that, let me turn the call over to Chris. Christian Hillabrant: Thank you, Kris, and good afternoon, everyone. We delivered solid first quarter results and are reiterating our guidance for full year 2026. This is a transformative year for Crown Castle, and we believe we have an opportunity to generate attractive shareholder returns as we transition to a stand-alone tower business and pursue our goal of becoming a best-in-class U.S. tower operator. To maximize shareholder value and to reach our goal of becoming best-in-class, we are focused on 3 business priorities. Our first priority is to conclude the sale of our small cell and fiber businesses, which we believe remains on track to close in the first half of 2026. We have received almost all required approvals and have largely completed the separation of our small cell and fiber businesses. Second, we are working diligently to preserve the value captured in our original DISH agreement from 2020. Along with the Wireless Industry Association, we have taken an active role in engaging with the relevant government authorities to ensure that DISH honors its commitments. We have also taken appropriate legal action. After DISH defaulted on its payment obligations in January, we exercised our right to terminate the agreement, and we are seeking to recover the remaining payments DISH showed for the terms of the contract. We believe we have a strong legal case against DISH and continue to vigorously pursue a legal remedy in the federal courts. During the first quarter, we amended our pending litigation against DISH to include a claim for breach of contract alongside our request for declaratory judgment. The amendment also asserts a claim against EchoStar for their role in helping DISH evade its contractual commitments. And finally, to become a best-in-class U.S. tower operator, we are performing a thorough review of our business, looking for ways to drive improvement in our operational efficiency and effectiveness. In the first quarter, we successfully executed a restructuring of our tower and corporate organizations, resulting in an anticipated $65 million reduction to annualized run rate cost. We have benchmarked our performance against competitors to both drive efficiency and excellence in operations. I would like to thank our Crown Castle teammates for working hard to ensure that we continue delivering for our customers during this transition period. I remain impressed by the resilience and determination along this journey. Our 2026 guidance also includes a year-over-year increase in capital expenditures as we seek to acquire more land under our towers and invest in systems and processes, which we believe will drive operational efficiency and effectiveness in the following ways. First, we believe that acquiring land under our towers improves our margin and increases operational control of our assets, allowing us to deliver more value to the customer by meeting their needs more rapidly. Second, we believe the investments we are making to enhance, streamline and automate our systems and processes will improve the quality and accessibility of our asset information and empower the Crown Castle team to make better business decisions in a more timely manner. As I look to the future, I am excited by the opportunities in our sector, including the persistent growth in mobile data demand, the upcoming spectrum deployments by Crown Castle's customers and over 800 megahertz of new spectrum auctions beginning in 2027. I believe our focus on becoming a best-in-class U.S. tower operator will position us to capitalize on these trends and maximize cash flow by unlocking additional organic growth and improving profitability. In summary, we believe we will generate attractive shareholder returns by focusing on the following priorities: including the sale of the small cell fiber businesses, preserving the value captured in our DISH agreement and improving our operational efficiency and effectiveness. We believe these priorities, combined with our disciplined capital allocation framework and investment-grade balance sheet will maximize shareholder value. With that, I'll turn it over to Sunit to walk us through the details of the quarter. Sunit Patel: Thanks, Chris, and good afternoon, everyone. We had a solid start to the year in the first quarter as we executed the previously announced restructuring. First quarter organic growth, excluding the impact of Sprint cancellations and DISH terminations was 3.1% or $30 million and included 0.3% or $3 million decrease in other billings. First quarter organic growth increases to 3.3% if DISH revenues are excluded from prior year site rental billings. Excluding the decrease in other billings, organic growth was 3.6%, this growth was more than offset at site rental revenues by $5 million of Sprint cancellations, $49 million of DISH terminations and a $26 million decrease in noncash straight-line revenues and amortization of prepaid rent. Adjusted EBITDA and AFFO in the first quarter benefited from lower repair and maintenance costs, sustaining capital expenditures and other nonlabor costs. These lower costs were largely due to timing and seasonality, so we expect them to occur later in the year. We also experienced a modest decrease in quarterly interest expense due to lower-than-anticipated short-term borrowing rates. Turning to Page 4. Our full year outlook remains unchanged. When excluding DISH revenues from prior year site rental billing, our full year outlook includes 3.5% organic growth, excluding the impact of Sprint cancellations and DISH terminations, which we expect to mark the low point. At the midpoint of the range for full year 2026, we expect site rental revenues of approximately $3.9 billion, adjusted EBITDA of approximately $2.7 billion and AFFO of approximately $1.9 billion. As a reminder, for the purposes of building our full year 2026 outlook, we'll assume the sale of the small cell and fiber businesses closes on June 30. Following the close of the transaction, we plan to allocate approximately $1 billion to share repurchases and approximately $7 billion to repay debt, allowing us to remain at our target leverage range between 6 and 6.5x. Our full year 2026 outlook positions us well to meet our unchanged range for AFFO for the 12 months following the anticipated close of the transaction of $2.1 billion at the midpoint. Turning to the balance sheet. We ended the quarter with significant liquidity and flexibility, positioning us to efficiently maintain our investment-grade rating after the sale of the small cell and fiber businesses based on our previously announced target capital structure and capital allocation framework. Lastly, our outlook for discretionary CapEx remains unchanged at $200 million or $160 million, net of $40 million of prepaid rent received. To wrap up, we believe we have an opportunity to generate attractive shareholder returns as we transition to a stand-alone tower business and pursue our goal of becoming a best-in-class U.S. tower operator. With that, operator, I'd like to open the line for questions. Operator: [Operator Instructions] The first question comes from Rick Prentiss with Raymond James. Ric Prentiss: Two questions for me. One, we had noticed at the FCC website that there's an application maybe to split the fiber small cell transaction into domestic and international to maybe try and get a May 1 closing. Can you update us as far as is that hopeful? What would be the process? And it seems to make sense. But if you could just comment on that FCC letter that's saying maybe you could split it into -- and the vast majority of the value seems to be in domestic. Christian Hillabrant: Yes, Rick, maybe I'll just start by saying we continue to work towards our stated goal of closing the transaction by the end of first half. We have received the vast majority of approvals, as I mentioned in my statement, and continue to feel very positive about the direction that things are headed. While not getting into the specifics of some machinations that might be going on behind the scenes, we remain extremely confident that we will close by the end of first half or as soon as possible. Ric Prentiss: Okay. Makes sense. And so just trying to work the Washington levers given the government shutdown maybe had affected things. Okay. Second question that we get a lot is when you think about Crown's portfolio of U.S. towers and the peer group of both public and private companies out there, is there any reason systemically or fundamentally on why over a medium or long term, your growth rates should vary from the peer group, maybe it's something as simple as where we are in the 5G cycle and then heading into a 6G cycle. Is there anything systemically or fundamentally different in your towers that is leading to the kind of lower new lease activity where we're seeing in this year's guidance? Christian Hillabrant: Rick, you almost answered the question for me. So thanks for the context there. Yes, I think if you look at the full course of the 5G cycle to date, our organic growth has been roughly in line with at least one of the peers and slightly lagged the other. When you include DISH, organic growth was in line with peer and exceeded the other. So nothing systemically more a cycle of what you have if you go back in time to the beginning of the 5G cycle is the timing of when that growth occurred. Ric Prentiss: Okay. And then so you think of the 6G, you guys might exceed or be similar depending on those cycles as we look at 6G coming around someday. Christian Hillabrant: I mean one of the benefits of having a portfolio that tends to skew towards urban and suburban where the PoP coverage is, is it actually drives for us earlier in the cycle. So yes, I think we're looking forward to the 800 megahertz of spectrum being released starting in 2027 in the auctions and what it might be for both Crown and the industry as a whole. Operator: The next question comes from Matt McNaum with [indiscernible] Unknown Analyst: I will have 2 questions as well. Just first, on the 5G cycle, I'm just curious, are we at the point now where carriers are coming back to initial 5G coverage layers to add more densification? And is this any different from prior 3G, 4G cycles? And then secondly, maybe a bigger picture question. Is the dynamic of your carrier customers partnering with satellite players for connectivity in remote areas affected at all how they're approaching network and site planning in conversations with yourself? Christian Hillabrant: Let's start off with the first question, which is around what the carrier behavior has been in terms of densification with 5G. You get a combination of 2 things. You have both the additional capacity where spectrum is available to add additional radios and tower loading on individual towers in which they're installed today. And then you have a continued densification where maybe they don't have the amount of spectrum that they need and/or they're looking to drive better in-building coverage in either residential or workplaces and therefore, go on incremental towers in the form of colocations. And not really any change from past deployments and very specific to the individual customer and their spectrum portfolio. In terms of answering your second question on the satellites, again, this has been something that I think we've said repeatedly, we see as something that is ultimately a plus up for operators to go into very, very rural locations where maybe coverage is a little more sparse. There's a number of limitations around satellite in terms of in-building coverage, line of sight that doesn't make it a perfect surrogate for really rural sites, but rather something that is an additional plus up for the satellite companies and the operators to squeeze some incremental revenue opportunities in those very, very rural areas. And in terms of its impact on us as a business, it's really de minimis or inconsequential at this point. Unknown Analyst: Just if I can follow up quickly, Chris. the mix of applications you're seeing between amendments and new colos, has that evolved at all in recent periods? Christian Hillabrant: Nothing specific, no. Operator: The next question comes from Aryeh Klein with BMO Capital Markets. Aryeh Klein: I think you mentioned in the prepared remarks how you're looking at benchmarking yourself versus peers. And curious where you think kind of the biggest incremental opportunity remains on that front. Christian Hillabrant: Yes. Thanks, Aryeh. I think best-in-class for us is something that we've defined across several pillars of our business. Think of it in terms of broad-based what do we do to become best-in-class towards the customer, towards our teammates here within the company, our shareholders and partners, which are to us landlords and vendors. And as just an example of the types of benchmarking we're doing, we're looking at for customer as an example, customer satisfaction and how can we dramatically improve our customer satisfaction over time. We benchmark against our other competitors and find ways to take actions to meet the unmet needs of the customers. It might be in the form of increased cycle time and delivery of an application. It could be in terms of the products that we develop to meet that unmet demand. We look at this holistically of what we can do to drive a superior customer experience such that when there's choice of a customer between 2 tower companies that we win 100% of the jump balls. That's the way I think about it. In terms of teammates, another example might be is looking at employee engagement across the organization post the split. It's about training and developing our employees. It's about process improvement and tools and pay for performance. So in each one of these, we've worked with outside consultants to help us to both define those goals and then to put in goals for 2026 specific to our company performance, but then also over the '27 and '28 so that we have a long-range transformation that allows us to make that claim that we're a best-in-class tower company. This is how we're approaching it and how we're implementing it in the company today. Aryeh Klein: And then if I could just follow up on the last question in relation to satellite risks. I guess if you think about your portfolio and maybe what's in a little bit more remote markets, is there an element that over the long run, whether that's 5 or 10 years, where you think maybe that piece is at risk? Are you able to quantify that if that's the case? Christian Hillabrant: I mean we've got no indication from customers. In fact, if you look at most of the public related statements, both of the carriers themselves and even the satellite companies and the satellite industry association, all of them see this as a complementary technology. Now are there specific use cases in a very rural area for fixed wireless, which we think is, obviously, we see that they've had some success, providing emergency coverage, absolutely. But if I have to walk up the hill to the top of the hill in order to get a satellite signal to place a call, if I want to do anything in the form of mobility and broadband type experience in mobility, this is probably not the substitute that's going to eventually displace towers anytime soon based on all those data sources. Operator: The next question comes from Michael Funk with Bank of America. Michael Funk: I have 2, if I could. So we've heard us here from a couple of the carriers that they intend to do more densification on their own fiber with small cells in 2026. And just wondering if you're hearing similar comments from your carrier customers and look to densify with 5G? And then I have one for a follow-up after. Christian Hillabrant: If I understand the question correctly, Michael, it's around densification, specifically in the small cell business that we're listing as discontinued operations? Michael Funk: All the carriers utilizing their own fiber and then using small cell to add capacity rather than contracting with the tower companies for densification in some of the urban and suburban areas that you mentioned earlier? Christian Hillabrant: I don't have any specific knowledge of that. I do know this is that we've seen continued demand of operators starting to ask us if we're interested in going back in the business of building macro cell towers for them. So I would assume that there's some need. As you know, the cost has gone up considerably in the last 6 or 7 years post pandemic in order to be able to build new sites and therefore, the business cases that we or any other builder of those types of facilities would apply, have to have an appropriate return. Based on those investments. And so that they might be going off and doing a spot small cell here or there, I wouldn't doubt it. But it certainly isn't something that we've seen a widespread impact into the business or the industry as a whole. Michael Funk: Okay. And any early conversations with AT&T about deploying some of the spectrum or requiring from deals office expected to close relatively soon first half of the year? Christian Hillabrant: We have continuous conversations with AT&T and all of our customers. I mean I think we're very eager for that spectrum that DISH had to be put to work. It's a good thing for Crown and for the industry as a whole. And so I'll just leave it at that. We have ongoing commercial conversations with nothing to share at this time. Operator: The next question comes from Richard Choe with JPMorgan. Richard Choe: I wanted to ask, Chris, a few alloy talked about looking at growth opportunities. And I was wondering, when should we expect, I guess, to see maybe the outcome of looking at those growth opportunities? Would it be after the close of the transaction and then kind of going forward? Or is that something that is happening now and something that you can implement sooner? Christian Hillabrant: A couple of comments. One is you see from our guide that it is a second half loaded growth guide that we've given. And therefore, we're in the process of developing and starting to build that. In terms of like specific things I'd leave you with what I've said historically, which is the great news is when we talk to our customers, they're looking to do additional business with us and looking for ways that we can partner with them. Some of that is related to, obviously, new colocations or amendments. Some of it's related to an expanded service offering. Many folks are asking for turnkey based services versus the service model that we currently have. We are starting to talk to folks about new tower builds again, which is exciting as a tower company to build new towers. And then other things like Power as a Service or shared generators, things that we believe will help us to ultimately build the revenue per tower and the profitability of Crown are all on the -- all being considered now. And then most recently, if you would have seen, I think, a press release, 1 of our partners recently released, which is around the exciting opportunity potentially here of edge compute and making our 40,000 odd sites available for colocation with data centers, given that many of our sites we have existing shelters that can be reutilized or repurpose for this usage. So there's a bunch of stuff in the pipeline, and I'd just say, look, as our guide has shown for this to be more of a second half or series of opportunities. Richard Choe: And I have to follow up with the edge data center comment, like how meaningful could that be this year and going into next year? And actually kind of follow up on that a little bit. Will you need to add more backhaul at your tower sites? Or is the current backhaul situation and most of your tower is pretty robust. Christian Hillabrant: Yes. Let's start with as an opportunity. I would characterize this in the trial phase, right? So we've signed an additional partnership to test the waters here I think I mentioned in the last earnings call were in Mobile World Congress in Barcelona, we saw a lot of very interesting edge use cases, starting to develop there. So I think we're excited potentially where this could take us. But these are early days still. And our key is to utilize our existing assets and to find ways to drive new revenue streams. So we're looking at this as a very opportunistic thing for us to pursue, with very little capital required, but yet as a real estate company, fully utilizing our assets. So this is how we're thinking about it. I'd say let's stay tuned to this, and maybe this is something that we can continue to update you on through the course of the year as we start to see some of the initial results of the efforts underway. In terms of the fiber, sorry, second part of that question, the question of the question, fiber, most of our sites do have fiber backhaul into them. So there's ample ability to scale those sites. One of the attractive things about tower companies as edge data centers is that you have ample fiber, you have ample power and you have space, which we have all the and, therefore, fairly easy in terms of speed to market for interested parties. Operator: Next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow: Great. Appreciate it. Just to follow up on Richard's question. I think you mentioned that there might be some opportunity for new tower builds. I think that's something we haven't seen a lot of among the public tower REITs in the last few years. Just curious like what form that could take, how significant it could be? And what kind of returns do you think you could get on that? I think, generally speaking, single tenant towers are not generally pretty low return business, but maybe you could elaborate a little bit on that comment. Christian Hillabrant: Yes. And I certainly don't want to raise expectations that we're going into a mass power bill here. It's more a demand profile from our customers looking for partners to help them build towers. I think some of the other smaller companies have started to slow down and as the cost of capital, to your point, has become more expensive. It requires making sure that you really have potentially multiple tenants lined up in order to build these towers and to make the business cases work. So we have a very disciplined approach in place on how we look at this. It's initially going to be small volumes here. But I think our hope is to eventually find a way to provide this as a service to our customers. as I think we're in a unique position given our size and scale to deliver this at a price that's effective and attractive in the marketplace, but allows for the returns that Sunit and his team require in order for us to put a cement in the ground. Eric Luebchow: Great. And just one follow-up. I think you've talked the last couple of quarters about kind of cost efficiencies through SG&A and gross margins and getting your margins up 300 or 400 basis points over some period of time. So I just wanted to confirm that and potentially anything you can reveal on kind of some of the cost initiatives that we'll see after the fiber and small cell deal closes that could kind of close some of the margin gap you have versus your 2 tower peers. Sunit Patel: Yes, let me take that. It's Sunit. So we've already done a fair bit of that with that 20% reduction in staffing this last quarter. Having said that, I do think there are 2 big areas. One is what Chris talked about in his remarks, which is us buying ground leases at returns that take our cost of capital. We think that is a long-term opportunity for us, where structurally, our costs are higher than our peers because they own more of the towers underneath their -- more of their land and they need their towers than we do. So that is a good long-term opportunity for us that we're executing harder on. And then the second is what we talked about, which is investments in platforms and systems and automation which we think will continue to drive efficiencies over the next few years. So yes, I mean, as I look at where we are in '26, let's say all the way after 2030 definitely things that we can do another, meaning in addition to the reduction we made probably another well over 200 basis points in margin improvements. Operator: Next question comes from Nick Del Deo with MoffettNathanson. Nicholas Del Deo: Maybe Sunit, to continue on the land topic, you currently own land at about 30% of your towers. How high do you think that can go over some reasonable time horizon? And how would you characterize the level of competition to acquire land and like the number of opportunities that you're seeing? Philip Cusick: Yes, it's a great question, Nick, because some of it is like how we engage with our landlords and make sure that they if they want to do something, they will prefer us. Some of it is financial returns. You're right. We might be competing against other people. We do believe our cost of capital is lower than many of those operators just focus on land purchases. So I mean, I think that you're beginning to -- you saw some benefit in the first quarter, you saw our CapEx is a little higher. But we do think this is a long-term opportunity. And where can we get to? I mean our goal is over the next handful of years get to a point where we own from 30% to as much as 40% of the land underneath our towers. So it's a long-term opportunity for us that we think we just stay focused on and turn up the dial on that and continue to execute well. Nicholas Del Deo: Okay. Should we think of the level of CapEx over the last couple of quarters as being reasonable prospectively? Or do you think that might even go a little higher to the extent that you can get the machine operating efficiently? Sunit Patel: I think the guide we provided for this year, I think, is fine. And then we'll see kind of where we get to towards the end of the year from a run rate production perspective. And then see what guide we'll provide next year. But Yes, I think this year's guide should be adequate in terms of the range to get done what we think we need to get done. Operator: Next question comes from Brendan Lynch with Barclays. Brendan Lynch: To start with the satellite deployments and Chris, I agree with your assessment that there isn't too much of a risk from direct to device to the tower business. Maybe you could comment on the fixed wireless access demand that you've had over the years and how that might be at some risk of increased competition from satellite -- from broadband satellite? Christian Hillabrant: Well, let's start with the premise of the start of fixed wireless for the operators, and I spent half micron on the operator side, so a little bit of insights here was really about excess capacity being soaked up and monetized by the operators. Since that time, if you look at the current growth rate of data being on a CAGR of like 30% plus, it's now clear this is a new line of business and that is driving incremental activity in terms of densification and capacity in the 5G networks as these operators really go and push this as an opportunity to grow their topline business. Again, our portfolio tends to skew more towards suburban and urban. The hypothesis that you're going to replicate the capacity that a terrestrial network has to service that customer from a broadband perspective seems highly problematic to me, comparative to that very rural customer where you may have excess capacity. The coverage areas of the individual satellites are much larger in terms of the service areas that they provide to than, say, a terrestrial network in general. And therefore, I think we feel pretty confident that, that won't be something anytime soon where the satellite guys are going to be going after the urban customer, but rather the rural customer rather than the guy who's out on his boat somewhere and wants to have broadband available or the farmer out in their farmland. This is how I think we're looking at it and as the industry looks at it today. Brendan Lynch: Okay. That's helpful. And maybe a related question because we've also seen a lot of fiber being rolled out fiber to the home. How should we think about that as competition that might be a little bit more urban, suburban focused than the satellite capacity that might be available? Christian Hillabrant: Well, if you're thinking about like voice over WiFi as an example, using VOIP. Obviously, it's been great for the operators to find a way to offload their networks, to provide that capacity using WiFi and broadband, but again, as they -- this is the same experience and that somebody is utilizing going on to WiFi outside of the home as a way of offloading. If there's a new business model there, I'm not aware of it. So in terms of threats that we look at is what could conceivably reduce the capacity requirements of our network across our portfolio, we don't see Wi-Fi beyond what is already being used as a huge disruptor in the marketplace and suddenly shifting a huge amounts of capacity off the operator networks. I think they would have done it already if they could. Brendan Lynch: Okay. And maybe just one other on the satellite front. To the extent that the satellite networks are going to need to connect to terrestrial networks, is there any upside potential from the satellite operators deploying at some terrestrial sites? . Christian Hillabrant: I mean the good news is Crown Castle is open for business. So to the extent that one of the satellite operators decides to build a terrestrial network and going into the type of competition that you described previously. I think we're open for business and eager to offer our towers and rooftops to those operators. I haven't seen anything that says that they're going to do this in any publications. Maybe you know something that I don't. But again, it's an opportunity that exists if somebody would step into the breach the DISH has left in the market. Operator: The next question comes from Madison Rezaei with Bernstein. Madison Rezaei: I appreciate the extra color on the DISH litigation guys. I know it's a little bit of a black box, and we're also sort of waiting to see, in the theoretical scenario where outcomes move in your favor, I guess, how should we think about sort of recoveries? Are we thinking this is potentially a primary like onetime cash proceeds? Do we think there could be something more structural how do we think that could ultimately flow through if we have any sort of context? Christian Hillabrant: Well, let me start by reiterating what I always do, which is that we are aggressively taking every action to compel DISH to fulfill its obligations, right, both from a legal perspective from a lobbying and public interest perspective, I've certainly been getting the frequent flyer miles back and forth to D.C. meeting with members of the administration, members of Congress, the FCC and the like kind of telling the story, and I think hats off to the WIA or Wireless Industry Association. I think they've done a very good job may not compellingly why this is not in the public interest to allow DISH to walk away from their obligations without paying their bills. And so I'm hopeful that there'll be some action taken, although we don't have any specific knowledge of how this will unfold exactly. In terms of the legal process, we feel really good about our lawsuits. I think we feel like we're in a good position, disputing the force majeure and the various suits that we filed. But I think I've always cautioned the folks on these calls that legal outcome is going to take at least a year. And so there is some time that it will take to get to a resolution there. And then any type of government intervention on our negotiated settlement would be on an ad hoc basis, and that would also take time. So there's no -- I don't have a crystal ball in front of me right now, but I would say if -- at the end of the day, I will feel very good having left it all out on the pitch that we've done everything we possibly can to try to drive to a favorable outcome for our shareholders. And I think legally, we're in a good position. But the timing of that, how it might manifest itself is still very much an unknown. Operator: The next question comes from David Barden with New Street Research. David Barden: So I guess, I got 2 questions. So I guess, Chris, with respect to the upper C-band auction, which is going to come in 2027, it's kind of the biggest event that's going to really happen next year. Could you lay out what you believe based on your conversations with the community of carriers, the base case deployment expectation is. Because there's been a lot of reporting about the FAA altimeter interference with the 4.2 to 4.4 gigahertz. And I think it would be great to just get a sense as to whether when we get this auction done, is this going to be something that drives growth in '27 or '28 or '29 or somewhere beyond. And the second question, if I could, please, is, there were a couple of questions earlier about the edge data center stuff, and we've been talking about this for a really long time, largely in part because of Crown Castle. And the question is, how does that business model look? Who owns the shed? What zoning do you require? How political could it be to get a data center plugged into a local community that uses X amount of power who owns the servers, who deploys -- how does it work? If you guys have had thoughts about that, it really interesting to hear like the evolved business model would be great. Christian Hillabrant: Yes. I'll start out with the first half, and then I'll let Sunit opine on the second half. So in terms of the upper sea band and the spectrum that's made available. It is really hard to give you an estimate of when we think that will be put into service. I think the good news is as we have agreements in place with our customers, that drive the capacity loading ability of each of the sites is it's not going to require a lot of work for us to be able to partner with our customers in enabling that rollout and as rapid as they're willing to deploy it. I do know this, there is a huge again, back to my more recent experience in D.C. There is a growing excitement amongst members -- senior members of Congress and the administration around emerging 6G and the spectrum that's being put into play here starting in '27 that will enable the U.S. to have a strong leadership position in 6G. Now how that manifests itself? What are the use cases? I can't tell you. I'm not sitting in the boardrooms of those companies. But there's going to be a lot of push from the government to enable this to provide funding for it, to provide spectrum for it. And so I'm excited about what that means for the industry as a whole, as I think about long term. And potentially, that we'll find a way to have a long-term guidance that you guys will actually be happy with in our guide. But all I can say is we're very hopeful for where we're headed in that perspective. I think in terms of the second part of the question on the edge data center, you want to talk about that Sunit? Sunit Patel: Yes. I mean the business model there is, look, we're a real estate company. So we sell a lot of vertical space. We also have horizontal space. So in this case, it's conditions charter space that people would rent that could have power. So we required power. In some cases, they might on power backup, they look at that. And then like Chris said earlier, all our dollars have fiber backhaul coming into the towers. So I think the advantage about what we have is you have a fiber connection, you have power and you can have a sort of secure conditions outer space. And we have a fair bit of that already because of prior initiatives. And in some cases, we'd look to either improve or put in new charter space. But essentially, all we are doing is renting our real estate, which is what to do what we do as a business, mostly vertical real estate and in this case, horizontals. So we're not taking any depreciation of technology risk by deploying our own servers or anything like that. Christian Hillabrant: David, the other thing just from my experience in actually building networks and sites and data centers is that there's this not in my backyard around data centers, too, about the requirement the power requirements and the cooling requirements. One of the advantages of the edge beyond the fact that you have really low latency is typically, these are much smaller installations. So you don't have the community uproar about a very, very large facility being put into place. And it provides some level of redundancy in that you have the the edge compute put out in multiple locations, and therefore, you have additional physical redundancy built into the network. So a couple of things of why, if anything, maybe it's even a smaller impediment to getting these out into place than the very large data centers that are getting some pushback in communities now. Operator: The next question comes from Batya Levi with UBS. Batya Levi: Great. Looking at your renewal cycle, it looks like you have a big one coming up with one of your tenants in '28. Can you provide some guidance on when those discussions would typically begin and how you would approach such a renewal with potential competition from private companies or carrier own deployments, maybe even satellite coverage I think that would be helpful to understand what elements of a new contract would be of utmost importance for you, maybe the contract length or escalator. Some guidance around that would be helpful. Sunit Patel: Yes. Thank you, Batya. Good Question. We typically don't get into specific customer discussions. But I would say over any 5- or 10-year period, we do have several at least to the 3 big ones, 1 or 2 of them where we are renegotiating either because it's a new agreement, which all our agreements are long term, 10 to 15 years. Or in some other cases, they want to occupy more space on our tower than they might have had given the deploying new spectrum band. So see it depends what those negotiations look like based on what they're needs are at the time. But I would just say that we have agreements with all our clients, and we generally try to work on them on a timely basis with all our clients. So that's all I can probably say at this point. Batya Levi: Maybe would you have a preference to do renewals in parts? Or does it typically have a sort of home in renewals? Philip Cusick: It sort of depends on the situation and what the client or the carrier wants to do given what -- where they are. Sometimes you do the whole thing, sometimes you might do some interim arrangements while you're working on the whole thing. So it just depends. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Brandon Nispel: Yes. I was wondering if you could talk about your capital allocation and specifically your dividend framework. The payout ratio is going to be extremely high at 90%. And I think pre deal, we were probably expecting the payout ratio to be much lower and work its way up. And with where the stock is at, it seems to make a lot more sense and be more accretive if you were to actually cut your dividend and buy back stock, especially as we sort of forecast out AFFO growth next year, assuming you delever. So I was hoping you could talk about that and sort of your decision to keep the dividend at current levels. Sunit Patel: Sure. Thank you. Yes, I mean, this question saw a lot of discussion and deliberation, both with the team and also the board and the finance committee of the Board and even back when we first announced this capital allocation framework. If you recall back then, people worried about DISH make it, for example. So some of this was talked through. And I think that where we came out is to basically reiterate that the dividend would stay where it is now. We do think that as we said previously, that we can grow our pretty well. And so we will, over the next couple of years or so get to the point where the dividend payout is within the ratio of the range. that we've talked about. And then in the short term, we are paying down a lot of debt because one of the key things for us is to remain investment grade, and we are going to be buying out $1 billion of shares, which should also help both return capital to our shareholders and also drive FFO per share growth. So yes, we did contemplate or think through that more than a year ago. And as I said at the time, people worried about if this would be around. So that was part of our thinking. Operator: Our final question comes from Michael Rollins with Citi. Michael Rollins: A couple of topics, if I could. So the first one is if you were a private company, what could Crown Castle do differently, that's difficult or you wouldn't do whether it's operationally or strategically as a public company? And just curious if there's other considerations as you think about where is best for Crown to operate in public versus private markets? And the second question I had was going back to the terms of contracts. And I know it's -- you can't talk about individual customers. But when you look at the cohorts of towers that you manage and the vintages and where they came from. Is there -- and you mentioned earlier that you're a real estate company. So I think of mark-to-market. In your portfolio, is there a significant number of towers that could either at some point have a significantly positive mark-to-market or negative mark-to-market that investors should be mindful of? Sunit Patel: Yes. Great questions. On the private versus public, I think that the goals and objectives that Chris articulated, I don't think it changed like making sure we are customer experience, customer satisfaction, improving our cycle times, operating efficiently, driving productivity. I think those will remain in place. I think where we see opportunities to put money to work, like we talked about buying ground leases. I don't think that would change making investments in platforms and systems to drive more efficiency, productivity automation. I don't think that would change. The only real change in a private company is, I believe, how much leverage you might take and what would you do with your cash because you're not paying dividends out, whether you pay debt down or pay to your shareholders. But from an operational perspective, I don't know that we would do anything, but I'll let Chris to jump... Christian Hillabrant: I was just going to say, I just came from leading the private tower company in Europe, and there's not a lot of differences. And in fact, you still pay dividends even as a private company. So I don't know that there's any real advantages or disadvantages. I think in the end, we should always be guided by what's in the best interest of shareholders that would guide a decision like that. I think it would be very expensive possibility. But it -- look, we would do whatever is in the best interest of shareholders always. But I can assure you, in terms of running a private tower company versus a public tower company. We all face the same series of pressures to drive efficiency, a highest return on invested capital. And it's about servicing the customer. And I don't really see any advantages one way or the other only in terms of the valuation of of how they're looked at in the public and private markets that would differentiate them. No real advantages that I would see, but that's one man's opinion. Sunit Patel: Yes. And then on your question with respect to repricing tower asset value, in terms of contracts, we have quite a few levers with clients. One is, to the extent they want more space on an existing tower beyond what they have contracted for, how would you charge for that. To the extent they want to add new dollars, what's the pricing for that? And in some cases, you might either have average cost over tower. In some cases, you might have market specific pricing. So just depending on escalators is another one. So depending on the client, the history where you are, what kind of money we might or might not be leaving on the table, competition, et cetera. what kind of commitments the clients is making the new tower or needing more space on an existing tower. We -- all of that gets factored into our commercial models to try and figure out what -- how we can craft win-win outcomes for both sides. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM First Quarter 2026 Earnings Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Victor Bareño. Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and thank you for joining our Q1 earnings call. With me today are our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its first quarter 2026 results yesterday at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is available on our website together with our latest investor presentation. As always, we remind you that today's conference call may contain forward-looking statements in addition to historical information. For more details on the risk factors relating to such forward-looking statements, please refer to our press releases and financial reports, all of which are available on our website. Please also note that during this call, we will refer to profitability metrics, primarily on an adjusted basis. Reconciliations to reported numbers can be found in the press release and in the investor presentation. And with that, I will now turn the call over to our CEO, Hichem M'Saad. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our first quarter 2026 results conference call. We will follow the usual agenda for today's call. Paul will begin with a review of our first quarter financial results. I will then discuss market trends and our outlook followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thank you, Hichem, and thanks, everyone, for joining our call today. Let me first walk you through the Q1 financial results. Our revenue in the first quarter of 2026 amounted to EUR 863 million, which was at the high end of our guided range of EUR 830 million plus or minus 4%. On a constant currency basis, revenue increased by 16% year-on-year and by 26% compared to Q4 '25. Equipment sales increased by 14% at constant currency and were led by ALD. Spares & services continued to deliver a very strong performance with a 23% year-on-year growth at constant currency. This was the result of continued expansion of our outcome-based services and strong spares demand in an environment of elevated set utilization rates. In terms of customer segments, revenue was led by logic/foundry, which accounted for the clear majority. For the full year, advanced logic/foundry sales are expected to show significant growth this year. However, due to quarterly phasing, they were down from the very strong first quarter last year. Mature logic/foundry for the large part from customers in China increased compared to Q1 last year and rebounded strongly compared to the relatively low level in Q4. Memory sales showed sequential growth compared to Q4 last year and also expected to grow significantly for the full year, mainly in DRAM. Sales in the memory segment were predominantly driven by applications for high-performance DRAM in HBM-related applications. Sales in the power analog wafer segment increased compared to the first quarter of last year, mostly in silicon-based solutions but from a low base. Gross margin in the first quarter amounted to a strong 53.3%. This was virtually unchanged compared to 53.4% in Q1 of last year, up from 49.8% in Q4. Gross margin was supported by a favorable product and customer mix including an increased sales contribution from China, which rebound strongly compared to the lower level in Q4. The gross margin also benefited from a gradual impact from cost reduction programs that we have been implementing over the past few years. We expect the gross margin to be at the higher end of the target range of 47% to 51% for the full year. SG&A expenses increased by 8% year-on-year at constant currency, mostly due to higher variable expenses, but dropped slightly as a percentage of sales, demonstrating our ongoing focus on cost control. For the full year, we continue to expect SG&A as a percentage of sales to drop below 9%. Net R&D increased 11% year-on-year at constant currency in Q1. We continue to step up R&D investments to support customer transitions to next-generation nodes and to advance our expanding pipeline of opportunities. For the full year, we intend to keep the net R&D within our target range of a low double-digit percentage of revenue. Operating profit increased by a solid 21% year-on-year at constant currency, and the operating margin reached a new record of 33.1%. If you look at the main movements below the operating line, financial results included a currency translation gain of EUR 10 million in Q1 '26 compared to a translation loss of EUR 40 million in the first quarter of last year. As a reminder, we hold a large part of our cash in U.S. dollars and the related translation differences are included in our financial results. Our share of income from investments, reflecting our stake of approximately 25% in ASMPT amounted to EUR 7 million in the first quarter, up EUR 2 million in the year ago periods. Next, the balance sheet and cash flow. ASM's financial position remains [ solid ], and we ended the quarter with a cash position of close to a EUR 1 billion. Free cash flow was EUR 48 million negative mainly reflecting the working capital outflow in the quarter marked by a sharp ramp in activity levels. Days of working capital increased to 69 at the end of March, up from 45 at the end of December. The main driver for the increase was higher accounts receivable due to strong sales increase compared to the relatively low level in Q4 as well as back-end loaded distribution of sales during the quarter. CapEx amounts to EUR 38 million in the first quarter, up from EUR 30 million in the same quarter of last year. And for the full year, we expect CapEx to be around or to be somewhat above the higher end of the guided range of EUR 150 million to EUR 250 million, with the largest part related to the construction of a new site in Scottsdale, which remains on track for completion in Q1 2027. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market trends. The first quarter, again, confirmed that AI is the main driver of semiconductor demand. Customers continue to add capacity to support the ongoing expansion of AI data centers and the broader infrastructure build-out. This is keeping demand strong in the areas where we are most exposed, especially logic/foundry and we saw this demand strengthening further during the quarter. We have also noted a continuing proliferation and diversification of the AI workloads into the CPU and the power markets. For this reason, we see AI driving strength in all segments of our business: advanced logic/foundry, mature logic/foundry, memory and especially DRAM and, to a lesser extent, power, wafer, analog market. Looking ahead, our strategic view remains unchanged. As AI adoption broadens and demand continues to scale, compute capacity is increasingly the limiting factor. In semiconductors, this is translating into tighter capacity needs for advanced logic/foundry and memory devices, driving higher investment intensity and increasing the urgency of tool deliveries. Against this backdrop, our focus is on execution as we continue to support our customers' expansion plans. The pace of demand is putting additional pressure from the supply chain. But so far, we have been able to manage these rising challenges in close cooperation with both suppliers and customers, reflected in the sharp step-up in our quarterly sales from EUR 700 million in Q4 of last year, to a level approaching EUR 1 billion projected for Q2. Turning now to customer segments. Logic/foundry again led our performance in Q1 supported by continued strength at the advanced nodes and a sequential rebound in mature logic/foundry demand. Our view is unchanged that logic/foundry will be a strong driver of our sales in 2026 and also going into 2027. The structural outlook for this segment remains strong. AI-driven compute requirement and the ongoing shift to more complex 3D device architecture and new materials continued to increase ALD and epitaxy and density. As we progress through the year, we expect momentum to build further with ongoing capacity additions as the 2-nanometer technology node accounting for the largest part of advanced logic/foundry sales in 2026. This first generation of gate-all-around device technology is shaping up to be a large node, enabling new applications in high-performance compute, including AI as well as advanced mobile and other leading applications. We continue to benefit from the step-up in our served available market at 2-nanometer supported by a broader position in Epi and sustained strong market share in ALD. In addition, we have seen a healthy uptick in demand related to the nodes from 3-nanometer to 7-nanometer, driven by agentic AI. The demand is outstripping supply which has led to renewed capacity investment. Looking ahead to the industry's next node transition to 1.4 nanometer, we expect pilot-line investment to begin later this year. We are deeply engaged with key customers as they prepare for that transition, and we expect the first meaningful contribution to our sales in the second half of 2026. As we have highlighted before, we expect the SAM uplift at the 1.4 nanometer to be even larger than what we saw at 2-nanometer node. At 2-nanometer, the industry's main priority was to get the first generation gate-all-around architecture and to high-volume manufacturing with gate-all-around now in production and ramping, customer have more room to include additional performance boosters. And for ASM, that translates into more functional there in the transition stack to further optimize power and performance, including additional dipole layers to enable Multi-Vt options. Alongside the higher SAM opportunity, we have already secured several key product penetration which supports our expectation for a higher ALD market share in the 1.4 nanometer node, public disclosure from some leading customers suggest that the 1.4 nanometer node is designed to deliver clear improvement in performance, power efficiency and density versus today's 2-nanometer node. This is well aligned with ever increasing AI token demand and the associated compute and power constraints in data centers. As our customers move toward higher volume manufacturing in 2027 and 2028, we expect 1.4 nanometer to become a meaningful driver for ASM. Next, looking at memory. Demand in Q1 was solid, with robust momentum in the most advanced DRAM technologies used in HBM-related applications. Continued investment in AI infrastructure is keeping demand for high-performance memory strong and supporting ongoing expansion of advanced DRAM capacity. For the full year, we continue to expect healthy growth in our memory business. Looking further out, DRAM remains a meaningful and strategic opportunity for ASM. From a technology perspective, our customer R&D engagement in memory continue to expand, including development work around new ALD and epi applications that support the transition to 4F² and very fantastic DRAM. As we highlighted at Investor Day, the transition to 4F² is expected to drive a step-up in ALD and Epi intensity and expand our served available market by approximately USD 400 million to USD 450 million based on 100,000 wafer start per month capacity. Turning over to power, analog, wafer market segment. The contribution in Q1 remained relatively low, reflecting the soft market condition in broader parts of automotive and industrial. That said, we have seen some pockets of strength in selected areas, particularly in power applications for AI data centers. For 2026, our view is unchanged that this segment should recover gradually from a low base. We remain well positioned to benefit once demand conditions improve more broadly. Moving on to China. The increase in Q1 was largely driven by the mature logic/foundry segment, where we saw higher activity across a broader set of customers, reflecting improving market conditions and to a lesser extent, the power, analog segment. In addition, I'd like to highlight ASM's ongoing success in winning new positions which also contributed to our strong performance in China. This demonstrated the continued competitiveness of our solution and the strength of our local team. Based on current visibility, we expect sales in China to increase for the full year with a stronger contribution in the first half. Now let's talk about advanced packaging. As we have discussed during the Investor Day, we are looking into advanced packaging as another midterm growth area for ASM. We believe that this market is ripe for disruptive solution in new materials and interface engineering playing into ASM's strength. We are engaged with multiple customers on advanced packaging, and we are seeing some encouraging traction for our innovative solutions. That brings me to the outlook. At current currency, we project revenue to increase in Q2 2026 to EUR 980 million plus or minus 5%, and we continue to expect revenue in the second half of 2026 to be higher than in the first half. As mentioned, China sales are expected to be first half weighted. This means that our other business segments are expected to strengthen from the first to the second half, including continued solid momentum in advanced logic/foundry higher sales in memory and a gradual recovery in power analog. While it's too early to provide specific guidance for the full year, based on our guidance in Q2 and a further increase in the second half, it should be clear that 2026 is going to be a strong year for ASM. And with that, we have finished our introduction. Victor Bareño: Thank you, Hichem. Let's now move on to the Q&A to ensure that everyone has an opportunity to participate please limit your questions to no more than two at a time. Operator, we are ready for the first question, please. Operator: [Operator Instructions] First question is from Andrew Gardiner, Citi. Andrew Gardiner: Hichem, just sort of pick up on the point you were making at the end of your prepared comments there. You're saying you will have growth in the second half of the year versus the first half, but obviously, the visibility is perfect to quantify it for us yet. Previously, you've been willing to talk about your performance relative to the wafer fab equipment market broadly and that ASM would outperform that. Clearly, WFE expectations are moving quite rapidly as well at the moment. Could you give us an update on how you see the broader market in terms of WFE? And can you confirm that you will still outgrow that in 2026? Hichem M'Saad: Thank you very much for the questions. Yes, we talked about that in our previous conference call that we're going to at least perform as good as the wafer fab equipment market or better. Yes, we have seen improvement in the WFE market. I mean we follow very closely what Gartner and VLSI are talking about. And we can reconfirm again that our growth in our market, in our revenue in 2026 will at least outgrow the WFE market again. So as I mentioned, we see strength in the market and our revenue is strengthening, and we are very confident that we'll be able to at least grow at least at the WFE market or beat that in 2026. Andrew Gardiner: Okay. And just a clarifying question, the point you were making on China. In the second half, so is that China down second half on first half? Or down year-on-year or perhaps it's both? Hichem M'Saad: No. I think China is really up year-on-year. So the -- what we talked about that we see right now that China is lower in the second half of 2026 versus the first half of 2026, saying this, and I want to repeat it again. China visibility is not that great as we talked about it, okay? So from that point of view, if there is anything, that second half China business that we see right now might also increase eventually. But right now, what we see very strongly that the second half would be a little bit slower than the first half. But again, that might strengthen in the second half. We don't know. Operator: Next question is from Nigel Van Putten, Morgan Stanley. Nigel van Putten: I want to follow up on the previous question on China. Perhaps for the full year, there are some limited visibility. But can you provide us a revenue or China revenue as a percentage of overall revenue for the first half at least? And how that maybe compares to the full year '25 when you said it's going to be -- or it came in a little bit over 30%. That is my first question? Hichem M'Saad: Nigel, thank you for your question. Nigel, maybe there's a misunderstanding that about the visibility -- low visibility of China. Right now, okay, our visibility for 2026 is very good, okay? China or no China, okay? Because I mean, it's really clear everywhere in our market, okay? So that's why we are really confident about the market. If there's anything in China, the revenue is going to increase further in the second half, okay, from where we see it right now. So, but China business has been good, and we feel very confident about it. Paul Verhagen: So maybe to add to what Hichem is saying, what we see in is now, at this moment, at least, is an accelerated demand. And in China, we have a higher H1 expectation. And H2, which might still change, we don't know, as Hichem has indicated. Possibly, that is because of concerns on export controls, we don't know. One thing is for sure that the overall sentiment is very good, like in the rest of world, also AI related. That's itself positive. Two, we also won some more layers in itself is a positive. But yes, there is clearly an acceleration going on, which, of course, customers are on tariffs, but which could be triggered by concerns around export controls and how that will develop further, I think, at this stage, and nobody knows. Then on the full year, based on everything we know today, I think the equipment revenue as a percentage of total sales will be similar to last year. But again, it's really too early to tell, so this might change because for all the reasons that we already mentioned. Nigel van Putten: Got it. That's really helpful. Then now maybe switching to the advanced logic customers which I understand are providing increased visibility maybe 8 quarters on a rolling basis. Question would be, do you see any sort of broadening on the horizon, sort of it's clear that the main customer remains very strong, but how are the other two doing maybe today? And how do you see that developing into the second half of the year? Hichem M'Saad: No, I think, Nigel, I think we see -- we're working right now with all customers in advanced node for both of the 2-nanometer node and 1.4 nanometer node. And then we see that gate-all-around is a technology that's going to be adopted by more customers. And we feel very confident that that's going to be the case. Of course, okay, some customers have better yield or performance than the other ones. But we think that gate-all-around is going to be really a broad technology node and for a variety of customers. Operator: Next question is from Didier Scemama, Bank of America. Didier Scemama: Just a follow-up actually to the previous question on the boarding of the customer base in advanced logic. Obviously, your largest customer is doing terrific. On the two smaller ones, is that supposed like expected to strengthen in Q2? Or is that more of an H2 driver? And I've got a follow-up. Paul Verhagen: Yes, let me take that question. I think what I can say on that. I don't want to be specific on Q1 and Q2 or Q3 when it comes out both down to customers. But what I can say is at least that based on current visibility that all those customers are expected to grow year-on-year. And of course, there is a significant difference with regard to the size of the various customer and the absolute amount of growth as a result of that. But we expect all three for the logic part, all three of them to grow year-on-year. Didier Scemama: Okay. And for my follow-up for Q2, would you expect China to be up sequentially or flat? Or how should we think about that relative to your overall sequential growth guidance? Paul Verhagen: What we've said indeed is that for next quarter, we expect EUR 980 million plus or minus 5%. We also said that for H1, we see an accelerated demand for China coming in for various reasons I just discussed in the call before. So I think it's reasonable to assume that also Q2, China will be pretty good. Didier Scemama: Should we expect, therefore, the gross margins in Q2 to remain at sort of above the long-term guidance given the mix? Paul Verhagen: You know that I'm not going to specifically guide on a quarterly basis for the margin, but the margin will be good that I can say China is accretive, as you know. But also, I think what is also not unimportant. I also want to highlight that is that the other product mix that we've seen actually in the last few quarters has been very strong. So that also helps. And last, but not least, the structural cost improvements that we're working on, which will every year add a little bit also play a role. But having said that, yes, higher share of China typically is accretive, yes. Operator: Next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: I have a question for 2027, actually. So if we look at your '26 growth drivers. I mean if I look at the different drivers, I don't see much layers increase in '26 as a growth driver, because I think it's mostly capacity, [indiscernible] was already adding a lot of capacity last year. So from a year-over-year point of view, you don't have a lot of incremental layers. Now if you look at '27, it looks like you will have a lot of layers opportunity that you laid out at your Capital Markets Day. So I was wondering, if we think about this dynamic of layers increasing, is it fair to say that '27, if we assume the same capacity increase that '26, that should be a higher growth than '26? You have more drivers on top of the capacity in '27 than you had in '26. Is that the right way to look at it, if you understand my question? Hichem M'Saad: Yes. I think we understand your question. I think it really depends both on the end demand from that point of view. But we -- as the technology node transition from 2-nanometer to 1.4 nanometer, we see the adoption of 1.4 nanometer starting in the second half of 2026. And we see the 1.4 nanometer bias to increase in 2027 for final production in the first half of 2028. And with the 1.4 nanometer node, there's more ALD and more Epi. And as we mentioned, these ALD layers are mainly in the front end of line for performance level. And that's where we have many more -- a lot of strength, and that's where we're going to have many more ALD layers. So we are really very happy with -- we'll be very happy with the 1.4 nanometer transition, because of the higher ALD intensity. Also, we have more ALD layers in molybdenum. I think that as we mentioned in our last press release that we are very happy to be in production, high-volume production at the 2-nanometer node with our moly ALD. And with the transition to the 1.4 nanometer, we also have won some process of record layer in molybdenum. So overall, the transition to 1.4 will be very accretive to us, and we'll be very excited with that transition in the future. Francois-Xavier Bouvignies: And the memory side -- Yes, go ahead. Paul Verhagen: I think you said it, but I want to make it a little bit more explicit that just for you guys to be clear that already in this year with the pilot for 1.4, which is also, of course, increased layers, as you know, we already see a very, very meaningful contribution of 1.4. So that's not only in '27, but it's already starting in '26. Francois-Xavier Bouvignies: Good to know. And maybe you didn't address maybe the memory layers and maybe for '27. And then you mentioned market share higher in A14. So can you maybe explain a bit the higher share here? I mean, is it because just your time is getting higher than the others? Or you just have more layers than you expected? -- more than before? Hichem M'Saad: Yes. So the 1.4 nanometer, what's the difference between the 1.4 nanometer node and the 2-nanometer node. So they are both gate-all-around. But for the 2-nanometer node, that's an architecture change. So customers didn't want to be very aggressive in putting many functional layers because of the change in architecture. But once we move to 1.4, they have added many goodies, which we call performance layers. And those layers are really mainly ALD layers. And they are all in the front end of line, where we play significant. That's where our strength is. Yes. So definitely, we see more ALD layers in 1.4 nanometer. Second thing, as you shrink, those -- and with the gate-all-around structure, as you shrink those layers become much more difficult because of the 3D nature and the shrinking. And with that, the since every layer becomes much more difficult, that also slows down the process. And with that, you need more equipment from that point of view. The other thing we see is that also there is a higher epitaxy intensity going forward. So overall, that's very positive. Operator: Next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. To come back on the Q2 guidance, which is about EUR 100 million of what the consensus was expecting. So I'm just trying to understand what led to this acceleration, if it's more advanced logic or memory. And if you could comment also on the lead time at the moment if they are increasing? And is there a difference between the two different segments? And I have a follow-up. Hichem M'Saad: I think that the acceleration is happening in mainly in the 3-nanometer to 7-nanometer node. in addition to the gate-all-around node. So what we have seen lately is that Agentic AI is becoming more important. And with that, that tends to favor using the CPU instead of GPU. So the 3 to 7-nanometer node is really mainly driven with CPU. And we see much more demand from our customer in that node, and that's really happening super fast at this point in time. We also see strength in memory continuing. So overall, the market is really strong in the leading edge, both logic and mainly logic and foundry, that's really the highest part of the market. Second is really also DRAM is also increasing. Stephane Houri: And about the lead time, sorry. Hichem M'Saad: So regarding the lead time, I mean, lead time has increased because of the supply chain constraints right now. I mean there's a huge demand everywhere. So yes, the supply chain has increased, and that's really the customer specific. We've been able to expect that to happen. That's why we can -- we have increased our capacity to from like EUR 700 million per quarter in Q4 of last year to about EUR 1 billion per quarter this year. And it's going to continue to increase in the second half, as we have mentioned. Stephane Houri: Okay. And that's exactly my follow-up. I mean you're going to be at least EUR 1 billion per quarter in the second half run rate and there's probably some additional growth coming in 2027, given what you said and what we see in the market. So at what point will you fill all your plants and notably the Singapore plant and that you will have to again increase the capacity? Hichem M'Saad: I think our manufacturing capacity is -- can take care of our business. I think we have expensive manufacturing capacity in Singapore and Korea. So we're ready for much higher volume. I think what's limiting -- if there's any limit is really the supply chain that's limiting the capacity than anything else. But I think that we'll be able to manage that in the second half. So that's why we're confident of increased volume in the second half of 2026. Operator: Next question is from Sandeep Deshpande, JPMorgan. Sandeep Deshpande: Maybe you can give a comment on what has changed in your customer behavior versus what you were -- you had seen from your customers the last time you reported in -- reported your results. Has something substantially changed given your very strong guidance into the second quarter? And then I have a small follow-up. Hichem M'Saad: I think that the market is really strong all over. Has there been any significant change? I think the change that we have seen is really on the PC part where for -- on the CPU part where it used to be that AI is mostly driven by GPU, but we see that CPU part becoming more important than before. And we see that's the strength we see in the 3-nanometer to 7-nanometer node, which was not there before. So that's really the strength we see. It's mainly the CPU-driven part for artificial intelligence. Sandeep Deshpande: And then when you look at the WFE, I mean you had said 15% to 20% at last results. I mean, given your guidance for the second quarter and your indication on the second half of the year, it looks like you're going to grow well over 20%. So what is your perception on WFE at this point for this year? And I mean, despite your lower exposure in the memory market, you are growing incredibly well. And so is this mainly associated with the second half ramp also with 1.4 nanometer where your content is growing, your number of layers you have is growing very substantially. So this is essentially share gain in the WFE market? Paul Verhagen: Yes. Let me take that, Sandeep. So yes, to give you a very short answer, that's part of it, absolutely. But also basically, I think as Hichem already said, but maybe in different words, we're firing in all cylinders. Every segment of the market is growing significantly. I mean, advanced logic/foundry, mature logic/foundry, memory of which, in particular, DRAM, we see a high growth and even power with analog for power-related AI data center applications from a low base, but as a percentage, still high growth. And of course, also pilots 1.4, that I started with, adds a decent amount for this year already, yes. Operator: Next question is from Adithya Metuku, HSBC. Adithya Metuku: Firstly, I wanted to talk about 2027. I know you gave these targets of EUR 3.9 billion to EUR 4.6 billion, top line at a EUR 125 billion WFE number. So call it EUR 4.2 billion midpoint. If you look at WFE numbers now, people are depending on whose numbers you take 40% to 50% higher than that EUR 125 billion in 2027. So my first question is, should we assume that, that EUR 4.2 billion could be maybe 40% to 50% higher from 2027? What are the nuances we need to keep in mind when we think about where WFE is going and how your revenues might go in 2027, you've clearly talked about outperforming WFE, I presume that will continue. So just any pointers you can give around how we should think about these targets you gave at the CMD 40% higher, 50% higher? And I've got a follow-up. Paul Verhagen: Yes. Let me take that. So indeed, I think we said EUR 3.8 billion to EUR 4.7 billion at CMD, where we assumed EUR 120 billion WFE, which today's view is indeed significantly higher, but there's one big difference. The assumption that we took at that time, which was somewhere September last year on the composition of the mix is very different from what we see today. So we had by far the largest part of the total WFE basically logic/foundry, while now the relative share of memory is significantly larger than what we assumed. And although we grow a lot in memory, but still our relative share of memory in our business is still relatively small. So that's why you will not see the full benefit of that increased WFE dripping down into our numbers. Having said that, based on everything we see today, we believe that '27 will be a strong year. But adding 40% to 50%, I would not recommend you to do that. That would give some distorted figure. At the same time, it's a very wide range, EUR 3.8 billion to EUR 4.7 billion is almost EUR 1 billion range. So also even within that range, there's still a lot of room to maneuver. And more than that, at this stage, I don't like to say. Adithya Metuku: Got it. Okay. We'll leave 40% or 50% of side go with 30% then. And just quick follow-up. On the MATCH Act, can you give us some color on how you're thinking about any potential impact for you guys as you think about your China revenues? Yes. Any color you can give around how you might be affected? I know it's hard to quantify numbers, but any qualitative color would be great. Paul Verhagen: Yes. So the MATCH Act indeed is being discussed as we speak. If it will happen or not is uncertain. It might or it might not. In what shape it will happen is also uncertain because at the end of the day, it is important, literally the point and the commerce are very important there, especially in relation to how to interpret what is exactly restricted. We're in, of course, discussion with relevant authorities, as you can imagine. So it's very hard, and I would love I could give you some more color to give decent color at this stage. Obviously, if something like that were to happen, it's not a positive, that might be clear. But how much, I'm really not in a position yet. It's too -- it's literally too unclear and too uncertain still on what might happen. So I don't like to speculate on that. Operator: Next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first one is regarding your very strong short-term momentum. You mentioned that just now it's all driven by the CPU-related incremental demand. I just want to confirm that, have you seen any customer from both logic and memory perspective, pulling forward? Are you asking you to accelerate the shipment of equipment because end market demand is coming so dramatic in the short term. So therefore, it's like a pull forward from 2027 at all? Hichem M'Saad: I think every customer wants the tools now instead of tomorrow. I think the demand is really high. And for us, it's which customer we ship to first than the other one. So I think like we mentioned, we are fully booked for this year. From that point of view, we have a strong demand in all parts of our business, really every part of our business very high demand. And yes, we see customers the demand is even increasing. So I mean, we -- our book is full. So we have to do our best to be able to satisfy the demand that we're getting right now. Tammy Qiu: Okay. And the second one is, last quarter, we discussed that the 1.4 nanometer is mainly driven by one customer versus others have been having discussion with you, but still a bit distant away from pilot production, et cetera. I'm just wondering where is the status of those remaining customers? Are they getting closer to make the decision on pilot production? Or are they still further down the line? Hichem M'Saad: So as we mentioned that we see -- we are working with all customers to the 1.4 second generation with a 1.4 nanometer technology node. And we see that business strengthening in all the customers from that point of view. Some of them is at a marginal increase and the other have a higher increase, but I'm not here to speculate on which customer, which, but we see at least a marginal strength in some and a significant strength in other customer. But saying this, I think more likely, like I mentioned that 1.4 nanometer would be more than one customer. Tammy Qiu: Just to confirm, have you seen any progress during the quarter, i.e., all of them have moved forward or just one of them moved forward comparing to last quarter. Hichem M'Saad: Can you repeat your question, please? Tammy Qiu: So basically, the time line of the 1.4 nanometer, last quarter, you mentioned that one is active preparing for pilot production, remaining two is still in discussion firmly at this stage. I'm just wondering, this is three months after, have you actually seen other customers together with a leading customer or moved forward in the time line for 1.4 nanometer? Or just one customer has moved forward instead of all three of them? Hichem M'Saad: I'm going to repeat my answer, where we see 1.4 nanometer strengthening broadly with some strengthening marginally in some customers and significant increase in other customers. Operator: Next question is from Jakob Bluestone, BNP Paribas. Jakob Bluestone: I want to come back to Adi's question around your ability to sort of take part in growth in memory. And my question is, when do you anticipate the transition to 4F² and FinFET for the cell periphery in DRAM to impact your revenues? So is this something that would impact in '27? Is it '28? Or do you think it's further out? Paul Verhagen: I can take that question. Yes, I think because I think last time already, we mentioned that the pace of adoption customer by customer is different. There might be even a customer that might completely skip it. We don't know yet, but that's to be seen. And I think for us, based on what we see and think we know today, I think you should take into account '28 as the first year where we start to see a positive contribution related to 4F². [ Might ] -- maybe a little bit earlier, I don't know yet, but I would -- I mean time line is still a little bit uncertain and very different from customer to customer. So I think the best color I can give right now is in '28. Hichem M'Saad: So add to what Paul has mentioned here, we see a strength in memory in 2026 and also increasing for us in 2027 and beyond. The biggest increase for us will happen really in the move into 4F², where we have more ALD layers and more also Epi intensity. But also we've seen some customers put in FinFET in their node in their road map. And with that, we're working with them and we might -- and since we have been very prominent in our FinFET technology in logic. So that we see some customers really pulling in that technology node. And with that, we probably will get some more layers as customer put in their FinFET technology node. So the biggest increase would be '28 and beyond, but also we see some increase in 2027. Jakob Bluestone: Understood. If I can just ask a quick follow-up as well. You mentioned a few times the sort of pickup in 3 to 7-nanometer transition, and I don't know if you can give any color on whether that's your largest customer or kind of more broad-based? Hichem M'Saad: Which transition, are you talking about, sorry? Jakob Bluestone: 3 to 7? Hichem M'Saad: Yes, I think it's really broad based. That's really broad-based. It's not only one customer, it's very broad-based. Operator: Next question is from Ruben Devos, Kepler Cheuvreux. Ruben Devos: I just had one on Epi in HBM. I believe you talked about significant Epi engagements with another HBM customer and expect good news this year. So of course, curious whether two months on has anything firmed up on that additional qualification? And would that be, let's say, fully incremental to your memory plan in '26? Hichem M'Saad: Okay. So to answer your question, yes, we talked about that, and we are engaging with our customer on epitaxy. There's really nothing else to say right now, but we'll let you know if there's any news from that point of view. It's really working with customers on a couple of customers on epitaxy. And hopefully, we can share some good news with you in the next investor call meeting. Ruben Devos: Okay. And then second one, really to just get a feel of maybe the aftermarket sales, right? I mean you've had a stretch of very good performance in the last few quarters, again, 23% up the past quarter. Outcome-based is about 25% of the mix. So it looks like, I mean, the target you said at the Investor Day of 12% CAGR is becoming more of a floor. I was curious whether you could talk a bit about, yes, the extended visibility you might have now in aftermarket sales. And I can imagine a margin uplift to realize if you manage to make a transition more towards outcome-based. But also besides that, are you able to sort of have the customer pay more per tool for the servicing packaging in general? Hichem M'Saad: I think that for service market, okay? What I mentioned, the service market is really good as you transition in a newer technology node because of process complexity. It's very important to -- a customer need more support from us and for the more advanced node. And with the advanced node also, we see a transition to much tighter specification on wafer-to-wafer and also repeatability on chamber-to-chamber matching and also on system-to-system matching. And with that, we have to provide a new solution to customers to improve the uptime and the availability. So we are very really -- we think that the surface business is going to increase in the future as you transition to tighter and tighter technology node. And we see that happening in the area of automation, in the area of robotics, in the area of optics. And those are really the solution that we're providing our customers. So the growth is going to be good in that part of the market. You mentioned that 12% growth. To be honest with you, right now, every part of the market is growing a lot. This year, the market is growing over 20%. I mean, latest, you see Gartner talking about 25%. So everything is great. It's really just spending my time, okay, to make sure that we can execute on getting customers the tools in time and make sure that the availability and the execution is top notch. Operator: Next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: First one for Hichem, please. Just looking at the technology execution and just trying to scale maybe how much upside there is to that? If I look at your long-term revenue guide, the high low range is kind of 20%, 25% between the low and the high. Obviously, part of that is the strength of the cycle. Maybe part of that is also conversion of existing evaluations and layer wins. Maybe could you just share how much of that is upside potential from layer wins? So if you could just think about that in the context of your go-forward revenues? And then I had a follow-up. Hichem M'Saad: You said the percentage I didn't hear you well on the percentage, which percentage are you talking about, please? Timm Schulze-Melander: Yes. So if we look at your EUR 3.8 billion to EUR 4.7 billion revenue guide, so part of that is going to be cyclical. Part of that's going to be your execution in terms of technology wins. I'm just trying to think is that half off, but some kind of scale of that? Hichem M'Saad: If you look into the business and where we are, one thing I can tell you, I'm really very excited about our technology road map. I think that things are going in our direction. If you look into logic, you see more and more layers coming in with 2-nanometer and also with 1.4 nanometer. ALD intensity is increasing and [indiscernible] intensity is increasing, and we're winning share in that part of the market. If you look into memory, memory is moving more and more into FinFET more and more in 4F², which needs more Epi, needs more ALD. So we're going to have more layers, and we feel very confident about it. And if you look into logic -- if you look into power, wafer, analog, we are really -- if you look at the power, wafer, analog, the power part of the market is the only part of the power, wafer, analog that's strong right now. And that's being driven by data centers, power devices for data center. If the wafer part and the analog part goes up, it's going to be even accretive to us. So the service business is also good. In the service business, we're going more and more by automation. And we really -- we're getting some -- getting into even robotics and that customer and leading customer, we're even selling them, okay, some robots to improve the system availability and so on. If you look into advanced packaging, that's an area that we mentioned that we have entered last year. It's a new area for us. I can tell you that we have so many -- believe me, so many interactions with customers. And we have to prioritize which one to do and some customers tell them, guys, maybe we don't have -- we cannot really help you there. And -- but with the customers that we're really engaging right now, I can see that they really like to work with us as a company because we're looking into the advanced packaging through a different option. We're looking into that as, okay, what can we do to disrupt the technology? What can we do to provide a solution that's better than what it is right now. How can we -- a solution to make sure that, okay, we reduce the -- to reduce the thermal mass on advanced packages coming with a new material that improve thermal conductivity. We're working with customers to make sure that we can seal the devices much better. So there is no moisture going in the packages. We're working with customers to actually improve the speed of connection between one chip to the other one, working with them on some innovative photonic layers. So I'm sure that with all of this really, we feel very confident where things are are going to go from that point of view. And depending where the market is going to go, I'm very confident that we're going to at least match the WFE market growth or actually have a higher growth than WFE. It's a great time for ASM right now. And we -- I see customers really want to work with us. I think our execution has improved. I think our competitiveness is getting even better than before. And what I can tell you, it's the best time to be in semiconductor. Timm Schulze-Melander: A very impressive runway. Maybe just a quick follow-up for Paul, just some housekeeping, actually. You talked about rising utilization rates, but actually Q1 aftermarket sales were down sequentially. And on your guide, I think last quarter, your guidance range was plus minus 4%. This time, you've widened that range to plus minus 5%, which doesn't maybe sit that well with a sort of improving visibility. Just wondered if there's any color you could share in terms of what you're seeing. Paul Verhagen: Yes. So actually, the range is, I think, already referred to is related to supply chain challenges. So far, we've been able to manage it. But at the same time, we have to be on top of it to make sure that we get what we need to deliver what we need as per our customer preferred COD customer request date. So that's a little bit where the range comes from, Timm. It's not so much demand. It's more what can we deliver on time given the supply chain constraints that so far manageable again. But yes, we have to be on top of it and nothing can go wrong here. Timm Schulze-Melander: So that's what was in the aftermarket in Q1 and maybe there's some catch-up in Q2? Paul Verhagen: I don't know if there's catch-up in Q2. I mean I think had a very good Q1. I think we delivered more or less what we wanted to deliver, and we will target to do the same in Q2. Victor Bareño: Thank you, Timm. We still have a number of participants in the queue, but we are running out of time. So let's take one final question. Operator, can we have the last caller? Operator: Final question is from Javier Correonero, Morningstar Equity Research. Javier Correonero Borderia: In the interest of time, I will just ask one. So your Axus acquisition 3 months ago, it is small, but I think there is a lot to unpack there when you think longer term. So Axus is specialized in silicon carbide processing. So I was wondering if you could explain a little bit more what's the rationale of the acquisition here? Is it like more silicon carbide content as we move into the 800-volt data center? Or is it TSMC potentially adopting silicon carbide interposers in the next few years or both? And of course, it is very early and small acquisitions, but do you have an estimate of what service of addressable market this acquisition could open once it is properly integrated with ASM [indiscernible]? Hichem M'Saad: Okay. So thank you very much for the question. So yes, we have acquired this company called Axus Technology, which is -- we're very excited about the acquisition in CMP. They have a very great CMP technology and very innovative, to be honest with you. And the -- like we mentioned, we have acquired this for the advanced packaging market because advanced packaging is -- needs more and more CMP layer, many, many, many more CMP layer. So there is room for another player. Also, it's a technology that's all about interfaces. And I think that we have some -- we do have some knowledge in interface engineering so that we will be able to really put our print there. It also CMP helps us with our new materials that we're developing for advanced packaging that I just talked about a few minutes ago because I mean, you deposit the film, but also you need to CMP. So we want to understand what's the interaction about the material that we're depositing the new material that we're depositing and the CMP, because CMP also has a slurry. There's a new -- with a slurry that means we're talking about new chemicals and so on and so forth. So it would help us also develop better materials in ALD, but at the same time, also good polymerization, which is extremely important for advanced packaging. So that's really why we made that acquisition. And then we're working right now on developing the product for advanced packaging, and it's going to increase our SAM absolutely. It is going to increase our SAM and we're in the process of doing R&D and so on in this part of the market. Victor Bareño: Okay. That concludes the Q&A. Thank you all for attending our call today, also on behalf of Hichem and Paul. Thank you. Goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Operator: Good day, and welcome to the Stifel Financial's Q1 '26 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead. Joel Jeffrey: Thank you, operator. Good morning, and welcome to Stifel's First Quarter 2026 Earnings Call. On behalf of Stifel Financial Corp., I will begin the call with the following information and disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at stifel.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Stifel Financial Corp. does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. I will now turn the call over to our Chairman and Chief Executive Officer, Ron Kruszewski. Ronald J. Kruszewski: Thanks, Joel. Good morning, and thanks to everyone for joining us. In the first quarter, we delivered very strong performance. Net revenues of $1.48 billion were up 18% from a year ago. That includes a nonrecurring gain from the sale of Stifel Independent Advisers, which closed in February, which was partially offset by interest on a legal judgment. We've excluded both from our core results. Excluding the SIA gain, revenue grew 15%. Either way, it was a record first quarter and regardless, it's the growth rate comparable to the best firms on The Street. Earnings per share were $1.48 on a GAAP basis and $1.45 on a non-GAAP basis compared to $0.33 last year. That's a significant improvement, so I want to be transparent. Last year's results were impacted by $180 million legal accrual, which was unusual to say the least. Adjusting for that, EPS was up 32% on a comparable basis. Our annualized return on tangible equity was nearly 25%. We expect 2026 to be a good year, and the first quarter reflects that, yet the environment has become more uncertain. Against a backdrop of escalating geopolitical risk, energy prices have risen, credit spreads have widened and interest rate uncertainty has increased. The wildcard remains the conflict in Iran and its potential impact on energy prices, inflation and ultimately growth. But I'd like to note that unlike some of our larger peers, Stifel's business model isn't built around trading volatility. We have a trading business, but it's client driven and relationship oriented, not structured to capitalize on market dislocations. Delivering these results in a volatile quarter tells you something important about the durability and diversification of what we've built. Our growth was broad-based. Global Wealth Management delivered record first quarter net revenue driven by record asset management revenues and growing adviser productivity. We also generated record first quarter investment banking revenue, producing a record first quarter for our Institutional business. Our firm-wide pretax margin was more than 22%, reflecting continued robust wealth management margins, coupled with an institutional pretax margin of nearly 20%. It is noteworthy that this metric improved nearly 1,300 basis points from last year, benefiting from both revenue growth and our international equities restructuring. Jim will provide more detail on that. Look, at the risk I cite remain within a range of market expectations, we are confident in the strong 2026. That confidence is grounded in something more than one quarter. Let me put these results in the longer context. Stifel is a company that both grows and understands the concept of return on invested capital. We've scaled revenue from about $100 million in 1996 to roughly $6 billion today, and we're targeting $10 billion in revenue and $1 trillion in client assets. We grow and we grow the right way. That long-term philosophy also informs how I think about some of the questions dominating every earnings call so far this season. For each one, I want to tell you what Stifel is doing and share my observations about what I'm seeing in the market around us. The first is AI. Across Stifel, we're seeing real benefit from our AI investments. The technology enables our advisers, our investment bankers, our commercial lenders and support teams to work faster and smarter. In every case, we're working to enhance client relationships with AI, keeping our professionals at the center of the value proposition. The opportunity here is significant. We are in the early process of linking our data to these new tools, and there is a lot of work ahead, but the early results give me confidence that we're on the right path. But I'd be less than candid if I didn't raise the concern about frontier models like Mythos that are becoming an entirely new category of technology as recently as a few weeks ago. I'm not sure any of us really fully understood what Mythos was, possibly even those that create it. And the next version, as I understand it, is already in development. Models this powerful increased capability on both sides of the table, for those defending and for those who would do harm. And if you ask me what our industry needs to get right before anything else, the answer is cyber, not just for Wall Street. This requires a national response. I have consistently said that this is an issue of national security. The second is credit. At Stifel, our lending philosophy has never been built around chasing yield. We treat lending as a relationship-oriented business, not a volume-driven growth engine. The headlines this season involve specific credit situations. First Brands, Tricolor, Medallia, where aggressive structures, weak collateral monitoring and in some cases fraud drove the losses. People had essentially 0 exposure to any of them. As an aside, the more recent concern has been about liquidity in private credit vehicles. Some funds are limiting withdrawals, and we're seeing secondary market participants offering liquidity at significant discounts to NAV. It reminds me of the scene in It's a Wonderful Life where Potter is trying to buy Bailey Building & Loan shares at $0.50 on the dollar during a run on the bank. The underlying assets haven't changed. But when everyone rushes to the exit at once, the gates come down. That's a structural issue. The third consistent question is around software loans. I've read the predictions that every software loan is essentially worthless given AI disruption. To put some numbers to Stifel, our software loan exposure is approximately $500 million on a $43 billion balance sheet, not a material number. The more important point is that we have reviewed our software exposure carefully. And while there are always normal pockets of stress, we don't see the broad credit issues that the headlines suggest. The fourth is legislation and market structure. Two questions are dominating this debate right now, stablecoin yield and tokenized equities. Let me tell you where Stifel stands on both. On stablecoins, we will offer them. But in my opinion, if a stablecoin pays yield, that's a deposit, subject to capital requirements, AML, BSA and the full framework of bank regulation or if the yield comes from investing in the underlying fund, then it's a money market fund. Follow those rules. Legislation should not create a third option that avoids both. On tokenized equities, we will build the capability to offer, settle and trade them. But in my opinion, the regulatory framework should follow the underlying assets, a tokenized Apple share is still Apple stock. Every rule that applies to that stock, disclosure, best execution, settlement finality, investor recourse applies to the token. The technology changes the delivery. It doesn't change the obligation. And for those who say this is about protecting the incumbents, if that was true, we wouldn't be building the capability at all, but we are building this capability. The principle is simple, a deposit is a deposit, a security is a security, custody is custody. Nearly a century of investor protection wasn't built to apply only to some participants. The technology doesn't change that. I've discussed AI and software disruption, credit markets and legislation and market structure. In each case, I wanted you to understand both where Stifel stands and my observation about what's happening around us. Over the last 30 years, we have shown a consistent ability to adjust to economic and technology change. Global Wealth Management is growing, our institutional pipelines are strong and our investments in the innovation economy through venture lending and deposit generation are paying dividends. Bottom line, what I see is a firm that is very well positioned. So Jim, please take us through the numbers. James Marischen: Thanks, Ron, and good morning, everyone. Before I jump into the financial results, I'll remind everyone that the EPS numbers are reported on a split-adjusted basis following our 3-for-2 stock split that was effective in late February of this year. Turning to the results. Total non-GAAP revenues of $1.44 billion was right in line with consensus estimates. Investment Banking was a primary upside driver, exceeding expectations by $8 million or 2% as the number of transactions closed late in the quarter. Advisory revenue was the primary driver of the beat. Transactional revenue came in 1% below expectations, but increased 7% from the prior year. I'll cover the components in more detail when we get to the Institutional segment. Asset Management revenue was modestly above consensus and increased 12% from the prior year and was driven by market appreciation and net new asset growth. Net interest income came in at the lower end of our guidance and $3 million below consensus. I'll cover the details and the second quarter guidance when we get to the Global Wealth Management section, but to highlight the miss to consensus expectations was driven by lower corporate or nonbank net interest income. Expenses were well controlled and benefited from the strategic actions Ron referenced earlier. Both our comp ratio and noncomp expenses came in below consensus. The effective tax rate was roughly 23%, slightly below both guidance and consensus due to improved profitability from our non-U.S. operations. Turning to Slide 4. Global Wealth Management generated $932 million in net revenue, the strongest first quarter in our history and essentially in line with last quarter's record. Results were driven by record Asset Management revenue and growth in net interest income. These results are particularly strong given the sale of SIA reduced our transactional and asset management run rate for 2 months during the quarter. We ended the quarter with total client assets of $539 billion and fee-based assets of $220 billion. Excluding the SIA impact, total client assets and fee-based assets were essentially flat sequentially despite the equity market decline as net new asset growth was in the low single digits and was offset by market depreciation. Our recruiting pipeline remains robust, though activity is episodic and dependent on changing competitive and market dynamics. Over the last 12 months, we've recruited trailing 12-month production totaling approximately $80 million, which does not include the impact that recruiting has on net interest income. Our client-driven balance sheet continues to enhance both earnings consistency and client engagement. As I mentioned, net interest income came in at the lower end of our guidance due to slower loan growth as market volatility impacted fund banking late in the quarter, more than offsetting growth in residential mortgages, securities-based lending and C&I loans. Nonbank interest income, particularly within corporate interest and securities lending, was approximately $3 million lower than originally forecast. For the second quarter, we expect net interest income in the range of $280 million to $290 million. Client cash balances increased meaningfully during the quarter. Sweep balances increased by more than $670 million, while non-wealth client funding increased by nearly $1.2 billion reflecting strong momentum from our venture group. Third-party money fund balances increased by nearly $200 million. We have significant funding to grow our loan book. While loan growth in the first quarter was slower than originally forecast, we've already seen fund banking activity pick up in April, and we are maintaining our full year guide of up to $4 billion in asset growth. Turning to Slide 5. Our Institutional Group posted its strongest first quarter in our history. Revenue was $495 million, up 29% year-over-year, driven by record first quarter investment banking. Investment banking revenue totaled $341 million, up 44% year-over-year, coming in slightly above our recent guidance due to the number of transactions closing late in the quarter with a particularly meaningful contribution from our new partners at Bryan, Garnier. Advisory revenues increased 59% to $218 million with continued strength in financials, industrials, consumers and health care. Equity capital raising was $67 million, our second strongest first quarter result with increased issuer engagement led by health care, industrials and energy. Fixed income underwriting of $50 million was up 9% year-over-year driven by increased public finance activity and higher corporate issuance. We remain the #1 negotiated issue manager in public finance by deal count with nearly 15% market share and are also seeing increased success in larger par value transactions. Investment Banking and Advisory pipelines remain very strong. That said, the pace of realization will depend on the geopolitical and economic factors that Ron mentioned earlier, including energy prices, credit spreads and interest rate uncertainty. We continue to anticipate a strong 2026. Transactional revenue increased 4% year-over-year, driven by a 12% increase in fixed income revenue reflecting increased client activity from market volatility. Equity transactional revenue was down 7%, entirely reflecting the European restructuring. Excluding that impact of a $9 million year-over-year decline due to those restructuring efforts, our core equity transactional business grew by 10%. This was always -- this was also the primary driver of the nearly 1,300 basis point improvement in our Institutional pretax margins year-over-year. While we've made significant progress in our non-U.S. operations, the first quarter benefited from some larger advisory fees and results will not be linear over the remainder of the year. Moving on to expenses. Our comp ratio of 57.5% was at the high end of our full year guidance and down from 58% a year ago. We are certainly conservative in our comp accruals early in the year, and we'll continue to look for leverage as the year progresses. Non-compensation expenses totaled $293 million, up 8% year-over-year after excluding the legal accrual from the first quarter of 2025. Our operating noncomp ratio was 19% and was at the midpoint of our full year guidance. The declines in our comp and noncomp ratios benefited from the strategic actions referenced earlier, and we remain confident in our full year guidance. Turning to Slide 7. Our capital position remains strong and provides meaningful strategic flexibility. The Tier 1 leverage ratio increased to 11.4% and the Tier 1 risk-based capital ratio rose to 18.7%. Based on a 10% Tier 1 leverage target, we ended the quarter with nearly $560 million of excess capital. I'd also highlight that we have thoroughly reviewed the new proposed capital rules. Based on our review, Stifel would obtain some relief across risk-based capital requirements, but these rules would have no material impact on our Tier 1 leverage capital. Finally, we repurchased 2.8 million shares during the quarter and have 10.2 million shares remaining under the current authorization. Assuming no additional repurchases and a stable stock price, our fully diluted share count for the second quarter is expected to be approximately 163.1 million shares. And with that, Ron, back to you. Ronald J. Kruszewski: Thanks, Jim. I want to close by saying that I'm generally excited about where Stifel is headed. We have a strong business and experienced team and a model that has proven itself in good times and in challenging ones. The environment is uncertain. I said that at the outset, and I mean it, but uncertainty has always been the context in which Stifel has grown. Look, Global Wealth Management is growing. Our institutional pipelines are strong, and I look forward to reporting our future progress. So with that, operator, please open the lines for questions. Operator: [Operator Instructions] We will take our first question from Devin Ryan with Citizens Bank. Devin Ryan: Question on AI. Ron, I appreciate the context you gave in the script. But a couple of questions we're getting. Obviously, as the technology gets stronger and stronger and potentially agents are automating more and even transacting, do fewer people seek out financial advisers? Or does that impact pricing that advisers charge? And then the more pointed question that we're getting is just around kind of tools that automate kind of customer cash sweep and just, does that drive balances even lower? And so that's a revenue stream that firms have to think about. Love your thoughts on both of those. Ronald J. Kruszewski: Well, look, the technology is powerful to your first question. And it just really helps adviser productivity. I believe, as I've said in many of things I've talked about that today, at least, the models are mathematically driven, and they're great at summarizing, organizing, putting -- helping you solve math. I said it's like chess. It's a finite board, and it's very good at that. When you move to judgment, which is what our advisers do, it just really isn't that good, and I'm not really comfortable thinking that we're going to serve our clients with some consensus building mathematical AI, to be honest with you. And we can debate whether or not human judgment will matter. But investing in markets are not a finite game. It's constantly changing. Every second, it changes. The participants change. Their outcomes change, their risk tolerances change. And so that's an ever-moving target. So to answer your question, what will happen, I believe, at least on the adviser side, is that this will make our advisers more productive. It will unearth potentially and it will, more opportunities, more ideas, more things on tax savings idea, more on a state, more things that will help our advisers do what they do, which is generally be the financial adviser to not only individuals, but the families. So I see this as a tailwind to advice, not a headwind. And it's a more sophisticated version. We've seen it in the past with robo-advisers and a number of things. This technology will be better, but again, I'm going to say it's a tailwind to the advice business. As it relates to agentic-type models and the cash optimization. Look, we've been through that, Devin. I mean we have about -- I'm going to say this, I think -- when I look at it overall, we have about $60 billion of our AUM that I would say is allocated to short-term cash between sweep deposits, smart rate, money market funds, short-term treasuries, it is about $60 billion, which is frankly about consistent, a little 11%, 12% of our AUM toward that portion. And of that, when you get right down to it after you take out adviser cash, we have about $7 billion that is, if you would be unsorted. I love that industry term. And look, it's transactional cash. It's -- I look at my own accounts. I have transactional cash because I have cash and I have needs, and I'm paying bills or I'm doing things or I'm getting a dividend, I'm reinvesting it. So will some technology come that will help optimize that? I think so, but at what cost, it's not free and what kind of movement, what kind of transactional things are going to happen. Listen, I think it will happen, but do I lose sleep over that? No. Okay. This is a business model question. And I'm hearing a lot of things, well, you just replace it with fees and things like that. And I think, well, look, we could do that, we do it anyway. We're not going to do it just because of this. So not overly concerned about the second, very optimistic about the first part of your question. Jim? James Marischen: Maybe add a little bit of detail there to support what Ron was saying is of the $60 billion as of the end of the first quarter, $12 billion was in sweep. So roughly 1/3 of that is an advisory cash accounts. And so that's not subject to the same type of sorting dynamics we're talking about here. So that's how you get to that $7 billion or $8 billion that's remaining. And I'd just say, as Ron reiterated, we've been out in front of this topic, minimizing our exposure to this. We've adjusted our balance sheet, both on the asset side and the liability side to give clients the yield-seeking products they want on the liability side and having a flexible balance sheet on the asset side to earn an acceptable return. So do we have some exposure here? I think everyone has some exposure, but you're never going to see, as Ron said, transactional cash go to 0. So I think on a relative basis, this general topic is less impactful to Stifel than to a lot of other players. If you think back 10 years ago, we funded our bank balance sheet 100% with sweep accounts. Today, that's [ 12 ] of much bigger numbers. So we've diversified and have already seen the sorting occur to a material extent. Ronald J. Kruszewski: Yes. And I answered the question, I tell you it's not that big of an issue. I'm giving a lot of oxygen to it. But I do think about these things. And I think for Stifel, it really is not a big issue. I mean I have to look at the numbers. But you can take it to the broader financial system, and zero-based interest in many banks and stuff and you wonder what will happen there. And my viewpoint is that the market will adjust. If rates go up, so are loan, banks are earning their spread and return on capital. So enough said, there's a lot of oxygen to something that I'm not thinking that much about. Devin Ryan: I appreciate it to both of you. And it's a question that we're, I think, all getting quite a bit. So just addressing it and I appreciate it. I'll ask a quick follow-up just on investment banking. Obviously, a very good start to the year. It sounds like backlogs are at a pretty healthy level as well. When you drill into that, can you just talk about the depository side, like just the expectations for more activity there and how that's kind of feeding into, I think, maybe the announced backlog or even preannounced backlog? And then with sponsors, are middle market sponsors reengaged right now? Or do we need to see them ramp up and that's the hope as the year progresses? Ronald J. Kruszewski: Yes. Look, on the depository side, I was talking with Tom Michaud a little bit about this. And what I would say is that -- in fact, it crossed M&A, not just on the depository side, but specifically on the depository side, there's a lot of uncertainty. And this uncertainty is impacting buyers. You talk -- reading the press saying about $150 oil and interest rates may be rising and what happens to credit spreads, et cetera, et cetera. And I think that, that is a pause. There's some market concerns about have the deals been done with enough of a premium. So there's a little bit of combine all this, and I think making people think about it. But the overriding question as depositories is that this administration and just compared to the last administration is fostering and encouraging bank M&A, and that's not going to change. And as we get closer to an election, not the midterms per se, but the 2028 elections, the potential and what's going to happen is going to happen, right, as people are incented to do that. It's not linear, which is what we're seeing now. And that's -- and you need the same thing as it relates to 2026. Deals got to be announced in the next couple of months. Otherwise, the 2027 deals. But that's what I would say. And overall M&A, look, we're seeing a lot of activity. But my sense is that if we didn't have the economic uncertainty that we have out there, we'd be seeing even more. James Marischen: Specific to sponsor, we're seeing a lot of activity and growth in backlog across a number of verticals. The one area I would call out that has been a little bit weaker is technology. And that's not as big of a vertical for us, but that is certainly an area that has been slower. Ronald J. Kruszewski: Software. James Marischen: Software specifically. Operator: We will take our next question from Mike Brown with UBS. Michael Brown: So Ron, you're allocating more capital to recruitment in 2026 and some good organic growth in the first quarter. Maybe can you just expand on how the recruitment and productivity efforts are faring relative to your expectations? Maybe what specific profile adviser are you kind of more aggressively targeting and having success recruiting? And then how is the competitive space from the wirehouses or some of your other peers? How is that been impacting recruitment and maybe cost of recruitment? Ronald J. Kruszewski: Well, I'll take your second part first. The competitive environment, a number -- a couple of the large firms, you may know some of them yourself, have really, really ramped some of these -- the competitive aspects of transitional pay, the so-called deals, and that's been interesting. But the quarter across the industry was slower for, I think, the same reasons that we're talking about M&A and everything else. It's just some uncertain times. As it relates to us, our strategy hasn't changed. We continue to be disciplined. As I said earlier in my remarks, that we grow and we've grown through acquisition for a number of years and recruitment and our return on tangible equity is 25%. You don't do that by making investments with an RO -- return on invested capital of 5%. It just doesn't work. So I'm very confident. What I'm mostly pleased about is our ability to compete, attract and recruit large teams, which is relatively being in the last, say, 10 years, new to Stifel and that we have that, and we're talking to a number of large teams. And that, to me, is encouraging. So recruiting [indiscernible] you get this every quarter, same question. My answer seems to be the same every quarter. Michael Brown: I appreciate the color there, Ron. Ronald J. Kruszewski: Yes. I mean it's -- no big news there in terms of -- we're still -- we're #1 in J.D. Power. We're #1 in advisory. We have a great culture. We have things -- if anything, what we're trying to do, and we've talked about this, it takes a little bit longer. We're just trying to get our name out there. I get discouraged sometimes when I'll talk to people and they say, oh, I didn't really know -- I didn't know that much about Stifel. And we're really trying to fix that. We've done that with a lot of our brand advertising and a lot of things we're trying to get out there. But that's still an area that we can improve, we will improve, and then that will improve our results. Michael Brown: Great. That makes sense. And just as a follow-up, I appreciate the color on the advisory side. I wanted to ask about the IPO window, which has certainly had some stops and starts in 2025 and in 2026. And we've had the Middle East volatility this year that seems to have contributed to some delays. But what's your read on maybe the ECM calendar specifically as we think about the back half of 2026 for Stifel and the industry here? Ronald J. Kruszewski: Look, I think it's good. I was talking to our desk. This might be dated by a week or so. But what I said was what's happening. And often when deals get delayed, they just get pulled and they'll get pulled maybe for the next set of numbers. And we've seen delays that are a week or two. So people are -- what that told me at the time was that people or clients or issuers and buyers are just concerned about volatility. And the volatility has always impacted ECM, and I think that's the case now. But when I layer that with the fact that things are just being delayed maybe for the next news that comes out of the Middle East or something or next comment. But it's healthy, I think. And now the environment changes in a nanosecond, as you know. But as I sit here today, I would say that, that's a healthy market. Operator: We will take our next question from Steven Chubak with Wolfe Research. Steven Chubak: So wanted to double-click, Ron, into some of the comments that you made around Agentic AI. I know you gave it quite a bit of airplay and you might argue too much airplay during at least at the start of Q&A. But this is perceived to be a pretty meaningful potential source of pressure eventually on idle Sweep Cash, whether it's Agentic AI, tokenization, lots of technology that's in the nascent stages of development. And I was hoping you could simply speak to the levers you might consider if headwinds to Sweep Cash do, in fact, materialize? And how does your pricing model differ from some of your competitors just in terms of account fees, platform fees that could serve eventually as potential offsets down the road? Ronald J. Kruszewski: Yes. Well, I read your report this morning, and so well thought out, I would tell you that. And the -- but again, when I put it down -- yes, I didn't go oh my gosh, we got an issue here at Stifel because we don't. But as it relates -- Steven, I don't -- I do think that there will be changes, okay? And there were changes on 0 rate commissions. And one of the leading consultants at the time said there wouldn't be another commission trade done by 2004. And the robo-advisers were going to do this, and were going to do that. And it's a business model. And the business model will adjust. And so if, in fact, Agentic can come in and be more efficient at sweeping cash, I don't really see how it's going to be that much more efficient, myself with all of the things that you would have to do. You'd have to actually give something -- access to everything, not only your recurring expenses, but your nonrecurring and your clearing checks and your -- all your credit cards, not just your one single account. And that's not going to be done for free. And so you're going to sit there and tell me that because of transactional cash is -- has a lower yield that someone is going to do and pay for that and give all that information, maybe, but it's a ways away, in my opinion. And if it does happen, there's a lot of things that you can do. Many banks will raise the yield in general, there's a competitive thing just to make sure that the NIM remains. And as it relates to platform fees, which I know you referred to in your report and you just did in your question, platform fees and account fees and inactive account fees, those are all levers. We don't have an account fee at Stifel. We don't have an inactive account fee. So those levers are actually unpulled at Stifel today, while many of our competitors do, do that. And so a fair question to me would be, well, why don't you do it? And my answer is it's not that easy, okay? It just -- I'm reminded of a commercial we did years ago where the person says, hey, what are all these fees? Why don't I have an idea, why don't we charge a fee on a fee. And the guy said, that's a good idea. It's just as difficult to do. And I'll be watching. And if the market -- if the cost of advice across the industry begins to be consistently with platform fees and done for firms that are trying -- that have bigger issues with cash sorting than we do. And you know that, Steven. We're probably at the low end of your issue of firms that are going to impact it on this. I think that's what your report said. So look, we have a lot of levers. We have dealt with changing economics in this business for as long as I've been in the business, and we will continue to do so. James Marischen: The other thing you have to think about here is the impact on the client and higher interest income is not just a complete wash based upon the fee when you think about the tax effect of those things because the higher interest income is taxable while the fee that they're paying is not tax deductible. So you have to consider that overall impact on the client as well when you're doing your overall thesis here. Ronald J. Kruszewski: Yes. I'd be interested when you get your feedback as to the number of firms that will say, oh, yes, it would be easy to institute these fees because I would take the other side of that. Steven Chubak: We'll certainly keep you in the loop, and I appreciate that perspective. For my follow-up, just on the restructuring within Europe, I was hoping that you could quantify the benefit to the margins that we're expecting in the coming year just from shuttering some of the businesses. And I was also hoping to get your longer-term perspective on how this informs at least your ambitions or appetite to expand outside the U.S. and tying that with just your M&A appetite in general, at least in the current environment amid what remains a heightened level of uncertainty. Ronald J. Kruszewski: That's a fair question. I'm going to let Jim -- I don't think we can really talk nor do we disclose margin improvement in that segment, but I'll lateral to Jim and let him decide whether he can answer in a moment. So you can think about that, Jim. As it relates to our strategy and what we have seen margin improvement, what we did and something that we sort of unwound was the fact that we invested in sales trading and capital markets within Europe and thinking we'll either be on the London Exchange or the Nordics, and we would do IPOs and we do sales trading and research over there. And what we found was that, that market because of MiFID and what they've done raised to themselves is that, that business, even at scale, I'm not sure you make any really money, but you certainly were not making -- we weren't making any money at the size that we were. But just as importantly was that when I would visit clients in Europe, and I would ask them what their objectives were, it was interesting. Most of them -- and this is a credit to the United States, their dream was to list on NASDAQ or the New York Stock Exchange. And we started -- and we've seen this. We just did a large transaction, European-based. We listed it on the U.S. Jim referred to it. And so what we decided to do strategically, and it frames or you can frame my thoughts about this is to lead our U.S. capabilities into Europe through advice, our advisory platform. And then we -- and then when we have an equity capital markets transaction, for the most part, they're coming back to the U.S., especially in health care and in areas where we have some expertise. So I feel that this was maybe you can criticize the way we started, but where we're ending up is where we want to be. We're a global firm. We have global capabilities. I just don't think we needed to do market-making sales trading in local markets to achieve our ultimate goal. And frankly, many of the clients' ultimate goal, which is to access the U.S. capital markets. Jim, I don't know... James Marischen: So in terms of some numbers to support the question you're asking here is as we've talked about this in prior quarters, we frame this up with a combination of not just the European restructuring, but also the sale of SIA. And we've told you in the past, that's about $100 million of revenue, probably roughly half and half between the 2 groups, the SIA as well as the European equities business. You think about it, that was probably somewhere between 70%, 80% comp margin that we're going to save off of. And then we talked about $20 million to $25 million of non-comp expenses gets you roughly to around a breakeven number of pulling those revenues out, and that's a good way to think about it. As we look at the non-comp expenses and what actually occurred, we were able to pull out about $6 million here in the first quarter, which is relatively consistent to what our guide was or what we talked about as we kind of framed this up last quarter. And so all of those things are fairly consistent. As we look forward, there's still more costs to be taken out of some of our European operations post restructuring. Think of some of the longer-term contracts like leases, think of subscription agreements and things like that. So more to come. But as we sit here today, we'll just caveat that this is a pretty good quarter for the international or the non-U.S. business, given some of the larger fees Ron talked about, it won't necessarily be linear, but it gives you a sense of kind of the overall financial benefit we'll receive over this entire year. Ronald J. Kruszewski: And look, you see it in our margins. Our margins in Institutional when I was getting questioned about that when it was sub-10% and now it's nearly 20%. That's a combination of both productivity and revenue plus the restructuring that we did. So I mean, it's a good thing. Operator: We will take our next question from Brennan Hawken with BMO Capital Markets. Brennan Hawken: So I wanted to touch on NII. You touched a little bit on the headwinds in the quarter. You mentioned corp and securities-based loan headwinds. But maybe could you provide a little bit more texture around what caused that versus your prior expectations? And then in the context of the $280 million to $290 million expected for next quarter, good to see your expectations for that to uplift. But maybe could you provide a little bit more texture around what's going to drive that? Ronald J. Kruszewski: I love giving NII and margin questions to Jim, and that's -- I'm not -- I'm going to do that right now. So Jim. James Marischen: Right. So in terms of this quarter, obviously, the nonbank NII is the main piece there. If you look at kind of the consolidated NII numbers and back off what you see in Global Wealth Management, you can compare 1Q year-over-year, and you can see the nonbank is down about $3 million. So it's consistent. That delta is consistent with what we described there. Most of that -- some of it is corporate interest. It wasn't securities-based lending, it was kind of stock -- securities lending, stock lending, if you will. That's opportunistic based upon individual hard to borrowers in your box. That number can move around from period to period. It was just somewhat slower in this individual quarter. We do view that kind of getting back to its normalized run rate. But the bigger piece of the $280 million to $290 million NII guide is going to go back to asset growth within the bank. And we said on the call that we still feel comfortable with up to $4 billion of asset growth. We're seeing things like fund banking pick back up in April. There was a number of paydowns kind of late in the quarter specific to fund banking that kind of caused the period-over-period end-of-period balances to decline. So as we look forward, we feel comfortable. Our original NII guide is $1.1 billion to $1.2 billion. We're already annualizing the low end of that, and we think there's a fair amount of growth that can occur in the second through fourth quarter that can help support getting higher in that range. So we feel pretty good about where we're at. Ronald J. Kruszewski: Yes. And it's not necessarily NIM expansion. It's just growing -- it's just growth. And we've never -- growth is always there in banking. That's not the issue. The issue is prudent growth, and that's what we're doing. But we see a lot of opportunities. I've always -- I am still optimistic about what we're building in venture and for the innovation economy, and that is -- that's got nice growth written all over it. Brennan Hawken: Great. And then you touched on this a little bit, Ron, in your prepared remarks about concerns around the software loans and whatnot. But curious to hear your -- what you're seeing in the CLO portfolio. So we've seen spreads widen out in the levered loan market, equity and lower-rated layers of CLOs have been under some pressure recently. So totally appreciate that you're in the higher layers, which have been fine. But what underlying trends are you seeing? Ronald J. Kruszewski: Yes, Jim? James Marischen: Yes. So our CLO book at the end of the quarter sat right around $6.8 billion. I'd say a little over 60% or 62% of those holdings are AAA rated with the rest AA rated. What we're seeing in terms of credit enhancement has remained consistent with what we've said in prior periods. On a blended basis, that's around 32%. You can see AAA class is 36% and north of there in terms of credit enhancement. AA class is around 24%. The underlying collateral here is very well diversified. There's no particular concentrations over, call it, 11%, 12%, 13% of the underlying portfolio. Our portfolio is spread out over nearly 100 CLO managers. And I think the key here is that what we see in our stress testing has not changed. We're not seeing any new issues. We're seeing consistent levels of the ability to withstand stress that are multiples of the great financial crisis and not break the underlying structure. So we feel very comfortable with the overall credit exposure in terms of CLOs. Ronald J. Kruszewski: Yes. And look, I've always said that,Brennan, what people are talking about is the lower rated tranches. That's really what they're talking about as you would expect. But as it relates to diversification, I don't think there's any class that's more than 10%. I think they can't go more than 15%. And every time I look at it, which I think I did in the first quarter, I just put it down. It's not an issue for us when we look at -- we look at it individual loan by individual loan across CLOs and look at it consolidated and individually. Our team does a really good job. But at the AAA, where we are at the top and what happens when it gets stressed, actually, the subordination gets higher as stress occurs because you divert cash flow. So what I sometimes ask myself is that is the yield give up worth the subordination, sometimes we got a lot of subordination. Remember, we don't get the full yield. We get the AAA yield. And thus far, over 10 years, risk weighting, risk-based capital, the way that it's allowed us to sort cash because a variable rate asset, it's been a great asset class for us, and I don't really see any stress in what we own. Operator: We will take the next question from Alex Blostein with Goldman Sachs. Alexander Blostein: I got almost as enthusiastic of response as you gave to Steve, so I appreciate that. So I wanted to ask you guys a question around the bank growth and loan growth and kind of how that comes together. Obviously, that's a priority for the firm for some time. I'm curious how you're thinking about funding that? Because if we look at the sweep deposit balances, they've been basically in a range of, I don't know, $10 billion, $11 billion for quite some time, a couple of years, even holding the whole AI sweep cash issue aside, as you think about the forward loan growth and without a whole lot of balance sheet sweep options, how do you sort of think about the funding mix here over time? Is that more institutional? Is it more sort of high-yield savings? I'm just trying to think about the funding of the bank on the forward. Ronald J. Kruszewski: Well, [indiscernible] both, but I would have [ accused ] Alex. I thought you might have complemented us on our deposit growth, okay, relative to our muted loan growth, okay, in terms of -- I think our deposit growth was $2 billion. And what we're seeing is much of our loan growth and the potential we see is not only self-funded, if you will, by deposit generation, but self-funded in a multiple of the loans outstanding. So some of those deposits are not sweep. So if you're focusing on sweep, then we got to go all the way back around the barn and come back and say, transactional cash and clients isn't going to get that much higher for all the reasons that we've been talking about. But in terms of our smart rate and our venture deposits and our sort of non-wealth deposits, that growth has been very strong. And that's -- to then answer your question, that's how we're funding that growth. James Marischen: If you look at the supplement and you look at Page 10, the bottom of Page 10 has a disclosure of third-party deposits available to Stifel Bancorp. There's $6.2 billion of excess deposits that are off balance sheet today that we can use to fund that growth. Obviously, a good portion of that is going to be in that third-party commercial treasury deposit line. So that's $5.7 billion of it. The vast majority of that's going to be obviously venture and fund banking. And as you think about that, that grew $1.2 billion in the first quarter. And if you look at that as kind of a mark-to-market of where we're at through, I don't know, as of yesterday, that's up another $700 million. So that's a significant source of funding capacity growth that continues to occur that's been fairly consistent and gives us a lot of flexibility if we're talking about up to $4 billion of asset growth. Ronald J. Kruszewski: And I'll end by saying, as I've said before, in this segment of what we're doing, we're really in the early innings of some of the things that we can do as we've been adding, frankly, technology capabilities to our treasury platform, international settlements. So there's a lot of work that we're doing to have a very competitive platform. And I see the potential. It's a great question. But again, we've said that it's almost self-funding what we're doing. Alexander Blostein: That's really helpful. Question on the buyback. Really nice to see pickup. I know you guys tend to do a little more in the first quarter than typically over the course of the year. So as you think about your share repurchase plans from here on through the rest of the year, any thoughts you'd share would be helpful. Ronald J. Kruszewski: Capital allocation, capital utilization, return on invested capital, all of those are the inputs to the model that will -- we're always buying back shares. The pace of -- that math changes daily as well as to what is. That's why we don't just sit there and say, we'll buy x number per day. We look at it. We balance that against M&A, other opportunities. But we've been more consistent because we felt that relative to our growth, our stock has been undervalued. So you see us buying back our stock. Jim do you want to... James Marischen: Ron touched on the strategy and how we think about it. In terms of capacity, we had $560 million of excess capital at the end of the quarter. If you think about what we've talked with the balance sheet growth expectation of up to $4 billion, say we do the full $4 billion. That's only about 70% of the current excess before retained earnings. So we certainly have a fairly material amount of capacity if the strategic rationale that Ron talked about, if that math works, we can buy back a lot of stock if we're so inclined. Operator: We'll take our next question from Bill Katz with TD Cowen. William Katz: Most of my big picture questions have been asked already. So maybe just thinking tactically, update us on sort of what's been happening in April just in terms of maybe client engagement, whether it be on the advisory side or on the institutional side and what the sort of cash levels look like just net of maybe billings and/or seasonal tax payments? Ronald J. Kruszewski: Yes. Look, I said client engagement remains strong. It certainly hasn't -- I just said that, Bill, and that wasn't through the quarter, I guess, my comments were through this call. And it is. I have to caution though, because from where I sit, the level of uncertainty, which we're not seeing right now, but the things that can change pretty quick whether it would be on the technology, this Mythos Anthropic thing is concerning. There's a number of things that can change investor sentiment and perspective very quickly. And this is one of those environments where it just feels like there's a lot of uncertainty. But today, things are good. Engagement is strong. Jim, I don't know if you want to comment on cash. James Marischen: Right. So if you kind of go bucket by bucket, sweep is down since quarter end. Smart rate is down since quarter end, while treasury deposits are up. And to provide some detail, you're down probably $1.4 billion in sweep, so call it about [ 10.6% ]. You're down about $400 million in smart rate. And then again, you're seeing a $700 million increase offsetting some of that in the other treasury deposits. Ronald J. Kruszewski: Yes. But you know what, I would just say that -- yes, this is so seasonal. I wonder if we've ever had an increase in April, okay, ever, is an outflow for -- and it's a lot of taxes. That's just what happens. And that's across the street, Bill. So that's -- I don't want those comments to be taken as some trend. It's April. William Katz: Of course. And then as a follow-up, I'm just sort of curious, you mentioned on the banking side, a very good pipeline, but it also seems like a lot of this conversation is about just sort of the ebbs and flows around uncertainty and certainly appreciate one day to next with the headlines coming out of Middle East is the confounding for everything. Should we be assuming that a little bit of a deceleration here in terms of activity from a revenue perspective, given your comments that if some things don't get sort of booked in the next couple of months, it's more about 2027, just as we think about the pacing for this year versus next for the advisory side of investment banking? Ronald J. Kruszewski: Look, I think our banking is overall strong. We're seeing real pockets and our at least what our guys tell me is it's strong. I think we caution a little bit on depositor. We're big in depositories. And so that feels like it's a low a little bit, but that can change quickly, too. And software and the technology side, which we haven't been as big at, but we can see when we look at numbers, that appears to be more muted relative to what else is going on. But overall, as I've said, if the risks land within the range of market expectations, we see the business improving. It's -- if some of these things get resolved, it could really improve. It's not just all downside from here. The business especially in ECM can really pick up here if we take some of the volatility out of this and uncertainty out of this market. There's always volatility. There's always uncertainty. It's just heightened, and we all know this. I'm not telling you anyone on this call anything that news from my desk. Operator: There are no further questions at this time. I will turn the conference back to Mr. Kruszewski for any additional or closing remarks. Ronald J. Kruszewski: Well, I would just want to complement all the questions. Actually was very robust questions, and we like being able to engage and give you our best answers, and I appreciate that. I appreciate everyone's time, and I look forward to talking to you in July. I would just say who knows what's going to happen between now and July, but we'll -- many of you will be talking before then. But to our investors that are on the call, thank you for calling in, and have a great day. Thank you. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome, everyone, joining today's Kimberly-Clark de México First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to CEO, Pablo Gonzalez. Please go ahead. Pablo Roberto González Guajardo: Thanks so much, Nicki. Good morning, everyone. I hope you're all doing well, and thanks for participating on our call. We had another strong quarter and a good start to the year with record revenue behind a strong performance in our Consumer Products businesses, double-digit increases in gross profit, operating profit, EBITDA and net income and EBITDA margin at the top end of our range. Our strategies and actions are having the intended impact, spearheaded by strong commercial and operating execution, and we continue to make progress on our KCM+ innovation, growth and transformation strategy. More on that after Xavier takes you through our first quarter results. Xavier? Xavier Cortés Lascurain: Thank you. Good morning, everyone. During the quarter, our sales were MXN 14.3 billion, a 3.6% increase versus the first quarter of 2025 and an all-time high. Total volume was up 3.7%, driven by consumer products, while price/mix was flat. Net sales were boosted by consumer products, which grew 5.4% with a 3.7% volume increase and 1.7% price and mix growth, while away-from-home decreased 1.3%. Exports were down 6.8% due to lower hard rolled sales, while converted products grew 15.8%. Sequentially, Consumer Products grew 1.4%, mainly volume driven, while away-from-home and exports grew 10.1% and 6.2%, respectively. Cost of goods sold decreased 1.1%. Our cost reduction program once again had very good results and yielded approximately MXN 450 million of savings during the quarter. These savings are mainly at the cost of goods sold level. They were generated through a combination of global fiber contracting initiatives, changes in sourcing and the use of alternative fibers, product redesigns and the introduction of new raw materials in nonwoven fabrics, diaper geometry redesigns to improve material efficiency and logistics and distribution efficiencies across our network. These initiatives reflect ongoing actions across procurement, product design, manufacturing and logistics. In addition to these actions, compared to last year, virgin and recycled fibers, fluff, superabsorbent materials and resins compared favorably. The FX was also lower, averaging around 15% less than last year. Gross profit increased 11.1% for the quarter. SG&A expenses were 10.2% higher year-over-year and as a percentage of sales were up 100 basis points. Distribution expenses were higher, while we continue to invest behind our brands and work to improve our footprint and streamline logistics operations. Operating profit increased 11.9% and operating margin was 23.2%. We generated MXN 3.8 billion of EBITDA, a 10.1% increase year-over-year with EBITDA margin at 26.7% at the upper part of our long-term range. Cost of financing was MXN 439 million in the first quarter compared to MXN 295 million in the same period last year. Net interest expense was higher since we earned less on our cash investments. During the quarter, we had a MXN 9 million foreign exchange loss compared to a MXN 14 million gain last year. During the quarter, in early March, considering that maturities of recent years have been paid from cash, we issued Certificados Bursátiles for MXN 10 billion through 2 placements. The first placement was for MXN 8 billion with equal amortizations in years '10, '11 and '12, and the second placement was for MXN 2 billion with a 2.6-year term. This allowed us to benefit from favorable conditions and improve our debt maturity profile. Net income for the quarter was MXN 2 billion, a 10.2% increase. Earnings per share were MXN 0.68, a 13.3% increase. We maintain a very strong and healthy balance sheet. Our total cash position as of March 31 was MXN 20.4 billion. Our net debt-to-EBITDA ratio was 0.9x with EBITDA to net interest coverage of 9x. With that, I turn that to Pablo.Thank you. Pablo Roberto González Guajardo: As mentioned, we had a strong start to the year despite still subdued economic growth and private consumption. We expect growth to improve as the year progresses, spurred by job creation and higher salaries, together with increased spending in anticipation of and during the World Cup. We expect consumer products businesses to continue to lead the way, Professional business stabilizing during the second quarter and growing during the second half of the year and parent roll sales still trailing due to more tissue required for consumer product sales, but becoming less of a drag as the year goes on. With respect to raw material costs, fundamentals support lower dollar prices versus last year, but we will experience some months of higher costs, both sequentially and in some cases versus last year, stemming from the oil shock the world is experiencing. We hope the impact will be limited in both strength and duration with prices returning to underlying market fundamentals. In the meantime, we're focused on price realization. We just implemented price increases in most of our businesses averaging 4%, and we'll continue to apply our revenue growth management capabilities. And we'll continue to be focused on operational efficiencies and ensuring another good year in cost reduction efforts. Of greater importance, we continue to make good progress on our KCM+ strategies. Our core businesses are performing well, and our diamond categories are accelerating growth behind consumer-centric, relevant and differentiated innovation together with greater engagement and improved commercial execution. Further, we're making inroads in private label and have identified opportunities to strengthen the North American supply chain together with our strategic partner. When it comes to new areas of growth, in the coming quarters, we will be working to consolidate and to increase efficiencies in adjacencies. Further, we continue to make progress on pet food and are actively analyzing the Kenvue opportunity. All in all, our KCM+ initiatives focused on accelerating growth are going well. Equally important, we have specific initiatives to develop our skill set, better utilize data to define consumer needs and engagement, work closely with our retail partners to remain a supplier of choice and continue to improve and where needed, transform our end-to-end cost structure in an increasingly dynamic environment. Effectively deploying and efficiently utilizing the most advanced technology solutions is the fundamental layer to support and drive all these efforts and time is of the essence. We hope these comments provide a good picture of where we stand and why we are so excited about KCM's present and future. With that, let me open the call for questions. Operator: [Operator Instructions] We'll take our first question from Ben Theurer with Barclays. Benjamin Theurer: Two quick ones. So first, if I remember right, about a year ago, the strategy over summer in terms of campaigning, promoting, you took a little bit more of a hands-off approach, a little bit more on the back, not as aggressive as in prior years. So just wanted to understand with the announcement you just had the 4% price increase on certain products that you're pushing, what should we expect from you guys as we go into the summer promotional campaign that usually kicks off by the end of the second quarter? That's my first question. And I'll have a quick follow-up. Pablo Roberto González Guajardo: Sure, Ben. Thanks for the question. We will follow the same path as last year, meaning we will not be as aggressive as in the past, although one thing that is happening is that the summer promotional season continues to expand in length. It's pretty much has already started here in mid-April. And it might have to do with the World Cup and all of the retailers wanted to get ahead of that event. But we're starting to see more promotion out there. But in our case, we continue to be more disciplined about it to ensure we can keep the value of our categories. Benjamin Theurer: Okay. And then a quick follow-up on the commodity cost side because I kind of like missed the commentary because obviously, you do have some exposure to oil price derivative products. So I just wanted to understand how the current surge in oil prices is kind of like affecting you on what might be more like, call it, a petro-exposed or just oil derivative exposed raw material cost pressure. Pablo Roberto González Guajardo: Yes, we are seeing some pressure on oil derivatives. But so far, and given where things stand, we believe it will be limited both in strength and duration. But that's where it stands right now. And as it is, it would have some impact, of course, on our cost and our margins, but we don't think it will be significant. Now things can change, of course, but where it stands right now, again, limited in both strength and duration. Operator: Our next question comes from Bob Ford with Bank of America. Robert Ford: Pablo, can you comment a little bit about how clients and competitors are responding to your 4% price hike? And when it comes to the North American production footprint with Kimberly-Clark Corp, how should we think about the magnitude of the opportunity as well as the economics of that? And is there a role for you in the very short term to help address the inventory loss that Kimberly-Clark Corp suffered in California? And then lastly, how are you thinking about Kenvue Mexico with respect to the final deal terms and the closing date? Pablo Roberto González Guajardo: Sure. Thank you, Bob, for the questions. First, on retailers and competitors responding to our price increases. I mean we're right in the midst of implementing those. It was really at the end of March, early April. We haven't seen anyone respond so far, not unusual because you know they always lag. Now it might be a little bit more difficult this time around to see that response and to even have this reflected quickly. Because again, we're already starting with the summer promotional season. And although we're going to be more disciplined, that always has an impact. So we expect that as this season goes through and we get into the third quarter, then we might see competitors react and our own prices reflect fully on going forward. When it comes to the U.S., I mean, we continue to have very good meetings with our partner to understand our regional footprint and what's best for everyone and how we can have the most competitive and efficient footprint in the region. And we're finding really good opportunities that I think will take a little bit of time to materialize, but we're seeing some very interesting opportunities, both for them and for us, and we continue to work on those going forward. And I think some of them will start to materialize end of this year, probably next year. Hard to tell the magnitude of the opportunity. We believe it's important. But again, we're starting with a couple of projects to make sure this goes the way we all expect and continue to look for opportunities. In the short term, yes, we are helping them bring back their inventories given what happened in the warehouse in California. So in the short term, we'll be helping with that. And then when it comes to Kenvue, we are in the process of the due diligence of the business and we're starting our discussions with our partner on the business. As you know, they're moving forth with their integration plans. And as part of that, we're discussing with them what would be next for KCM Mexico. I expect that we will have a more complete analysis and discussion with them probably May, early June and hopefully have a decision by the end of this quarter or early next quarter on whether we move forward with this or not, but things are looking good. Operator: We'll take our next question from Renata Cabral with Citigroup. Renata Fonseca Cabral Sturani: Congrats on the results. So my first question is related to costs and a follow-up actually. As considering the current level of the FX, it's natural we consider that those margin improvements can carry over along the year, but we are now in a situation of volatility in terms of raw material prices. Just to check the view regarding this margin trend along the year broadly, if you can? And the number two is related to the consumer division that had a growth of 5%. We see the slowdown in the Mexican economy. If you can give us some color in terms of a category that is doing better, would be great as well. Pablo Roberto González Guajardo: Thank you, Renata. Well, first, on the cost side, yes, you're right. I mean, the FX will continue to be a tailwind. And again, if raw materials were driven at this moment for by fundamentals, we would continue to see improvements, and that would also be a tailwind. But again, we're experiencing this uncertainty right now with the oil shock and the impact that, that's having on all derivative commodities. So that will have an impact, but we still believe that we have enough with our efficiencies, our cost reduction program and the FX to continue to post margins within our target and most likely at the upper range of our target even with that cost impact. Now if that goes away, then we could see further improvements throughout the year. When it comes to the market, yes, it still feels, as I mentioned, the economy is still stagnated. I mean we are not seeing great growth and domestic consumption is still pretty subdued. And we continue to see the same dynamics in our categories as we saw second half of last year. So that's soft volume growth and some pricing in most of the categories, particularly on the core categories, that's bathroom tissue, diapers, napkins, a little bit more growth in categories that have further room for penetration like incontinence and wipes, et cetera. So no changes really there on the dynamic on the categories. So all in all, given where the categories stand, our results of 5.4% in consumer products and I think particularly 3.7% in volume, we believe those are pretty strong given that there's not a lot of volume growth in the categories. So that also means that our shares are strong, and we continue to make inroads with the innovation we're putting out there in the market. So good start to the year, and we feel good about where we're positioned and a lot more coming in terms of innovation and commercial execution to continue this trend that really started in the second half of last year with consumer products. We had a very strong 3 quarters sequentially in Consumer Products, and we hope we can get that to continue. Operator: We will move next with Alejandro Fuchs with Itau. Alejandro Fuchs: Pablo, Xavier, and team, congratulations on the results. My question is just a very quick one regarding the MXN 10 billion increase in debt that you posted during the quarter. I wanted to see maybe, Xavier, if you can elaborate a little bit more on what the use of proceeds is -- and if this has anything to do maybe with, as Pablo was mentioning, a potential deal with Kenvue and KC in the U.S. in the second half of the year, maybe. Xavier Cortés Lascurain: Alejandro, in principle, the placement was not tagged to anything directly. As you know, we usually like to renew debt in advance when we see an opportunity, given the size of the deals that you need to do for them to be efficient. We prefinance, let me use that word, 2 or 3 years ahead. And the last 2 debt payments that we did came from our cash. Having said that, if we were to do anything in terms of M&A coming forward, this places us in a good position to be already prefinanced for that. I hope that answers it. Operator: [Operator Instructions] We will take our next question from Antonio Hernandez with Actinver. Antonio Hernandez: Congrats on the results. Just a quick one regarding Away from Home that continues declining. What is your perspective here? Do you see any data that reflects an overall improvement, maybe how you started the quarter versus how you ended the quarter? Pablo Roberto González Guajardo: Thanks for the question, Antonio. Look, Away from Home was lower versus last year, but it did have an important sequential improvement. So we see the business starting to improve. As I've mentioned in prior calls, this is a business that suffered more the effects of the slowdown of the economy and the adjustment in inventories by the trade. And we continue to see some of that. But again, our volumes are starting to improve sequentially. And we believe this might be -- the second quarter might be still a little bit flattish. But given where we see inventory levels at this stage in the trade and our plans going forward, we expect this business to grow in the second half of the year. So it's had a little bit of a rough patch, but I think it's coming under control and the right trend. And again, second half, we should be growing the business nicely. Operator: And at this time, there are no further questions in queue. I will now turn the meeting back to Pablo Gonzalez for closing comments. Pablo Roberto González Guajardo: Well, nothing more to say. Just thanks so much for participating in the call. We really, really appreciate it. And as always, if there's further questions, you can certainly reach out to us, and we'll be more than glad to talk to you. So thanks again, and have a great rest of the week. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect. Pablo Roberto González Guajardo: Thank you, Nicki.
Operator: Good morning, and welcome to today's Amneal Pharmaceuticals Investor Call. I will now turn the call over to Amneal's Head of Investor Relations, Tony DiMeo. Anthony DiMeo: Good morning, and thank you for joining Amneal Pharmaceuticals investor call. This morning, we issued a press release announcing Amneal agrees to acquire Kashiv BioSciences and reporting preliminary Q1 results. The press release and presentation are available at amneal.com. Certain statements made on this call regarding matters that are not historical facts, including, but not limited to, management's outlook or predictions are forward-looking statements that are based solely on information that is now available to us. Please see the section entitled Cautionary Statements on Forward-Looking Statements for factors that may impact future performance. We also discuss non-GAAP measures. Information on use of these measures and reconciliations to GAAP are in the press release and presentation. On the call today are Chirag and Chintu Patel, Co-Founders and Co-CEOs; Tasos Konidaris, CFO; and Jason Daly, Chief Legal Officer. I will now hand the call over to Chirag. Chirag Patel: Thank you, Tony. Today is a defining moment for Amneal. This morning, we announced that Amneal agrees to acquire Kashiv BioSciences, creating a fully integrated global biosimilars leader and positioning Amneal to become the #1 affordable medicines company in the United States. We have long said this was our goal. And today, we're showing exactly how to get there. Turning to Slide 3. I'll begin the call by discussing the strategic fit of the acquisition and the remarkable biosimilar opportunity ahead. Chintu will share more about Kashiv, our combined capabilities and the robust biosimilar portfolio we will have. Tasos will discuss the transaction, our financial outlook and Amneal's very strong first quarter results, which we preannounced this morning. At a high level, Q1 marked another consecutive quarter of strong top and bottom line growth with revenue up 4%, adjusted EBITDA up 19% and EPS up 29%. Our strong start of the year, combined with growth of existing and new products, gives us confidence to raise our stand-alone guidance for 2026. This consistent performance is something investors have come to expect from Amneal and something we take great pride in. On Slide 4, we provide an executive summary of this combination. First, this is a highly strategic transaction that creates fully integrated global biosimilars leader. This unlocks direct access to more than $300 million of worldwide biologic loss of exclusivity over the next decade by bringing together Kashiv's deep R&D and manufacturing capabilities with our proven commercial scale. This combination builds on a longstanding partnership that significantly reduces execution risk. Second, this combination creates immediate scale in biosimilars. We expect multiple launches each year going forward, supported by a robust pipeline of more than 20 biosimilars programs. Third, this adds biosimilars as a key growth pillar within affordable medicines. The transaction further diversifies our business and extends our growth profile well into 2030s, while also creating a footprint to expand internationally over time. And fourth, the deal is structured to create value from day 1. With a balanced mix of upfront consideration, performance-based milestones, we expect significant financial synergies and we maintain a disciplined financial profile with a clear path to deleverage to below 3x by 2028. Let me turn it over to Chintu to share more about Kashiv. Chintu Patel: Thank you, Chirag. Good morning, everyone. Going to Slide 5. Today's acquisition announcement reflects our long-stated goal to be vertically integrated in biosimilars. I want to acknowledge the Amneal and Kashiv teams whose hard work made this possible. Kashiv is a biologics platform built over 12 years with more than $900 million invested, 600-plus employees and 4 R&D and manufacturing sites. It brings proven capabilities, a differentiated portfolio and a global operational footprint in U.S. and India, which provides reliable supply chain and cost efficiencies. Turning to Slide 6. Kashiv adds deep biosimilar development expertise and scaled U.S. and India manufacturing, enabling multiple programs to run in parallel with speed and cost efficiency. The platform can support 3 to 5 biosimilars developments annually and offers end-to-end biologics capabilities from clone development and protein characterization through clinical and regulatory execution. These expertise spans key modalities and the vast majority of biologics, including microbials, monoclonal antibodies, fusion proteins, bispecifics and cytokines. From a manufacturing perspective, drug substance capacity is expected to scale from 26,000 liter in 2026 to 75,000 liter by 2028. Combined with Amneal, this creates a fully integrated global biosimilar platform. I will hand it over to Tasos to share more on the transaction. Anastasios Konidaris: Good morning, and thank you, Chintu. Turning to the transaction overview on Slide 7. As you can see, we have purposely structured this deal to balance upfront value and success-based consideration to ensure alignment of interest. The upfront value of $750 million is a 50-50 mix of cash and equity. The equity portion translates to approximately $29 million of Amneal shares, representing 8% equity dilution. In addition to the upfront value, the deal terms include potential milestones of up to $350 million, contingent upon attaining certain regulatory approval milestones as well as potential royalties over 12 years contingent on achieving certain gross profit levels. Finally, Amneal will fund operations between signing and closing of the deal. We spent a lot of time structuring this transaction to ensure it aligns incentives with the large commercial opportunities ahead of us and doing it in the most balance sheet-friendly way. The transaction will be funded by cash on hand as well as some additional debt, and we expect the combined company's net debt leverage ratio at the end of 2026 to be 3.7x adjusted EBITDA, only a slight increase to the 3.5x adjusted EBITDA at the end of 2025. It is important to note that we expect to resume our deleveraging in 2027 and expect our net leverage ratio to be 3x below adjusted EBITDA -- net debt adjusted EBITDA by 2028. Finally, we expect this highly strategic transaction to close in a few months as we work through annual shareholder approval and customary closing conditions and regulatory approvals. Let me now share our expected combined financial growth profile on Slide 8. First, we're embarking on this acquisition from a position of strength. As you may have seen from our press release this morning, we announced record first quarter preliminary financial results, and we also raised our full year stand-alone guidance. Amneal's ability to deliver solid top line growth and double-digit adjusted EPS growth in a tumultuous macroeconomic environment is a testament to our strategic choices, strong execution and relevancy of our products. Consequently, on a combined basis, including Kashiv, our 2026 view remains largely unchanged aside from a small impact to cash flow related to near-term transaction and integration costs. Importantly, we're maintaining the higher adjusted EBITDA and EPS outlook, which we believe is a clear signal of the underlying momentum and confidence in the trajectory of our business. For 2027 and beyond, we expect the combined company to continue to grow both in terms of top and bottom line performance. And by 2030, we expect revenues to have grown by approximately $1.2 billion or 40% over 2026 and EPS up by approximately $0.70 or 70% over 2026. Finally, we expect substantial operating cash flow growth, which supports our continued deleveraging. While increased financial performance is important, I cannot emphasize enough the impact this acquisition is having in enhancing our diversification, providing us with access to large markets into 2030 and beyond, just like our GLP-1 deal with Pfizer. Let me now hand it back to Chirag. Chirag Patel: Thank you, Tasos. On Slide 9, this transaction fits squarely in our long-term strategy. It adds biosimilars as a key growth pillar and positions us higher on the value curve with greater scale and higher growth. So why now? In looking at Slide 10, it's because we are entering the golden era for biosimilars. The global market is expected to grow from about $40 billion today towards $200 billion by 2035, driven by the largest biologic loss of exclusivity in history over next decade. Advancing to Slide 11. Biosimilars represent the next major wave of affordable medicines, and we are at an inflection point. Physician adoption is accelerating, patient access is expanding and the U.S. regulatory advancements are lowering development time and cost. Today, about half of U.S. drug spend is concentrated in high-cost biologics. Furthermore, biopharma pipelines continue to shift towards biologics with most therapies in development being large molecules. Each biologic is a future biosimilar opportunity. With biosimilars, access expands and cost lowers, delivering meaningful value for patients and the health care system. In 2024, biosimilars were estimated to have saved the U.S. health care system $20 billion. There's a powerful opportunity to improve affordability and expand access because what is the point of innovation if it is not accessible. Turning to Slide 12. Despite this opportunity, there are only a handful of integrated global players. And today, there is no clear U.S. biosimilar leader. Most players have relied on partnerships to date. With Kashiv, we bring together development, manufacturing and commercialization, enabling faster execution, smarter and bigger portfolio choices and ability to capture full economics. We believe this level of vertical integration is a true competitive advantage. I'll pass it back to Chintu to share more on the combined capabilities and portfolio. Chintu Patel: Thank you. Chirag shared with you the strategy on why biosimilars. Let me share with you the clear reason why Amneal. Looking at Slide 13, since our founding, we have built a leading affordable medicine business. We are now #3 in U.S. retail generics with over 280 products across dosage forms with one of the most complex portfolio in the industry. This is a natural extension of our strategy, and we will execute with the same rigor and discipline in biosimilars. On Slide 14, we show how this combination brings together end-to-end biosimilar capabilities. Kashiv adds scientific expertise and in-house development from cell line through approval, along with scaled biologics manufacturing across a global footprint. Amneal brings a proven commercial engine, leveraging our leading affordable medicines business, long-standing customer relationships and the specialty branded infrastructure to drive market access and uptake. Built on a 10-year plus partnership with Kashiv, our capabilities are highly complementary and positions us to execute well. Next, let's look at Slide 15 and the combined portfolio. Together, we have a combined portfolio of 20-plus biosimilars that targets over $100 billion in U.S. opportunity and more globally. First, we expect to have 6 commercial biosimilars by 2027, including biosimilars for Avastin and Denosumab and a biosimilar for XOLAIR, which is pending approval. Second, we expect 6 or more additional approvals from our advanced pipeline by 2030. And third, in 2030 and beyond, we have a deep pipeline of future programs that extend our growth well into the next decade. Strategically, this is a balanced and durable portfolio mix. Many opportunities are biologics with less than 1 or 2 competitors expected and others are widely used products with large markets, creating a durable and scalable growth engine. On Slide 16, we have a clear line of sight to steady cadence of near-term catalysts from Kashiv. First, lanreotide is a high-value partner asset expected to be approved in quarter 3. Second, biosimilar XOLAIR follows with anticipated approval at year-end, which is another Kashiv partnered asset that we now capture full value for. After that, we see a pipeline of additional approvals in 2028 and 2029, including biosimilars for ORENCIA and CIMZIA, each representing meaningful future growth drivers. Let me now pass it back to Tasos. Anastasios Konidaris: Thank you, Chintu. I'm very pleased to share with you our exceptional first quarter preliminary results, our confidence in the strength of our business, which translates to increasing our full year guidance on a stand-alone basis. And finally, our proposed acquisition of Kashiv BioSciences, which positions Amneal as a leader in the large global biosimilars market. Let me first start with our first quarter preliminary financial results, which were characterized by robust top line growth, exceptional bottom line growth and continuing deleveraging. Moving to Slide 22 in the appendix. Total net revenues in the first quarter of $723 million grew 4%. Q1 Affordable Medicines revenue of $423 million grew 2%, driven by strong performance of key women's health and ADHD products due to high market demand and increased Amneal supply. These high-margin products drove Q1 segment gross margin to 47.3%, up 320 basis points versus Q1 of 2025. We continue to expect Affordable Medicines revenue growth of 7% to 8% this year, driven by the strength of new product launches and strong execution by our teams. Q1 Specialty revenue of $133 million grew 23%. First quarter CREXONT revenue of $21 million reflects continued strong market uptake. Earlier this week, we shared with you our additional Phase IV data, which showed CREXONT as having more than 3 hours good downtime versus RYTARY, reflecting the CREXONT's compelling clinical profile. In addition, we're also delighted with the strong launch trajectory of Brekiya for cluster headaches. Revenue in Q1 2026 was $4.6 million compared to $1.6 million in Q4 2025. This rapid adoption as well as feedback from patients and prescribers confirms the substantial market need and long-term revenue potential for Brekiya. Turning over to AvKARE, where Q1 revenues of $166 million declined by $6 million or 4% as strong growth in our government channel was offset by expected decline in the low-margin distribution channel. As you recall, this is part of our strategy to enhance profitability, and we're happy to report that AvKARE's gross margin in the quarter grew by 690 basis points versus first quarter last year. Moving to Slide 21. From a bottom line perspective, the strong growth of adjusted gross margins by approximately 500 basis points and thoughtful expense management translated to Q1 2026 adjusted EBITDA of $202 million, up 19% and Q1 adjusted EPS of $0.27, up 29%. Finally, our strong financial performance and discipline continue to reduce leverage and our net leverage ratio in March of 2026 declined to 3.5x adjusted EBITDA compared to 3.9x adjusted EBITDA in March of 2025. So in summary, and before I turn to our acquisition of Kashiv BioSciences, our business fundamentals, financial outlook and balance sheet have never been stronger, which positions us well to consider such a strategic deal. Turning back to the acquisition for a moment, as we outlined on Slide 17, this is a highly synergistic transaction, adding significant value to our commercial and operating business model and providing substantial financial benefits over the course of time. From an integration perspective, we're combining Kashiv's R&D and manufacturing expertise with Amneal's commercial engine. We're strengthening market access, expanding in hospitals and accelerating international growth. With our shared global platform, we accelerate time to market at lower cost. From a financial standpoint, we expect $400 million to $500 million in cumulative financial synergies over time. There are 2 key elements to this. First, we're now capturing full economics from partnered assets by eliminating milestones and profit-sharing obligations that existed as part of prior licensing deals. Second, we also expect to realize substantial tax benefits as well as incentives from the local Indian authorities. Importantly, this deal goes beyond traditional cost synergies. It creates strategic scale and durable value while also avoiding the significant time and capital needed to build a biosimilars platform organically. Let me now hand it back over to Chirag. Chirag Patel: Thank you, Tasos. On Slide 18, since 2019, we have built a stronger and more diversified Amneal, and delivered consistent top and bottom line growth each year. We have done this by executing well across our business. We launched 20 to 30 products annually, expanded especially with CREXONT and Brekiya, entered biosimilars with our first products, established a novel GLP-1 collaboration with Pfizer, expanded internationally and acquired and more than doubled the AvKARE business. That said, the opportunity ahead remains significantly greater than what we have achieved to date. We envision Amneal 2030 as a much larger, more diversified biopharmaceutical company with more than 400 retail and injectable medicines, mostly complex and differentiated, a large pipeline of 20-plus biosimilars and multiple specialty branded products advancing the standard of care, while Amneal fills hundreds of millions of U.S. prescriptions each year. In summary, the key takeaway from today's call are on Slide 19. Today marks a pivotal moment for Amneal, establishing a fully integrated global biosimilars leader, strengthening our diversified portfolio and extending our durable growth profile into 2030s. Our strategy remains clear to become America's #1 affordable medicines company and a leading global provider of essential medicines because innovation only matters when it reaches the patients. With that, thank you, and we will open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Matt Dellatorre with Goldman Sachs. Matthew Dellatorre: Congrats on the deal. I know this was a long time coming, so very exciting. Maybe 2 questions, if I may. First, just on the commercial strategy for the new expanded portfolio. I see you have both the mega blockbusters like OPDIVO and KEYTRUDA and also many sub-$5 billion assets in there. And then also, it's a healthy mix of pharmacy benefit and medical benefit drugs. So could you maybe just speak a bit on how you approach portfolio construction and what type of assets we should expect over time as you all disclose more and the pipeline expands? And then I realize you're primarily focused on the U.S. market, but can you just remind us how you are thinking about the international biosimilars business as well? And then maybe stepping back, a question for Chirag. When you look at this new kind of combined company you all have now, what would you highlight as maybe the 2 to 3 specific things that you're most excited about and which you think could drive upside to this long-term guidance that you're giving today? Chirag Patel: Thank you, Matt. So let me address the portfolio mix first, the Kashiv pipeline. So markets are shifting more towards PBM, as we know. We predict 70%, 75% market to be driven by private label, PBMs, specialty pharmacies and 25% or so percentages will be driven by buy and build. So it's a well-thought-out portfolio. If you look at the disclosed product, there are certain undisclosed product that just like what we did with small molecule, we want to be the big player, relevant player and mostly focused on niche products. So how do we achieve that? That is why we have some of the big products like KEYTRUDA, OPDIVO, DUPIXENT, but each has its own reason why we have selected. Just to give you an example, DUPIXENT requires such a large biologics capacity, we're building it. And at the right time, it will be ready to deliver. Then we have niche products, which we expect 2 to 3 competitors. So if you look at overall in the next 10 years, our portfolio would be probably 70% would be niche, about 30% would be the large molecule that we must have to offer a complete package to the customers. So that is how the portfolio makes very well and obviously, the IP driven, a lot of strategy work goes behind it for the last 10 years, what Kashiv has done, and we love the portfolio. And execution is going to be the key, which Kashiv has executed over the last 25 years. We will bring the same rigor to execute this big platform on the biologics. Your second question on how do I think about U.S. commercialize, I answered most of the products. We will be marketing Amneal directly. We already have a long-standing relationship with big buyers such as CVS, Express Scripts, Cigna, Optum, UnitedHealth. These three are about 80% of the market. We also enjoy a great relationship with smaller customers. So we're well set to commercialize products in the United States with a broad portfolio of small molecule. Don't forget that plays a role as well. It's the same people, same relationship, same trust that we have established. If you ask the Red Oak of the world or Walgreens of the world, they would rank Amneal as the most strategic, the best platform, best values, the most complicated products that we come up with and create a massive patient access at affordable prices. We intend to do the same with biosimilars. International, our strategy has been clear. India, we have started marketing on our own, mostly the unmet need on the branded side and biosimilars. Rest of the world, we enjoy great partnership, as Amneal, Kashiv has also built great partnership with companies as well, which will be disclosed in the near future. So I'm a big believer in a partnership model. So you can -- there is a biosimilar void. There's 118 biosimilars. How do we deliver as an industry on all of that. So partnership will make great sense, and we don't intend to have boots on grounds in Europe or South America or Canada, that's not where we are focused on. We are solely focused on delivering biosimilars at scale, staying in the molecule for a long time, be a champion in America as we have a stated, goal is America's #1 affordable medicines company, and we are on our way to get there, maybe 2030, '32, we have multi-decade strategy. So we are completely focused and internationally, great partners. We look forward to work with them. New -- the last one, I'm sorry, is a long answer, but I'm so excited. The new combined company, what is the most exciting thing. So let's go back. I mean, our core business is performing at a full throttle, it -- the women's health, the hormonal patches demand has gone up, the inhalation products demand, ophthalmic products demand, they're all at a high level. And also the small molecules LOEs are going to double in the next 5 years than it had for the last 5 years. So tremendous growth opportunity in core business by itself. Second, our specialty brands, very exciting. You saw the CREXONT data, amazing. I mean we're getting words from our partners in Europe and India that this would become a first-line therapy because they've been using 40 years old technology platform. The product was made 40 years ago, IR product, Sinemet, which gives you off time every 2 hours, 3 hours, you think of a life of a Parkinson's patient. CREXONT is the best therapy out there for maintaining the daily lives. So very excited about CREXONT and seeing a great outcome on Brekiya. It's a much needed product, useful product for cluster headache patients and severe migraine patients. The third, GLP-1 partnership with Pfizer. As we all know, GLP market is going to keep growing. It's going to become life setting. So tremendous capacity would be -- and capability would be required. This is what we are building with Metsera, then it's with Pfizer. We enjoy a great relationship with Pfizer, a win-win situation, global markets, global demand. We have 18 countries, emerging countries, including India, we've been given the rights to market. Pfizer's branded products, which came from Metsera portfolio. That's a completely unique strategy than fighting over the generics at such a low prices that's been out there in -- just started in India and rest of the world. And we believe this is consumer products, everybody would want less side effect, longer duration, which potentially Pfizer products delivers. And the last one, as we've been talking on this call, is all about biosimilars, huge growth. We've been saying that this is the inflection point. The providers are excited. The 80% now turns into biosimilars. The insurance company, the coverage is becoming better and better. CMS has keep pushing for it. FDA has reduced the regulatory requirements. So this is the perfect time that we integrate this platform and deliver 3 to 5 biosimilars develop and file and commercialize for many years to come. And it also opens up the opportunity for bispecifics, right, the fusion proteins and in the future, ADC as well. So if you -- this is why it's so important for Amneal to now have a complete platform, small molecule platform and large molecule platform. Long answer, but I hope it was helpful, Matt. Operator: Your next question comes from the line of Les Sulewski with Truist Securities. Leszek Sulewski: Congrats on the transaction. So you noted the capacity scaling from 26,000 liters to 75,000 liters. How does this compare to some of your peers? And what's the magnitude of dollar spend to get there? And separately, would you say this is rightsized for that business moving forward? And do you see a further need for capacity expansion beyond the 75,000 liters? And then second, on the gross margin profile, maybe just walk us through the puts and takes around 1Q and how does the remainder of this year look? And then over the long run, how should we think about the margin profile now that the biosimilars business will be integrated? Chirag Patel: Great. Chintu and I will take the first one and pass it to Tasos for the second one. So Kashiv has built the platform manufacturing sites over the last several years, which is -- which coincides with the product approvals timing. So XOLAIR being first, we will be in manufacturing Piscataway, New Jersey and also the backup site is India as well for global supply. So all key molecules will have 2 sites, U.S., which, as you know, we are a U.S. champion. We always believe in U.S. manufacturing. So we keep expanding U.S. manufacturing, and we only have a site in Chicago with Kashiv acquisition, which is for E. coli. So the current capacity is sufficient for first few launches. And then over '27, '28, '29, we're expanding to 75,000 liter, which is, again, matches with the pipeline execution and pipeline approval and launch timing. That is how we see the capacity expansion. And it will be a good problem to have from 2030, '31 to keep expanding. Once we have the infrastructure in the same site, we can expand another -- keep expanding 25,000 liter -- another 25,000 liters as we need, we are always smart about this. We'll keep expanding the capacity. So we never would have issue with capacity. I'll pass it to Chintu to give more lights to this. Chintu Patel: So we have perfectly sized the capacity, and it's not only about how many thousands of liters, it's also about how you design and the number of bioreactors because you need flexibility in your manufacturing and for the execution of the filing products. So I think that's a key differentiator that how we have thought through that on a long-term basis to cater to our goals of filing a few biosimilars every year and the same time also commercially to make sure that we have the excess capacity. And we are -- we have diversified our supply chain from U.S. and India perspective also. So if it's a cost sensitive product, we will have enough capacity in India and also in U.S. So I think we are positioned well to cater to all the 20 products that we have and we have also considered this as a global capacity. So it's not only U.S. specially, we are playing globally in this market. So we are pretty comfortable with the 20 products having 75,000 liters. It's all about the design and how we have thought through that. And we have taken under consideration good market share. So that's also there. About the spend, it's about $30 million, $50 million a year, we'll be spending for next 2, 3 years on the CapEx to get to the 75,000 liter. Anastasios Konidaris: And Les, this is Tasos. Around gross margin. So I'll just speak in annual terms. So if you think about our gross margin in 2025 full year total company, we were at 42.9%. So let's call it 43%, and my gut feel is I think we will finish 2026 at about 45%. So at least at 200 -- we're aiming at a 200 basis points expansion. And that's going to come -- that's going to be driven, a, by all the business units. So our affordable medicines margins will continue to expand as we have continued to evolve the pipeline to more and more complex products with higher price points, right? You've been hearing this from us for the last 6 years now, number one. Number two is we talked about our conscious decision to increase the gross margins in our AvKARE business, which has been -- that acquisition has been a spectacular success and by focusing more on the government, at the expense of the low-margin distribution business. So that continues to pay dividends. And then finally, in our specialty business, which already has low 80s, 81%, 82% gross margins kind of continue to drive that adoption. So those have been the drivers why our gross margin this year should be at about 45% compared to about 43% last year. As you think over the course of time, margins have more room to grow, more room to grow beyond the 45%. If you were here about 5, 6 years ago, you will have heard Chirag and Chintu talking about having gross margins in the old days, almost 50%. So this is where we are driving directionally over the next 10 years. So it takes some time to get there, but we see another -- over the next 3 to 4 years, we're looking at the 45% gross margin to be closer to, call it, 47% gross margin as the portfolio continues to be driven by biosimilars, which have a higher price point than the rest of the business. Operator: Your next question comes from the line of David Amsellem with Piper Sandler. David Amsellem: So I have a few. First, can you just comment and elaborate on the insider ownership of Kashiv? That's number one. Number two is why provide long-term revenue EBITDA targets, not just '27, but also out to 2030? What was the rationale there? And just remind us is the EBITDA margin expansion that you're factoring in between 2027 and 2030, is that -- how much of that is a function of just the elimination of the shared economics on biosims? And then the last question is how much of your revenue base by 2030 do you expect will be from biosims? Anastasios Konidaris: David, I'll take question #2 and #3. If you can just -- can you just repeat question number one for a second, if you don't mind? David Amsellem: Yes, the insider ownership of Kashiv. Anastasios Konidaris: Insider ownership of Kashiv. Okay. Got it. Okay. So well, I'll take the first one. I'll start with the first one. So insider ownership of Kashiv, you can see it essentially in our proxy, which has been owned by the Amneal Group, which has been also a big shareholders at Amneal since the beginning of time. So ownership includes of the Amneal Group, includes both our CEOs who've always been transparent of that as well as people who have been investors in Kashiv and -- investors of Kashiv and also at Amneal for a very long time, and key contributors to what we have built now, which is a great company. So that kind of thing addresses question #1, hopefully. Number two is no CFO that I know likes to provide long-term guidance because it's a Catch-22 as lot of things can happen over the course of time. Having said that, and you got to -- I think you know us long enough to know, we take our long-term guide and financial commitments incredibly, incredibly seriously. So for us to provide long-term guidance, we had to feel pretty confident on our ability to deliver on those commitments, number one. Number two, I think it speaks to the tremendous amount of diligence we have done in this acquisition, which probably expand at least a year's worth of work by tens of people in our R&D group, in our legal group, in our business development group, in our financial group and the commercial group to convince me and convince us as a management team to lay those numbers out for our investors. The final thing is, I would say, why provide long-term guide, to us, it provides a focal point by which we focus 8,000 employees at Amneal and now our brand-new colleagues at Kashiv. So everyone, all of our 8,000-plus employees are singularly focused to a set of financial metrics, so it eliminates ambiguity. So this is what's behind why provide those targets. And also you got to assume we're being prudently conservative, right? No management team, at least that I know, wants to put out numbers which they are at risk of missing. So that's kind of how we thought about and why we provide those long-term targets. Now in terms of revenue and EBITDA expansion, it's a combination. It's a combination of both. I don't have the exact percentages, right? A lot of how much of that is a new acquisition versus how much of that is the existing business. As I mentioned before, we have an existing business. You look at our affordable medicines, every part of our business is growing. So we are doing this deal, not because we need to, because we think this is the right deal to do at the right time with the right risk parameters to drive growth for this business in 2030 and beyond. So you look at our affordable business, and that business is growing this year. We expect it to grow 7% to 8%. That growth will continue, and you can model this and biosimilars will add to that, right? And then in terms of an EBITDA basis, Q1 EBITDA was up 19%, right? Last year's EBITDA growth was 10%, this year. So the base business that is growing at least adjusted EBITDA 10%. We expect this to continue and add on -- the additional add-on we expect to come on biosimilars. So that's how we think of it. It is a highly derisked long-term forecast that is based on the growth of the existing business plus the acquisition and it's conservative in nature. So hopefully, that addressed some of your questions. David Amsellem: Yes. How much of your business do you think is going to be biosimilars? Like what's the revenue base going to be in 2030... Anastasios Konidaris: So... David Amsellem: Footprint now, yes. Anastasios Konidaris: Yes. So if you think about 2030, for example, the guidance we're providing is between $4.3 billion and $4.5 billion, probably about $1 billion -- a little over $1 billion, $1 billion to $1.3 billion, that's going to be biosimilars. Operator: Your next question comes from the line of Chris Schott with JPMorgan. Christopher Schott: Just 2 for me. Maybe just first, a bigger picture question on biosimilars. Can you just talk a little bit more about how you see the competitive landscape evolving as we approach this very large cycle of biologic patent expirations? I know you mentioned there's no clear leader in the space, but do you anticipate there's going to be a more meaningful consolidation of share and there's going to just be a handful of players? Or will this remain a more fragmented market as a whole? And the second one for me is just on a specific product on lanreotide, the Somatuline Depot. Can you just talk a little bit about that opportunity as we think about 2026 in terms of market dynamics and competitive landscape and just how meaningful of a product that could represent for Amneal? Chirag Patel: Yes. Thank you, Chris. Competitive landscape on biosimilars, as we know, the vertically integrated players are taking more market share. Amgen, obviously, one brand company that is still investing in biosimilars. Rest of the brand companies have moved out of favor for biosimilars, as you know, they are more obviously back to the innovative medicines. So that leaves Sandoz obviously clear global leader at this point and a great company. Celltrion is coming in, is a -- from -- a South Korean company, which is expanding in the United States and globally and building a large vertically integrated platform. Samsung is doing both out-licensing mainly and concentrating also different division on biosimilars. India's Biocon has been in the biologics for over 40 years. So they're already in the United States market. And then Kabi with mAbxience ownership and their own, we see them as a vertically integrated player. So the way it would expand is -- this is why it's an inflection point that we, as Amneal got the platform or getting a platform with the manufacturing capacity, with the pipeline that we execute over the next 5 to 7 years. It requires a lot of manufacturing infrastructure, a lot of R&D infrastructure, number of years, even with FDA's Phase III gone, still will be 5-plus years from the timing of starting the clone development all the way to the filing and approval and then the IP negotiation settlement. All those things would take 5, 7 years. So -- and you can't see like in a small molecule, you have 50 companies jumping in from India and China. We don't see that. We see a few companies will come from India, a few maybe from China, but they all have to build these U.S.-oriented infrastructure or regulated markets, which is a different ball game than you've been producing biologics for the emerging markets, because the requirements of FDAs are much at higher standards than those other countries. And Amneal builds everything first with U.S. in mind. So yes, there will be more competitors. The large molecules like KEYTRUDA, OPDIVO, you will see 5 to 10 competitors. Some would be partnered, and niche, this is why we, Kashiv and Amneal will be focused on is in niche molecules where we will see 2 to 3 competitors. So that's how we see the competitive landscape, maybe 8 to 10 players. There are 118 molecules to go after. Big biosimilar void is there. So that is a large, large number of products to work on and not everybody can do every product. As we said, our capacity capability is 3 to 5 per year. Chintu, do you want to add anything? Chintu Patel: I mean there's a lot of high barriers of entry, and science, it's much more complicated than the small molecules. It will cost close to $50 million to $75 million per product. So there are lots of barriers. So I think it still will remain not that competitive plus as Chirag stated, it takes 5, 7 years for a new player to build this platform and have the manufacturing and development expertise and capacity. At Kashiv, we have a fantastic group of 600-plus people. And that experience, I think, gives us the confidence of this 3 to 5 biosimilar. So competition, as Chirag stated, would be these 4, 5 players might be vertically integrated, but still is largely a space for somebody to be a leader and the Amneal will be a leader by 2030. Chirag Patel: And lanreotide, Chris, is -- the market dynamics changed. There was -- Cipla was in the market, had some contract manufacturing issues, so they are no longer in the market. It leaves it only with brand and the product is in high demand. We're getting calls from everybody. So we have requested FDA to expedite the approval and they're working on it, and we could be the first, again, the -- I'm sorry, it's a small molecule, generic lanreotide in the market, and we will supply and create another access for the hospitals and clinics as soon as possible. Chintu Patel: And this is also a global. So we have a pending approval in Europe also, and it's a highly complex product. It's a drug device combination peptide. So we are looking forward to this product and its opportunity. Operator: Your next question comes from the line of Glen Santangelo with Barclays. Glen Santangelo: Just a couple for me. Chirag, I mean, I think everyone would generally agree strategically that a deal like this kind of makes sense. But I'm kind of curious to get your perspective on the operational complexities of sort of what's involved here. Because if you look at the -- we were just talking to Chris' question about the evolution of the competitive landscape. A number of the other players have decided to go more in the partnership licensing route versus the vertical integration route. And maybe that's a function of how complicated or operationally complex it is. And so I'm kind of curious if you worry at all about increasing the risk profile of the company in that way. And then maybe secondarily, I wanted to talk about the 2027 EBITDA guidance that you put out today. And I'm guessing you kind of realize that, that number is a decent amount below what the Street was already forecasting for fiscal '27 and kind of implies some deceleration in the EBITDA growth rate in '27 versus '26. And just sort of given the $400 million to $500 million in synergies we sort of talked about, you had a couple of partnership deals that seem like they're on track and maybe you'll have full ownership of them by the time they come to fruition. I'm just trying to reconcile all the pieces that you've laid out here as it relates to how soon we may see those synergistic benefits in '27 and beyond. Chirag Patel: Thank you, Glen. So let me take the first one. I'll pass it to Tasos for the second question. So the first one, partnering versus full economics or vertically means vertically integrated. Yes, it is complex. This is why it took 10 years for Kashiv to build this platform with significant investment. So this is why we believe it be competitive light compared to obviously the small molecule. And why you can take the large few molecules, right, who could stay in the market, who could take the leadership position and stay all the way until the molecule needs to be delivered and produced. So if we have -- first of all, it gives you full economics. So your margin expands, you have full freedom of selecting products and it's not easy to in-license 20 products. We have 20 products biosimilar basket, and we're going to add more in coming years. So that freedom, the full economics in the United States market, it makes sense to be completely vertically integrated. As I stated before, Glen, that it would -- the partnering would -- is great. And in international market, we look to partner and Kashiv already has partnership with the key players globally who are well set globally. So I see the combined model, but mostly the companies that would be successful if you look back in 2030 or '35 are going to be all vertically integrated. They will not be -- just like in small molecule, there are not any companies that have survived being just the marketing companies. We got to do a lot more than that because the real, real complications is the R&D, is the IP, is manufacturing. I think the PBMs and private labels are making the marketing and sales easier, which is how it should be. I hope that answers the first question. You can -- may have a follow-up, but let me pass it to Tasos. Anastasios Konidaris: Glen, I love financial modeling questions. So let's kind of put things in perspective. So the first point is guidance for 2027 on EBITDA of $820 million is kind of substantially below where the Street is. I'm not sure where the Street is, number one, I think that they are about $835 million. So us providing guidance of $820 million plus compared to $835 million, I don't think it's substantially less than that, kind of point number one. But also, obviously, we don't run our business to kind of satisfy anybody else other than us and our shareholders, kind of point number one. Point number two, this kind of notion of kind of deceleration. This year EBITDA, right, the midpoint is at $755 million is about 10% growth versus prior year. Even if you take the low end of what we gave you for next year of $820 million, that's about 9%. So 9% versus 10%, I don't think it's a big deceleration, number two. And number three, we feel great about growing EBITDA 9%, 10%, even absorbing a strategic deal, which is going to have some dilution next year until it becomes accretive in 2028. So we feel great about being able to give our shareholders a view about next year of adjusted EBITDA up of about at least 9%, number one. And at the same time, fund incremental R&D, right, to maximize the opportunity here of $300 billion plus of branded products going generic over the course of time. That's kind of how we thought of it, and try to give you guidance for 2027, that's a long time away. So I think it speaks to our confidence about telling you what we think we can -- the minimum we can deliver next year. So hopefully, that gives you some perspective. Operator: Your next question comes from the line of Ash Verma with UBS. Unknown Analyst: This is [indiscernible] from UBS. I'm just asking questions on behalf of Ash. So I have 2. The first one, and I apologize, this has been discussed before. So the first one, how do you think about the lanreotide market opportunity? It seems like there's just limited competition in this molecule. So I just wonder like how confident are you about the approval time line in 3Q? And what will be the gating items for the launch? And then my second question on gross margin. So I think like it was discussed before the annual -- like in annual term, it's about like 45%, but in 1Q, I think this quarter it is about 48%. Does that mean we're going to see some gross margin normalization later this year? If you can give some clarification on that, that would be helpful. Chirag Patel: Thank you, [indiscernible] The lanreotide, the gating item is only the FDA approval. We're ready to supply, and it's a great opportunity for Amneal. I'll pass it to Tasos on the gross margin. Anastasios Konidaris: Yes. Our Q1 gross margin follows for a while. It was just a record quarter, which was overall up 510 basis points versus Q1 of last year. So it's just to kind of be able the sustainability of 510 basis points is kind of hard to keep repeating quarter after quarter. So this is why I think we're being -- we have a little bit more modest gross margin expansion for the rest of the year. And this is why, though -- even though with a little, call it, a little bit more modest growth the rest of the year, we still feel confident that overall company gross margins this year in 2026 should be closer to 45%, 45%, maybe a little better compared to about 43% last year. Hopefully, that's helpful. Operator: There are no further questions at this time. I will now turn the call back to Chirag Patel for closing remarks. Chirag Patel: Well, thank you, everyone, and have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the CME Group First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Adam Minick. Please go ahead. Adam Minick: Good morning, and I hope you're all doing well today. Earlier this morning, we released our earnings commentary, which provides extensive details on the first quarter 2026, which we will be discussing on this call. I'll start with the safe harbor language, then I'll turn it over to Terry. Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, in the earnings release, you will see a reconciliation between GAAP and non-GAAP measures following the financial statements. With that, I'll turn the call over to our Chairman and CEO, Terry Duffy. Terrence Duffy: Thanks, Adam, and thank you all for joining us this morning. I'll make a few brief comments about our record quarter before turning it over to Lynne to provide an overview of our financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. I'm proud to announce that CME Group has achieved a record-breaking start to 2026. Our outstanding performance in the first quarter reflects the essential role we play in the global economy and the trust our clients place in our markets to manage risk during periods of significant economic transition. The first quarter average daily volume of 36.2 million contracts was the highest quarterly average daily volume in CME Group's history and represented an increase of 22% compared to the same period last year and 6 million contracts a day higher than any previous quarter. For the first time in our history, we achieved simultaneously record volume across every 1 of our 6 asset classes: rates, equities, energy, agricultural products, metals and foreign exchange. In aggregate, our commodity sector volume grew by 38% and our financial products volume grew by 18%. Building on the momentum of our record 2025, our global expansion continues to accelerate. International average daily volume reached a record 11.4 million contracts, a stunning 30% increase in 2025. The EMEA, APAC and Latin American regions all posted record highs. Remarkably, our international business also saw a record volume in all 6 asset classes simultaneously, proving that our value proposition is resonating globally. We aren't just growing volume, we're growing client value. We delivered record levels of capital efficiency, saving our customers an average of over $85 billion in margin per day. Additionally, open interest ended the quarter up 11% over the past year and up 19% since the beginning of 2026. During the quarter, U.S. treasury open interest reached an all-time high of 36.3 million contracts, driven by unprecedented demand for U.S. treasury futures and options. This growth reinforces CME Group's role as the deepest and most efficient liquidity pool in the world. We continue to innovate and provide the tools our clients need, and in an environment that is always risk on. These include last week's CME FICC, or Fixed Income Clearing Corporation, cross-margining agreements received approval from both the SEC and CFTC to expand to our end user clients beginning on April 30. 24/7 crypto trading scheduled to go live on May 29. Also, we're excited to announce that we will be filing to change our Micro Equity Index options to be financially settled to better serve the users of those products. Our new environment in Dallas is on track to open this summer, and we will provide a critical testing ground for our clients in advance of 2 of our agricultural products migrating to the cloud by the end of the year. As we look to the rest of 2026, we are confident in our ability to continue to deliver value to our clients and shareholders. Our strong performance, coupled with our ongoing investments in technology and product innovation, provides a solid foundation for future growth. With that, I'll now turn the call over to Lynne to review our financial results in more detail. Lynne Fitzpatrick: Thanks, Terry, and thank you all for joining us this morning. As Terry mentioned, the first quarter was record-breaking across the board. This included growth in our clearing and transaction fee revenue of 15% year-over-year. The average rate per contract for the quarter was $0.652. Our pricing strategy includes volume tiering, which results in decreasing rate for contracts at higher levels of volume. With volume records in every single asset class this quarter, this volume tiering encouraged incremental trading, providing risk management benefits to our customers and driving highly profitable incremental volume to the exchange. The combination of our volume growth and pricing structure resulted in an increase of $205 million in clearing and transaction fees for the quarter. Market data revenue also reached a record level, up 15% to $224 million, marking 32 consecutive quarters of year-over-year market data revenue growth. In aggregate, CME Group generated record revenue of $1.9 billion, up $238 million or 14% from the first quarter of 2025. Adjusted expenses were $512 million for the quarter and $405 million excluding license fees. Our adjusted operating income was $1.4 billion, or a 72.8% adjusted operating margin, the highest in our history. Adjusted net income and adjusted diluted earnings per share came in at a record-setting $1.2 billion and $3.36 per share, 20% higher than Q1 2025. This represents an adjusted net income margin for the quarter of 64.9%, with $200 million of the $238 million increase in revenue accruing to adjusted net income. We returned $3.2 billion to shareholders during the quarter, with $2.7 billion in variable and regular quarterly dividends and $536 million in shares repurchased. This quarter delivered the highest volume, revenue, operating income, adjusted net income and diluted earnings per share in the history of CME Group. These results are a reflection of our position as the world's premier risk management destination. As our clients continue to navigate uncertain times, we remain fully committed to meeting their evolving needs through continued innovation and deep liquidity. We'd now like to open up the call for your questions. Operator: [Operator Instructions] The first question in the queue is from Patrick Moley with Piper Sandler. Patrick Moley: Terry, you mentioned that you've received regulatory approval to expand the DTCC cross-margining agreement to end user clients. At the same time, the DTCC has been running a pilot program to tokenize U.S. treasuries as collateral. So as you think about the intersection of these 2 initiatives, I'm curious how you see enhanced collateral mobility impacting CME's clearing business. And then more specifically, with customers having the ability to move tokenized treasury collateral in real time, just what that could mean for the industry write large? Terrence Duffy: Thanks, Patrick. Suzanne Sprague is here, and she's been working very closely with both FICC and folks at DTCC and the regulator. So I'm going to ask her to opine on that question to start, and then I'll go. Suzanne Sprague: Yes. Thanks, Patrick. We are continuing to work with FICC as well as internally on various tokenization efforts. So we think that there is a benefit for the industry to be able to reduce friction moving collateral, especially for collateral that does not settle naturally same day. Treasuries is a good example of that. So we will continue to explore what we could do together with FICC as well as other initiatives that we're pursuing at CME, including the tokenization of cash and our partnership with Google, as well as looking at other assets that might be of interest in the ecosystem today to be able to reduce some of those frictions and free up liquidity by moving those assets on digital technology. Terrence Duffy: Patrick, just to add on to that, I have said and the team has said, we're looking at potentially our own stablecoin here. We're looking at multiple different ways to make that $85 billion a day of margin efficiencies continue to grow, and not only just the margin efficiencies, but the capital efficiencies about how we move money back and forth each and every day and what's the best interest of every single client. So whether it's through tokenization, stable, using cash and treasuries, other forms of margin that they use with us today, we want to make it as effectively for them and efficiently for them. So I think it's an exciting time for us, and we look forward to informing you more as we continue to roll out these proposals. Patrick Moley: Okay. That's great color. As a quick follow-up, we've seen some pretty interesting developments in the perpetual future space this year. The S&P Dow Jones JV recently granted an exclusive license for the S&P 500 perpetual futures to a relatively lesser-known company [indiscernible] blockchain. And on that platform, we've seen volumes explode in commodity perps. So just with your goal to try and attract more and more retail eyeballs to CME's product suite, I'm curious how you're thinking about perpetual futures as a product structure that could eventually become a more meaningful driver of [ retail ] engagement. And then just if you could maybe talk about some of the regulatory or market structure hurdles that I guess would need to be cleared before we get there. Terrence Duffy: So thanks, Patrick, and I'm glad you raised that. There's a couple of things I want to unpack there. First, we'll talk about the JV venture, then I want to talk about some of the commodities, and Derek can address that, and what the true volumes are associated with that. It looks very large in the way they're trading, but remember, those are in notional value, not in contract terms the way we calculate our business. So, and who's on those platforms, how those platforms work, what's the risk management associated with it and why would that institution potentially want to participate in something the way those are structured. First of all, perpetuals are against the law in the United States of America. That's first and foremost. That is where it's at today. They are not allowed under the Commodity Exchange Act of 2000. The centerpiece of that act was how do you define what a futures contract is. It wasn't a bunch of other things in the act. The centerpiece was what is a futures contract. And it was defined as a contract for future delivery. It was not designed as a contract that never ended. So I really believe that for perpetuals, I think convergence is massively important to the commercial producers and other participants that these contracts are designed for. Contracts are not designed, not, I repeat, not designed for speculators or hedgers or not to design for speculators or just a pure retail. They're designed for hedgers, commercials and producers. That's the way they -- you have to have a natural buyer, a natural seller. And they need to have convergence between cash and futures in order to run their business, which benefits the participants, not only in the United States, but globally. You need to have these markets. As the great Dr. Milton Friedman said to me in 2002, if we did not have futures contracts today, we would need to invent them in order to move forward and progress. But that -- the way the market works between cash and futures is critically important. So the decisions that people want on perpetuals, they seem to me more of they're trying to create a contract for the speculator. That's not the mission of the commodity exchange. That's not the definition of it. So I -- that's something that I'm very much involved with as it relates to perpetuals. Your other part about the volume going into some of these products, I assume you're referring to some on silver, some on oil, and so let's talk about that for a second. When they listed those on [ XYZ on hyper liquid], as you know, the way that market works, if in fact they were to have a tip-over in [ the auto ] liquidation, they've been very fortunate to have an orderly market for the most part, but if in fact, you had an auto liquidation, the money from the losers, it comes from the winners. It's a very difficult proposal for any institutional hedger to use a product such as that where if they're due $1 and they get $0.45 back because the other side of the trade just got beat up and so that's where they got the money from. So I am concerned about some of those rules, and those are done on a perpetual basis. I think the agricultural communities, the energy communities and others are not completely pleased with some of the pricing of those products. But I'll let Derek talk about that. But what's important, before he mentions it, we have to think about the timing of when those products were listed. You got to remember, silver went from $50 to $118, I believe, Derek, is that about right? High, and then back to $86. Oil went from $50 a barrel for almost 4 years to north of $100, and then back down $86. So that was where that activity kind of caught. Now the question will be, is that sustainable? So I'll let Derek comment on those particular products. Derek Sammann: Yes. I appreciate it, Terry. I think if you look at the results of this last Q1 and even continuing into Q2 of this year, you're seeing exactly what Terry talked about. The purpose of futures contracts are to enable hedgers to be able to know that they can identify the forward curve. These products then converge to physical delivery and physical markets, whether it's corn, whether it's livestock, whether it's oil, whether it's gold, all come to physical use. So we look at the end-user commercial need of these customers. When you look at the growth and record activity in our commodities portfolio as a whole, you'll see that every single portion of our client segments grew with double-digit growth in every single group led by commercial, corporate banks buy side and [ prop firm ]. So retail is a part of that, but financial customers will follow where the end user manages and hedges their underlying risk, and that's in our futures market. Terrence Duffy: And so on the first part of your question with the S&P listing on that, we were not made aware of that, even though we own 27% of the index business. We were not made aware of that decision. We got made aware once they listed it, literally several hours before their press release went out. Their press release went out, and which coincided with the opening of that market. We've been engaged with conversations, as you can imagine, with our partners. We both have a deep respect for intellectual property. We've made our points very aggressively on that, and I think they understand that now. And so we are continuing to work with our partners at S&P to make certain that, as we go forward, we're all on the same page. Operator: And the next question in the queue is from Dan Fannon with Jefferies. Daniel Fannon: So Terry, I wanted to follow up on your comments about the Micro Equity Index option to change. I think you finally are making to be more financially settled. So just wanted to talk about why now and what you see is the opportunity going forward with that. Terrence Duffy: I'll let Tim chime in, but I will tell you why now is -- maybe we should have done it a little bit sooner, but why now is because the client base continues to go across multiple different versions of the equity complex, whether it's the larger [ E-mini ], whether it's the micro or something smaller, and how they participate. This client base in the micros seem to be more of a retail focus. They really don't want to deliver their options into a future where the people that are trading the larger clients do want to deliver their options into the future. So we felt very strongly that the micro contract would make more sense for that constituency. But at the same breadth, we didn't think it made sense to change all of our equity contracts to deliver into cash settled. Basically we'll keep them as deliverable into a future. But Tim, you can add to that. Tim McCourt: Great. Thanks, Terry, and thanks, Dan. And I think part of it is, as Terry said, as CME Group is the comprehensive leader in risk transfer for the S&P 500 and the NASDAQ complexes. It's important for us to continue to evolve our products to meet the risk management and market access needs of our customers. And that's the feedback that we're receiving. When we look at the micro-size products and how those strategies are deployed, to hedge other parts of their either stock portfolios or ETF portfolios, or looking to access the market, that they prefer the financially settled mechanisms where they could have the options expire against the futures daily settlement price. And that is the change we're looking to file. It will then, as Terry said, be different than the institutional-grade E-mini offerings and options on those products, which serve a very specific and highly utilized function of the market of delivering the underlying futures, which is a benefit to the institutional community and the hedgers out there, particularly when they're looking to access the almost $40 billion per day of capital efficiencies in our equity complex at CME Group. We've actually seen continued adoption of our E-mini products by clients where several large buy-side clients are also switching some of their structured product strategies to utilize the efficiencies and the benefits of trading futures-based options at CME Group on the S&P 500. So we think this will further grow the complex as we remove some of the barriers to entry for clients and give them a better tool that serves the risk management needs of their portfolio. Terrence Duffy: And just so you not think I'm talking [indiscernible] my mouth, in this particular contract, we didn't design it as a financially settled in the micro because it's just for retail or speculation. It's not. You have to look at the value of the S&P 500 and who uses that contract today. For your historians that may or may not know this, we started with an S&P 500. And then we cut the multiplier of the 250. As the contract continues to go up and value, participants, even the large ones, need to trade a smaller contract or they need to trade a bigger contract, depending on what their needs are. So we are trying to take these pools of liquidity for the constituents to across the entire spectrum of CME's equity products. And it's basically the decisions are being made for the value of the index itself, not for just the constituents who are trading in. So I think that's a really important distinction. Operator: The next question in the queue is from Ken Worthington with JPMorgan. Kenneth Worthington: Can you talk a bit about the evolution of WTI and how you see the ongoing growth of U.S. Gulf oil playing into the dominance of the Cushing's settled product? And secondly, how do you see the changes in Venezuela and the conflict in Iran changing global supply chains? And how might this feedback into CME energy activity and CME oil market share? Terrence Duffy: Ken, that's a really good question. I think a lot of people like to have the answer to that one, especially in the industry for sure. I'll let Derek talk a little bit about the TI because I think it's important. But when we get into geopolitical, like what it means for Venezuela, I mean, we know what has been said publicly by the administration, but we don't ultimately know what's going to happen. So I think we'll stick with what we think on TI right now, Derek. Derek Sammann: Yes. I think that's a great question, Ken. It's certainly timely in light of what we've been seeing in terms of restrictions and constrictions of [indiscernible] supply. 20% of the crude oil market, as you know, comes from the Middle East, flows out in the global network. That has been disrupted. We've been talking for years about the ways in which we have continued to evolve WTI as a global benchmark. Ever since the export ban was lifted in 2014, U.S.-produced WTI, and nat gas, in fact, have been flowing out into global markets. So I think that to us, this is just another confirmation point of the absolute essential nature of U.S. produced energy products, both WTI and Henry Hub, that is now being produced and exported at record levels outside the U.S. And this is just another marker of adoption globally of the -- what these markets mean and what these products mean to risk management across the board. We have seen outsized growth for 4 years in a row now of global adoption of commercial end-user customers in Europe and Asia as both the Russian conflict with Ukraine disrupted supplies, this is another supply disruption, meaning a greater reliance on another provider of last resort. And that is the U.S. right now. As it relates to your specific question on the crude grades, we launched these contracts back in 2018, 2019, fully expecting a global adoption of WTI. When you have a physical contract that delivers in Cushing as we see record amounts flowing out into the U.S., we needed to provide a risk management tool to get physical in Cushing down to the Gulf Coast enter the export market. I think what you're seeing in the record volume in open interest and our crude grade contracts, it's really solidifying WTI as a dependable supplier of oil to the world. We think that continues to reinforce WTI's importance globally. And you look at the dependability of physical deliveries, we continue to dependently deliver those barrels month after month. In fact, our GME -- our state in the GME Global Mercantile Exchange in Dubai, which delivers the [indiscernible] crude contract, also physically delivered outside the Strait of Hormuz, has been uninterrupted in delivering 15 million to 20 million barrels a day as well. So the market needs to find dependability of supply. They found that in WTI. That's the reason why we're exporting not only record amounts of WTI and Henry Hub, but also [ RBOB ] gasoline and HLR diesel contract as well. So it confirms the importance of that in global products for global customers that we are the dependable provider, and we continue to ramp up exports, and that further solidifies U.S. energy products in the portfolios of global customers. Terrence Duffy: And Ken, I don't want to be dismissive, so I want to go back to the beginning of your question on Venezuela. Can you ask that question now separately so maybe I can address it? But I may not be able to. Kenneth Worthington: So it was just about how the changes in Venezuela impact global supply chains and what it means for CME activity and share? Terrence Duffy: So I think for -- not quite sure what that's ultimately going to mean with Venezuela. I think that the verdict is still out about how that country is going to run. As everybody knows, I think that their production got run way down. Their infrastructure in Venezuela was not doing what it was at peak. So those are all issues that they need to have addressed going forward. And then there's going to be a lot of politics and other people trying to deal with that particular issue. So as far as our share goes, I think what is important, and Derek touched on it, WTI is no different than Brent, another one, these are global markets. Whether it's produced in the United States or it's produced in Saudi Arabia or UAE or Qatar, these are global markets and people are going to sell to the highest bidder. And that's just how the oil market has worked. So I think sometimes people here in the United States think that we have this massive supply of WTI so our gas prices should be a lot lower. Our producers sell all over the world. And that's the way this market is, it's global. But the good news is, I think what Derek is saying, is the benchmark at WTI is getting a much higher visibility, and I think that will continue, which will bode well for CME's risk management [indiscernible]. Derek? Derek Sammann: I think one little last piece that's worth noting on the share piece here is that Venezuelan crude is extremely [ heavy ]. It's going to take a long time to rebuild the infrastructure in Venezuela, import that and then actually resource some of the refineries in the U.S. to adopt that. So we think that's a term impact. If you look at the forward curve of the oil market, you'll see a backwardation, lower prices [indiscernible] expecting more U.S. flow in. The last point I want to note is on the share piece of that. I think if you've seen record amounts of activity in global energy markets, we have seen share increases back in CME WTI north of 79%, 80%. And that's just confirmation that when markets are going through times of undue stress, market retrenches to core liquidity on the home exchange. We've seen that in WTI futures and options over this last 3 to 4 months. Operator: And the next question is from Ben Budish with Barclays. Benjamin Budish: I wanted to maybe start with market data. It looked like this quarter's recurring revenue growth was the fastest I think you've seen in several years. I'm just curious if there's anything you can share there. To what extent are these contracts volume based? To what extent are these from new FCMs kind of joining the platform? And how sustainable do you think this growth is over the near term? Terrence Duffy: Thanks, Ben. We'll turn it over to Julie Winkler, who heads up this area for CME. Julie? Julie Winkler: Thanks for the question, Ben. Yes, it was a great quarter. We had record $224 million in revenue. So we are up 15% from Q1 of 2025. And I'd say one of the biggest shifts that we've seen is really a surge in the simulated trading environment. So what's happening there is really strong growth, and I would say maturity among these platforms. And so these environments are really allowing new traders access to our market data. They're learning how futures products work. And they're taking advantage of the educational resources provided within these platforms. And really using it as part of the customer journey become successful new active retail traders. And so we've seen very strong year-over-year growth in these participants utilizing these sim environments to begin their trading journey in futures, that we believe is really going to be additive over the long term to the retail ecosystem. So sim participation was up significantly. And so that is really kind of driving that retail or nonprofessional participation in our market data business. We've also made -- we continue to make policy changes, right, in thinking about data feed licensing and how that all needs to work. That has contributed to some of that recurring revenue growth that you're seeing. And then lastly, subscriber growth has continued on the professional side as well. We were up about 1% from Q4 and up about 2.45% from the number of professional subscribers we had a year ago. So I'd say it's a number of fronts. A lot of this is relatively sticky revenue in that sense. And we continue to work with our customers to ensure that our benchmark data is provided and they're getting the data in the way that they want it. Lynne Fitzpatrick: If I could just reinforce a little bit of what Julie said, I mean I think what we're really pleased with is kind of broad-based growth. So we're seeing that subscriber growth. We're seeing the new product growth as well as some of the changes just with pricing. But this is a really healthy ecosystem that we're seeing across the market data business. Benjamin Budish: All very helpful. Maybe just a follow-up, maybe sticking with the retail team. You mentioned in the earnings commentary that on the prediction market side, you've now seen it looks like about 15% of volumes are kind of markets related. So curious if there's any further details you can share, what, if you have any visibility on, what types of customers are trading those contracts rather than sports? I would imagine all this is happening within your 2 current FCMs. But just curious what that customer base looks like. And maybe any color you can share in terms of the pipeline of potential additional FCMs would be helpful. Terrence Duffy: Thanks, Ben. Tim, do you want to address that? Tim McCourt: Yes. Thanks, Ben. So when we went live with our prediction markets and event contracts offering back in December, we've seen strong growth both in terms of adoption and volume where we recently surpassed the $220 million contract mark. And then when we look at the participation across those contracts, we started a marketing effort in the middle of March with our partners at FanDuel. And since then, the actual participation or the distribution of volume towards the market-based contracts across equity, crypto, energy and metals actually exceeded 30%. That's a shift that we're pleased with. And I think it speaks to the attractiveness of the offering where we're looking at attracting these next-generation traders to our markets. They're coming in through the apps through our FCM partners, and they're trading all types of the event contracts, both sports and the market space contracts. And that's something I think that reinforces the value prop of CME, that we have some of the world's leading benchmark products at CME Group and now we're making them more approachable and more accessible to the individual and next-generation trader through the fully funded or fully collateralized event contracts and prediction markets offering at CME. And the other thing that we're pleased to see is since December, we've had over 150,000 new accounts trade at CME Group in these products, which is off to a fantastic start. We're continuing to work with our partners that are currently trading, and we have a pipeline of FCMs we're still working to get on board and offer these products to their end users. So optimistic about the future, but a first few good months here out at CME Group in our prediction market offering. Terrence Duffy: So Ben, just to emphasize a little something, when we originally negotiated this deal with FanDuel, our goal and objective was it had nothing to do with sports. Our goal and objective was to do with markets and distribution. And that is exactly what we're starting to see happen. Even though it's very, very early innings, to say the least, for baseball season, Tim is absolutely right, what's going on here. And that's exactly what we were hoping to see. And if, in fact, both our partner, if FanDuel wanted to have [indiscernible] so we were accommodating to them, but that was never our goal and objective. Our goal and objective were markets, on events, on markets, for their participants and ours. And that's what we're starting to see. And for me, that's exactly what we wanted to see happen. Operator: The next question in the queue is from Alex Blostein with Goldman Sachs. Alexander Blostein: I had a follow-up on the energy markets. And just curious to get your thoughts on the health of the underlying customer. Obviously, we've seen extreme volatility, which feels like it might continue for some time. There's always a debate about good vol, bad vol. This doesn't feel like great vol. So if you think about what's happening with the underlying users and the durability perhaps of the customer base on the go-forward basis, I'd love to hear your comments on that. Terrence Duffy: Derek? Derek Sammann: Yes, it's a great question. I think that when you look at markets in times of stress, as I mentioned before, you're going to see liquidity retrench back to home markets. And we've absolutely seen that. When we think about healthy markets, we think about a couple of different markets. Number one, we want to see health across the entire breadth of the portfolio. So we saw record activity not just in WTI futures, but options. We saw record activity and open interest being held in the crude grade contract, as I mentioned before. We're seeing record uptake and actually fastest uptake in Europe and Asia. And we're seeing options set records, particularly in the short-dated part of the curve as well. So broad-based activity across all products. We're not seeing activity spikes in one. We're also seeing, despite the fact that we're seeing some pretty unprecedented volatility times and uncertainty, open interest in energy has been extremely resilient. If you look at open interest since the deck 31, our open interest in energy is up 14%. Even on a year-on-year basis, open interest is up 1%. So open interest is a marker of the sustainability and health of activity, and that is still holding in well. One of the other markers we look at is the breadth of activity across client segments, and every 1 of our client segments continues to perform up double digits across the board, led by our commercial customers, not surprisingly, in markets like this. Retail has returned over this last quarter as we saw in the metals markets as well, very much wanted to be actively involved in our micro contracts. But I would say the growth and the sustainability in the open interest holdings continue to be -- show positive trends. And we're seeing sustained activity. We are not seeing activity that we saw immediately following COVID, which was a spike in activity closing open interest and reduction in activity across client segments. So we are seeing a healthy amount of activity. I would attribute at least a portion of that strength in these markets to the growth in our options business, particularly with the short-dated options business that are giving customers the ability to discretely manage event risk like we're seeing right now. And that's why we're seeing records in weekly options that I think customers are using to manage short-dated risk around longer-term core exposure. So at this point, we're seeing into April a strong participation, open interest holding there, and good participation across clients. Terrence Duffy: And just to add to that, Alex, I think you got to look at the entire industry, and it's not just oil, it's the shipping industry. These are billion-dollar ships that are sitting out there that need to be insured. Insurance companies are very nervous about extending insurance to some of these billion-dollar ships that could be blown up in a heartbeat. So they are looking to offset some of their risk on the insurance side, whether they're creating a swap or trading futures against it. So I think the client base will continue to expand because this -- even though, whenever this gets resolved, people are still going to be very concerned. So I think we'll get a new constituency of participants, not too dissimilar from the mortgage industry and others, from insurers and reinsurers from the energy business using our products and others in order to manage that risk going forward. These are very expensive vessels that they cannot afford to have being sunk in the Strait of Hormuz or anywhere else. So I think it's a very interesting what's going on. You mentioned good vol and bad vol, Alex. I want to touch on that for a second. So good vol is the volatility that market kind of goes orderly in a direction and it maybe goes into a different direction. When you see pockets of volatility with not much [indiscernible] that to me is bad volatility. But that's headline volatility. And headline volatility can be very disruptive to the marketplace. And there's a lot to that, but that normally is short-lasting as well on the bad volatility. So we'll see how that continues to proceed going forward. Alexander Blostein: Got it. Yes. No, super helpful. One quick follow-up just on the numbers. Obviously, with a lot of volumes coming through, RPCs came down a bit. And I was hoping you could maybe frame how to think about near-term RPC across, particularly the energy markets where we're seeing the bigger decline. Terrence Duffy: Thank you, Alex. Lynne? Lynne Fitzpatrick: Yes. So I would keep in mind a few things when you look at the energy volume and the RPC in this quarter. First, as Derek touched on, we obviously had record volume there. But you also had some real spikes in short periods of time. So March, the level of activity we saw there is certainly impacting the numbers. So if you look at the total volume growth, you would expect additional usage of volume tiering. You also saw a mix shift towards crude, which tends to be lower priced than things like our nat gas. And Derek also touched on one other thing, the micro business really grew significantly. So we saw about 315,000 micro energy contracts a day this quarter. That was up from about 80,000 contracts a day in the same quarter last year. So that is going to have a dampening effect on the weighted average. Those are at about $0.52 a contract. So I think those 3 factors really are what weighed in on the energy RPC. The last one that's a little bit harder to see is just the shift towards more member trading. So that's really where we saw that impact. So going forward, I would look at that overall level of volume in terms of volume tiering. And then I would look at those mixes in terms of crude versus nat gas, and then the micro versus full-sized products. Operator: The next question is from Michael Cyprys with Morgan Stanley. Michael Cyprys: I was just hoping you could update us on your partnership with Google, including tokenizing cash, what the time frame and key milestones are there, how you see this playing out? And if you could also update us on the prospects for CME stablecoin as well. Terrence Duffy: Yes. Thanks, Michael. I'll have Suzanne and Lynne touch on both, because they're both working on those projects. So Suzanne, why don't you talk a little bit about the tokenized Google and timing and things of that nature? Suzanne Sprague: Yes, thanks for the question. So we are working with the settlement banks in our ecosystem as well as clearing members to be able to advance stages of tokenizing cash. You may have seen a press release from Bank of Montreal in the last few weeks, announcing publicly that they have been working with us and Google on the tokenization project. And so the goal there really is to be able to increase the testing capabilities within the settlement bank ecosystem as well as start integrating clearing members into that testing process this year, with the goal of being able to go live by the end of this year. And again, the tokenization of cash really for us enables movement of value outside of traditional banking hours, especially looking at 24/7 trading activity, as Terry mentioned in his opening remarks. It's a key component to being able to enable the movement of value in the off hours, as well as allow us to build upon other tokenized assets using the Google Cloud Universal Ledger. On stablecoin, we also continue progressing that effort with regulatory engagement. And as Terry mentioned there, we are looking to be able to seek a license to be able to issue stablecoin. And we're exploring technology partners that can help us do that as well. We plan to be able to advance that effort this year, although we can't opine on the regulatory engagement time line. Happy to have Lynne add anything else as well for stablecoin. Lynne Fitzpatrick: Yes. I'll actually add 2 things that are a little further afield related to Google. So first, you heard Terry mentioned that we are getting close to opening our Dallas facility for testing with our clients with the goal of ultimately operating markets in the cloud. So we're excited about that progress that we've made with Google. That was something that has been several years in the making. We're also -- that was a big part of the investment that Google originally made in CME. So I just want to make sure you all noted that the Google shares, which were preferred shares, the only difference between those shares and common was that they did not have voting rights. Those did convert into common during this quarter. So you will see that in the basic and diluted share count rather than seeing that separate class of preferred stock. So going forward, you will also see just that earnings that was allocated to the preferred stock, it will show up just in the basic and diluted. So you won't see that differentiation going forward. I just want to make sure you captured that. Terrence Duffy: Do you have anything on stablecoin, we'll get -- Michael, hopefully that addresses your question? Michael Cyprys: Yes. Just a quick follow-up, if I could, on the cloud. So with the contracts migrating to the cloud. I was hoping you could maybe elaborate on the benefits that you see the steps that you're taking to help facilitate that. How do you see the scope and path for migrating other contracts eventually to the cloud or what that might look like and how you sort of evaluate that and what the benefits could be? Terrence Duffy: Well, I'm a big believer that this is the future. And I think if you were to start an exchange or any other business today, you would be in the cloud. We are 175 years, 200 years old at this stage of our proceedings. I think this is the future of markets, having access to be in the cloud. I think the efficiencies that a hyperscaler like Google will be able to provide to CME and its clients will be second to none. And I think that is really exciting. You have to start somewhere. We wanted to start with our less latency-sensitive products, which are the agricultural complex and that commodity side. So I think this will be the catalyst that show people how the benefits of having markets in the cloud and the redundancy that they will have with 20 other centers just in the United States alone, if in fact we needed to go there. So it's pretty exciting from my standpoint. This was our vision going way back during the pandemic in '20 and '21 to do this with a big partner like Google. And I think the future, not only it was looked at, is starting to be realized. So I think it's exciting and I'm looking forward to this progressing forward, and I'm looking forward to every single product being in the cloud, as long as, and I'll say it again, as long as Google's technology and facilities are better than what we have right now. And I believe they will be. Operator: The next question in the queue is from Bill Katz with TD Cowen. William Katz: Maybe, Terry, one for you. if you can update us on your thinking on capital allocation at this point in time. Obviously, you have the dividend, but I'm sort of curious of what your thinking is on M&A. In particular, it seems like there's a lot of different vectors of growth in the industry, both de novo and inorganic, and how that might shape your views on priorities. Terrence Duffy: I missed the latter part. But on the capital allocation, Bill, I think is what your question was, the first one, and I'll let you take the second one. But on capital allocation, I think from the beginning, Bill, going back to '02, I was a big proponent of paying a dividend at CME when everybody else said you shouldn't do that. But I thought it served our interest really well. I still think it does, and I think returning capital to shareholders is really important. But at the same time, I don't want to be stuck in a situation where we're afraid to do something that we think can grow the business, whether it's through M&A or something else, if the opportunity presents itself. So I think instead of putting myself in a box or the company in a box about capital allocation, right now, we are in a really strong position with our dividend, we're in a strong position on repurchasing shares, as you heard Lynne talk about earlier. But again, if there's an opportunity that we see that makes sense for our shareholders, without going out too far outside of the scope of what we do, we will be evaluating those, and that might change our capital allocation at that time. But right now, we're pretty committed to where we're at on the allocation of dividend and share repurchase for now. And what was that the latter part of your question? William Katz: It was all the same question. And then maybe just a quick follow-up, one for Lynne. If I look at your adjusted expenses, excluding licensing fees, it looks like it was up about 7% year-on-year, if I did the math correctly. I think the -- I think you affirmed your guidance for $1.695 billion for the year. Can you sort of unpack what the growth was in Q1 and how we should think about maybe the -- just sort of the pacing as we look through the rest of the year? Lynne Fitzpatrick: Yes. So certainly, and your numbers are correct, so we saw about a 7% growth rate in Q1. Obviously, with a high level of activity, you saw some of the variable expenses come in a bit higher. So you'll see that in compensation, you will also see that in technology where we did see more activity going across the system. So we'll continue to monitor as we go forward. We sometimes see these spikes in activity. We're seeing a little bit of softer activity so far here in April, but it tends to be different periods of time over the course of the year. So we'll continue to look at that guidance as we move forward. But at this point, we're comfortable with where we're at. I would point out that we do expect the occupancy cost to continue to grow over the course of the year as we do things like opening the Dallas facility. You will expect technology to continue to grow as we move more into the cloud environment. The others don't have as many specific drivers that I'd call out. Operator: Next question is from Craig Siegenthaler with Bank of America. Craig Siegenthaler: We were looking for an update on your prediction markets FCM JV with FanDuel just given FanDuel's announcement earlier this month that they will launch a new FCM. So I assume they're going to favor the new venture where they can keep 100% of profit. So are there any major differences in the offering? Terrence Duffy: Yes. Thanks for the question, Craig. And I think there's a bit of confusion on what they can and cannot do with that potential application process. I'll let Lynne describe it to you so we're all on the same page. Lynne Fitzpatrick: Yes. So certainly, this is something that we were aware of, that they were going to make this application. I think it's important to note the difference between an application and a launch. So similar to the way we started an application process, and it took several years to get that approval, they want to be prepared for any future changes and registration requirements or the like. So this actually doesn't signify any change in our relationship or the partnership going forward. And as Terry mentioned, and as you would expect, there are some contractual restrictions in terms of operating alternative venues during our partnership. Terrence Duffy: And I think that's really important, Craig, they can't just get an FCM license, apply for one or buy one and compete with the JV that we put together with them. That is obviously contractually against what we originally stated with them. So I think it was a bit confusing to begin with at best. Craig Siegenthaler: That's helpful. And just one follow-up on prediction markets. Any update on the DCM side and volumes where there's multiple entities hooked up to, including DraftKings? Terrence Duffy: Is there any volume up there with DraftKings? Tim McCourt: No, I think, Craig, just sort of to my earlier comments when we were speaking about prediction markets, we just recently crossed the $220 million contract volume threshold since going live in -- back in December of 2025. I think the notable thing from volumes is, again, as we were covering, is that the percentage of volume in market-based contracts across the CME Group benchmark products in equities, cryptocurrencies, energy and metals is in excess of 30% since mid-March when we -- with our partner at FanDuel increased the marketing efforts, and we've had 150,000 accounts trade at CME Group. So those are the sort of numbers-based updates for prediction markets. And we would say off to a great start and optimistic about the continued growth from here. Terrence Duffy: Craig, what I think is also important is there's a lot of activity, for lack of a better term, going on around the sports prediction markets between the states and the providers. Where there's not a lot of noise, and nor should there be, is around the market event contracts or prediction markets on financial products. And I think that's why we're seeing them grow. And I think that's a very good sign for the future. And I think you're going to start to see other people probably leaning that direction more than just looking at the pure sports itself. So we'll have to wait and see, but I think that bodes very well for CME if in fact that goes there because potentially the offsets you can be looking at against our multiple asset classes that we have here at CME Group that others don't. So I'm pretty interested to see how this all plays out in the future investments going into prediction markets on the sports side of the equation. Operator: The next question is from Brian Bedell with Deutsche Bank. Brian Bedell: Maybe just staying with that very line of your answer on the prediction markets, good to see that market side rising as a mix of the percentage of volume. What is your view on potentially creating company KPI types of contracts, like financial KPI contracts? And I know -- I believe, maybe you can weigh in on this, but I believe they most likely would need to be SEC regulated. So maybe your view on any kind of time line of that, if that is something that is -- that you're interested in developing. And then also if you could just confirm, I think the rate capture on the contracts for you guys is about $0.01 a contract. I just wanted to confirm that. Terrence Duffy: Okay. Thanks, Brian. So do you want to address the first on that. Tim McCourt: Yes, sure. Brian, and thanks for the question, we're certainly seeing a lot of interest in other economic or market-based contracts where we've seen good growth in the economic indicators as well as the benchmark products at CME Group. I think with respect to anything that is financial or KPI or individual stock related, that is something that we continue to engage with customers on. But as you noted, there are some regulatory questions and clarity required about how those products would be brought to market and what the security versus commodities-based offering might be. So that's something we continue just to engage with the regulators. So I'd say stay tuned on that, but no imminent plans or a path forward for those just yet. Lynne Fitzpatrick: And in terms of pricing, we don't break out entirely, there's obviously different pieces depending on where the volume comes from either through the various channels. Obviously, the clearing and transaction fee is transparent. But again, for us, this is about getting the traction with the potential customer base and getting the eyeballs in that distribution and getting kind of that community exposure to our products, which we're seeing good uptake on that right now. Brian Bedell: Great. And then maybe if I can ask Lynne, if you could just talk about the April collateral balances that you're seeing so far and if that's -- if you're still managing about a 30 basis point spread in those balances. I said 30 basis points -- 10 basis points on the noncash, I think, and 30 on the other, on the cash. Lynne Fitzpatrick: Sure, Brian. So in Q1, we did show an average of balances for cash of about $149 billion. That is up a bit so far here in April at $153 billion. In Q1, we averaged about 33 basis points on the cash. I don't -- typically don't disclose for the partial period how we're doing so far in April, but that held steady at about 33% versus last quarter. Then on the noncash in Q1, we had $171 billion on average at that 10 basis points. So far in April, we're averaging $174 billion. So both up slightly in terms of the average balances. Operator: The next question in the queue is from Ashish Sabadra with RBC Capital Markets. William Qi: This is Will Qi on for Ashish Sabadra. I appreciate you guys squeezing us in. Just wanted to maybe follow up on some of the comments around market data and information services. I think last year you guys had some data license changes in regards to the introduction of the end-of-day data category versus real-time delayed and historical. It seems like clients are still kind of generally building out the infrastructure to kind of track that data and they've been back-billed for that charge. How much of a contributor is that license change to the market data and information services growth? And are there any other policies that we should be aware of that are notable as well? Terrence Duffy: Julie? Julie Winkler: Yes. Thank you for the question. Certainly, that was a change in policy. And part of it, right, is just to protect what we believe is a strong intellectual property of our data assets and just changing business practices within the space. So it has in the past and will continue to be of real-time professional subscribers being the core of that market data revenue line. And so while data licensing such a end of day is adding to the growth of the business. It is not a significant driver of that revenue that we talk about each quarter. That continues to be that real-time professional subscriber. I'd say policies in general though, I mean, this is where -- and Lynne mentioned it earlier, right, there's this blend of utilizing policies, introducing things like enterprise pricing with our core partners, simulated trading environments, things like that, that we are going to continue to do, [ Term SOFR ] is another great example of our build-out of our benchmark space. So these are all things that the team is actively working on as this space continues to evolve and change. And I think it's working given the 32 consecutive quarters of year-on-year growth. So we'll continue to update you on that. But I think, again, strategic and pricing-related initiatives as well as new product development is going to be a core of us continuing to drive this growth going forward. Operator: The next question in the queue is from Simon Clinch with Rothschild & Co. Redburn. Simon Alistair Clinch: I was wondering if I could just ask about [ BrokerTec ] and BrokerTec Chicago in particular. I was wondering if you give us an update on how that's progressing. Any benefits you're seeing also what kind of behavioral changes you're seeing across that treasury complex? And I guess, how we might think that could impact the overall treasury performance of BrokerTec in the future? Terrence Duffy: Thanks, Simon. Mike? Michael Dennis: Yes, Simon, thanks for the question. While still early innings, adoption of BrokerTec Chicago is expanding as clients leverage the platform's value proposition of smaller tick sizes, and co-location alongside our core futures and options markets in Aurora. What I like about BrokerTec Chicago is it gives our clients choice and execution venue, depending on their trading strategy and market conditions. We have over 35 clients connected to the platform already. And that includes several participants from the derivative space who exclusively trade U.S. cash treasuries on BrokerTec Chicago. ADV grew 93% month-over-month in March, and we saw a record day of $1.2 billion on April 8. So additionally, we view BrokerTec Chicago as an important foundation in a larger effort to deliver unique new trading efficiencies by bringing our cash and futures markets closer together. So we're pleased with BrokerTec Chicago so far, and we'll keep you updated on new features as it progresses. Simon Alistair Clinch: Great. And just a follow-up on prediction markets. Terry, could you expand a little bit more about on the -- I think you said 150,000 new contract -- new accounts that sort of started trading on CME's platform, having come through that predicting market funnel. I was wondering if you could talk about just what you're seeing, the early behaviors of those kinds of accounts, what -- how you think it might evolve as you sort of try and graduate those kind of customers across the actual traditional futures [indiscernible]? Terrence Duffy: So I'll let Tim comment, Simon. But I think when you look at those new accounts coming in to trade that particular product, it's really difficult to predict what the next 6 months or a year is going to look like with that constituency. It could be a whole new group of them. The market can get a little bit stale or could get exciting. You just don't know what's going to happen that would drive the growth of those new accounts or take it away from it. So I hate to try to make a prediction on that. I would rather try to create efficiencies for each and every client and build the business that way. But I'll let Tim talk more about it. As I said earlier, when we originally did this deal with FanDuel, it was about distribution and having people look at our products and then participating, and then hopefully they would be graduating into the other parts of our industry, which we think they are and they will. So to me, that's the long game here, and we are going to continue to stay focused on the new client acquisition, as we talked about for many, many years. And this is just an extension of the new client acquisition through our FanDuel partnership. Tim, do you want to expand? Tim McCourt: Yes. Thanks, Terry. I think the one thing I would expand on that is when we think about the original thesis of why we're trying to attract the next generation of trader to our markets, it's because we want to get our benchmark products and these benefits and the value prop of CME Group into the traders earlier in their life cycle as a market participant. So when we think about what is exciting about the prediction market is prior to the introduction of the full value margin of event contracts that make it easier to access some of these markets at CME Group. We were on the life cycle of perhaps a trader started in other markets, whether it was single stocks or ETFs or options and then eventually cross over to CME Group to open a futures account, work with our futures brokers and start trading either full size or micro-sized contracts at CME Group. What's exciting though we don't know the exact motivation of all those 150,000 traders at CME Group is with the smaller-sized, full value margin contract, we now have the opportunity to perhaps be their first trade in the financial markets. And that is something that is evolving and transformational for our opportunity here at CME Group, that we can meet these clients earlier in their journey. And then as you noted, Simon, once they are then in the ecosystem at the CME Group, we're optimistic they will look at other products. But hard to say exactly what that graduation or life cycle will look like. But capturing them earlier in that journey is one of the things that we find attractive about this opportunity. And it's great to see that bear fruit this early on in the endeavor. Operator: And the next question in the queue is from Chris Allen with KBW. Christopher Allen: Just a quick one following up on the capital discussion from earlier. I just want to ask about the buyback philosophy. So the buyback level doubled this quarter versus the prior quarter, even with the stock improving materially this quarter. So I'm just kind of curious how you're thinking about it from a -- you view it as opportunistic buyback or is it -- is there anything related to the preferred conversion to common shares? Any color there would be helpful. Terrence Duffy: Thanks, Chris. Lynne? Lynne Fitzpatrick: Yes, sure. So Chris, one thing that you are saying is we did comment that we will be using the OSTTRA proceeds and putting those to work in the repurchase. So we will continue to be opportunistic with repurchases, but we also will be using that $1.55 billion that we received from the OSTTRA sale and putting that towards repurchases. So between last quarter and this quarter, we've completed about half of that. So we had about $758 million remaining in cash from the OSTTRA proceeds at the end of Q1. Operator: And the last question in the queue is from Michael Cyprys with Morgan Stanley. Michael Cyprys: I was just hoping to circle back to the cross margining where you see the regulatory approval to launch the expanded treasury cross-margining to end clients in the coming weeks. So I was hoping you could help quantify the impact of that in terms of added margin and collateral efficiency for customers, how you see the scope for expanded client engagement, velocity and what that path might look like? Terrence Duffy: That's a good question, Mike. And I don't know if we're going to have complete visibility into what it's going to look like ultimately. But we are excited by the beginning of it. I'll let Suzanne talk about from her end, what she's seeing. Suzanne Sprague: Yes. Yes, thanks for the question. We are excited to be bringing those 2 big liquidity pools together in the interest rate space. We think that just as we've seen in the House program, we do have the ability to offer a pretty compelling savings the 2 clearing houses. We anticipate the savings can be upward of 80% for the client book just like we've seen on the House side of the program today. We are at about 22 clearing members today that have signed the agreements for the House program. And although we've just announced the approval, we do already have 1 clearing member that signed the agreement for the customer program scheduled to go live at the end of this month, and are engaging with a number of other clearing members to offer the client program as well. . So hard to speculate on the dollar savings, but we do anticipate the ramp-up will be similar to what we saw on the health side and that we'll be able to deliver significant savings for customers, just like we have so far on the House program. Lynne Fitzpatrick: And I would just add that this is a unique benefit that they're able to get those offsets between their activity at CME and at FICC. So it does help reinforce the value proposition of our offering. Michael Cyprys: And what were the savings on the House side? Suzanne Sprague: Max savings have been about $1.5 billion. Average daily is closer to just over $1 billion. Operator: And showing no further questions. I will now turn the call back over to management. Terrence Duffy: Well, thank you. Our record-breaking start to 2026 underscores the importance of our risk management ecosystem. I want to harp on one thing that Lynn talked about earlier. We have continued to grow this business, exponentially grow the client base globally and bring more participants in here to mitigate and manage risk. The rate per contract is always something that's difficult to figure out. And I think when you look at that, you need to focus on that just a little bit more as we continue to grow our business because we actually think this is a really good thing as we continue to grow. So this is not new. We're growing the business and we're really excited about that because it allows multiple participants to continue to grow their business here at CME and pay a price that makes sense for them and for us and for more importantly for you. And we're seeing unprecedented engagement across all of our global asset classes today. We remain focused on disciplined execution and delivering superior value to our shareholders. Once again, I want to thank you all for joining this call today. Operator: This concludes today's call. Thank you for your participation. You may disconnect at this time.
Operator: Good afternoon. This is the conference operator. Welcome, and thank you for joining the GTT First Quarter 2026 Activity Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francois Michel, the company's CEO. Please go ahead, sir. Francois Michel: Good afternoon, everyone, and welcome to GTT's activity update for the first quarter of 2026. I am sitting here in Paris with Thierry Hochoa, our CFO. And together, we will walk you through the usual key business highlights, but also our revenue for the first quarter. The agenda for the presentation today is the usual one. I am sure that you have noticed that we now go with a new setup, hence, first introductory point to further explain what lies behind the One GTT brand. I will then provide you with a business update for our key activities, meaning the GTT Energy and GTT Marine divisions. Thierry will elaborate on our revenue for the first quarter, and I will then share with you closing remarks before we can open the floor to your questions. So first, the One GTT brands. This new organization, which is as you know emphasizes the fact that GTT is now at a turning point following the very successful acquisition of Danelec last year and taking into account our ambition, which we have explained to further develop the core business, but also associated services. It was very important for us and for our customers to bring all teams together under a clear vision, but also a clear structure. So the creation of 2 divisions, GTT Energy on the one hand and GTT Marine on the other, thus provides greater clarity on our activities to our customers and to our staff. It fosters the execution of our strategy to, of course, keep the core business running but also to ensure the success of our service approach to the shipping industry, in particular, in the LNG. I have already set very clear operational targets for these 2 divisions. For GTT Energy, it is 3 priorities: accelerate innovation, strengthen our service offer and revamp our LNG as a fuel and onshore offers. For GTT Marine, the priority is to deliver on the synergies, combining the hardware and software solutions that we have now in this division, and you will see the first results of this strategy. We have also put in place a hub of advanced technologies to put together in the same -- under the same roof, all breakthrough technologies and venture capital. Let's turn now to our first activity, GTT Energy, very much in line with our expectations and with the messages that I had delivered at the annual results and in line with the growing need for new LNG carriers. In Q1, our order intake continued its upward trend. We have announced 29 LNGC orders in the first quarter. It marks our second best Q1 commercial performance after the 2022 record year. We are close to that level. We have also received 2 orders for very large ethane carriers, each of 100,000 cubic meters capacity and one onshore storage tank. This momentum, which I had announced, has continued despite the situation in the Middle East. We have registered 8 LNGC orders just in March and the momentum, I can tell you, continues to date in April. We are, of course, closely monitoring the current situation in the Middle East. To date, and I will come back to this point, this conflict has no direct impact on GTT's business activity, meaning on orders and on deliveries. And if you look at deliveries year-to-date in Q1 22, LNGCs have been delivered versus 23 last year, so a level which is totally equivalent. Now let's turn to the impact of the current situation in the Middle East on LNG global production capacity. As we all know, the closing of the Strait of Hormuz has heavily disrupted the energy and the shipping markets because about 20% of production volumes are nonavailable today. But if I now look at the production capacity, today, only about 3% of the production capacity in LNG has been damaged with the drone attacks on Ras Laffan. As you know, 2 liquefaction trains have been hit. We know that this infrastructure will restart. It will take perhaps a couple of years. Some people say between 3 and 5 years. It could be faster than that, but who knows. I would like to underline, however, a couple of things that, first of all, the situation does not slow down or undermine the need for new vessels to export future volumes associated to FIDs. And if I look at the additional capacity, which is expected to come online by 2030, it represents 180 million tonnes per annum of additional capacity, which is 40% more than the production level today, most of this coming from the U.S.A. And of course, all of this will require new vessels. Now if I look at the FIDs that can come on top of this already high level of FIDs that have been taken, you have the list on the screen. The list of FIDs that are likely to reach -- to be taken this year or in '27 confirms the greater exposure of the overall LNG production to the U.S.A. and to other regions than the Middle East. And as a reminder, this year, 23 million tonnes per annum of FIDs have been taken, including in Qatar and in the U.S.A., and we start the year after a record level in 2025. Now if we look at the shipping routes and the shipping intensity, what you see is that the war confirms that energy security risk will remain persistent. Indeed, the closure of the Strait of Hormuz calls for greater flexibility to ensure energy security and all this at the most reasonable price possible. And we know that some countries with significant exposure to Qatar such as India, Pakistan, Bangladesh; I could mention Taiwan, Singapore, Korea, China, but also in Europe, Italy, will need to diversify their source of LNG. So looking ahead, what we anticipate is that we anticipate that heightened scrutiny on the LNG supply diversification, which could possibly result into a higher shipping intensity over the long run. But we also anticipate the need to create more buffers in the LNG capacity in storage in particular. Now let's move on to our second activity, GTT Marine. The GTT Marine division won new contracts, very good contracts, both in the Performance Solutions and in the safety units. As for safety, GTT Marine has secured new accreditation from 2 new oil majors, which is a prerequisite to expand its addressable offshore fleet, very good news. And second, we start to leverage our broad customer base to sell more of the systems in performance, so for performance solutions, meaning adding performance and voyage optimization to initial data collection. And consistent with the strategy, we have, in particular, signed a new contract, a very good contract with Petrobras a new customer to equip up to 120 vessels with combined hardware and software solutions. Third point for this new division, the integration of Danelec in the GTT Group is progressing as planned, and we are well on track to deliver the synergies that we have announced. Let me now hand over to Thierry Hochoa, our CFO. Thierry Hochoa: Thank you, Francois. Good afternoon, everyone. Now moving on to the financial part of the presentation. Let's start with the order book. Continuing the commercial dynamic seen in the fourth quarter of 2025, GTT recorded a total of 32 orders in the first quarter of 2026. They include 29 orders for new LNG carriers and 2 VLEC, very large ethane carriers and 1 onshore storage. Their delivery is scheduled between the second quarter of 2028 and the fourth quarter of 2029. This is our second best first quarter commercial performance. Over the period, 22 LNG carriers were delivered, a similar level with the first quarter of 2025, around -- not around, but 23 LNG carriers delivered last year for the first quarter. Finally, our backlog at the end of Q1 2026 remains very solid with 297 units for the core business and 46 units for LNG as a fuel. Let's look into more details at revenue by activity at the end of Q1 2026. Total revenues at EUR 193 million are up 1% compared to Q1 2025 and driven by new builds standing at EUR 173 million, meaning minus 4% compared to last year and mainly impacting from lower order intake in 2025, driven by revenues from services increased by 28% at EUR 5.4 million, thanks to a higher level of assistance to vessels in operations and pre-engineering studies. Regarding GTT Marine, revenues increased by 208%, thanks to the contribution of Danelec acquired last July. I now hand the floor back to Francois for the outlook and the key takeaways. Francois Michel: Thank you, Thierry. So in the absence of any significant order delays or cancellations, we can confirm today our 2026 objectives. Our estimated 2026 consolidated revenue ranging between EUR 740 million and EUR 780 million, our estimated EBITDA ranging between EUR 490 million and EUR 530 million. And of course, we can confirm that the dividend policy will remain unchanged. So a couple of takeaways after this first quarter and before we move on to your questions. The first quarter is very well in line with our expectations and I think what we had announced at the annual results. We have seen a sustained level of orders recorded at the end of 2025 continued despite the geopolitical situation. And in fact, it even accelerated. We saw revenue for the first quarter slightly up versus last year, which is somewhat good news, but well on track. And we also saw a growing contribution of GTT Marine with commercial wins consistent with our combined offering, combining hardware and software solutions. Again, as of today, and we are cautious, but as of today, the conflict in the Middle East has no direct impact on GTT's business activity. Thank you for your attention, and we are very happy to take your questions. Operator: [Operator Instructions] The first question is from Matt Smith of Bank of America. Matthew Smith: I had a couple, please. I think last time we spoke, you talked to around 150 orders to come through over the next few years, perhaps next couple of years as a result of FIDs already taken on LNG projects. I guess my question really was, have your assessment on the pace of those orders coming through. I think you referenced largely in a 2-year time period. Has that assessment changed at all? Does the excess of Qatari vessels make any difference to your assessment there? That would be the first one, please. And then the second one would be turning to digital on Marine. You point out that this is now 7% of group revenue, so quite significant. I just wondered if you could add some color, latest thinking how material could this be by 2030, perhaps in terms of group contribution? Or what's the sort of growth rate that we could see with the benefit of the acquisitions, the synergies? Any additional color there would be useful, please. Francois Michel: Thank you. So regarding the pace of the order intake, we have no information whatsoever today regarding a slowdown of the pace of those orders following the FIDs of last year. And the majority -- what I can say is that the majority of the ships related to the FIDs of last year still need to be ordered. So after the end of Q1, and of course, it's a little bit difficult for us to mark exactly where the -- for which FID the ships are ordered, sometimes we don't know. But from the 29 ships that have been ordered in the first -- Q1, we know that 10 ships are nonchartered, 19 ships are chartered. And from those chartered ships, only 5 are related to the FIDs from last year. So the majority of the volume that we have discussed about still needs to be ordered in the coming 2 or 3 years, I mean, with the usual uncertainty. Second, regarding digital, we are exactly on track with our budget after the first quarter. We will report on this Marine division because it includes, in fact, Marine hardware and digital solutions at the end of the first half of this year. And we are also on track to deliver the synergies of EUR 25 million to EUR 30 million expected at the end of 2030. So today, our vision is that this division, of course, without M&A, but could represent 10% to 15% of the group revenue, perhaps a little bit more, but that's the vision today. Operator: The next question is from Guilherme Levy of Morgan Stanley. Guilherme Levy: The first one, just thinking about secondary implications to your business from the current conflict. If we think about an environment in which the oil prices stay higher for longer, how would you think that could increase demand from shipowners for performance improvement solutions on your Marine business? And then secondly, maybe a question related to that, but on LNG as a fuel, what could be the potential in the first years if oil prices stay, say, at spot over a prolonged period of time? Francois Michel: Thank you for the questions, which are hard questions. In our view over the long run, it is clear that there will be longer LNG routes and also longer periods of storage and buffer storage that will increase the need for low boil-off rate and additional performance solutions, as you point out. I am not -- at least this is what we assess at the Board level. I am not yet able to put specific figures based on that, but this is the trend that we see. And I hope that I can give more specific indication after the first half of this year. Regarding LNG as a fuel, today, we believe that the move towards LNG as a fuel is primarily due to environment concerns and that this trend will continue. I have asked the teams to totally revamp our offer of systems, including to be able to have prefabricated systems delivered on the shipyards, but also turnkey solutions, including fully installed solutions. And so the question for us is probably less a question of market evolution than a question of penetration of our solution, where I believe we can get a lot of business. So it can be very significant, but it will take me a couple of quarters to revamp the offer and to present it -- to present a fully revamped offer, new technology and new commercial systems before the end of the year. That's for sure. Operator: The next question is from Richard Dawson of Berenberg. Richard Dawson: Two from me. So good to see no direct impact from -- on GTT from the Middle Eastern conflict yet. But is there a risk that this could change if the duration of the conflict extends further? So can we maybe see some of the Middle Eastern clients asking for construction or deliveries on those vessels to pause as those LNG projects start-ups are delayed. So particularly the Qatari volumes from [ NFS and NFE ]. Is that potentially at a risk? And then secondly, just going back to the structuring of the business. So what does that really mean from an operational point of view? Will there be separate management teams running GTT Energy and Marine, for example? And can we maybe get more disclosure on profitability between the 2 segments? Francois Michel: I would say -- so thank you for all your questions. Regarding the direct impact, what I mean is that today, for instance, you have very indirect impacts on our ability to conduct business, such as logistic constraints to travel to the region, for instance, to engage with customers. And so of course, if the situation were to stay -- to last for a very prolonged time, at some point, we could expect some logistic delays or just issues in interacting with customers or supporting the customers in the region. But it's very important to see that today, there has been absolutely no indication whatsoever of any slowdown of construction, no cancellation of FIDs nor of ships. And to the contrary, the indications that we have received from Qatar is that they ask more the engineering companies to be able to restart as soon as possible the construction and the buildup of the capacity in Qatar so as to offset at least partly even in the short run, the capacity that has been damaged. So we have no indication whatsoever that there is a long-term delay. If there was a delay, it would be -- an impact, it would be, in my view, very indirect such as disruptions in the supply chain, in particular, in electronic components because to deliver ships, you need electronic components, but we are not yet there, I believe so and far from there. Second, yes, in terms of new organization, for me, it means 2 business units, of course, one which is very much larger than the other one as we speak. But the Marine activity is a fully operational business unit with its management well in place with clear operational priorities. We will report on the results. It has a CEO, a CFO and a management team. Regarding GTT Energy, for the moment, because of the size of the business, in practice, I run this division myself together with the management team of the group. Operator: The next question is from Kevin Roger of Kepler Cheuvreux. Kevin Roger: The first one is a kind of follow-up on the order intake dynamic. Basically, Q1 has been very good, and you implicitly say that you still need to have a lot of orders for 2025 FID project. So do you expect in a sense to be able to replicate the Q1 commercial performance over the next few quarters? Just to understand what you expect as a dynamic, which is quite important in a way for the share price reaction. And the second one is also on the, let's say, long-term outlook because when we look at the implicit comment that you made from the Middle East, which is basically new LNG project, diversification, possible increase in vessel intensity, more buffer, et cetera. Can you give us a bit of color on what it makes as an impact on the 10-year market outlook? And if you can, in a way, precise a bit the famous EUR 450 million plus, plus number that you provided at the full year earnings. If you have a bit of sense or a bit more color on where you think this number can land? Francois Michel: Thank you for your questions. So regarding the order intake dynamic, as you know, we cannot guide on orders and certainly not on a quarterly basis. But explicitly, I can say that the vast majority of the ships that need to be ordered after 2025 record level of FIDs, and in fact, the FIDs of this year, have not been ordered yet. And I still expect today those ships to be ordered in the coming 2 to 3 years with the usual pace. So yes, I would not be surprised if the implication of that would be good quarters in the coming years. So that is mechanical. But I cannot guide on a specific level or normalized level quarter-by-quarter, in particular, in the current context because some orders could shift from one quarter to another, and that would have no material implications regarding our medium-term business model. Regarding the need for more diversification and more buffers. We know talking directly to governments in Asia, I just come back from Asia. We know that when we talk to the Indians, for instance, we know that there will be more buffers from those countries, meaning more storage. This is clear. So there will be more floating storage and more onshore storage, more strategic storage of LNG in the region, but also a need to diversify the sources of gas. If you take a country like India, 60% of the Indian gas is coming today from the Middle East. It's, of course, a situation that must be controlled with more buffers, but also with more diverse routes. And so that implies a number of additional ships to be ordered over the medium term. That is our assessment today. And it's -- this effect is material. So it's not a marginal effect on the overall volume of ships. Now can I revise the overall estimate of how many ships will need to be ordered over the next decade? We, of course, have an idea, but it would be, let's say, not cautious for us to release the figure today in the midst of the crisis in the Middle East. And so we will do it most likely, I believe, in the first half of next year when the crisis is over and when the situation is completely stabilized because we are looking at a long-term cushion. Operator: The next question is from Henri Patricot of UBS. Henri Patricot: Two questions from my side. The first one, following up on LNG as a fuel. Just wondering if you can give some comments on the outlook for orders for this year. I mean you mentioned that you're in the middle of revamping your offers. Does that imply that we shouldn't expect many orders this year or perhaps more coming next year? And then secondly, to follow up on the comments on the long-term outlook. Do you have any concern that the current events and disruption to LNG flows coming quite soon after the disruption that we saw back in 2022 with the Russia-Ukraine war could have a negative impact on the long term on LNG demand as the fuel is perhaps not seen as reliable as it could be for some of the buyers? Francois Michel: We are working on a good number of projects for LNG as a fuel as we stand today. So we have a good technology, which many shipyards can use. And so we are working very actively. What is true is that we would like to increase the penetration further because we know that in the majority of cases, LNG as a fuel can be used with membrane containment system, which is not our historical market share. So it is more, let's say, a plan to win aggressively market share in this area. And yes, of course, I expect an acceleration of the sales between this year and next year and the year after. So yes, that's totally true. Second, regarding the long-term outlook, for me, the question is less the question of LNG that it is the question of investment in the Middle East. The Middle East, in general, has been seen as a haven, as a very safe place to invest, not only for energy, but also in a couple of other areas. It's clear that people will take a buffer when they source energy from the Middle East, not only gas. But what we try to show in the presentation is that, in fact, the largest dynamic that we see in the coming years is indeed coming from the U.S.A. And so we see that the implications -- the overall implications of the situation can be a much more diverse source of LNG, much less concentrated. Clearly, no country is buying 100% of their gas from a single country, whatever is this country, but also longer shipping routes and more buffers. This is our situation now. I have not heard of any country, in particular in Asia, which is the largest dynamic in demand that they are thinking about not investing anymore in gas. That's not at all the situation today. It's not the situation. Operator: The next question is from Jamie Franklin of Jefferies. Jamie Franklin: Just one left from me. So if I look at your order intake through the first quarter, obviously, about half of those were announced prior to Middle East conflict escalation, about half after that during March and onwards. But presumably, a lot of these were already in advanced stages of discussion prior to the conflict. Could you help us give us -- get a sense of kind of how many of the 1Q orders were from discussions that started post conflict? Or in other words, if you've seen any sort of acceleration or deceleration in inquiries for new orders? Francois Michel: Thank you. It's a good question. The majority of those orders, of course, have been discussed for a couple of weeks or a couple of months, in fact. So the cycle for us is long, and we don't see any deceleration of the discussions regarding the pace of orders. And so we don't expect a slowdown of orders in the coming quarters, if that answers your question. I hope it [ doesn't ]. Operator: [Operator Instructions] The next question is from Jean-Luc Romain of CIC CIB. Jean-Luc Romain: I've got 2. The first is about the adoption of your new GTT NEXT1 technology. In light of the evolving needs of your customers and your clients, do you see this technology as possibly adopted faster? And the second question is regarding the map you show on Slide 10. I don't think it was -- I saw -- I didn't see Russia, but I think I guess it's in other producers. So just one question. Francois Michel: Okay. So over the medium term -- thank you for your question. Over the medium term, what we believe is that if we have longer routes of shipping and in general, longer storage and people will invest in general on systems with a low boil-off rate, and as you know, NEXT1 one has been developed as a platform, in fact, to reach a very, very low levels of boil-off. So we believe that the overall environment is conducive to an acceleration of low boil-off rate systems, including NEXT1. Yes. Thierry Hochoa: And regarding your second question, the map. Okay, answered. Operator: The last question is from Jean-Francois Granjon of ODDO BHF. Jean-Francois Granjon: Yes. You probably already answered my 2 questions. Nevertheless, I will come back on the first one on the Middle East, taking into account the situation, do you expect a slowdown for the future FID? I think, for the ship owner, it's not very interesting to invest immediately on the new vessel, new LNGCs. So do you expect some potential risk to see a slowdown for the future orders with probably lower FIDs from the Middle East area? And the second question, I will come back on the LNG as a fuel. You mentioned in the press release some more and more competition. So could you explain more or give us some more color about that? What do you expect? And do you consider that it will be more and more difficult to develop your own technology, membrane technology? And are you more cautious regarding the trend expected for your business in this market? Francois Michel: So thank you for your questions. On the Middle East, what I think is important to see is that, of course, for, let's say, consumers of LNG, in particular, in Asia Pacific, but also from the Middle East perspective, it is a crisis, but for other continents, in particular, for the U.S. and for exporters of LNG, which are not in the Middle East, this crisis is very unfortunately, but it is an opportunity. And so if anything, we don't see at all a slowdown of orders of LNGC. We don't anticipate it from the non-Middle East part, if you want. We also don't anticipate a slowdown in FIDs from the non-Middle East part. There will be in the short run, volatility and uncertainty regarding everything that comes out of the Middle East, meaning FIDs, but also LNGC orders perhaps in the very short run. But beyond those short-term effects, what we anticipate is that it will be more than compensated by additional investments outside of the Middle East. Regarding your second question, LNG as a fuel. Well, I think what I think is, first of all, the trend towards LNG as a fuel will continue for, again, primarily for environment concerns, but also because it's -- it has really become the fuel of choice for large container ships and for cruise ships. So I don't expect any disruptions in this trend. But what we also believe is that for many reasons, but including because of rising labor cost, lower labor availability, lower qualified labor availability, we must industrialize our membrane containment systems more to bring them in, let's say, more easy to do business with directly to the yards, which is something that GTT has not done historically. We have been a little bit shy at providing solutions in a turnkey fashion and in a prefab fashion together with partners. And this is the core of what we are working on. And I have absolutely no doubt that -- and from my experience in the yard, I have no doubt about the fact that by making our solutions easier to do -- to use directly in the yards, we will increase the penetration of our solution. So I'm optimistic regarding this market. Operator: Gentlemen, there are no more questions at this time. Francois Michel: Thank you all for your various questions and for your attention. We look forward to continuing the discussions with you and to seeing you soon. Thierry Hochoa: Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.
Operator: Good afternoon. This is the conference operator. Welcome, and thank you for joining the GTT First Quarter 2026 Activity Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francois Michel, the company's CEO. Please go ahead, sir. Francois Michel: Good afternoon, everyone, and welcome to GTT's activity update for the first quarter of 2026. I am sitting here in Paris with Thierry Hochoa, our CFO. And together, we will walk you through the usual key business highlights, but also our revenue for the first quarter. The agenda for the presentation today is the usual one. I am sure that you have noticed that we now go with a new setup, hence, first introductory point to further explain what lies behind the One GTT brand. I will then provide you with a business update for our key activities, meaning the GTT Energy and GTT Marine divisions. Thierry will elaborate on our revenue for the first quarter, and I will then share with you closing remarks before we can open the floor to your questions. So first, the One GTT brands. This new organization, which is as you know emphasizes the fact that GTT is now at a turning point following the very successful acquisition of Danelec last year and taking into account our ambition, which we have explained to further develop the core business, but also associated services. It was very important for us and for our customers to bring all teams together under a clear vision, but also a clear structure. So the creation of 2 divisions, GTT Energy on the one hand and GTT Marine on the other, thus provides greater clarity on our activities to our customers and to our staff. It fosters the execution of our strategy to, of course, keep the core business running but also to ensure the success of our service approach to the shipping industry, in particular, in the LNG. I have already set very clear operational targets for these 2 divisions. For GTT Energy, it is 3 priorities: accelerate innovation, strengthen our service offer and revamp our LNG as a fuel and onshore offers. For GTT Marine, the priority is to deliver on the synergies, combining the hardware and software solutions that we have now in this division, and you will see the first results of this strategy. We have also put in place a hub of advanced technologies to put together in the same -- under the same roof, all breakthrough technologies and venture capital. Let's turn now to our first activity, GTT Energy, very much in line with our expectations and with the messages that I had delivered at the annual results and in line with the growing need for new LNG carriers. In Q1, our order intake continued its upward trend. We have announced 29 LNGC orders in the first quarter. It marks our second best Q1 commercial performance after the 2022 record year. We are close to that level. We have also received 2 orders for very large ethane carriers, each of 100,000 cubic meters capacity and one onshore storage tank. This momentum, which I had announced, has continued despite the situation in the Middle East. We have registered 8 LNGC orders just in March and the momentum, I can tell you, continues to date in April. We are, of course, closely monitoring the current situation in the Middle East. To date, and I will come back to this point, this conflict has no direct impact on GTT's business activity, meaning on orders and on deliveries. And if you look at deliveries year-to-date in Q1 22, LNGCs have been delivered versus 23 last year, so a level which is totally equivalent. Now let's turn to the impact of the current situation in the Middle East on LNG global production capacity. As we all know, the closing of the Strait of Hormuz has heavily disrupted the energy and the shipping markets because about 20% of production volumes are nonavailable today. But if I now look at the production capacity, today, only about 3% of the production capacity in LNG has been damaged with the drone attacks on Ras Laffan. As you know, 2 liquefaction trains have been hit. We know that this infrastructure will restart. It will take perhaps a couple of years. Some people say between 3 and 5 years. It could be faster than that, but who knows. I would like to underline, however, a couple of things that, first of all, the situation does not slow down or undermine the need for new vessels to export future volumes associated to FIDs. And if I look at the additional capacity, which is expected to come online by 2030, it represents 180 million tonnes per annum of additional capacity, which is 40% more than the production level today, most of this coming from the U.S.A. And of course, all of this will require new vessels. Now if I look at the FIDs that can come on top of this already high level of FIDs that have been taken, you have the list on the screen. The list of FIDs that are likely to reach -- to be taken this year or in '27 confirms the greater exposure of the overall LNG production to the U.S.A. and to other regions than the Middle East. And as a reminder, this year, 23 million tonnes per annum of FIDs have been taken, including in Qatar and in the U.S.A., and we start the year after a record level in 2025. Now if we look at the shipping routes and the shipping intensity, what you see is that the war confirms that energy security risk will remain persistent. Indeed, the closure of the Strait of Hormuz calls for greater flexibility to ensure energy security and all this at the most reasonable price possible. And we know that some countries with significant exposure to Qatar such as India, Pakistan, Bangladesh; I could mention Taiwan, Singapore, Korea, China, but also in Europe, Italy, will need to diversify their source of LNG. So looking ahead, what we anticipate is that we anticipate that heightened scrutiny on the LNG supply diversification, which could possibly result into a higher shipping intensity over the long run. But we also anticipate the need to create more buffers in the LNG capacity in storage in particular. Now let's move on to our second activity, GTT Marine. The GTT Marine division won new contracts, very good contracts, both in the Performance Solutions and in the safety units. As for safety, GTT Marine has secured new accreditation from 2 new oil majors, which is a prerequisite to expand its addressable offshore fleet, very good news. And second, we start to leverage our broad customer base to sell more of the systems in performance, so for performance solutions, meaning adding performance and voyage optimization to initial data collection. And consistent with the strategy, we have, in particular, signed a new contract, a very good contract with Petrobras a new customer to equip up to 120 vessels with combined hardware and software solutions. Third point for this new division, the integration of Danelec in the GTT Group is progressing as planned, and we are well on track to deliver the synergies that we have announced. Let me now hand over to Thierry Hochoa, our CFO. Thierry Hochoa: Thank you, Francois. Good afternoon, everyone. Now moving on to the financial part of the presentation. Let's start with the order book. Continuing the commercial dynamic seen in the fourth quarter of 2025, GTT recorded a total of 32 orders in the first quarter of 2026. They include 29 orders for new LNG carriers and 2 VLEC, very large ethane carriers and 1 onshore storage. Their delivery is scheduled between the second quarter of 2028 and the fourth quarter of 2029. This is our second best first quarter commercial performance. Over the period, 22 LNG carriers were delivered, a similar level with the first quarter of 2025, around -- not around, but 23 LNG carriers delivered last year for the first quarter. Finally, our backlog at the end of Q1 2026 remains very solid with 297 units for the core business and 46 units for LNG as a fuel. Let's look into more details at revenue by activity at the end of Q1 2026. Total revenues at EUR 193 million are up 1% compared to Q1 2025 and driven by new builds standing at EUR 173 million, meaning minus 4% compared to last year and mainly impacting from lower order intake in 2025, driven by revenues from services increased by 28% at EUR 5.4 million, thanks to a higher level of assistance to vessels in operations and pre-engineering studies. Regarding GTT Marine, revenues increased by 208%, thanks to the contribution of Danelec acquired last July. I now hand the floor back to Francois for the outlook and the key takeaways. Francois Michel: Thank you, Thierry. So in the absence of any significant order delays or cancellations, we can confirm today our 2026 objectives. Our estimated 2026 consolidated revenue ranging between EUR 740 million and EUR 780 million, our estimated EBITDA ranging between EUR 490 million and EUR 530 million. And of course, we can confirm that the dividend policy will remain unchanged. So a couple of takeaways after this first quarter and before we move on to your questions. The first quarter is very well in line with our expectations and I think what we had announced at the annual results. We have seen a sustained level of orders recorded at the end of 2025 continued despite the geopolitical situation. And in fact, it even accelerated. We saw revenue for the first quarter slightly up versus last year, which is somewhat good news, but well on track. And we also saw a growing contribution of GTT Marine with commercial wins consistent with our combined offering, combining hardware and software solutions. Again, as of today, and we are cautious, but as of today, the conflict in the Middle East has no direct impact on GTT's business activity. Thank you for your attention, and we are very happy to take your questions. Operator: [Operator Instructions] The first question is from Matt Smith of Bank of America. Matthew Smith: I had a couple, please. I think last time we spoke, you talked to around 150 orders to come through over the next few years, perhaps next couple of years as a result of FIDs already taken on LNG projects. I guess my question really was, have your assessment on the pace of those orders coming through. I think you referenced largely in a 2-year time period. Has that assessment changed at all? Does the excess of Qatari vessels make any difference to your assessment there? That would be the first one, please. And then the second one would be turning to digital on Marine. You point out that this is now 7% of group revenue, so quite significant. I just wondered if you could add some color, latest thinking how material could this be by 2030, perhaps in terms of group contribution? Or what's the sort of growth rate that we could see with the benefit of the acquisitions, the synergies? Any additional color there would be useful, please. Francois Michel: Thank you. So regarding the pace of the order intake, we have no information whatsoever today regarding a slowdown of the pace of those orders following the FIDs of last year. And the majority -- what I can say is that the majority of the ships related to the FIDs of last year still need to be ordered. So after the end of Q1, and of course, it's a little bit difficult for us to mark exactly where the -- for which FID the ships are ordered, sometimes we don't know. But from the 29 ships that have been ordered in the first -- Q1, we know that 10 ships are nonchartered, 19 ships are chartered. And from those chartered ships, only 5 are related to the FIDs from last year. So the majority of the volume that we have discussed about still needs to be ordered in the coming 2 or 3 years, I mean, with the usual uncertainty. Second, regarding digital, we are exactly on track with our budget after the first quarter. We will report on this Marine division because it includes, in fact, Marine hardware and digital solutions at the end of the first half of this year. And we are also on track to deliver the synergies of EUR 25 million to EUR 30 million expected at the end of 2030. So today, our vision is that this division, of course, without M&A, but could represent 10% to 15% of the group revenue, perhaps a little bit more, but that's the vision today. Operator: The next question is from Guilherme Levy of Morgan Stanley. Guilherme Levy: The first one, just thinking about secondary implications to your business from the current conflict. If we think about an environment in which the oil prices stay higher for longer, how would you think that could increase demand from shipowners for performance improvement solutions on your Marine business? And then secondly, maybe a question related to that, but on LNG as a fuel, what could be the potential in the first years if oil prices stay, say, at spot over a prolonged period of time? Francois Michel: Thank you for the questions, which are hard questions. In our view over the long run, it is clear that there will be longer LNG routes and also longer periods of storage and buffer storage that will increase the need for low boil-off rate and additional performance solutions, as you point out. I am not -- at least this is what we assess at the Board level. I am not yet able to put specific figures based on that, but this is the trend that we see. And I hope that I can give more specific indication after the first half of this year. Regarding LNG as a fuel, today, we believe that the move towards LNG as a fuel is primarily due to environment concerns and that this trend will continue. I have asked the teams to totally revamp our offer of systems, including to be able to have prefabricated systems delivered on the shipyards, but also turnkey solutions, including fully installed solutions. And so the question for us is probably less a question of market evolution than a question of penetration of our solution, where I believe we can get a lot of business. So it can be very significant, but it will take me a couple of quarters to revamp the offer and to present it -- to present a fully revamped offer, new technology and new commercial systems before the end of the year. That's for sure. Operator: The next question is from Richard Dawson of Berenberg. Richard Dawson: Two from me. So good to see no direct impact from -- on GTT from the Middle Eastern conflict yet. But is there a risk that this could change if the duration of the conflict extends further? So can we maybe see some of the Middle Eastern clients asking for construction or deliveries on those vessels to pause as those LNG projects start-ups are delayed. So particularly the Qatari volumes from [ NFS and NFE ]. Is that potentially at a risk? And then secondly, just going back to the structuring of the business. So what does that really mean from an operational point of view? Will there be separate management teams running GTT Energy and Marine, for example? And can we maybe get more disclosure on profitability between the 2 segments? Francois Michel: I would say -- so thank you for all your questions. Regarding the direct impact, what I mean is that today, for instance, you have very indirect impacts on our ability to conduct business, such as logistic constraints to travel to the region, for instance, to engage with customers. And so of course, if the situation were to stay -- to last for a very prolonged time, at some point, we could expect some logistic delays or just issues in interacting with customers or supporting the customers in the region. But it's very important to see that today, there has been absolutely no indication whatsoever of any slowdown of construction, no cancellation of FIDs nor of ships. And to the contrary, the indications that we have received from Qatar is that they ask more the engineering companies to be able to restart as soon as possible the construction and the buildup of the capacity in Qatar so as to offset at least partly even in the short run, the capacity that has been damaged. So we have no indication whatsoever that there is a long-term delay. If there was a delay, it would be -- an impact, it would be, in my view, very indirect such as disruptions in the supply chain, in particular, in electronic components because to deliver ships, you need electronic components, but we are not yet there, I believe so and far from there. Second, yes, in terms of new organization, for me, it means 2 business units, of course, one which is very much larger than the other one as we speak. But the Marine activity is a fully operational business unit with its management well in place with clear operational priorities. We will report on the results. It has a CEO, a CFO and a management team. Regarding GTT Energy, for the moment, because of the size of the business, in practice, I run this division myself together with the management team of the group. Operator: The next question is from Kevin Roger of Kepler Cheuvreux. Kevin Roger: The first one is a kind of follow-up on the order intake dynamic. Basically, Q1 has been very good, and you implicitly say that you still need to have a lot of orders for 2025 FID project. So do you expect in a sense to be able to replicate the Q1 commercial performance over the next few quarters? Just to understand what you expect as a dynamic, which is quite important in a way for the share price reaction. And the second one is also on the, let's say, long-term outlook because when we look at the implicit comment that you made from the Middle East, which is basically new LNG project, diversification, possible increase in vessel intensity, more buffer, et cetera. Can you give us a bit of color on what it makes as an impact on the 10-year market outlook? And if you can, in a way, precise a bit the famous EUR 450 million plus, plus number that you provided at the full year earnings. If you have a bit of sense or a bit more color on where you think this number can land? Francois Michel: Thank you for your questions. So regarding the order intake dynamic, as you know, we cannot guide on orders and certainly not on a quarterly basis. But explicitly, I can say that the vast majority of the ships that need to be ordered after 2025 record level of FIDs, and in fact, the FIDs of this year, have not been ordered yet. And I still expect today those ships to be ordered in the coming 2 to 3 years with the usual pace. So yes, I would not be surprised if the implication of that would be good quarters in the coming years. So that is mechanical. But I cannot guide on a specific level or normalized level quarter-by-quarter, in particular, in the current context because some orders could shift from one quarter to another, and that would have no material implications regarding our medium-term business model. Regarding the need for more diversification and more buffers. We know talking directly to governments in Asia, I just come back from Asia. We know that when we talk to the Indians, for instance, we know that there will be more buffers from those countries, meaning more storage. This is clear. So there will be more floating storage and more onshore storage, more strategic storage of LNG in the region, but also a need to diversify the sources of gas. If you take a country like India, 60% of the Indian gas is coming today from the Middle East. It's, of course, a situation that must be controlled with more buffers, but also with more diverse routes. And so that implies a number of additional ships to be ordered over the medium term. That is our assessment today. And it's -- this effect is material. So it's not a marginal effect on the overall volume of ships. Now can I revise the overall estimate of how many ships will need to be ordered over the next decade? We, of course, have an idea, but it would be, let's say, not cautious for us to release the figure today in the midst of the crisis in the Middle East. And so we will do it most likely, I believe, in the first half of next year when the crisis is over and when the situation is completely stabilized because we are looking at a long-term cushion. Operator: The next question is from Henri Patricot of UBS. Henri Patricot: Two questions from my side. The first one, following up on LNG as a fuel. Just wondering if you can give some comments on the outlook for orders for this year. I mean you mentioned that you're in the middle of revamping your offers. Does that imply that we shouldn't expect many orders this year or perhaps more coming next year? And then secondly, to follow up on the comments on the long-term outlook. Do you have any concern that the current events and disruption to LNG flows coming quite soon after the disruption that we saw back in 2022 with the Russia-Ukraine war could have a negative impact on the long term on LNG demand as the fuel is perhaps not seen as reliable as it could be for some of the buyers? Francois Michel: We are working on a good number of projects for LNG as a fuel as we stand today. So we have a good technology, which many shipyards can use. And so we are working very actively. What is true is that we would like to increase the penetration further because we know that in the majority of cases, LNG as a fuel can be used with membrane containment system, which is not our historical market share. So it is more, let's say, a plan to win aggressively market share in this area. And yes, of course, I expect an acceleration of the sales between this year and next year and the year after. So yes, that's totally true. Second, regarding the long-term outlook, for me, the question is less the question of LNG that it is the question of investment in the Middle East. The Middle East, in general, has been seen as a haven, as a very safe place to invest, not only for energy, but also in a couple of other areas. It's clear that people will take a buffer when they source energy from the Middle East, not only gas. But what we try to show in the presentation is that, in fact, the largest dynamic that we see in the coming years is indeed coming from the U.S.A. And so we see that the implications -- the overall implications of the situation can be a much more diverse source of LNG, much less concentrated. Clearly, no country is buying 100% of their gas from a single country, whatever is this country, but also longer shipping routes and more buffers. This is our situation now. I have not heard of any country, in particular in Asia, which is the largest dynamic in demand that they are thinking about not investing anymore in gas. That's not at all the situation today. It's not the situation. Operator: The next question is from Jamie Franklin of Jefferies. Jamie Franklin: Just one left from me. So if I look at your order intake through the first quarter, obviously, about half of those were announced prior to Middle East conflict escalation, about half after that during March and onwards. But presumably, a lot of these were already in advanced stages of discussion prior to the conflict. Could you help us give us -- get a sense of kind of how many of the 1Q orders were from discussions that started post conflict? Or in other words, if you've seen any sort of acceleration or deceleration in inquiries for new orders? Francois Michel: Thank you. It's a good question. The majority of those orders, of course, have been discussed for a couple of weeks or a couple of months, in fact. So the cycle for us is long, and we don't see any deceleration of the discussions regarding the pace of orders. And so we don't expect a slowdown of orders in the coming quarters, if that answers your question. I hope it [ doesn't ]. Operator: [Operator Instructions] The next question is from Jean-Luc Romain of CIC CIB. Jean-Luc Romain: I've got 2. The first is about the adoption of your new GTT NEXT1 technology. In light of the evolving needs of your customers and your clients, do you see this technology as possibly adopted faster? And the second question is regarding the map you show on Slide 10. I don't think it was -- I saw -- I didn't see Russia, but I think I guess it's in other producers. So just one question. Francois Michel: Okay. So over the medium term -- thank you for your question. Over the medium term, what we believe is that if we have longer routes of shipping and in general, longer storage and people will invest in general on systems with a low boil-off rate, and as you know, NEXT1 one has been developed as a platform, in fact, to reach a very, very low levels of boil-off. So we believe that the overall environment is conducive to an acceleration of low boil-off rate systems, including NEXT1. Yes. Thierry Hochoa: And regarding your second question, the map. Okay, answered. Operator: The last question is from Jean-Francois Granjon of ODDO BHF. Jean-Francois Granjon: Yes. You probably already answered my 2 questions. Nevertheless, I will come back on the first one on the Middle East, taking into account the situation, do you expect a slowdown for the future FID? I think, for the ship owner, it's not very interesting to invest immediately on the new vessel, new LNGCs. So do you expect some potential risk to see a slowdown for the future orders with probably lower FIDs from the Middle East area? And the second question, I will come back on the LNG as a fuel. You mentioned in the press release some more and more competition. So could you explain more or give us some more color about that? What do you expect? And do you consider that it will be more and more difficult to develop your own technology, membrane technology? And are you more cautious regarding the trend expected for your business in this market? Francois Michel: So thank you for your questions. On the Middle East, what I think is important to see is that, of course, for, let's say, consumers of LNG, in particular, in Asia Pacific, but also from the Middle East perspective, it is a crisis, but for other continents, in particular, for the U.S. and for exporters of LNG, which are not in the Middle East, this crisis is very unfortunately, but it is an opportunity. And so if anything, we don't see at all a slowdown of orders of LNGC. We don't anticipate it from the non-Middle East part, if you want. We also don't anticipate a slowdown in FIDs from the non-Middle East part. There will be in the short run, volatility and uncertainty regarding everything that comes out of the Middle East, meaning FIDs, but also LNGC orders perhaps in the very short run. But beyond those short-term effects, what we anticipate is that it will be more than compensated by additional investments outside of the Middle East. Regarding your second question, LNG as a fuel. Well, I think what I think is, first of all, the trend towards LNG as a fuel will continue for, again, primarily for environment concerns, but also because it's -- it has really become the fuel of choice for large container ships and for cruise ships. So I don't expect any disruptions in this trend. But what we also believe is that for many reasons, but including because of rising labor cost, lower labor availability, lower qualified labor availability, we must industrialize our membrane containment systems more to bring them in, let's say, more easy to do business with directly to the yards, which is something that GTT has not done historically. We have been a little bit shy at providing solutions in a turnkey fashion and in a prefab fashion together with partners. And this is the core of what we are working on. And I have absolutely no doubt that -- and from my experience in the yard, I have no doubt about the fact that by making our solutions easier to do -- to use directly in the yards, we will increase the penetration of our solution. So I'm optimistic regarding this market. Operator: Gentlemen, there are no more questions at this time. Francois Michel: Thank you all for your various questions and for your attention. We look forward to continuing the discussions with you and to seeing you soon. Thierry Hochoa: Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.
Operator: Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation First Quarter 2026 Earnings Call. [Operator Instructions] Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours. Brad Stewart: Thank you, Sarah. Good afternoon, everyone, and thank you for joining our first quarter 2026 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to one per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we are not able to get to your question due to time restrictions, you may call (602) 606-6349. To begin, I will first refer you to the disclosures on Slide 2 of the presentation and note the following: this conference call and presentation contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A Risk Factors or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now I will hand the call over to Adam for some opening remarks. Adam Miller: Thank you, Brad, and good afternoon, everyone. So these are certainly interesting times, and there are now more reasons to be optimistic about our industry than we have seen in over 4 years now. We operate one of the largest fleets in the truckload industry, and roughly 70% of our fleet is deployed in one way or over-the-road service. It is true the one-way market has been the most difficult place to be over the past 3 years plus as this market has felt the brunt of the influx of capacity over the last several years. Much of that capacity may not have been playing by the rules that we play by and therefore, operating with a different cost structure with distorted pricing behaviors and cyclical patterns. The ongoing efforts of the FMCSA and the DOT to prevent and revoke in validly issued CDLs, shut down noncompliant CDL schools and address our service abuses are in the early stages and are already having an impact on the market. This cleanup effort should, in our view, have an outsized impact on not just the one-way truckload market, but on the lowest price capacity in this market. The market that was the hardest hit over the past few years is now benefiting the most from the removal of capacity, a dynamic which we expect will continue. As we mentioned last quarter, the market has progressed to a point where even small changes can cause disruption. And we saw evidence of that during the first quarter as the severe weather in January led to acute tightness in an elevated spot market almost overnight. We were able to leverage our one-way over-the-road capacity at scale to provide solutions across multiple brands to help our customers recover from the storm when others in our space were not able. Following the recovery from the storm, the tightness in the truckload market has continued to build, largely due to declining capacity though some indications of improving demand are beginning to emerge. Broad truckload market indicators show improving trends for low tenders, tender rejections and spot pricing. Our business is experiencing even stronger levels on these metrics as our leading presence in the one-way market grows increasingly valuable to shippers. So late in the first quarter, we began to see the outcomes from early first quarter bids, which showed our volumes generally holding steady or growing while achieving mid-single-digit percentage rate increases. For reference, that is better than last year at this time when targeting slightly lower price increases often led to lower volumes. Price activity is very busy now. In addition to bid season being in full swing, many bid activity has increased, indicating incumbent carriers are unable to or perhaps unwilling to service right at existing rates. In addition, turn back bids are happening more frequently as bid awards are being at least partially rejected by the awarded carriers as networks have shifted or the market has moved well past rates that were proposed even 1 or 2 months ago. Unlike the past few years, shippers are generally not issuing off-cycle they're not issuing off-cycle bids opportunistically to improve service or drive prices lower, these actions are driven by a need to secure capacity. At the same time, previously deep discounts in the spot market have evaporated. Further encouraging shippers to align with quality asset capacity. This is on top of a trend of shippers favoring asset-based relationships that have formed late last year in response to the regulatory enforcement efforts. Whether for these reasons or because of expectations of improving demand, we have already had a number of shippers initiate discussions about peak season demand support, which is not typical this early in the year. As we navigate a busy and rapidly evolving bid environment, we have shifted our bid targets to a range of high single to low double-digit percentage increases on current pricing activity as compared to our low to mid-single-digit target 1 quarter ago. Across our truck blue brands, we are reviewing business that is not subject to current or near-term bids and addressing rates that are below market. Aside from the market developments and our position in one-way service, we believe our work over the past 2 years structurally cutting cost out of our business with ongoing opportunities for further progress sets us up for greater incremental margin as business conditions improve. As the market improves, recruiting and retaining quality drivers have and will become more challenging. We believe we have an advantage with our terminal network and academies to source and develop drivers. However, we expect this to be a challenge for the industry in the back half of the year. While the LTL sector is not seeing the same sharp tightening as truckload, we are seeing our freight mix improve and rate renewals continue at a mid-single-digit pace. Shipment volume trends have been directionally in line with normal seasonal patterns, though somewhat understated until late in the first quarter. However, we saw a notable improvement in weight per shipment for the first time in years with this measure progressively growing throughout the quarter. This is a result of bringing on more industrial customers who can leverage our expanded network footprint to move heavier and longer length of haul shipments. We believe we are in the early stages of our network transition from regional to national. We expect that over time, growing into our network investments on maturing freight mix, improvement in network density and continuously refining our operational execution will allow us to drive sustained methodical improvement in operating margin. We remain committed to thoughtfully deploying capital intentionally leveraging our strengths and creatively unlocking synergy opportunities across our businesses. And with that, I will turn the call over to Andrew and Brad to review the results and our guidance. Andrew Hess: Thanks, Adam. The charts on Slide 3 compare our consolidated first quarter revenue and earnings results on a year-over-year basis. Consolidated revenue, excluding Truckload fuel surcharge was essentially flat and operating income declined by $38 million year-over-year largely due to the $18 million of expense for claim development in our LTL segment, primarily related to an adverse arbitration ruling on the 2022 claim. $4 million of expense in our Truckload segment for an adverse decision on VAT reimbursement in Mexico for prior tax years. Warehousing project business deferred to future quarters and an estimated $12 million to $14 million net negative impact for volume and cost headwinds from severe winter weather disruptions and sharply rising fuel prices during the quarter. Adjusted operating income declined $37 million year-over-year, primarily driven by the same items. GAAP earnings per diluted share for the first quarter of 2026 were a loss of $0.01 and primarily due to the items noted above. GAAP earnings per diluted share in the prior year quarter were $0.19. Adjusted EPS was $0.09 for the first quarter of 2026 and compared to $0.28 for the first quarter of 2025. Our consolidated adjusted operating ratio was 97%, up 230 basis points year-over-year. The effective tax rate on our GAAP results was 7%, and our non-GAAP effective tax rate was 28%. Slide 4 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, the relative shares of our various services -- service offerings remains largely consistent quarter-over-quarter, with LTL gains slightly over the fourth quarter as it exits its seasonally weakest period of the year. Now we will discuss each of our segments, starting with our Truckload segment on Slide 5. Aside from the negative impacts to volume and cost from severe winter weather and fuel challenges in the quarter, most operational metrics were improving throughout the quarter. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, turned out stronger than we anticipated and even improved sequentially over our end of year peak season result. Largely driven by spot opportunities that developed within the quarter. However, volumes and cost per mile for the quarter were both unfavorable as a result of the weather and fuel challenges. On the whole, our truckload adjusted operating ratio of 96.3% only degraded 70 basis points year-over-year as a reduction in empty miles and the strengthening rate environment largely offset the headwinds to volume and cost. Q1 marks the seventh consecutive quarter of year-over-year improvement in miles per tractor. Importantly, the strengthening rate backdrop and improving network efficiency have ongoing implications for our business, while the weather issues are not expected to reoccur. On a year-over-year basis, revenue excluding fuel surcharge was essentially flat as a 1.4% improvement in revenue per loaded mile, excluding fuel surcharge and intersegment transactions, largely offset a 1.8% decrease in loaded miles. Adjusted operating income declined $7.6 million year-over-year, largely as a result of the adverse decision in VAT reimbursement, as noted earlier as well as the cost headwind from severe winter weather and fuel escalation in the quarter. U.S. Express made further progress on operating efficiency and trailed the legacy brands and adjusted operating ratio by approximately 300 basis points for the quarter. The ongoing progress that U.S. Express is encouraging, and we expect this business will continue closing the gap in margin performance with our legacy brands as the market. Moving on to Slide 6. Our LTL business grew revenue, excluding fuel surcharge, 2.6% year-over-year, driven by a 5.2% increase in weight per shipment, with an 8.5% increase in the length of haul. Tonnage trends showed momentum as the quarter progressed, ending with March average daily tonnage up 7% year-over-year. Our expanded service coverage and presence in new markets is helping us win business with new customers, gradually increase our industrial exposure and transition our network and freight mix from regional to national. Shipments per day were down 1% year-over-year for the quarter, largely as a result of winter weather disruption in January and the shift in freight mix to a higher weight per shipment. Revenue per hundred weight excluding fuel surcharge, fell slightly by 70 basis points year-over-year, driven by the increase in weight per shipment, while renewal rates continued their trend of mid-single-digit increases. We continue to make progress normalizing operational and cost fundamentals following a period of significant change to our network and freight. Purchased transportation as a percentage of revenue, equipment rent and variable labor per shipment all showed improvement year-over-year in the first quarter, and we anticipate further improvements in efficiency as we refine our network and freight flows. As mentioned earlier, adjusted operating income and adjusted operating ratio were negatively impacted year-over-year by the adverse claims development. We are encouraged by emerging seasonal freight patterns steady progress on rate renewals, accelerating volume trends late in the quarter and an improvement in weight per shipment for the first time in years as freight mix continues to develop into our expanded terminal network. Now I'll turn it over to Brad for a discussion of our Logistics segment on Slide 7. Brad Stewart: Thanks, Andrew. Logistics revenue for the first quarter declined 9.9% year-over-year as volumes were down 18.9%, while revenue per load grew 10.4%. Third-party carrier capacity grew more difficult to source during the fourth quarter, and this trend continued through the first quarter. Gross margin of 16.6% for the first quarter declined 150 basis points year-over-year but improved 110 basis points from fourth quarter levels as strengthening spot opportunities helped to offset pressure on contractually priced business. Despite the year-over-year decline in volumes and gross margin, our Logistics segment produced an adjusted operating ratio of 96.2%, only a 70 basis point degradation year. In addition to the increase in third-party carrier costs brought on by the regulatory pressures on capacity, our Logistics business experienced increased pressure on gross margin as we further enhanced our already rigorous carrier qualification standards in response to a sharp increase in cargo theft in the industry and the troubling carrier practices exposed by recent regulatory efforts. This affects not only new applicants seeking to join our carrier base, but also resulted in a reduction in the number of existing carriers we are tendering loads to. While such efforts were a headwind to capacity costs and caused us to eject more loads as unprofitable, as we reset contractual pricing through the bid season, we expect that load count will improve and pressure on gross margin should lessen. Given the complementary relationship between our Logistics and asset-based Truckload segments, we believe the improving market dynamics will ultimately benefit both our asset and logistics businesses over time. Our Logistics business has demonstrated its agility in navigating a volatile market in the past few years by maintaining its operating margin close to target levels through disciplined pricing and cost management. This team is now further leveraging technology take cost efficiencies to a new level as well as to improve our responsiveness and our ability to capture opportunities in the marketplace, which we expect will contribute to our earnings in 2026. Now on to Slide 8 for a discussion of our Intermodal business. The Intermodal segment grew revenue 2.7% and improved its operating ratio of 50 basis points year-over-year as a 1.6% increase in revenue per load and a 1.2% increase in load count offset headwinds from winter weather in the quarter. Load count and revenue per load improved progressively throughout the quarter, with March load count up 8.4% year-over-year. While the intermodal pricing environment is more competitive than truckload, at this point. We are encouraged by ongoing opportunities to leverage our strong service performance and our truckload relationships to continue growing our volumes at improving rates. We remain focused on delivering excellent service and driving appropriate turns through growing our load count with disciplined pricing, cost control, network balance and equipment utilization. Slide 9 illustrates our all other segments category. This category includes warehousing activities and support services provided to our customers, independent contractors and third-party carriers such as equipment sales and rentals, equipment leasing, owner-operator insurance and maintenance. Additionally, beginning January 1, 2026, all other segments also includes the cost of our accounts receivable securitization program that was formerly reported below the line in interest expense in prior quarters. For the first quarter, revenue increased 13.5%, operating results declined to an operating loss, partially due to the inclusion of $5 million of costs for the accounts receivable securitization program as well as start-up costs on new contract awards in our Warehousing business, for which revenue is expected to ramp in the coming months. On Slide 10, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the second quarter of 2026 will be in the range of $0.45 to $0.49. This range represents a larger-than-normal sequential increase in quarterly results. As the first quarter was negatively affected by events that we do not expect to recur and because freight market fundamentals are improving, exiting the first quarter. Our projections reflect recent trends in volumes, spot rates and bid activity as well as expectations for a continued seasonal build in freight demand for both truckload and LTL services. The key assumptions underpinning this guidance are listed on this slide. I won't take time to read through all of our assumptions here but I do want to highlight the point that the recent strengthening of the truckload pricing environment will generally impact our contractual rates beginning late in the second quarter and into. This concludes our prepared remarks. And before I turn it over for questions, and everyone to keep it to 1 question, perfect discipline. Thank you. Sarah we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from Chris Wetherbee with Wells Fargo. Christian Wetherbee: I guess, obviously, the pricing environment in the truckload market is improving, probably materially versus what we talked about last time. So Adam, I was kind of curious as you think about the margin opportunities or maybe the earnings opportunity for the truckload business as we go through, I guess, this year, but maybe bigger picture. Do you think this cycle has the potential to be what you kind of hoped it could be in terms of the cycle earnings of the Truckload business or the midscale margins of the truckload business? Any color around that and maybe timing towards getting there would be helpful. Adam Miller: Yes. So I mean, a great question, Chris. And it's early in the inflection here. So it's hard to know exactly the strength, the duration and the timing of how that will play out. But just leaning in on our experience in previous cycles, I don't think we've ever really seen the pressure on capacity and that, I mean, from regulatory forces versus just normal economics. And so I think we could see more capacity coming out of the network than we typically would see in a cycle. And I feel like that could be a catalyst to really drive a strong bid season this year but also into next year. So the question is going to be, can we capture rates, but can we also improve the utilization on our equipment, which we've done that now for 7 consecutive quarters on a year-over-year basis. And then can we grow our seated trucks, not necessarily investing in more trucks. Now hey, if we get to that point, obviously, we'd have the ability to do that. But to be able to see more of the trucks that we have on our fleet, while running them productively. If we're able to do all 3 of those, then I do believe this sets up to be able to get back to a more normalized earnings or margin profile that we're accustomed to seeing in our businesses, and that includes even U.S. Express getting to the legacy performance that we've seen at Knight and Swift. It's early in the cycle, and we're just getting some feedback on bids, and we're seeing how those awards are coming in. And then how -- some of our customers are tendering those awards and what mini bid activity looks like, what turndown business is looking like. So still a lot to read through into the market. But it certainly feels like the setup is there for those in the industry to get back to kind of sustainable rates that puts our industry in a position where the good quality compliant carriers have the ability to make enough margin to invest in their businesses, invest in drivers, invest in safety and invest in good quality equipment. Operator: The next question comes from Richa Harnain with Deutsche Bank. Richa Talwar: So just following up from that previous question, just Adam, when you say normalized margins, maybe you can highlight kind of what that is mid-cycle, -- is it sort of low teens that we're talking about here? And then just I think, Brad, when you ended the segment, you said the impact of this high single-digit, low double-digit rate improvement will really be seen towards the end of Q2 into the back half of the year. But if you can just kind of like give us a sense of the level of magnitude of margin expansion as we move through the year, you're already calling for 100 to 200 basis points of year-over-year improvement in Q2 before we really start to see the evidence of this type of rate environment, I think in 2Q, you just caught a low single-digit improvement, right? So I'm just trying to get a sense of how we should flow through this in the model near term and maybe more longer term, if you could help things. Adam Miller: Okay. Well, I'll hit on maybe the first portion. I'll try the second and Brad, you can dovetail on that. I think we probably got this question on normalized margins for the last like 5 earnings calls in a row. So I'll try to be consistent on how I answer this. We look at our business in a normalized market, the truckload business typically operates in the mid-80s, right? So that's kind of a mid-teens margin when the market is really good, we've operated sub-80s and then typically, in a difficult market, you're upper 80s, obviously, this cycle played out differently has been far more challenging across the industry and for us, included in that. But that's what I'm referencing getting back to that mid-80s normalized earnings. I feel like there's the setup here in this bid season and going into next to be able to achieve that. And then when you look at where we're at, we have our LTL business that's been growing, and that doesn't have the same cycles as truckload and we look at just methodically improving the margins in that business. Obviously, we had the anomaly with the claim development in the first quarter, but we expect that to be put behind us and continue down the path of improving margins as we grow in to that network and start to march down into the 80s, which I still feel this year, we can achieve a sub-90 operating ratio during the year and just continue to build upon that. And then typically, when our truckload business is healthy, the logistics business can grow exponentially. Now early on as the cycle changes, logistics feels pain because the rates haven't adjusted yet to what the third-party capacity rates are. And so you probably see a low-count degradation which we've seen because you just can't take freight that you can't make a margin on. As rates reset, contractual rates, but also backup rates which we do a lot of with our customers. And so when the routing guy falls apart, they tend to slow to the backup rates that hopefully put us in a position where we can do it with our own trucks, we could do it with quality third-party capacity through our logistics business, 1 that we were able to take a lot more of the loads that we're turning down today. So in normal earnings, I would expect logistics to be growing. And then Intermodal, we believe is on a path to profitability. I think we laid out the improvement sequentially that we expect to achieve in intermodal, which would mean we're profitable. And volumes are really starting to build in that business. Last year, this time, we took a big step back when you had the tariffs announced that we were kind of pushing for improving our revenue per load, and that led to us losing some volume. But this year, it's very different. We're getting improvement, some improvement in rate, not near where you're going on the truckload side, but some improvement, and it's resulting in better volume as well. So we're starting to see things build and we'd expect intermodal to get it to profitability and to see that improve as the cycle strengthens. So that's how we're viewing kind of this, say, normalized, you're never really at normal. It's kind of you're always flowing in the cycle. But that's how I'd frame it up, be sure for that question. And then in terms of the high, low double-digit request, right now, we've probably got about 70% of our business in bid -- but a lot of that starts to be implemented kind of mid- to late second quarter and then it starts to flow into the third quarter. We have some pretty big customers that hit in the third quarter. So we may be seeing the activity really build in terms of approving a healthy rate improvement or rate increases, but it may not flow through to the P&L immediately. but we expect that margin to really start to flow through kind of fully based more in the third quarter and then build into the fourth quarter. Brad, I don't know if you had anything else you want to elaborate on. Brad Stewart: And just one thing I would add is in terms of our contract versus spot mix, we came into the first quarter in the 10% to 12% kind of range low double digits, where we had been for really the last couple of years in terms of spot exposure. We exit the first quarter, just a couple of points higher than that, kind of low to mid-teens perhaps. And look, as we navigate the pricing environment and navigate trying to manage our business and extract yield from our network, jumping into spot exposure is step one in trying to manage yield. And so our first priority is our contractual recurring relationship business, and we have expectations for what -- where the market is on price at this point. And that's what we're trying to address first and foremost. And -- if we can't come to agreement on price the same way in terms of the market, -- we may end up with less contractual exposure on certain accounts, and that will create more spot exposure. And so that's something that can evolve over the next several months as we continue to work through bid season. And so that's just another lever that can contribute to our realized rate per mile this is the contract and the backup rates as that 1 spoke to. So that's something that we're going to be managing and watching week by week as we work through this, but a lot of different avenues to generate. Operator: Your next question comes from Ken Hoexter with Bank of America. Ken Hoexter: And I guess, Brad, just to extrapolate on that a bit, right? It sounds like in the prepared remarks, Adam, I think you might have mentioned you're revisiting contracts that are longer in nature. Are you already starting to give those notices to to get out of the contracts and start to renew? Is that how tight the market has got. And I just want to understand kind of the comments around that. And to clarify on the LTL, did you say the delay but the weights are ramping, the delay in getting pricing, but you're seeing weights ramping given the industrial move. How long does that delay get until you get that pricing? Adam Miller: Well, let me clarify that. We're not saying we're getting delayed pricing on LTL. I think we're saying we're getting mid-single digit on the renewals, but we're seeing a freight mix change where we're getting longer length of haul, heavier shipments that we believe will improve the yield of the business. And so the revenue per hundredweight make it a little bit skewed in terms of the year-over-year comparison because of the freight mix change, but we're not seeing delay in LTL pricing. And then in terms of the rate review is what we would call them is we're going through our network and looking at any rate that may just be stale. If it's beyond a year, it's something we're going to look at. We're reviewing those that are called the bottom 20% performing and looking at what we need to do to get those rates to where they're closer to market. And so if we don't have an active bid to address those, we're being proactive of making that going through that review and then having discussions with customers around that. So that is something that is active. I think early stages right now because there are a customer a lot of customers that do RFPs and like I said, we're probably in the heart of about 70% of that business, but there is the 30% that we need to make sure we're addressing as the market moves quickly. Ken Hoexter: And same for the LTL, does that gap closed, do you get if you're already at high single, low double in truckload. Can you see that transfer to the LTL market? Adam Miller: I don't know that they align that right now in LTL on renewals, we're getting mid-single digits right now. Ken Hoexter: Okay. Operator: Your next question comes from Ravi Shanker with Morgan Stanley. Ravi Shanker: Adam, last quarter, you very helpfully walked through what you saw were upcoming catalysts on the supply side. Obviously, lots of moving parts here, but everything from derailers law, the Montgomery case and the brokerage side, you proposal for a $5 million minimum insurance as well as all of the rules that we saw last year. How do you see this evolving over the next few months and potentially the market tightening up more? Adam Miller: Yes. I mean I think you hit them, Ravi. I mean these are all pressures that we think are going to deter bad actors from coming into our space. I think it's going to push capacity out of the market that aren't at sustainable rates and are acting in a compliant manner. I think clearly, when our industry saw spot rates jumped dramatically in 2021 and then we had this push for immigration, this industry was targeted. And we had a lot of people enter our space and didn't have much experience in trucking, probably didn't have a great safety background, didn't have proper training and also we're probably exploded by some of the Camelian carriers that are out there and ultimately paid them rates well below what someone who's a citizen in the U.S. would view as livable wages. And so I think that population is getting pushed out with the pressure on eliminating the improperly issued nondomicile CDLs. And I think Delia's law will help codify that into law, among other things. I think we've got an administration who is really pushing on what some of these Camelian carriers, how they've exploited the system and the self-certification of training, the self-certification of logs and putting more regulation behind that. And I just think there's going to be a lot more oversight from the FMCSA that's needed. Now hey, if we get minimum insurance, that's another big thing. I mean you got English language proficiency, that's pushing capacity out of the market. And hey, I think drug testing is another big one where we already have set a much higher standard for ourselves. We've been doing hair follicle drug testing for over a decade. And we see that you're probably 10x to 15x more likely to pick up a positive drug testing you would with urine. Yet we don't accept that as a valid way to test drivers, and you can't even submit those positive results to the clearinghouse. And so those drivers can just go on to another company and get a job and be behind the wheel. And we don't think that's right. And so I think that's another thing that I think this industry needs to help clean it up and really be focused on putting the safest drivers on the road. But Ravi, what I'd say is we've never seen this type of push to clean up some of the capacity and the unsafe drivers out on the road. And when you pull that one of them, I think moves the needle enough, but when you aggregate them, I think we're already starting to see that influence the market. And really, the improvement we're seeing and the ability for us to get rate is driven largely by capacity reduction versus demand. And if we start to see demand pick up in conjunction with some of these other efforts that are just in the early innings, I think we could find ourselves in a much more favorable position from a carrier standpoint. Andrew Hess: Ravi, I would say that I think it's clear to us through our conversations, the administration is committed to the cleanup that needs to happen in our industry. We think if we can get legislative support through -- law and the like. But obviously, that makes that more durable through future administrations, but we don't think it's dependent on that. We think whether that happens or not, that the actions of the administration are going to be effective over the next few years as we continue to kind of get things right with our industry. Operator: Your next question comes from Scott Group with Wolfe Research. Scott Group: So Adam, what are you seeing with seated tractor counts and drivers generally? And then just big picture, if you think back last cycle, just massive growth in your and everyone's brokerage business, but all the things that you talked about and that last question with nondomicile and Camilion and Montgomery, all these sorts of things. I'm wondering, as you're having these big conversations, is there a sense from shippers that they're less willing to do a brokerage offering right now and maybe are they willing to pay more for asset-based this time versus maybe prior cycles? Adam Miller: Yes. Okay. Well, let me hit on those, Scott. So on the ceded truck side, that -- certainly, finding drivers hiring driver has always been a challenge in our space. I've always said, in our industry, you either have drivers or you have loads. Really do you have them at the same time, right? So we're starting to see the loads come through. And so we're making investments to ensure that we can have an advantage in sourcing drivers. And so we're making investments in our marketing spend and the number of recruiters we have. We're leveraging AI to ensure that we're very quick to react to leads as they come in. And we're really leveraging the Academy network that we have to train and develop drivers. And we're -- as we've made those investments as we saw the market change, we're starting to see that build some momentum really across all of our different brands. And so I'm feeling more bullish on our ability to not only improve rates, but to improve our utilization and grow seated truck which I know was the biggest challenge during the last up cycle in the pan I think everyone went backwards to truck with how difficult labor was. I think the challenge that we'll have is that we've only gone after the high-quality drivers in some of our space have been able to hire those that don't meet the criteria that we had. Now as some of those drivers are kind of pushed out of the market because of some of the things we just talked about, the quality drivers that we look at are going to be more attractive. But we believe we bring far more to the table with terminal network we have, the equipment we have and the ability to give high-quality training. And so we feel like we'll have an advantage to maintain and even grow our seated truck count as drivers become more challenging. And to your point about logistics, I agree with you that I think we saw this proliferation in logistics because you had customers that just had to move goods at all cost because demand was so high and you had this lot of capacity coming in. I think when talking to shippers, I think they're going to have a bias towards towards asset-based carriers. I mean we're already starting to see that. We're starting to see that they're limiting even some bids, many bids only to asset-based carriers are living the percentage that they will allow in terms of brokers to participate in a bid. And I think that's going to continue. Now I think we get viewed a little bit differently because we do bring some assets to the equation with the power only that we offer. But we've also talked about what we're doing to vet the carriers that we work with. We have taken a great number of steps to really ensure that we have high-quality safe carriers. Now you're not always going to be perfect that, but we have cut down the number of carriers that we work with dramatically. Just since the beginning of this year, were down 30%, and we had made a large cut even earlier last year. And so we had, how long you've been in business. We're looking at evidence that you have logs that we could see where your tractors are at we actually -- because I think 1 of the challenges in our space is the broker has no idea in most cases, who is actually driving the truck. And I think that's been a real challenge. -- for the broker and the shippers really know that. And so we are taking steps to ensure we know we have a copy of the license, we know who's in the truck, especially if they're going to operate and leverage 1 of our trailers. So we're taking a lot of steps to put ourselves in a position that when customers kind of demand that as part of the logistics solution. We have that to offer. So I don't think you're going to see the same expensive growth that we saw during the pandemic. But I do think those that are good quality logistics providers do it the right way and have an asset solution to complement what they're offering. -- will have the ability to grow in a strengthening market. Operator: Your next question comes from Jonathan Chappell with Evercore ISI. Jonathan Chappell: Adam, I know you don't go into the monthly detail on LTL as some of the pure plays do. But is there any way to help give a cadence on kind of how the first quarter maybe April transpired as we think about like weight's been good, that's you're finally getting the turn there. But are we going to start to see more consistent kind of shipment tonnage growth? And then importantly, are you -- do you feel if you do get that demand tailwind or tonnage tailwind shipment tailwind behind you. I know cost alignment was kind of pretty difficult. Have you been building out the national network? Do you feel like your costs are now appropriately aligned that if there were to be a demand pickup that would kind of go right to margin improvement as opposed to still kind of chasing that with resources? Adam Miller: Okay. That was a long question, John. I'll try to hit every component of it. That's the shortest one so far. Yes. Okay. So on the LTL front, I think we talked about in our commentary that we were a little bit slower on volume to begin the quarter but a good build with March being the strongest and then those trends continuing into April. We only got a couple of weeks into April, but we're not seeing that slow down at all. And then typically, second quarter is our one of our strongest quarters in LTL. We do believe we have a tremendous amount of operating leverage in the business. There's just a few pinch points that we have, where we may have a few locations to open up this year, but it's not going to be near the investment we had to make in the prior years. And so it's allowed us to focus on the fundamentals with ensuring that we're efficient with our labor, managing the purchase trends. I think some of the things that Andrew touched on the LTL discussion, and so yes, as we see the tonnage improve, and it may not -- because of the freight mix, it may not even have to be a huge lift in shipment count if you're getting more tonnage that typically yields better. As we look at our kind of our weekly performance and we have an estimated OR in that weekly performance as we see that building, yes, I think we're seeing the operating leverage in the business and a lot of that flowing to improved margins. And so that's where, if you feel like if this continues, it could be back half of this year, we start to see that operating ratio began with an 8 versus the 9 and then just continue to build from there. I mean, hey, we're still working on freight flows and again, adjusting to the different -- the changing network but we feel very confident about our LTL team and what we're doing there and just making kind of consistent improvement in both the freight mix and the cost structure. I don't know, Andrew, you may have something you want to add to that? Andrew Hess: Well, let me just say a couple of things. Just to give you a sense for the momentum within the quarter. So obviously, the Southeast was pretty heavily impacted by weather, and that's kind of our highest density volume is in our business. But if you look at tonnage in January, it was up 1.6%, February 2.6% and March 6.9%. So we really ended up at 4.1% up or so on tonnage year-over-year. So we really did see that build as we kind of moved out of the weather and some of the new contract wins took effect. So I think that's going to be a positive momentum as we build into for us. In Q2 was our strongest seasonal quarter of our business. But when it comes to cost, I think below the surface, obviously, the claim or the arbitration liability cost impacted the core low, but we're seeing steady progress in our cost efficiency. So we saw our variable wage per ship improved from the fourth quarter to the first quarter, we expect that's going to continue. We have seen, I guess, I would say, just to give you a little feel for it. We're seeing the most improvement in our dock wages per shipment. And I think line haul is the next area where we're going to start to see the most improvement. So the costs that came out of the business as we brought our different businesses together last year, in terms of vehicle-oriented travel costs, right-sizing our equipment, all of those are showing positive trends. The one thing I would probably mention to you is we've mentioned that we're slowing down, building new locations. And that is right. That's kind of where we're at. But we're going to -- we have locations where there are pinch points that in our -- the security of our flow need to be addressed, and we are increasing door counts in those locations. That's going to allow our freight to flow in a more natural way, in a more cost-efficient way. So you're going to see a fab locations where we need to, to help with that flow. Those are going to create some growth, but primarily, they're going to help with our costs. So we're still aligning our evolving network with our footprint but we're in a place now where it's just -- we're positioned well. We're just going to see improvement in terms of that efficiency we expect going forward. Operator: Your next question comes from Dan Moore with Baird. Daniel Moore: A lot of questions have been asked and answered, but one that was not addressed yet that I think is definitely worth a little bit of time is leverage around U.S. Express. So I can't imagine about a rate environment to begin to realize momentum in that business. I think we've argued for a while now that, that's really what was needed. I know you guys have done a lot of cost repair and management repair. In terms of the business, but just the ability to move to a rate cycle, much less a rate cycle like this one. really presents a lot of opportunity. Can you talk to us about the size of the business today, generally? And maybe talk to the potential earnings leverage of U.S. Express as we move forward. Adam Miller: Yes. Well, so Dan, I think you're right. I mean when we purchased U.S. Express a few years ago, I mean, we felt like we were going to be in a more favorable environment sooner than we have found ourselves. So that's put some pressure on the margin and how quickly we are able to drive accretion through that acquisition. But I agree, we're finally in a place now where we can work on improving their freight network and improving their rates to a more sustainable level. And we've got a great team there, the gentleman who leads that business that was led sales at Swift following the merger and was an integral part of the improvement at Swift and the margin profile at Swift. And so we feel him and his team are well positioned to understand what it takes to make some of the changes. And hey, some of those rates are going to need to go up in a very meaningful way. And they're very equipped with understanding of the market, leveraging the network information we see across all of our brands. And closing the gap on where we're at from a legacy standpoint, I think this last quarter, they're about 300 basis point difference from an OR standpoint. Some of that is still a cost delta but I think a lot can be made up through getting the rates closer to where we are from a legacy standpoint, I think we've got the right team there. We've made a lot of changes there, but feel well positioned in the discussions with our customers and getting, I think, good feedback in the early parts of the bid and expect to see rate continue to grow and develop. Andrew Hess: And from a cost perspective, let me just make a couple of points. I'll point to Adam Miller: What are we going to say, Dan? Daniel Moore: Yes, I'm sorry. I just wanted to -- 1 thing that would be helpful to understand is just the size of the business today and if you want to bracket it, that's fine or any manner in which you'd like to answer the question. I know it's -- I know, obviously, it's a consolidated business at this point, but we don't know how how -- we don't know what the revenues are. So if you can maybe add some context around that today, if at all possible, that would be really appreciated. Adam Miller: Yes. I think between the trucking and the logistics business, I mean, you're just under $2 billion between those 2. Close to that. And now, Andrew, you want to... Andrew Hess: Yes. So just I think 4 areas that I think are opportunities ahead of us on cost. First, the cost of insurance and safety. So that -- we've had to go through something of a culture change there in regards to how we manage safety and insurance. And the CSA crash basic, I think, is a good number for us to look at. That's over 60% better from where we were we at the acquisition. So we are seeing, especially, we're starting to see that impact the business. And those legacy costs of insurance and claims have weighed on the business. We think that the -- the safety performance that's improved dramatically is going to start to impact the business. The equipment costs, we're still working through some of our high-cost equipment leasing and so we think as we roll through that equipment, that's going to provide some opportunity -- we've -- in terms of hiring costs and advertising, we think there's opportunity there as we get better at that to bring that cost down. Obviously, the biggest opportunity is rate that Adam talked about, where we think we have more than a normal amount of progress to make on rate. So a lot of the work we've done on cost has been on the fixed cost side. On our overhead costs, which has been pretty significant in the last year. We think that, that's going to be structural and sustainable through volume growing in the business. Daniel Moore: A lot of tailwinds emerging, a good look for the remainder of the year, guys. Operator: Your next question comes from Brian Ossenbeck with JPMorgan Chase. Brian Ossenbeck: Maybe just to come back to some of the more topical ones here will be discussing here for a while. Just in terms of the -- I guess, the work you did with carriers in the logistics business, down 30% I think it was for accepted Carrier. That's a pretty significant number. So is that something you feel like the rest of the industry has to go through as well. Maybe they have an even higher number of carriers they're going to have to squeeze out of their networks. And Adam, we've heard for a long time about hair follicle testing and things of that nature. It sounds like I think you said there's some momentum. But like what are the steps we would have to see for that to get a bit more progress? And when should we expect maybe we could see that start to begin. Adam Miller: Well, look, I don't want to speak to what other logistics companies should do or have to do, I think about what we felt like was required of us to ensure that we're putting quality carriers hauling our shipments, hauling our trailers when they're doing power only. We're anticipating that our customers are going to start being more concerned about this. as this becomes more of a relevant issue. And I think we're already seeing that in mainstream media. We've already had some discussions with some of these shippers about how we're really monitoring who's hauling their freight who's actually driving the truck. And so we felt it was prudent for us to take the steps to eliminate capacity that we didn't feel comfortable with. And do I think others will do that. I think some will. I think some will still take the cheapest carrier when they're available, and that may just be based on survival. So I don't know how that will play out. But I do think some of this capacity is just going to have to exit regardless because of some of the regulatory changes that are being enforced. And we feel very -- we were very supportive of this administration and the actions that they're taking. So some logistics company may not have a choice because the capacity of the leverage today won't exist. But we're not waiting for that. Where we want to be proactive and to do the right thing. On the hair follicle, Brad, do you want to maybe touch on that, Brad, you've been engaged in that? Brad Stewart: Yes, it was just maybe get a share in terms of what we've seen in our own experience over the last decade or so, as Adam mentioned, we do both, right? We do the year analysis because that's what's recognized by the feds. And we do the hair follicle test because that's what works. So we pay incremental cost to do that in addition to that because that is an important part of our hiring process. And what we found over doing this thousands, if not tens of thousands of times a year, is that the hair follicle test identifies roughly 14x the drug users that the urinalysis test does. So that prevents us from hiring them, it does not prevent them from driving in our industry because not all carriers do that. And so there is an openness it seems in Washington to at least engage in this conversation. Congress past this years ago, and just health and human services has not gotten around to writing the rules to actually put this into practice. So it does seem like there's maybe an openness to engaging in that conversation. We would ask just to allow us to report but those of us who are paying for the test, what we are finding. Maybe we don't require it of everyone, but if we're going to pay for it, let us report that to the registry because we do think that is important for safety for the motoring public. Operator: Your next question comes from Ari Rosa with Citigroup. Ariel Rosa: So Adam, I wanted to ask a bit of a strategic question. You've said a few thousand tractors since the USX acquisition. It makes sense to us, of course, why that decision would have been desirable in the downturn when obviously it was difficult to find loads. But now as we think about the up cycle, is there any dimension in which that holds back the ability to get the same level of upside that you might have seen if you kind of retain those tractors. I'm just hoping you can kind of discuss that decision or maybe defend that decision a bit, give us a little bit of color on like why that was the right decision to shed those tractors and also put it in the context of, on an absolute basis, obviously, we're looking at a larger tractor count now than what you had in kind of the prior cycle. So kind of how do those dynamics play out against each other as we think about what the upside could look like? Adam Miller: Well, what I'd say, Ari, is we don't go into an acquisition with intentionally trying to shrink the capacity. I think as we go in and review the freight network and U.S. Express, 40% of their loads were coming from brokers which obviously you're not going to be successful if that's where -- who you're relying on for your freight. So we had to go in and adjust their network to find direct relationships, loads that can support their network. And so in doing so, you had to turn some of the business they were very dependent on. At the same time, we're ensuring that we have good quality, safe drivers. And so we did change the standards at the hiring standards that U.S. expressed very early on in the acquisition to ensure that we had good quality drivers to drive down the craft basics to improve the safety, to improve productivity. Some of the things that Andrew has mentioned, -- and so when you do that, you kind of -- you're limiting the class sizes that you're going to have and then you're changing your freight network. When you have that kind of churn, you'll naturally end up or you have the risk of ending up with more open trucks than you feel comfortable carrying as overhead. And so as you went through that to get the business on a better foundation and position them to be far more healthy long term, you end up with some capacity that you just need to sell and exit and remove from your brand. And so that was the process that we went through at Express. Now we feel stable today -- and we're making the same investments there on the recruiting front and now leveraging that we have at Swift and said some at night to be able to train like our other brands do. And obviously, as you have a better freight market, they'll be able to make some progress on repairing their network and putting themselves in a position to have sustainable rates to grow the business back. And hey, we'd love to be able to seat more trucks and grow trucks. But today, we have -- we still have some empty trucks that we want to fill before we invest in additional capital but hey, we're in a much better spot today than if we would have just tried to hang on to all the trucks from the original acquisition and keep the porphyry and not adjust the standards that we hire in terms of drivers. So I still feel it was the right move. We feel good about how we're positioned and expect to make some real progress on margin and to the business. Brad Stewart: And I'm just going to add a little bit of context, this is Brad. I know the op income right now coming out of the long and Argos down cycle doesn't show it, but we are running more miles than we were prior to the last up cycle. So we've got more of a basis there to work with going to this new cycle. Adam Miller: So appreciate the question, Ari. I think that now concludes our call. I think we're beyond the time here. So appreciate all the questions and interest from everyone. And again, if we weren't able to get to your question, you can call (602) 606-6349, and we'll try to return your call as quick as possible. Thank you, everyone. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, and welcome to the BankUnited, Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jackie Brova, Corporate Secretary. Please go ahead. Timur Braziler: Thank you, Clay. Good morning, and thank you, everyone, for joining us today for Bank Unit Inc.'s First Quarter 2026 Results Conference Call. On the call this morning are Raj Singh, Chairman, President and CEO; and Jim Mackey, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. . Before we begin, please note that our remarks today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect current expectations and are subject to various risks and uncertainties that could cause actual results to differ materially. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. Additional information regarding these risks can be found in the company's annual report on Form 10-K for the year ended December 31, 2025, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Raj Singh. Raj Singh: Thank you, Jackie. Thanks, everyone, for joining us. I know this is a very busy morning. A lot of banks have these calls going on. So if you joined our call, we appreciate it very much. I know we had -- it was not an easy choice. But before we get into the numbers, I want to take a minute of your time and do my public service announcement which I usually do towards the end of the call, but I'm going to start this time with that. And you heard this announcement from me before at previous earnings releases that meetings I've had with investors and conferences we've done. We've been talking about this for some time, but I think it bears repeating. So our business is a fairly seasonal business. And that seasonality is well understood by us and has been demonstrated now over several cycles, several year cycles. And I'll talk about that in a little bit of just as a refresher of what that seasonality is. Deposits and loans, I'll talk about them separately because they behave separately. Our deposit balances, especially NIDDA, they start declining sometime in mid- to late December and the bottom out and deep in the first quarter they start to rebound back late in the first quarter, towards the end of the first quarter. And then they go straight up in second quarter, usually, second quarter is our strongest growth -- NIDDA growth quarter. They stabilized in the third quarter, and then in fourth quarter, the cycle again begins with declines in December. Now we've observed this for many, many years. Loan production and again, production, not balances. Loan production, especially C&I loan production start slow in the first quarter. That's our slowest quarter. It picks up steam in Q2 and Q3 and Q4 tends to be our biggest production quarter. We saw that last year, the year before, and we expect to have the same happen this year. There is some seasonality in expenses, but I think that's not just to us that everyone has that with FICA and stuff that happens in the first quarter. So I won't get into those details. Now when this happens, especially this big swings in NIDDA, it impacts our margin. It impacts our margin, margin impacts our revenue, that impacts our bottom line, EPS and ROE. So what happens when you look from Q4 to Q1, you see a pretty meaningful drop in earnings in ROA and EPS and so on. But then if you look to Q2, it kind of rebounds all the way back, if not generally more than all the way back. So in fact, yesterday, as I was writing down my notes on what I'm going to say on this call, I do this day before I sit down with a yellow pad and I hand write what I'm going to say. I had this data at moment, like I think I've done this before. And I went back and I looked at my notes, surprisingly actually still held on to my notes from my call a year ago. And it wasn't a dejavu moment. It was that I've been here before. This is exactly what happened a year ago. So I just quickly jotted down like what happened in Q4 last year to first quarter of last year, like so '24 going into '25, what happened to earnings, EPS, ROA and all that stuff. And I compare it to what happened this year, -- and our earnings quarter-over-quarter declined by $11 million this time last year. This year, they declined $10 million. EPS declined 13 basis points this year. It was a ROA declined 10 basis points last year, this year, it was 9%, slightly better, but kind of in the same ballpark. That's just the seasonality of the business. So the model of the story is, don't look at quarter-over-quarter, look at year-over-year or trailing 12 months. I know it's a fast-changing world, and we're all in the -- I believe in the here and now. But if you just look at the very short term, it will throw you off both in quarters in which seasonality works against us and in quarters in which seasonality works for us, which will be the next quarter. With that PSA out of the way, let me get into the numbers. So earnings for the first quarter came in at $62 million. EPS was $0.83. And I'll compare this to first quarter of last year, like I just said. Last year, earnings were $58 million, and EPS was $0.78. NIM was at 2.99%. Last year, this time, NIM was 2.81%. PPNR was $106 million. Last year, PPNR at this time was $95.2 million, about 11.5% growth. Despite seasonal pressure on NIDDA, like I just mentioned, in the quarter, deposits did grow. Non-broker deposits grew $277 million. We used most of them to pay down brokered. So net growth was about $7 million but again, like I mentioned, should be looking at annual numbers or trailing 12 months number. So over the last 12 months, non-broker deposits grew by $1.4 billion, NIDDA grew by $875 million. I would actually even go further and say, [indiscernible] end balances don't mean as much as average balances do. And average NIDDA grew by more than $1 billion. I think it was $1.5 billion. I'm looking at Jim to confirm, but I think it was $1.5 million. Talking of loans over the last year grew at $906 million. This quarter, it grew only $9 million. Non-core loans continue to shrink pretty consistently. That's been now going on for several quarters. So not much -- nothing new over there. Let's switch to credit. So we made a lot of progress on credit this quarter. NPLs were down $98 million, that's 26% and criticized and classifieds were down $146 million or 12%. Now that 26% and 12% is just the progress we've made in the last 3 months. That's not an annualized number. Our coverage ratio of ACL to NPLs improved from 59% to 76%. Switching to provision, with respect to provision, we continue to be cautious. The geopolitical landscape has changed in the 3 months since we last spoke to you. And we did use $8 million in qualitative factors in our provisioning to kind of account for that uncertainty. Tom can talk more about this, but I don't think we've seen any meaningful change from the way -- what our customers are telling us in terms of their plans and their capital investments and so on. But I will also say that they are very keenly aware of the situation in the Middle East and are watching it like as they should. -- smart money seems to be betting that the conflict in the Middle East will wrap up in a matter of days or weeks and not months but only time will tell how that will play out. So like I said, I'll go back and say we did use some qualitative factors to the tune of $8 million for that uncertainty. Switching to other aspects of the P&L, NIM, like I said, came down to 2.9%. And that number was within sort of the ranges of outcomes that we were expecting when we modeled this in our numbers back in December. All the other numbers are not that notable for me to get into. I'll leave for some of the stuff for Tom and Jim to talk about. Oh, yes, we did buy back 1.3 million shares as we had promised. So we're off to a good start on the buyback, and we still have just a hair under $200 million in dry powder left, and we'll continue to use that. Lastly, guidance, no change to guidance. So what we gave you stays. That's a full year guidance that we gave you, and we're still feeling pretty good about those numbers. I think not much has changed actually since we gave you guidance in our business or in the economy. I guess in the economy, you could say, the conflict in the Middle East is sort of the only new factor but it looks like it's moving towards some kind of resolution in the short term. So with that, I will turn it over to Tom. Thomas Cornish: Great. Thanks, Raj. So I have a little bit of my own public service announcement today as well [indiscernible] with Raj. So before I -- I want to talk about deposits first and sort of deposit strategy. before I dig into some of the numbers, some of which Raj has already covered, I want to back up a little bit and just talk about sort of what are we trying to do with the overall deposit and client book and over a longer period of time and how has that performed? . So when I look at it, I would say we have 3 major goals. One is to be a top-tier performer in NIDDA growth. And our NIDDA, as you know, is largely commercial and NIDDA. So when I look at that number, as Raj said, we're up period-to-period from first quarter last year, $875 million or 11%, which is a pretty impressive number. On an average basis, we're up $1.5 billion that Raj mentioned. So strategy kind of #1 of being a high-level NIDDA growth organization and that being a central part of our business focus, I think, has been well accomplished. The second major emphasis is being a payment processor and transactional bank for our clients and making sure that we maintain good pricing discipline around all the products and services that we sell that flow through commercial NIDDA and making sure that we are effectively cross-selling as many products as we can into the client base. So I kind of measure that by -- is our service charges on deposit growth greater than our NIDDA growth? And when it is, to me, that seems to be a multiplier effect on that. So if we look at service charges on deposits year-over-year, first quarter to first quarter, we're up 18.8% versus an 11% deposit growth. So to me, that means we're executing on the strategy of ensuring that, that book is well sold, well priced and client relationships are becoming very sticky. The last part, which is really the hardest work is managing deposit costs. And you'll see we had a decline in average deposit cost for the quarter, and I'll go through those numbers. But the process of managing deposit costs, especially in a period of time where we're not forecasting a Fed funds rate decrease that we can lean into is hard work. And we are consistently doing that. We just -- Raj and I were talking now, we have a series of rate cuts that are going in this week on the deposit front. So we are consistently analyzing the deposit book and looking to make it more cost effective. So I think kind of about -- those are the big 3 strategies that we try to execute around when we think about the client book and the deposit book as a whole. So with that, a little bit more detail, as Raj mentioned, non-broker deposits were up by $277 million from the previous quarter and $1.4 billion from a year ago. NIDDA represents 30% of total deposits. Our average cost of deposits declined by 6 basis points from the previous quarter from 2018 to $212 million. Wholesale funding declined by $70 million from the previous quarter and $749 million from the previous year. And as I said, service charge revenue was up 18.8% for the quarter. As we look into the second quarter, which is on the deposit side, traditionally, our best quarter. We have a high level of conviction around very strong deposit growth and NIDDA growth in the quarter. It's our best quarter typically, and all indications from pipeline and activity and business that's in closing documentation is that it will be a very strong quarter. On the loan side, as Raj noted, it was fairly typical first quarter for us, Cree and mortgage warehouse lending were up $76 million and $77 million, respectively. C&I declined by $144 million from the previous quarter. Part of that is declining off of higher utilization rates that we tend to see at the end of the quarter. First quarter, particularly in our larger corporate business tends to always be a bit softer because of the financial statements timing for new business that comes through. Resi continued to decline as part of our emphasis to focus on the commercial lending business. And so I think it was about what we expected to see for the quarter. A few comments on CRE that I typically make the CRE portfolio is now just under 30% of the overall booking within the CRE book, if you look at Page 9 in the detailed analysis, you'll continue to see that it's a well-balanced portfolio across all asset classes, virtually all asset classes are somewhere between 20% and 25%. And so maintaining a good quality balance in the CRE book is important. You'll note that the total weighted average debt service coverage for all property types is $1.84 and the average loan-to-value is 55.4%. So portfolio continues to perform well. It's probably the last quarter, I'll actually point this out, but we continue to see improvements in the office book. You'll note the office book on Page 9, the weighted average debt service coverage ratio is now up to 1.78. It's typically been running in the 1.54, 1.55 range. And what we're seeing is continued improvements in leasing. We've seen a reduction in the office book, which the traditional office book is now only about 16% of the book and about 4% is medical office building. And we're also each quarter, starting to see this narrowing that we've talked about in the past, which is the gap between physical occupancy and economic occupancy as lease rate abatements start to run off, we see a closing of that. So we saw a pretty significant increase in the weighted average debt service coverage over the last few quarters. And 1.78, it's a pretty strong performing portfolio right now. So that's my coverage on CRE. And I think with that, I'll turn it over to Jim. James Mackey: Great. Thanks, Tom. -- as Raj walked through, it's worth mentioning again, our first quarter is our seasonally light quarter for most of our businesses. So therefore, comparisons to the fourth quarter are always difficult to make. I don't want to repeat a bunch of the numbers that Raj took you through, but I do want to hit just a couple of other highlights. So if I just focus on the full year trends, you definitely see steady improvement in most of our key performance indicators that we look at. Net income was up 5%. PPNR was up 10%, ROA was up 6%. And was up 6% and NIM was up 18 basis points. So the trends year-over-year are really good and definitely in line with the guidance that we gave you at the last quarter. So we put in the press release just for full transparency, we do want to call out a couple of notable items this quarter. The impact was largely just due to the really strong performance last year and also the strong stock performance. And this was more than offset by the reversal of our previously accrued FDIC special assessments. So turning to NII and NIM. As Raj mentioned, relative to the prior quarter, we typically see a downward trend. We also added in the materials on Page 5, just a chart for the last few years, so you could easily see those trends, I thought it would be helpful. Now the dip from first quarter to fourth quarter this year was a few basis points larger than last year, certainly less than back in '23. But I just wanted to call out what was driving that. And it was a variety of small things. It was nothing large. It was all the things that we were sort of modeling going into it broadly. We saw the full quarter impact of the Fed rate cuts last year as it flows through the balance sheet. And notably, in the securities portfolio, some of the timing of those cuts were present more in the first quarter than in the fourth as certain coupons reset. We also had a higher reliance on brokered deposits due to the NIDDA seasonality that we've been talking about. We also did some activities in our investment portfolio. We had some opportunities to prefund some purchases and things like that because of actual situation in the marketplace. So we had a higher reliance on brokered deposits in the quarter and also the broker deposits were a little more expensive this year than historical. It's a little unclear exactly what was driving that. I don't know if it was from the war, the activities in Iran or what, but it was elevated costs that we don't typically see. NII was up $16 million or 7% from a year ago. And as I mentioned, NIM expanded 18 basis points. And this is driven by the common theme that we've been talking about that we've been reducing the cost of our deposits at a faster clip than the decline in our loan yields. Importantly, the NIDDA balances were up $875 million or from a year ago. Those are the spot, not the average. On the credit side, as Raj mentioned, credit trends are quite positive overall, which portends improvement going forward. Criticized and classified was down $333 million or 24% from a year ago. And just since last quarter, nonperforming loans were down $98 million or 26%. Now some of these improvements were resolved through charge-offs. That's why you did see some elevated charge-offs this quarter. It was $36 million. It was largely driven by just a few C&I loans. So this brings our trailing 12-month charge-off rate to 37 basis points, which as we've talked about before, we'd like to see that closer to 25%. So it is elevated from what we'd like to see. But again, the trends that -- things that we are seeing more recently in some of these books, the inflows are a lot slower than the outflows. So barring any economic shocks, we expect to see improvements in charge-offs later this year. And as we mentioned, especially related to the guidance, we definitely felt like more of the provision expense would be more front-end loaded versus evenly spread throughout the year. Our allowance for credit losses was $209 million, down $11 million from last quarter. Provision expense, as I mentioned, was elevated at $25 million. We did add some qualitative reserves, about $8 million. So our coverage ratio ended at 87 basis points, which is down a few bps from the prior quarter. If we purely followed our models, we would have told us to bring those reserves down a little bit more, but we felt prudent to add some into our qualitative, which brought it up to the 87 basis points. And I do want to mention, and we disclosed this on Page 11, most of our charge-offs are coming from the C&I portfolio of late. And if we look at the coverage of our C&I portfolio, it's around 160 basis points. So quite a solid coverage to cover the risk in that portfolio. On the noninterest income and expense side, just a few quick comments. Noninterest income was $25 million. It's up $2 million from a year ago. If I normalize for some of the securities gains. We always have securities gains. They bounce around from quarter-to-quarter. But if I normalize for that, noninterest income was basically flat. We felt good about the activity that we saw in our capital markets fee income, but they are dependent on activity in the quarter, when loans close, when syndication fees occur, size of the types of swaps that are booked and -- and so we're generally in line with where we expect to be at this point in the year and still feel good about the guidance that we provided. On the expense side, it is up from a year ago, $167 million. That's largely due to the investments that we made last year into our businesses to go into new markets, higher specialty talent, et cetera, and also just cost of living increases and basic things that are going on in that space. So it's in line with expectations. It's consistent with our full year guidance, and it's really driven by employee compensation and the benefits as we grow our businesses. And then just before I turn it back to Raj, I'll just reiterate a comment that he said that we are not changing our full year guidance. We always have volatility quarter-to-quarter. That's a theme that we talk about constantly just the nature of our commercial businesses but we're performing consistently with our seasonal patterns and in line with expectations, and all of that was modeled as we provided our guidance and so no changes. And with that, I'll turn it back to Raj. Raj Singh: Just one thing I forgot to mention on credit. So we took down NPAs pretty meaningfully this quarter. And I expect NPAs to go down into the rest of the year as well, probably not at the same clip. I mean if we did the same clip, we won't have any NPAs left in a couple of quarters. So -- there will be -- I expect NPAs to reduce at second quarter, third quarter into the fourth quarter. Another anecdote I'll give you. One of the things I do generally before this call a day or 2 before is I talked to my Chief Credit Officer -- Chief Risk officer Chief Credit Officer. And I generally ask him how he's feeling about this quarter. And this was, I think, the best call I've had in the last 3 quarters. And I measure the success of the call by the length of the call. the longer the call is the worst I feel because generally, he's walking me through names of things that he's worried about. This call, I have to actually ask them, "What about this loan? What about that London he was like, no, are going fine. So the call lasted maybe all of 3 minutes or 4 minutes versus last call 3 months ago, lasted a lot longer. So it's only 3 months -- 3 weeks into the quarter. but I'm feeling much better about credit and feeling much better about how much lower our NPAs are. And I also get updates like that on pipelines from Tom, deposit pipeline is better than I expected, honestly speaking. And we're feeling pretty good. With that, I will turn it over for Q&A. Operator: [Operator Instructions] The first question comes from Dave Rochester with Cantor. David Rochester: I wanted to ask you about the title business. I noticed the deposits were down this quarter. Normally, they get stronger as we head into 2Q. I would imagine that's still the expectation. And we're down like 3 quarters on that at this point. So if you could just talk about that outlook. And then are you still bringing in plus or minus new customers a quarter there? And if you can just update us on the competitive backdrop, that would be great. Raj Singh: Sure. Actually, we're bringing in more than 40 now. So our average over the last months -- 3 quarters has been more closer to 50. So the relationship intake has actually increased a little bit. . And I'm very, very positive on the outlook for the title business. It is the most seasonal of our businesses. right? HOA is also a little seasonal, not as much, but NTS is what drives a lot of that NIDDA volatility. But overall, in terms of gathering market share, we have not lost momentum. In fact, we picked it up. Thomas Cornish: I would add that's net. -- client relationship growth as well not just gross. Yes. . David Rochester: Yes. SP663696138 Great. And those relationships tend to be $2 million to $3 million on average in size, right? Raj Singh: On average, it's about 3 yes, around $3 million, give or take, yes. . David Rochester: Have you been adding more sales people to that business or any other technological enhancements, anything like that? Raj Singh: Yes, we have added more people in fulfillment in the back office. We've added more people in the front office. So clearly, yes, we are also, we have 2 large technology projects going on, which will impact much as that business, that will impact the entire bank but we're upgrading our treasury platform, and we're operating our payments platform. But again, like I said, those are infrastructural things that every business line will use, but NTS uses them as well. David Rochester: Yes. And just the -- what's that? -- sorry? . Thomas Cornish: I'd just say, average deposits are up year-over-year in the MTS business. So not meaningful. David Rochester: Yes, yes. And maybe just 1 last 1 just on the competitive landscape there. Occasionally, you see a larger bank come in and try to defend a relationship and it may not just be for the title piece, but something else. Can you just talk about what you're seeing from any of the larger banks that might be snooping around and what you're seeing out of banks more of your size, if you're seeing any interest in this type of business. Raj Singh: There is certainly more competition today than a year or 2 ago, both from -- we see from time to time, larger banks try to get into this but they've not been able to replicate what we have. So they've not been able to make much progress. We have seen banks much smaller than us and somewhat our size also compete. But honestly, I think it's a lot easier for them to just be taking market share away, like we're taking away from the 90% or 89% of the market that we don't bank than it is to take away from us. So there is more competition. There is -- I've seen like very small community banks trying to play around this space, but we have a 8-year head start, 9-year head start whatever it is. It's not like we have some kind of a trademark or intellectual property that is the moat. The moat is the fact that we have the largest market share. We've seen every issue that comes up with this. We have the largest sales force, and we've been doing it the longest in the way we are. We're most integrated with all the ERP providers. and that gives you the advantage to keep going forward. So there's more competition. I expect the competition to be even more going forward, but so far, we're doing just fine. Thomas Cornish: And we're not sitting still. We're continuing to focus on improving operations, getting better at everything we do. So we're letting that iron sharp and iron. Raj Singh: Yes. We made a pretty significant investment in the back office and fulfilling in customer service and what have you because the book has grown quite rapidly. And if you just -- when things are growing, it's easy to go hire salespeople because you can see salespeople will add more revenue, but you have to pay attention to the back office that actually keeps the lights on for our clients. It makes them happy in the long term so they don't lose you -- so we don't lose them. That was a pretty big investment we made last year. Thomas Cornish: And this is a heavy real business. . Raj Singh: Yes, it's a heavy operational business. . David Rochester: Well, it's a great business and certainly a nice advantage for you guys. So I appreciate all the color there. Operator: The next question comes from Jared Shaw with Barclays. Jared David Shaw: I guess just looking at the guidance and when you're saying reiterate the guidance, I'm just going back to last quarter's deck. With with that guidance you were assuming 2 cuts, if we don't get cuts, can you walk us through the ability to get to that 30% margin at the end of the year? Raj Singh: Yes. Our balance sheet is very, very neutrally hedged. So we're very, very slightly asset sensitive. So just mathematically speaking, it probably should give us a basis point advantage with the Fed doesn't cut, but it's really rounding. For the most part, it really does not do anything for us. Our risk to our guidance if it comes from market competitiveness, especially on the lending spread side, where we've been kind of calling that out for some time now. We're still seeing very tight spreads, CRE more tight than C&I, but everything has tightened up this year has been for several quarters now. That is actually a bigger risk than what the Fed does unless Fed does something sort of bizarre as it move several moves that nobody is expecting one way or another, it really will not impact our guidance. So we're not really worried about the Fed cutting once or twice or not cutting, it will not have an impact. If we miss our NIDDA guidance, if you're not able to grow, that will obviously be the single largest driver the largest risk we would have, and the second would be loan pricing and credit spreads. Jared David Shaw: Okay. All right. And then on the provision, you called out the $8 million qualitative overlay. Should we think about that as just maybe front-loading some of that provision and that the $68 million is still the good number? Or is it really 68% plus 8% for the full year? James Mackey: No. We're still sticking with the guidance that we provided for the full year. And like we said, I do think based on what we see more of that $68 million would be front-end loaded versus at the back end. So you can't just take the 68 divide it by 4 and project it out, but skew it more to first and second quarter. Jared David Shaw: Yes. Okay. And then if I could just sneak one more in. Just on the fee income. -- capital market is obviously very strong in fourth quarter. How should we think about sort of the components of growth in fee income as we move forward through the rest of the year? Raj Singh: Our capital markets income is probably closely aligned to production in both C&I and CRE. And then within production, I would say, slightly larger loans tend to drive that like syndication. They're not going to syndicate a $10 million loan, but we will syndicate a $60 million, $70 million, $80 million loan. So production is light in the first quarter. And then within the production if you're doing most of it in the lower end, then your capital markets income generally is impacted. So you saw lower capital markets income this quarter for both those reasons. Last quarter, it was the biggest production quarter and that's why you saw capital markets income as strong as it was. So it will vary quarter-over-quarter, plus it's a little bit of episodic also. It's not like $1 a day type of a business. It is a little bit lumpy. You can have a big deal you're working on, it slips over into the next quarter that could happen from time to time. But overall, the capital markets business should be a double-digit growth business for us. FX, which is still in the very early stages that is just beginning to gather momentum, and it's hard for me to predict what it will do but that's a very small number right now, but that can have a very big impact over the coming year or 2. Thomas Cornish: I would also add, if you look at the number of clients that we have added on to the FX platform, in the last 6 months, it's an impressive number. And I think even the raw number, well, Raj said, it's a small number, is up over 100% from the previous year. So we have really good hopes for the FX income, especially in the markets that we're in. They tend to be markets where people have international trade transactions, they have payroll transactions. They have other things that drive that business. We would expect the service charges on account business to be double digit in terms of fee income growth. I mentioned it was up 18.8% over last year. Our expectations are somewhere in the 15% to 20% range for that. And I think we feel we have a good bit of conviction that we'll be able to get that. The swap business is a bit interesting because there's kind of like a sweet spot as it relates to the profitability of the business at the very highest end as you would imagine, when you do swaps, you're sitting across the table from somebody like Jim who is extraordinarily knowledgeable about every basis point in the swap transaction. If you can go down far enough market where the transaction is still large, but there's more room in the pricing on swaps. That's really where kind of the sweet spot is for us. So the volume of transactions is important, and we think that will be good seasonally through the rest of the year. But also the mix point tends to be very, very important because you can -- that can vary by basis points, which over a lot of transactions over the course of the year can be meaningful. We do have a good bit of confidence in our syndications business, and it's been a strong point for us. We've funded these teams on the syndication side. We've added very good quality resources to them, and I have good confidence that syndication revenue would be good at the remainder of the year. Just 1 last thing to add to it. I mean commercial card revenue was up good strongly year-over-year. Again, it's small, but it's growing. And then 1 of the comments that Raj said, just with it being in the swaps business is very tied to the lending business, the activity we saw this quarter versus a year ago was very consistent -- just last quarter, we had a couple -- 1 or 2 larger transactions that drove a little more revenue a year ago versus this time. So it's -- the activity is there. It just really depends on the size of the transactions in any given quarter. Operator: The next question comes from David Chiaverini with Jefferies. David Chiaverini: Wanted to swing back to credit quality. -- kind of mixed in the quarter, criticized classified down, but you did mention in the release about 2 credits being charged off and we did see the elevated NCOs this quarter. Are you able to share which industries those were in? And then the second part of it, you mentioned about how we should see a decline in NCOs later this year. So it sounds like we should expect elevated NCOs in the second quarter as well. Is that a fair interpretation? Raj Singh: No, I think that as a general statement that the first half would be better -- will be higher net charge-offs because we already have first quarter, $35 million, $36 million. It's hard to predict exactly quarter-by-quarter. But generally speaking, I would say the charge-offs should be front-loaded. The 2 industries that you asked about, 1 is health care, and the other was transportation. So those 2 made up a large portion of the charge-offs and one was in Atlanta and one was in Florida. So geography also in case you asked that next question. Thomas Cornish: And our larger child drafts last quarter were in 2 completely different industries from the car was yes, yes. . David Chiaverini: Got it. And then back to the NIDA discussion. Nice trends year-over-year, 11%. Your guide is for 12% given this higher for longer rate environment. To what extent could that be a headwind to NIDDA growth? Because in the past few quarters, you've mentioned about the NIM expansion being driven by mix shift rather than the Fed, but curious about your thoughts there. Raj Singh: Yes. We were growing double digits. NIDDA was growing double digits when Fed funds was over 5%. So it is not about pricing. What is driving our NIDDA growth is our focus, our products, our specialty capability we've built. And it's not about just lazy money. This is not lazy money. This money we do a lot of payments, which is why this money sits in our pipes and people use us not because the price were because of the capability that we offer them and we continue to gather market share. So I'm not worried about rates could be 50 basis points higher, 50 basis points lower, that will not impact our NIDDA outlook. That will have an impact on interest-bearing deposits. And if the Fed moves down, it gives us an excuse to go back and reprice the deposits. And when the Fed is not moving and it's just harder to just do that, but we're still doing that, as Tom said, during -- this week, actually, we are pushing through certain portfolios, some pricing action on some of the portfolios. It's just as easier the Fed is moving. So I'm not -- the Fed being up or down or sideways, it doesn't really impact our NIDDA outlook. Thomas Cornish: The NIDDA growth is largely driven by net new client acquisition. Yes, that's across all business lines, specialty geography, whatever segment that it's in, it's driven by that. probably 75% to 80% of the growth was driven by that. . Operator: The next question comes from Michael Rose with Raymond James. Michael Rose: Just given the absence of rate cuts now that I think the market is expecting. Any updated thoughts around. Deposit beta expectations as we move forward. I think last quarter, you kind of talked about an 80% beta with cuts. . Raj Singh: Yes. With cuts is 80%, but the Fed is not going to move. If we get complacent, and don't look at interest-bearing deposits and just let that ride. It has a natural tendency that the rates -- the portfolio will price up. So that's the hard work you have to do is to make sure it doesn't price up and maybe even get it even to go down a few basis points. Not easy. That is really hand-to-hand combat client-by-client portfolio-by-portfolio but we are attempting to do that. New money competition is high. I think Jim mentioned, as an example, as a proxy, broker deposits are 15 basis points wider than they were like 6 weeks ago. Now I'm not smart enough to know why I'm guessing maybe it's the conflict in the Middle East and people just get a little nervous, they want to grab more liquidity or maybe it's something else. But we did see a pretty meaningful change maybe just rates have gone up 2 years now at 370, 380 and not closer to 350, maybe it's that, maybe it's a whole bunch of stuff. But we are leaning more and more towards NIDDA, I mean if I could have my way, and I have just no growth but NIDDA,all growth NIDDA. That's not possible, right? That's -- we will have interest-bearing growth as well. But it is our job is to make sure interest-bearing costs stay within reason, maybe come down just a little bit but it will be hard to make it come down a lot if the Fed is not moving. But if we don't do the hard work, they will naturally have a tendency to drift up, and we don't want to happen. Michael Rose: Okay. Helpful. And then maybe just the follow-up question on that, and I hate to ask for near-term guide, but I'm going to try here. . So obviously, given the margin guide for the year and the decline this quarter, it implies a pretty steep ramp from here. Can you just help us with the second quarter with the inflows coming back in and just some of what that margin within a run of expectations could look like for the second quarter? Because I think people are -- at least what I'm hearing is you're struggling to kind of get to that 320 full year guide. Raj Singh: What I'll do is, I'm actually looking at a sheet here from last year. So I'm not going to give you guidance quarter by quarter going forward. If we don't do that, right? If Leslie was here should be screaming at you. What I will do is I will just point to what happened last year, right? In fourth quarter of '24, we were at 2.84% we came down to 2.81% in the first quarter. And in the second quarter, we went up to 2.93% and then we went up to 3% in the third quarter and to 306 in the fourth quarter. . Now you can go and look at that pattern, right? We have a pattern of dipping down and then coming back very strongly in the second quarter and then maintaining some of that growth in the third and fourth quarter as well and then coming down again in the first quarter. So that's the best sort of guidance I can give you is go back and look at what has happened in the past because it tends to follow some pattern. Not every year is exactly the same. There is a lot of moving parts. But that's about as much guidance I can give you. I can't tell you what the quarter will be. But more than what we've already said, which is that it will be a very strong NIDDA growth quarter. Michael Rose: Totally get it, just trying to frame the conversation. Maybe just one last follow-up. Obviously, the repurchase is pretty strong this quarter. Any reason to think that the pace would be any different as we move forward? I know you said up to $250 million stock is obviously down a little bit today. But any reason to think that, that pace would change? Raj Singh: Not really. We're still being opportunistic where we can be. But at the same time, we're not trying to manage it on a day-to-day basis. Jim and I both have day jobs. So -- but there is still volatility in the market, and we try to use that volatility to our advantage the best we can. . Thomas Cornish: And we're working -- we're trying to steadily work towards the target of about 11.5% CET1. Better gravity that we're working towards. Operator: All right. The next question comes from Woody Lay with KBW. Wood Lay: One wanted to follow up on credit. And as you noted, NPA saw nice improvement even if you exclude the charge-off benefit -- so that incremental like $65 million of improvement. Could you just give some color on either the resolution or upgrades there? . Thomas Cornish: Yes. I would say if you look at that, you have a couple of fairly large loans that moved out of the bank. They were either refinanced in the longer-term capital markets that we were taken out by a lender in the group that was several of the large ones. You have a couple of upgrades in performance. That would be the mixture of the other items other than the charge-offs. Wood Lay: Yes. And then maybe just on the outlook that NPAs should continue to decline from here. Middle East represents some uncertainty and the kind of whipsaws back and forth on when that could potentially end. So what's driving that positivity that NPAs could continue to decline? Raj Singh: I think we're very familiar with every loan that is either in NPAs or criticized classified bucket. And we're looking at them very granularly to see where is performance getting worse or better or stable -- so my assessment on NPAs into the -- looking into the future is more based on that granular knowledge of the portfolio rather than what $100 oil might do. So that's not really what is driving that. It's -- I'll give you an example. Just 2 days ago, there's an NPA of about $17 million, $18 million in the CRE space that has been sitting there for almost a year, it looks like it's going to come to a resolution, and we might get a small recovery out of that. So I just know what's in the portfolio and where it is, this loan that I'm talking about as a close date of like third week of June. So I won't count the money until it actually the wire comes in, but it's it's a pretty good indicator that $7 million will get resolved, and it will be off our books before the end of second quarter. So it's things like that, right? There's another one in the C&I space, which has -- the performance has stabilized to kind of improve. But we're keeping it in the NPA category, we'll see how it works out. Three months ago, I was not as positive about how that business was doing. But now we've seen things they've done in the last 2 or 3 months that are looking better. It will probably still be an NPA, but it's maybe a couple of quarters down the road it gets resolved. So it's based on our granular knowledge of the loan portfolio rather than any big macroeconomic thing. Thomas Cornish: Yes. In some instances, we're aware of refinancings in the private credit market that are going on, in some instances, and individual credits. We're familiar with asset sales that are happening that will pay down the debt, you may have a division that's selling off within the company. I mean there -- as Raj said, there's specific kind of item by item that we can go through and identify events that we think are going to happen in the near term that give us that conviction. Wood Lay: Got it. That's really helpful color. And then last for me. I know it's pretty small in the grand scheme of things, but that little over $5 million of performance items and compensation this quarter. Was that included in the expense guide that was given last quarter? Or is that in addition? . Thomas Cornish: Yes. No, it's included. Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. . Jon Arfstrom: Maybe for you, Tom, anything else to note on the C&I decline? You flagged the Q4 utilization, but anything else to note on commercial lending pipelines and what you're seeing there? Thomas Cornish: I would say, different parts of the business operate differently. When we say C&I, it really encompasses kind of larger middle market corporate lending and encompasses commercial lending for more midsized companies in the small business area. I think we're having probably higher levels of success in kind of the mid-level and down areas. That's a little less volatile as well. And also the credit sizes are a bit smaller. Pricing tends to be a bit better. We see less pricing pressure in that segment. The further you go upmarket, the more pricing competitiveness in terms and conditions competitiveness that you face. So a big part of kind of managing the growth of the business this year is managing that mix and managing the segments that we're in. We're fairly -- what is the right word I'm looking for, fanatical about kind of managing segments and keeping them within risk tolerance levels and kind of risk appetite as it relates to total exposure for industry segments, whether it's C&I side or the CRE side. So I expect that we'll see good quality C&I growth over the rest of the year. We're seeing good penetration in new markets that we're in particularly the southern markets, the Atlanta, the Charlotte. We just had a party yesterday for our new Charlotte office and had really good responses. We expect Texas to continue to grow well. So I think that there's -- it's broad, but I think there's going to be good market segments for us to grow in, but it's a very competitive business right now. We're trying very hard to manage this margin issue versus the volume issue and make sure that we're -- we've got a good pricing discipline. . Jon Arfstrom: Yes. Okay. Yes. And just that segues into the next one. How much more room do you guys think you have on deposit pricing from here? It sounds like you've got some rate cuts coming, but or some deposit pricing cuts coming, but how much more room do you guys think you have? Raj Singh: If the Fed doesn't move, then I think it's not like there is 30 basis points of room left here to cut. We will probably -- the existing book will probably cut 5, 10 basis points here or there but it's -- you can't really move too much unless the Fed moves. And the new money that comes in generally is at a higher price than the existing book. That's just the nature of the deposit business. So that will depend on where the market is. Like I said, broker market as a proxy was certainly very heated in March. We'll see where it kind of lands over the course of the next quarter, the remaining of the year. But it's we'll cut where we can, but it's not like there's some wholesale reduction that is still left if the Fed doesn't move. Thomas Cornish: But it is our commitment to focus on this. I can't even begin to tell you how much time we spend and how many painful meetings we have, we torture people over this, we torture our people, we torture ourselves . Raj Singh: Actually, the next meeting is on Friday . Thomas Cornish: Working through this. And it's like -- can we go down by 3 basis points on this account. And if it's a large account, 3 basis points makes a difference. It's an account by account relationship by relationship and pushing hard. It doesn't come by itself. I can assure you of that. . Jon Arfstrom: I know it's not easy. But you're still thinking 320 NIM by the end of the year and holding the provision guide? And if you can deliver that, I think that's really all that matters. Yes. I appreciate it. Correct. Operator: The next question comes from David Bishop with Hub D Group. David Bishop: Yes. Staying on the topic of maybe the NIM here. I think Tom or Jim, you mentioned securities took it on the chin a little bit from the Fed rate moves. From an earning asset yield perspective, do you think with an absence of rate cut here, -- in the near term, you might see average earning assets yields stabilize or start to turn here? I'm just curious how you're viewing yields within the market relative to roll-off. Thomas Cornish: Yes, except for competition related to credit spreads, right? If competition continues to ramp up and you start to see pressure there, that will be a little pressure on pricing. But we tried to factor that into our guidance. So really dependent if it's worse or better than what we projected. Yes, that will be also partially impacted by the asset yield mix changes. I mean, the continued rundown of resi and the continued emphasis on the commercial lending categories will help that. We also have some commercial real estate credits this year that are up for this year that were part of an older fixed rate book that we had of loans that were done 7 years ago or whatever they were done at lower rates. So we're looking at probably 7% to 8% of the portfolio that was at a fixed rate basis that we think we can reprice. So there's different elements to this that are levers that we think we can pull throughout the year in order to improve asset yields kind of across the board. David Bishop: Got it. And one f0inal question, as you look across the commercial portfolio. Any particular segments that are particularly impacted by rising energy or gas costs there? Just curious as you sort of analyze the portfolio, any segments that sort of jump out as being potentially at risk in the near term. Thomas Cornish: Yes. Everything is impacted a bit by it. I mean, we don't have we're not in sort of the energy lending business or businesses that you would say have a very front-end direct impact from it, but every consumer is impacted by rising energy prices and to some extent, any rise at that drives in food consumption type prices. So we do not have heavy consumer lending portfolios kind of B2C type lending portfolios. We don't have much of that. So we think we're reasonably insulated from that, but it's going to impact every consumer, and that drives 70% of the economy in terms of consumer expenditures and GDP. So it sort of depends on severity and duration in duration, duration -- we're watching it closely, and we'll react quickly if we start to see something that's concerned. It's one of those things we have a large food distribution company food distribution companies are going to have some level of impact from gas prices and what happens at the consumer if they start to downsize or trade down in quality of beef for things like that, but those are really difficult to try to assess other than watching it credit by credit. Operator: The next question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: I'm just curious if you could remind what you guys are using for your economic scenarios as you calculate your loan loss reserve? And maybe what about your portfolio kind of gives you confidence that at what is a kind of below peer loan loss reserve to loan ratio? Thomas Cornish: Well, we look at Moody's primarily with the different booty scenarios and obviously, internal views as well overlays but again, really compare when you're comparing our aggregate coverage to others, you have to look at the mix within the portfolio. For example, if you just look at our C&I book, which I talked about, is where a lot of the charge-off activity has been. I think our coverage ratios are very comparable to peers. We've got a larger portion in our book of resi than some of our peers and the coverage on that tends to be a lot lighter. The performance there is very good. So you have to look at the sum of parts really to compare it to others. And I think we look much more comparable when you do that. Stephen Scouten: Fair enough. And then just my only other question would be, I think, Raj, like I like you reminding us to think about year-over-year, but I do look year-over-year profitability from an ROA perspective is basically flat around 66 basis points on what appears to be a core basis. So what's the biggest driver of improving that ROA on a year-over-year basis through the rest of this year. Raj Singh: NIDDA growth. If I was to pick 1 thing, that would be it. We deliver on ID improved in -- we deliver on that, everything else will take care of itself. Stephen Scouten: Got it. Sounds good. I appreciate the time. right. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Raj Singh for any closing remarks. Raj Singh: Thank you all for joining us. And like I said, I know this is a very busy day. If we missed anything, of course, you know how to reach me or Jim will be available. Thank you so much. Talk to you again in 90 days. Bye. . Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to Travel & Leisure First Quarter 2021 Earnings Call -- Conference Call and Webcast. [Operator Instructions] Question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, it is now my pleasure to turn the conference over to Andrew Burns, Vice President, Investor Relations. Thank you, Andrew. You may now begin. Andrew Burns: Thank you, Rob. Good morning, everyone. Before we begin, I'd like to remind you that our discussion today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings and our press release accompanying this earnings call. . You can find a reconciliation of the non-GAAP financial measures discussed in today's call in the earnings press release available on our Investor Relations website. Please note that all references to EBITDA, net income, diluted earnings per share and free cash flow made during the call are on an adjusted basis as disclosed in our earnings release. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our results in our longer-term growth strategy. And then Eric Coke, our Chief Financial Officer, will provide greater detail on our results, capital allocation strategy and outlook for 2026. Following our prepared remarks, we will open the call up for questions. Finally, all comparisons today are to the same period of the prior year, unless specifically stated. With that, I'll turn the call over to Mike. Michael Brown: Good morning, and thank you for joining us. Travel & Leisure delivered another great quarter. Thanks to the hard work of our team, we are carrying forward the positive momentum achieved in 2025. We First quarter EBITDA exceeded guidance, driven by strong execution in our Vacation Ownership business and resilient owner demand. In the quarter, we achieved gross VOI sales growth of 7% and EBITDA margin expansion of 180 basis points and EPS growth of 31%. Our strategy starts with delivering outstanding vacation experiences for our owners and members. . We convert that owner satisfaction into recurring demand, predictable cash flow and consistent capital returns. Our first quarter results are a clear validation of that strategy and a proof point of the durability of our model even as the macro environment remains uncertain. In the quarter, we generated revenue of $961 million, EBITDA of $225 million and EPS of $1.45, with compounding growth across the P&L. We are seeing continued strength in our Vacation Ownership business with 7% gross VOI sales growth and above plan VPG. We tour growth of 5% was above our 2025 tour growth rate of 3%. I'd like to emphasize that we achieved these results -- these impressive results while executing on our resort optimization initiative, which naturally pressures those metrics. During the quarter, we returned $128 million to shareholders through dividends and share repurchases. Our dividend increased 7% to $0.60 per share, and we repurchased 1.2 million shares in the quarter. At the same time, we are investing in the business to drive long-term profitable growth. We continue to make meaningful progress advancing our multi-brand strategy and digital road map, and this balanced approach, delivering near-term results and returning meaningful cash to investors while investing for the future is central to how we create long-term shareholder value. Since our last call, macroeconomic uncertainty and geopolitical risks have been prominent in the news. I'd like to start with recent trends we are seeing with our consumer and across the business. Overall, our owner base remains healthy. They are prioritized and travel, and we are not seeing any meaningful shifts in their behavior. First quarter gross bookings were up year-over-year. The booking window remains steady at approximately 100 days and average length of stay is unchanged year-over-year at just over 4 days. The distance travel to our resorts in Q1 was actually up slightly to last year, indicating consumers' willingness to travel to our resorts. The data suggests that in uncertain economic times, our value proposition becomes even more relevant. For the 80% of owners that have paid off their loan, their vacationing for the cost of annual maintenance fees. This value proposition is clear to our owners and is best reflected in our 97% retention rate for owners that are current on their loan or paid it off. As we enter our peak sales season, we are mindful of the macro backdrop and its potential to influence consumer behavior. That said, the trends we are seeing remain healthy, our value proposition continues to resonate, and the model is performing as designed, positioning us to outperform across cycles. During the quarter, we continued to make meaningful progress advancing our multi-brand strategy and saw clear proof points of its success. Margaritaville is rapidly approaching $150 million in annual VOI sales, reflecting the success of our revitalization efforts and new partnerships. In the Accor Vacation Club brand, we expect to nearly double our VOI sales in 2026. We also began selling Eddie Bauer Venture Club at select sales centers. In March, we welcome guests to our first Eddie Bauer Resort in Moab, Utah. We are seeing strong interest and early momentum has exceeded our expectations. Sports Illustrated Resorts, sales are now underway at our new Nashville sales center. We also announced our new Sports Illustrated resort location in Baton Rouge, home to Louisiana State University and Southern University. As the brand's fourth resort, Baton Rouge is a highly complementary sports-centric university market that fits well within the club's growing portfolio. Overall, combined VOI sales from these brands are expected to approach 10% of our sales mix this year, and we expect that to increase further in the years ahead. Scaling our multi-brand strategy remains a critical pillar of our long-term growth plan, enabling us to reach new customer segments and meaningfully expand our addressable market. The progress we are seeing across the portfolio gives us confidence that this strategy is gaining traction and developing as we envisioned. On the partnership front, we recently renewed and expanded a 5-year agreement with United Parks & Resorts, owner of SeaWorld and Busch Gardens, building on the highly successful strategic partnership that began in 2013. In addition to our current on-site kiosk and promotional activations, the new agreement expands our presence across additional parks. This meaningfully increases our ability to introduce new families to our Vacation Club offerings and provide current owners with exclusive events and experiences. Overall, the expanded partnership strengthens our top-of-funnel demand prospects and supports new owner growth. Turning to the resort optimization initiative we announced last quarter. This effort involves removing a small number of aging, lower demand resorts to strengthen our overall resort system for owners while also improving the financial health of Travel + Leisure and our club HOAs. I'm pleased to report that we are realizing all the expense savings outlined last quarter, and we've been able to sustain our historical sales growth rates despite the resort closures. In summary, we've started 2026 from a position of strength with clear visibility into the key drivers of our performance and momentum in our core Vacation Ownership business. We are reiterating our full year outlook, and I remain confident in our ability to drive growth, generate meaningful cash flow and continue creating long-term shareholder value. Now I'll turn the call over to Erik to further elaborate on our results, capital allocation framework and outlook. Erik? Erik Hoag: Thanks, Mike, and good morning, everyone. I'll frame my comments in 3 parts: how the business performed, how we ran it and how we're allocating capital. Starting with performance. First quarter results were ahead of our expectations, continuing the trajectory we discussed on our February call despite a more volatile macro backdrop. What stands out is not just the strength of our results, but how the business performs across different environments. The compounding in the first quarter is clear. Revenue grew 3% EBITDA grew 11%, net income grew 22% and earnings per share grew 31% with tour flow feeding the top line and operating leverage and capital allocation driving outsized growth in earnings per share. Looking at our Vacation Ownership business, this segment continues to operate at a high level with results in the quarter showing steady demand and strong execution. Gross VOI sales were $549 million, up 7% year-over-year, driven by tour flow growth of 5% and continued strength in volume per guest, which increased 3% to $3,321. Tour flow remained strong in the quarter, consistent with the momentum we saw exiting 2025. While our new owner mix was slightly below prior year levels, we remain confident that it will increase as the year progresses. Top of funnel demand remains strong, and we view mix in the quarter as more a function of conversion dynamics rather than a change in underlying demand. Segment EBITDA was $191 million, up 20% year-over-year, with margin expansion driven by operating leverage, improved inventory efficiency and the benefits of our resort optimization initiative. From a broader perspective, demand remains stable. While we're always mindful of the macro environment, it's important to remember that most of our VOI sales come from existing owners who have effectively prepaid for their vacations. As a result, their travel behavior is less sensitive to economic changes, and our performance is driven by the strength of those long-term relationships through repeat usage, retention and ongoing upgrade activity over time. Credit performance remains within our expectations with provision rates slightly down year-over-year in the first quarter. We are seeing some movement in early-stage delinquencies and particularly in more recent vintages, which we would expect to influence provision over time. With that said, we still expect our full year provision rate to be modestly below prior year levels. The underlying credit profile of new originations remains healthy with weighted average FICO scores remaining above 740 and average down payments trending above 20%. Turning to travel and membership. In the quarter, transactions were flat year-over-year, reflecting a continued mix shift within the business with declines in exchange activity, offset by growth in travel clubs. Exchange membership was approximately 3.3 million subscribers, down about 2% year-over-year. As expected, the mix shift continues to pressure revenue per transaction and segment revenue was $165 million, down 8% year-over-year. Segment EBITDA was $59 million, down 13%. This reflects the continued mix shift within the business. with declines in the higher-margin exchange business and growth in lower-margin travel clubs. Travel and membership remains a capital-light, high-margin business that generates significant free cash flow. Our focus is on managing the business for cash and flexibility as we reposition the platform to improve returns over time. Shifting to the balance sheet. We exited the quarter with in line with our expectations, just below 3.2x. As a reminder, leverage typically trends higher earlier in the year and declines as we generate free cash flow over the course of the year. Liquidity remains strong with over $1 billion of available capacity, including cash on hand and our revolver, supported by consistent free cash flow generation and the continued access to the securitization markets. In March, we executed our first ABS transaction of the year, raising $325 million at a 98% advance rate and 5.1% coupon. This transaction reflects our ability to access capital at rates well below the average interest rate on our portfolio, creating significant net interest income even in a more volatile macro environment. Overall, the balance sheet provides the liquidity and flexibility to allocate capital across growth opportunities and return meaningful cash to shareholders. Before I review our outlook, I want to take a moment to discuss capital allocation. Our framework remains unchanged. We focus on deploying capital where it generates the highest risk-adjusted return on a per share basis while maintaining a resilient balance sheet and returning excess capital to shareholders through a consistent dividend and share repurchases. When returns are compelling, we also pursue opportunistic M&A that is well aligned with our strategy and accretive to growth. When you step back, the business rate continues to generate returns well above our cost of capital, while returning a meaningful portion of that value to shareholders. Moving to the outlook. We are reaffirming our full year 2026 guidance, which reflects continued strength in the Vacation Ownership business, cost management and travel and membership and the impact of our resort optimization initiative. While still early in the year, performance in the first quarter was ahead of our plan and our full year outlook continues to appropriately reflect both the current environment and the trends we're seeing in the business. For the full year, we continue to expect gross VOI sales to be in the range of $2.5 billion to $2.6 billion. EBITDA in the range of $1.03 billion and $1.055 billion and volume per guest to be in the range of $3,175 and $3,275. Continue to expect to convert roughly half of our full year EBITDA into free cash flow. During the quarter, we took inventory drawdowns in our Chicago and Nashville Sports Illustrated resorts where sales are now underway. That investment did impact first quarter free cash flow, but does not change our full year free cash flow conversion expectation. We continue to expect our full year adjusted tax rate to be approximately 29% and year-over-year EPS growth to be in the teens, supported by EBITDA growth, lower interest expense and share repurchases. For the second quarter, we expect gross VOI sales to be in the range of $660 million and $690 million, EBITDA in the range of $260 million and $270 million, and volume per guest to be in the range of $3,200 and $3,250. This reflects a continuation of first quarter trends while recognizing that growth can vary across quarters based on mix and timing. Our outlook reflects a business that's performing as expected with downside appropriately managed given the current environment and upside driven by execution. To close, the business continues to perform as designed. We're seeing steady demand, strong execution across the platform and continued conversion of earnings into cash over time. As we move through 2026, we remain focused on executing against our plan, allocating capital to the highest return opportunities and compound value on a per share basis. Rob, we can now open the line for questions. Operator: Thank you. [Operator Instructions] And the first question comes from the line of Chris Woronka with Deutsche Bank. Chris Woronka: Congratulations on a nice start to the year. Michael, you guys have started off with a nice collection here of the Sports Illustrated Edipower and our Greenville resorts. So 3 distinct brands in addition to the core brands that you started with, the question is kind of to what extent do you think you can possibly grow those brands further? And are you seeing any attractive opportunities on the hotel conversion front that kind of enable those? . Michael Brown: We're very pleased with how each of the brands, the additional 1 that I'd add to that is a core Vacation Club, which is the newest one post post-COVID and would since our name change. And that, as we mentioned, we'll double the sales this year. When you look across all of those brands, our anticipation is we want to grow each of them to support the growth of our Battleship brand, the Wyndham brand. As we start to look at how each of them can grow, I think the total revenue potential varies by brand. However, as we've stated on a number of calls is we want to get each of these up to about $200 million plus. And if you start to think about those 4 brands and stack that level of growth, you can have a lot of visibility into that 6% to 8% total VOI run rate for the foreseeable future. Fundamental to our strategy is to do things pragmatically, do a brand, start executing to another one, start executing. And if you look at the cadence of what we've done in adding brands, adding a core growing that brand, then add the second one in the revitalization of Margaritaville, as you heard, highly successful. And then the last two, Eddie Bauer, we started lightly last year, and it's really picking up momentum in Q1, and then we'll start Sports Illustrated. So we believe the success of adding new brands is the execution of the ones we already have, starting with Wyndham, ending with our latest announcement -- our latest start-up sales, which is Sports Illustrated. So those are key to our strategy, and we think we're going to grow. And I think that validates and is providing more clarity and precision around our long-term growth rate on VOI. Chris Woronka: Okay. Very helpful. Just as a follow-up, I know you guys mentioned a little bit of uptick in early delinquency activity. I guess, I don't know, Eric, if there's any more detail you want to ask the question that comes out of it is do you think that ultimately opens up an opportunity to essentially reacquire some of that inventory at favorable pricing? Or are you not quite down that path yet. . Michael Brown: Thanks for the question, Chris. So maybe a couple of comments on the loan loss provision. Maybe I'll start with how we actually performed. So maybe even going back to the fourth quarter. Fourth quarter provision was roughly 19%. It was down year-over-year. Full year 2025 provision was 20.7%. The first quarter start to the year were down to 19%. And -- so we've had 2 quarters of year-over-year decline. Second, regarding the early-stage delinquency predominantly in newer cohorts of loans, loans originated over the last several quarters. I do think that these will ultimately manifest into the provision. But third, there are several components to the loan loss provision calculus that I think are worth noting. First, I just mentioned delinquencies. Second, down payment rates, which are up, which is a good guide for the provision for us. FICO scores remained stable and healthy at above 740, which is another good guide for the provision. And maybe the last thing I'd say associated with this is the percentage of sales financed is also down, which is another good guide for the provision. So it's really those elements that give us confidence in projecting that the full year provision should be down year-over-year. And Chris, to your question, yes, when defaults happen, that does give us the ability for us to take that inventory back and resell it at today's prices with a very low cost of sales. Operator: Our next question comes from the line of Patrick Scholes with Truist Securities. Charles Scholes: Mike and Eric. Mike, I wonder if you could just put to bed any concerns, and it sounds like you had already, but just to finalize it -- any changes or concerns for the remaining 3 quarters versus your guidance earlier in year, certainly, the Algebra says if you beat on 1Q versus your guide, but maintain implied the rest of the year down slightly. Is it simply just Iran has happened since you reported in mid-February that kind of keeps you cautious and there's nothing else in your business that has -- as your outlook has changed. Is that a fair assumption? . Michael Brown: You've nailed it, Patrick, but let me first say -- let me first say, let me first speak to our business. We reported in mid-February, it's 2 months later, nothing's changed in our confidence in the building for the remainder of this year, prospectively. You've seen the results in Q1, which I would characterize as an extremely strong quarter, we had a great Q1 last year. I view this quarter as better. We beat the high end of our range. If you remember last year, we had Liberation Day, April 1, I believe it was, and we expressed that, that uncertainty led through in the way we thought about the rest of the year. this year, there's a war going on, which creates macro and geopolitical uncertainty. And we don't want to be tone out to that reality. But if you just step back and look at our consumer, great first quarter, 3 weeks into Q2, continued momentum exactly as we saw in Q1 and if you look prospectively, yes, it's great to look in the rearview mirror. But looking forward, we look at our summer bookings. They're up year-on-year, a great sign given that Q2 and Q3 is our high season. We get a daily report card in the form of VPG, continues to perform extremely well. Erik just spoke that we're monitoring early-stage delinquencies, but that's more retrospective. And I think between the macro uncertainty not micro uncertainty, we think our business is performing extremely well. I think the last piece of this puzzle is that Q1 is about 21% of our full year number at the consensus point. If that number was 29% versus '21, we might be having a different conversation. But early in the year, business is performing well, macro economy, we just want to be cognizant of what's going on outside of our business. And given that it's very early in the year, be thoughtful about that. So that was a very extended way to agree with you. Charles Scholes: I just wanted to put that to rest. I'm sure you -- as the quarter progression you may get questions, so we have the answer and writing there. Erik, my question for you. You talked about the earlier-stage delinquencies, specifically in newer cohorts. Does that means the newer first-time buyers, and specifically, what is it about those? Is it maybe a little bit weaker -- relatively weaker financial demographic, a younger customer than, say, your less newer or your legacy cohorts. Could you explain a little bit more about that? . Erik Hoag: Yes. Sure, Patrick. So when I say newer cohorts, these are the more recent cohorts, I think the last 3 quarters. When you sort of double-click into the characteristics within the cohorts, there's not a single attribute that I would say is maybe worth calling out. It's not tied to FICO. It's not tied to product type. It's not tied to income band. It's -- we're seeing a little bit of wobble associated with the loans that have originated in the last several quarters. Operator: Our next question is from the line of Stephen Grambling with Morgan Stanley. . Stephen Grambling: I think I heard in the comments that you said that the new owner mix was a little bit lower than expected and you attribute that to conversion dynamics. So I'm wondering if you could just expand on, what is happening in terms of the conversion dynamics there that might be impacting it and how you expect that to evolve over the course of the year? Michael Brown: Stephen, this is Mike. I would say that's a result of a positive story we have, which is growth in our new owner tour growth. There was a lot of commentary last year around our ability to grow new owner tours in Q1. Although our total tour growth was 5%, our new owner tour growth was 7%, Which is extremely strong. That's always step 1 and driving new owner mix into your total business. When we talk about conversion dynamics, basically, our close rate was lower in Q1. That's natural. Anytime you scale the business and grow new owner tour flow or any tour flow, you're likely to suffer maybe a little bit of underperformance on close rates. We've got that, but we've got step one accomplished, which is a great new owner tour growth in Q1. We think that will continue to be strong as we head into the high season with both our new partnerships and just the way we've developed some of the smaller ones on a regional basis. And we believe as we tend to do quarter after quarter improve the execution when we get focused on something that we think is a little bit behind. That's what happened in Q1. But again, I'll just reiterate that, probably the big storyline for us in Q1 was the new order tour growth year-on-year, which was 7%. Stephen Grambling: That's helpful. And then 1 unrelated question, just on free cash flow. I think you made a couple of comments on the intra remarks, but can you just maybe elaborate on any kind of puts and takes to think about impacting the cash flow conversion over the course of this year? And then maybe if you can remind us how to think through free cash flow conversion differences between the segments even as we think about the vacation ownership versus T&M segment. Erik Hoag: Sure. So let's start maybe a little bit with free cash flow, and we can talk about the segments on the back side. Free cash flow for the full year, we're reiterating our roughly 50%, roughly half of adjusted EBITDA should convert to free cash flow. I will say that the pace of free cash flow in 2026 will be backloaded. We've got inventory investments that we're making, we made in the first quarter associated with Nashville and Chicago. We've got inventory investments in the second quarter as well. So you're going to see the concentration of our free cash flow more back loaded. And then from a conversion perspective, with the benefit of our ABS transactions and being able to generate cash off of those, the free cash flow conversion across segments is very similar. Operator: Our next question is from the line of David Katz with Jefferies. David Katz: Thanks so much. I think a lot of the commentary around the VOI business is very clear. What I'd love to get just a little more color on is what you're including as we go through the quarters for the remainder of the year in your guidance or, 1, travel and exchange. It is flat the high end of the bracket and down some number at the bottom end, that kind of help is what I'm looking for. And then with respect to the resort optimization, I'd love to get a clearer sense of what exactly you're baking in for the quarters and the remainder of the year and whether from that, or sort of flat challenge, et cetera. I think hopefully, that's a clear question. Erik Hoag: It is, David. So it's Erik. So let me give you a couple of components associated with what's driving the year for us. So we had mid-single-digit tour flow growth in the first quarter. Our second quarter and our full year expect similar trends, mid-single-digit tour flow growth. We expect gross VOI sales to also be mid-single digits in both the second quarter and in the full year. I think about the Travel and Membership business as a little bit of an extension from where we finished 2025. And some of those stats are the following. The Travel and Membership business was down 9% in 2025. They were down 10% in the fourth quarter. They're down 13% here in the first quarter. So I think an extrapolation of the travel and membership business in 2026 is a fair base case to pursue. And then the resort optimization initiative has been a bit of a tailwind for us to start the year, when the Q is filed later this morning. You're going to see that the developer obligation, our carry cost, that savings is manifesting itself right into the P&L. And the one thing that we are also seeing is that despite the fact that we've closed several sales centers with the resort optimization initiative, our gross VOI sales have continued to remain very strong. So as I think about the rest of the year, it's very much a continuation of the mid-single-digit guide that we've got for the second quarter. It's an extrapolation of travel and membership. It's the manifestation of the resort optimization savings, and all of that compounding through the P&L to teens EPS growth as we continue to repurchase shares. David Katz: Okay. Very helpful. Congrats on the quarter. . Operator: Our next question is from the line of Ben Taken with Mizuho Securities. Benjamin Chaiken: Maybe we could talk about Worldmark and Eddie Bauer. I think you said Eddie Bauer was exceeding your expectations. I mean my understanding is that you're effectively combining these 2 portfolios. I would imagine that would create a pretty powerful upgrade opportunity. So my question is, one, am I on the right track regarding this upgrade opportunity; two, if so, have those upgrades started? And with that contributing to some of the strength in 1Q? And then three, as you see it, is the bigger opportunity upgrading the 180,000 or so market customers? Or is it selling the new combined portfolio to new customers entirely the world market of Bauer. Michael Brown: Great question. What we're trying to do is basically put a booster to Worldmark. The Walmart owner base has a clear travel demand. And we've heard time and time again, they love that. outdoor experience, the chance for families to be together for a friendly resorts and in not urban centers. And the plan for Worldmark is to highly, highly align the Eddie Bauer Venture Club with it so that in effect, operates as a singular club. . The success in Q1 is right along the lines of what you laid out, Ben, is it's a new product offering with a slightly different experience. that owners are going to get to enjoy. What I would say is, though, even though it exceeded our expectation, I don't think we've really unleashed the full power of what that brand is going to be. And what I mean by that is that in our world, it takes time to get fully registered in all jurisdictions, and we're partially -- we're registered in a few, but not all. We've opened only 9 sales locations. And we've only announced one resort. You can expect more this year and can expect more nice destinations. And I think as the Worldmark base sees those new destinations, the upgrade opportunity, the ability to own world market by incremental opportunity or credits into the Eddie Bauer system will only get strengthened. So ultimately, we want to preserve and grow the Worldmark brand through this brand extension, which is the Eddie Bauer Venture Club. As you mentioned, it's off to a great start. It's on the back mostly of upgrades, but it is our full intention to start feathering into the Eddie Bauer mix, new owners and I think it really attracts a new opportunity and gives us a new chance to grab some partnerships that maybe otherwise wouldn't be available in some of our other brands. Benjamin Chaiken: Understood. That's helpful. And then switching gears a little bit. There's kind of this never-ending question regarding the exchange business. Maybe you can walk us through your feelings on both sides as it pertains to keeping our disposing of the asset and then what your current stance is? Michael Brown: Well, it's as we've always shared, we're -- we will make our decisions on what we think is best for shareholders and the optimization of return for shareholders. we're all clear on the landscape of the traveler membership business. Exchange is in natural industry secular decline for the reasons we've all spoken about in the past. Despite that and despite what's happened over the last 3 to 5 years in that business, we've been able to maintain our overall travel and leisure mid-single-digits growth enterprise-wide on an EBITDA basis. We believe that is very much in our grasp despite what's happening on the exchange side. We continue to focus first on organic growth and by adding new business lines and new focus. We think the outlook that we laid out in travel and membership is the realistic, but we're looking to outperform that and outperforming it is not easy, but we're constantly looking both inside the timeshare space and outside for new lines of business, and we're actively working on those business lines, and we're going to keep working until we can change in the curve to be additive to our story, not basically absorb it as part of our mid-single-digits growth. What I would add on top of that is if there is a strategic opportunity, we'll evaluate it. And if it makes sense, we would not hesitate to make that type of move. But at this point, we're super focused on trying to bend the curve from the current decline trajectory because we know with the strength of our VO business that provides an additive nature to our EBITDA growth. Operator: The next question from the line of Ian Zaffino with Oppenheimer. Ian Zaffino: As far as VPGs, how do we think about that? I know you gave guidance for the full year, but how do we think about that throughout the the year. I'm just thinking about you're talking about mix earlier. Does that kind of impact how you're thinking about the VPG? Because I guess we were to believe that the VPG would be coming down just given more new owner mix and now it seems like the mix is changing a little bit. So any kind of color you could give us on where you think things are going and why. Michael Brown: What you're thinking about -- you're thinking about it the right way, and VPG will take natural pressure on an enterprise basis when you get a higher new owner mix. we're heading into Q2 and Q3, which naturally has a higher new owner mix, which we expect to happen definitely in Q2 and again in Q3. So you would expect some natural pressure on VPG, but that's a mix issue, not a performance or an execution issue. So as you look at the cadence, you would expect those higher VPGs in Q1 with a higher owner mix, which is what we got. But Erik has laid out our range for the year, and I think that's accurately reflecting both the cadence and how we think we'll ultimately perform on VPG. Ian Zaffino: Okay. And then I guess as a follow-up, I know the question if I ran kind of came up. And any kind of potential softness you might see? Like how do you think that's actually going to play out? Is it a matter of fuel prices are high and that's what might soften demand? Is it just kind of like a sentiment thing where consumers don't want to either travel or spend money on a DO. How does it actually manifest, you think or kind of what's baked into what you're expecting? . Michael Brown: We'll give you our best thinking about how we think it would show early signs of showing up in our individual performance. And it's why we highlighted some of the travel trends we're watching. We would expect a little bit of conservatism in the consumer travel behavior. First and foremost, booking windows would shrink, they have not so far this year. I would expect people to transition away from air travel to drive 2 destinations. That has not inspired so far this year. I would also look at VPGs to modify. They haven't. They've continued to perform extremely well. We said we're monitoring early-stage delinquencies. There's nothing in the travel trends that's noticeably moved. In fact, it feels like it's actually moved the positive direction, that would cause us to say there's an early radar sign or a signal that says the consumer is weakening. I say all that, knowing that every week, we look at these because we're looking for early signs, they just -- all we can report is what we know on April 22nd and what we would know on April 22, is early warning signs have not shown up in our travel trends, but we'll continue to monitor them. Operator: Our next question is from the line of Lizzie Dove with Goldman Sachs. Elizabeth Dove: I guess on a similar theme, just thinking about that new owner mix that you mentioned and being a key focus for this year. I guess, like, I think, typically in precedent times where there's a macro slowdown like getting that new owner to make that big purchases typically been tougher. Can you maybe walk through how you're thinking about like levers that you have to drive that new owner growth this year as you push that more for the remainder of the year? Michael Brown: Well, it all starts with what happened in Q1 is you have to see the guest. And then secondly, you have to look at your conversion rates and the 7% growth in Q1, I can't emphasize it enough is a big one coming out of Q1. We have laid the groundwork with our partnerships. We've laid the groundwork with the execution to be able to grow top of funnel key metric. And now our focus will be and our teams already very focused on it is the next stage down the funnel, which is conversion. Unquestionably, as consumers confidence rises and falls just like every single metric that's in every single business, it fluctuates. And we will have fluctuation in almost all of our metrics on the owner and the new owner side, I think what we rest on is that as we monitor and get ahead of any metric that starts to adjust, our team is quick to react, whether it's in cost management, whether it's changing our strategies, either on the marketing side or the sales side, that we feel as we mentioned in our prepared remarks, we think we can outperform across all cycles because there's a ton of value in the business. We've got the key metrics in place, being top of funnel, both owner arrivals in the summer and new owner tours that we can execute further down the funnel and have a lot of levers to make sure that we ultimately deliver the results we've put out to the Street. Elizabeth Dove: Got it. That's super clear. And then going back to the strategic review that you're undergoing. I think last quarter, you mentioned the swing factor was somewhere in between $15 million and $25 million in terms of EBITDA benefit. I know we'll get the queue later, but just any sense of like how we're tracking and kind of range of outcomes in terms of like coming in at the low end versus the higher end of that as we get through the year. Michael Brown: So just to clarify, when you say strategic initiative, you're referring to the resort optimization initiative, correct? Elizabeth Dove: Yes, yes. Michael Brown: Yes. So as Erik mentioned, when you see the Q, you'll see great proof points is that we're realizing full, if not slightly above the cost savings. So we're super encouraged first and foremost that -- the cost savings are being fully realized. Our team is doing a great job combining very process-oriented of of extracting those. Again, as a reminder, the resorts we're taking out have an average tenure of, I believe, about 40 years. So we're looking at more aged resorts with lower demand. And our focus really now is around the consumer and helping them determine having all the facts of their options, whether they want to stay in their ownership or exit, and working through on a one-on-one basis, the population of owners who ultimately need to make a decision. But when it comes back to the economic side of the equation, we're realizing the savings we expected, if not slightly ahead, but it's sort of like our full year guidance. It's early in the process. We have 3 quarters to go, but super encouraged around the execution being at or slightly above plan through the first 90 days. Operator: Next question come from the line of Trey Bowers with Wells Fargo. Raymond Bowers: Just had a couple of modeling questions on the free cash flow side of things. As we think about inventory for the year, is there a chance that as we look to EBITDA to free cash flow conversion, if another city where you wanted to add inventory popped up, could that shift things or just kind of the pace and timing of VOI sales caused what would be some of this conversion to kind of get pushed into '27? And then second, just around nonrecourse debt. Is that expected to be kind of neutral this year or a bit of a draw or a bit of a positive? Erik Hoag: Yes, so free cash flow, the pace of free cash flow in 2026 is going to be back-end loaded. With the Chicago and Nashville spent the inventory investments that we made in the first quarter, we've got additional investment that we're making in the second quarter. So we've got some conviction around converting roughly half of EBITDA into free cash flow on the full year, but you're going to see it really manifest in the back half of the year. From a portfolio perspective, I would say it's generally neutral. Raymond Bowers: Okay. And then just from the brand perspective, are there other sports illustrators or any Bowers out there that you guys are talking to? Both of those brands are not brands that I think a lot of people are super resonate with consumers, but obviously, it's doing something really positive for you guys. Could you just maybe walk through why Eddie Bauer and SI or kind of brands that are bringing in new owners? Is it the brand itself? Or is it kind of just what you've done with the brand that is causing it to resonate. Michael Brown: Well, I would say that I believe the Sports Illustrated brand highly resonates and is an iconic brand that almost everyone associates with a sports experience. I'd like to equate it to Margaritaville, which is not your typical hospitality brand and yet everyone associates it with the lifestyle. So I think those retail brands that express a lifestyle, both Sports Illustrated and Eddie Bauer are highly reflective of how we think hospitality is changing to be lifestyle based. And we just simply have taken the opportunity to find new markets through those lifestyle brands. I would add to it is a core is a traditional hospitality brand. And in the grand scheme of things, we're trying to combine lifestyle and our core hospitality brands of Wyndham and a core and ultimately grow the top line. So -- yes, I think, first of all, they're great brands and that they strongly are identifiable with the lifestyle, and that is resonating with the consumers as they make decisions. Raymond Bowers: And 1 more, if I could sneak it in with the core. Will the license fees around that be similar to what you guys have with the guys at Wyndham or is that a different structure to that deal? . Michael Brown: It's roughly the same. Operator: Our final question is from the line of Brandt Montour with Barclays. Brandt Montour: So I'm having a little bit of trouble, for having my head around the delinquency stuff. I wanted to go back to that quickly because it's not really super clear to us what's driving it. If there's no obvious characteristic you'd call out or normally, it seems like that you want to blame the macro for this. So you've seen a lot of many delinquency cycles. You called it a wobble. How would you say it feels this one feels in terms of how it would play out, like is it worse than -- I'm assuming it's better than the one you saw at this time last year? And then what are you kind of assuming when you say that the provision should still get better and you called out a bunch of good guys. On the bad guy side, what are you kind of assuming in terms of like where it stabilizes, when it stabilizes or anything you can kind of give us there? Michael Brown: Brandt, the first thing I'd say is that it's early stage delinquencies. There -- it's early in the cycle. We've seen it, wanted to communicate it. And the reason I wanted to bring up some of the good guys that are also running against the loan loss provision is just that, that as we sit here in the middle of April, we still got conviction that the loan loss provision will be down year-over-year based on just the confluence of things that make up that calculation. So the delinquencies that we've seen in the early stage delinquencies that we've seen I would say just that there are more recent vintages. But beyond the more recent vintages, there isn't a characteristic that I would specifically call out. And we're monitoring it, and we're working it. We've got aspirations to bring it down. Brandt Montour: Okay. And the second question is actually on AI. You guys have showcased some great progress in terms of your guest experience and the technology stuff that you've done. But I wanted to more ask about how you're using or planning to use new AI tools on the distribution side, i.e., enhancing the top of funnel and sort of working with the bigger models out there that are disrupting some of the ways in which consumers find their travel options. And so is that something you're doing directly or planning to do directly with tech companies? Are you working through the brand companies that you partner with to speak to them and work with them? Or what can you tell us about progress on that initiative? . Erik Hoag: Let me start with AI and then I'll just move to some technology updates as well to show some, as you said, showcase some positive things we're doing. On the AI front, we view sort of 2 opportunities there is, first is on the customer experiences to start in the search and book window and then expand outward from there. So we really want to get our owner-based engage when they're looking at resorts, planning their resorts, creating as little friction as possible and getting their destination confirmed in their inbox as a confirmed reservation. That's the starting point. Secondly is, as we look at AI in the distribution side of the equation, I think the bigger opportunity for us on the stage 1, stage 2 basis is going to be on sort of non-full product type of vacations, whether its rental short-term product, low transaction prices that's where you're best to start as opposed to trying to transact on an average transaction price of $25,000-ish through AI. I think we want to start with lower transaction prices and move up the chain from there, and that's work going forward. On the digital side, a lot of exciting things happened. We talked about Club Wyndham app that we launched and was received very well. We spoke recently about the Worldmark app that we launched last year. We already have 20% of our bookings, which is pretty amazing how recent that app was launched in how quickly that was adopted by our Walmart owners, already 20% of our bookings are happening through the Worldmark app. And we launched the Margaritaville app in Q1. So when you think about the cadence of reducing our friction, some of it's AI, but a lot of it is just the quality of our IT team and the speed at which they've worked with the business to get usable tangible customer experience technology out into the market that we're getting affirmation that it's working through the actual level of bookings we're seeing from our owners. Operator: This now concludes our question-and-answer session. I'd like to turn the floor back over to Michael Brown for closing comments. Michael Brown: Thanks, Rob. Thanks for joining us today, everyone. To wrap up, we've had a great start to 2026, and our strategic priorities are clear. We remain focused on disciplined execution to deliver strong results in 2026, while continuing to scale our multi-brand strategy to drive long-term profitable growth. Erik and I look forward to continuing the conversation with many of you at upcoming conferences and again on our second quarter call. Thank you for your time and continued interest in travel and leisure. Operator: Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM First Quarter 2026 Earnings Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Victor Bareño. Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and thank you for joining our Q1 earnings call. With me today are our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its first quarter 2026 results yesterday at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is available on our website together with our latest investor presentation. As always, we remind you that today's conference call may contain forward-looking statements in addition to historical information. For more details on the risk factors relating to such forward-looking statements, please refer to our press releases and financial reports, all of which are available on our website. Please also note that during this call, we will refer to profitability metrics, primarily on an adjusted basis. Reconciliations to reported numbers can be found in the press release and in the investor presentation. And with that, I will now turn the call over to our CEO, Hichem M'Saad. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our first quarter 2026 results conference call. We will follow the usual agenda for today's call. Paul will begin with a review of our first quarter financial results. I will then discuss market trends and our outlook followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thank you, Hichem, and thanks, everyone, for joining our call today. Let me first walk you through the Q1 financial results. Our revenue in the first quarter of 2026 amounted to EUR 863 million, which was at the high end of our guided range of EUR 830 million plus or minus 4%. On a constant currency basis, revenue increased by 16% year-on-year and by 26% compared to Q4 '25. Equipment sales increased by 14% at constant currency and were led by ALD. Spares & services continued to deliver a very strong performance with a 23% year-on-year growth at constant currency. This was the result of continued expansion of our outcome-based services and strong spares demand in an environment of elevated set utilization rates. In terms of customer segments, revenue was led by logic/foundry, which accounted for the clear majority. For the full year, advanced logic/foundry sales are expected to show significant growth this year. However, due to quarterly phasing, they were down from the very strong first quarter last year. Mature logic/foundry for the large part from customers in China increased compared to Q1 last year and rebounded strongly compared to the relatively low level in Q4. Memory sales showed sequential growth compared to Q4 last year and also expected to grow significantly for the full year, mainly in DRAM. Sales in the memory segment were predominantly driven by applications for high-performance DRAM in HBM-related applications. Sales in the power analog wafer segment increased compared to the first quarter of last year, mostly in silicon-based solutions but from a low base. Gross margin in the first quarter amounted to a strong 53.3%. This was virtually unchanged compared to 53.4% in Q1 of last year, up from 49.8% in Q4. Gross margin was supported by a favorable product and customer mix including an increased sales contribution from China, which rebound strongly compared to the lower level in Q4. The gross margin also benefited from a gradual impact from cost reduction programs that we have been implementing over the past few years. We expect the gross margin to be at the higher end of the target range of 47% to 51% for the full year. SG&A expenses increased by 8% year-on-year at constant currency, mostly due to higher variable expenses, but dropped slightly as a percentage of sales, demonstrating our ongoing focus on cost control. For the full year, we continue to expect SG&A as a percentage of sales to drop below 9%. Net R&D increased 11% year-on-year at constant currency in Q1. We continue to step up R&D investments to support customer transitions to next-generation nodes and to advance our expanding pipeline of opportunities. For the full year, we intend to keep the net R&D within our target range of a low double-digit percentage of revenue. Operating profit increased by a solid 21% year-on-year at constant currency, and the operating margin reached a new record of 33.1%. If you look at the main movements below the operating line, financial results included a currency translation gain of EUR 10 million in Q1 '26 compared to a translation loss of EUR 40 million in the first quarter of last year. As a reminder, we hold a large part of our cash in U.S. dollars and the related translation differences are included in our financial results. Our share of income from investments, reflecting our stake of approximately 25% in ASMPT amounted to EUR 7 million in the first quarter, up EUR 2 million in the year ago periods. Next, the balance sheet and cash flow. ASM's financial position remains [ solid ], and we ended the quarter with a cash position of close to a EUR 1 billion. Free cash flow was EUR 48 million negative mainly reflecting the working capital outflow in the quarter marked by a sharp ramp in activity levels. Days of working capital increased to 69 at the end of March, up from 45 at the end of December. The main driver for the increase was higher accounts receivable due to strong sales increase compared to the relatively low level in Q4 as well as back-end loaded distribution of sales during the quarter. CapEx amounts to EUR 38 million in the first quarter, up from EUR 30 million in the same quarter of last year. And for the full year, we expect CapEx to be around or to be somewhat above the higher end of the guided range of EUR 150 million to EUR 250 million, with the largest part related to the construction of a new site in Scottsdale, which remains on track for completion in Q1 2027. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market trends. The first quarter, again, confirmed that AI is the main driver of semiconductor demand. Customers continue to add capacity to support the ongoing expansion of AI data centers and the broader infrastructure build-out. This is keeping demand strong in the areas where we are most exposed, especially logic/foundry and we saw this demand strengthening further during the quarter. We have also noted a continuing proliferation and diversification of the AI workloads into the CPU and the power markets. For this reason, we see AI driving strength in all segments of our business: advanced logic/foundry, mature logic/foundry, memory and especially DRAM and, to a lesser extent, power, wafer, analog market. Looking ahead, our strategic view remains unchanged. As AI adoption broadens and demand continues to scale, compute capacity is increasingly the limiting factor. In semiconductors, this is translating into tighter capacity needs for advanced logic/foundry and memory devices, driving higher investment intensity and increasing the urgency of tool deliveries. Against this backdrop, our focus is on execution as we continue to support our customers' expansion plans. The pace of demand is putting additional pressure from the supply chain. But so far, we have been able to manage these rising challenges in close cooperation with both suppliers and customers, reflected in the sharp step-up in our quarterly sales from EUR 700 million in Q4 of last year, to a level approaching EUR 1 billion projected for Q2. Turning now to customer segments. Logic/foundry again led our performance in Q1 supported by continued strength at the advanced nodes and a sequential rebound in mature logic/foundry demand. Our view is unchanged that logic/foundry will be a strong driver of our sales in 2026 and also going into 2027. The structural outlook for this segment remains strong. AI-driven compute requirement and the ongoing shift to more complex 3D device architecture and new materials continued to increase ALD and epitaxy and density. As we progress through the year, we expect momentum to build further with ongoing capacity additions as the 2-nanometer technology node accounting for the largest part of advanced logic/foundry sales in 2026. This first generation of gate-all-around device technology is shaping up to be a large node, enabling new applications in high-performance compute, including AI as well as advanced mobile and other leading applications. We continue to benefit from the step-up in our served available market at 2-nanometer supported by a broader position in Epi and sustained strong market share in ALD. In addition, we have seen a healthy uptick in demand related to the nodes from 3-nanometer to 7-nanometer, driven by agentic AI. The demand is outstripping supply which has led to renewed capacity investment. Looking ahead to the industry's next node transition to 1.4 nanometer, we expect pilot-line investment to begin later this year. We are deeply engaged with key customers as they prepare for that transition, and we expect the first meaningful contribution to our sales in the second half of 2026. As we have highlighted before, we expect the SAM uplift at the 1.4 nanometer to be even larger than what we saw at 2-nanometer node. At 2-nanometer, the industry's main priority was to get the first generation gate-all-around architecture and to high-volume manufacturing with gate-all-around now in production and ramping, customer have more room to include additional performance boosters. And for ASM, that translates into more functional there in the transition stack to further optimize power and performance, including additional dipole layers to enable Multi-Vt options. Alongside the higher SAM opportunity, we have already secured several key product penetration which supports our expectation for a higher ALD market share in the 1.4 nanometer node, public disclosure from some leading customers suggest that the 1.4 nanometer node is designed to deliver clear improvement in performance, power efficiency and density versus today's 2-nanometer node. This is well aligned with ever increasing AI token demand and the associated compute and power constraints in data centers. As our customers move toward higher volume manufacturing in 2027 and 2028, we expect 1.4 nanometer to become a meaningful driver for ASM. Next, looking at memory. Demand in Q1 was solid, with robust momentum in the most advanced DRAM technologies used in HBM-related applications. Continued investment in AI infrastructure is keeping demand for high-performance memory strong and supporting ongoing expansion of advanced DRAM capacity. For the full year, we continue to expect healthy growth in our memory business. Looking further out, DRAM remains a meaningful and strategic opportunity for ASM. From a technology perspective, our customer R&D engagement in memory continue to expand, including development work around new ALD and epi applications that support the transition to 4F² and very fantastic DRAM. As we highlighted at Investor Day, the transition to 4F² is expected to drive a step-up in ALD and Epi intensity and expand our served available market by approximately USD 400 million to USD 450 million based on 100,000 wafer start per month capacity. Turning over to power, analog, wafer market segment. The contribution in Q1 remained relatively low, reflecting the soft market condition in broader parts of automotive and industrial. That said, we have seen some pockets of strength in selected areas, particularly in power applications for AI data centers. For 2026, our view is unchanged that this segment should recover gradually from a low base. We remain well positioned to benefit once demand conditions improve more broadly. Moving on to China. The increase in Q1 was largely driven by the mature logic/foundry segment, where we saw higher activity across a broader set of customers, reflecting improving market conditions and to a lesser extent, the power, analog segment. In addition, I'd like to highlight ASM's ongoing success in winning new positions which also contributed to our strong performance in China. This demonstrated the continued competitiveness of our solution and the strength of our local team. Based on current visibility, we expect sales in China to increase for the full year with a stronger contribution in the first half. Now let's talk about advanced packaging. As we have discussed during the Investor Day, we are looking into advanced packaging as another midterm growth area for ASM. We believe that this market is ripe for disruptive solution in new materials and interface engineering playing into ASM's strength. We are engaged with multiple customers on advanced packaging, and we are seeing some encouraging traction for our innovative solutions. That brings me to the outlook. At current currency, we project revenue to increase in Q2 2026 to EUR 980 million plus or minus 5%, and we continue to expect revenue in the second half of 2026 to be higher than in the first half. As mentioned, China sales are expected to be first half weighted. This means that our other business segments are expected to strengthen from the first to the second half, including continued solid momentum in advanced logic/foundry higher sales in memory and a gradual recovery in power analog. While it's too early to provide specific guidance for the full year, based on our guidance in Q2 and a further increase in the second half, it should be clear that 2026 is going to be a strong year for ASM. And with that, we have finished our introduction. Victor Bareño: Thank you, Hichem. Let's now move on to the Q&A to ensure that everyone has an opportunity to participate please limit your questions to no more than two at a time. Operator, we are ready for the first question, please. Operator: [Operator Instructions] First question is from Andrew Gardiner, Citi. Andrew Gardiner: Hichem, just sort of pick up on the point you were making at the end of your prepared comments there. You're saying you will have growth in the second half of the year versus the first half, but obviously, the visibility is perfect to quantify it for us yet. Previously, you've been willing to talk about your performance relative to the wafer fab equipment market broadly and that ASM would outperform that. Clearly, WFE expectations are moving quite rapidly as well at the moment. Could you give us an update on how you see the broader market in terms of WFE? And can you confirm that you will still outgrow that in 2026? Hichem M'Saad: Thank you very much for the questions. Yes, we talked about that in our previous conference call that we're going to at least perform as good as the wafer fab equipment market or better. Yes, we have seen improvement in the WFE market. I mean we follow very closely what Gartner and VLSI are talking about. And we can reconfirm again that our growth in our market, in our revenue in 2026 will at least outgrow the WFE market again. So as I mentioned, we see strength in the market and our revenue is strengthening, and we are very confident that we'll be able to at least grow at least at the WFE market or beat that in 2026. Andrew Gardiner: Okay. And just a clarifying question, the point you were making on China. In the second half, so is that China down second half on first half? Or down year-on-year or perhaps it's both? Hichem M'Saad: No. I think China is really up year-on-year. So the -- what we talked about that we see right now that China is lower in the second half of 2026 versus the first half of 2026, saying this, and I want to repeat it again. China visibility is not that great as we talked about it, okay? So from that point of view, if there is anything, that second half China business that we see right now might also increase eventually. But right now, what we see very strongly that the second half would be a little bit slower than the first half. But again, that might strengthen in the second half. We don't know. Operator: Next question is from Nigel Van Putten, Morgan Stanley. Nigel van Putten: I want to follow up on the previous question on China. Perhaps for the full year, there are some limited visibility. But can you provide us a revenue or China revenue as a percentage of overall revenue for the first half at least? And how that maybe compares to the full year '25 when you said it's going to be -- or it came in a little bit over 30%. That is my first question? Hichem M'Saad: Nigel, thank you for your question. Nigel, maybe there's a misunderstanding that about the visibility -- low visibility of China. Right now, okay, our visibility for 2026 is very good, okay? China or no China, okay? Because I mean, it's really clear everywhere in our market, okay? So that's why we are really confident about the market. If there's anything in China, the revenue is going to increase further in the second half, okay, from where we see it right now. So, but China business has been good, and we feel very confident about it. Paul Verhagen: So maybe to add to what Hichem is saying, what we see in is now, at this moment, at least, is an accelerated demand. And in China, we have a higher H1 expectation. And H2, which might still change, we don't know, as Hichem has indicated. Possibly, that is because of concerns on export controls, we don't know. One thing is for sure that the overall sentiment is very good, like in the rest of world, also AI related. That's itself positive. Two, we also won some more layers in itself is a positive. But yes, there is clearly an acceleration going on, which, of course, customers are on tariffs, but which could be triggered by concerns around export controls and how that will develop further, I think, at this stage, and nobody knows. Then on the full year, based on everything we know today, I think the equipment revenue as a percentage of total sales will be similar to last year. But again, it's really too early to tell, so this might change because for all the reasons that we already mentioned. Nigel van Putten: Got it. That's really helpful. Then now maybe switching to the advanced logic customers which I understand are providing increased visibility maybe 8 quarters on a rolling basis. Question would be, do you see any sort of broadening on the horizon, sort of it's clear that the main customer remains very strong, but how are the other two doing maybe today? And how do you see that developing into the second half of the year? Hichem M'Saad: No, I think, Nigel, I think we see -- we're working right now with all customers in advanced node for both of the 2-nanometer node and 1.4 nanometer node. And then we see that gate-all-around is a technology that's going to be adopted by more customers. And we feel very confident that that's going to be the case. Of course, okay, some customers have better yield or performance than the other ones. But we think that gate-all-around is going to be really a broad technology node and for a variety of customers. Operator: Next question is from Didier Scemama, Bank of America. Didier Scemama: Just a follow-up actually to the previous question on the boarding of the customer base in advanced logic. Obviously, your largest customer is doing terrific. On the two smaller ones, is that supposed like expected to strengthen in Q2? Or is that more of an H2 driver? And I've got a follow-up. Paul Verhagen: Yes, let me take that question. I think what I can say on that. I don't want to be specific on Q1 and Q2 or Q3 when it comes out both down to customers. But what I can say is at least that based on current visibility that all those customers are expected to grow year-on-year. And of course, there is a significant difference with regard to the size of the various customer and the absolute amount of growth as a result of that. But we expect all three for the logic part, all three of them to grow year-on-year. Didier Scemama: Okay. And for my follow-up for Q2, would you expect China to be up sequentially or flat? Or how should we think about that relative to your overall sequential growth guidance? Paul Verhagen: What we've said indeed is that for next quarter, we expect EUR 980 million plus or minus 5%. We also said that for H1, we see an accelerated demand for China coming in for various reasons I just discussed in the call before. So I think it's reasonable to assume that also Q2, China will be pretty good. Didier Scemama: Should we expect, therefore, the gross margins in Q2 to remain at sort of above the long-term guidance given the mix? Paul Verhagen: You know that I'm not going to specifically guide on a quarterly basis for the margin, but the margin will be good that I can say China is accretive, as you know. But also, I think what is also not unimportant. I also want to highlight that is that the other product mix that we've seen actually in the last few quarters has been very strong. So that also helps. And last, but not least, the structural cost improvements that we're working on, which will every year add a little bit also play a role. But having said that, yes, higher share of China typically is accretive, yes. Operator: Next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: I have a question for 2027, actually. So if we look at your '26 growth drivers. I mean if I look at the different drivers, I don't see much layers increase in '26 as a growth driver, because I think it's mostly capacity, [indiscernible] was already adding a lot of capacity last year. So from a year-over-year point of view, you don't have a lot of incremental layers. Now if you look at '27, it looks like you will have a lot of layers opportunity that you laid out at your Capital Markets Day. So I was wondering, if we think about this dynamic of layers increasing, is it fair to say that '27, if we assume the same capacity increase that '26, that should be a higher growth than '26? You have more drivers on top of the capacity in '27 than you had in '26. Is that the right way to look at it, if you understand my question? Hichem M'Saad: Yes. I think we understand your question. I think it really depends both on the end demand from that point of view. But we -- as the technology node transition from 2-nanometer to 1.4 nanometer, we see the adoption of 1.4 nanometer starting in the second half of 2026. And we see the 1.4 nanometer bias to increase in 2027 for final production in the first half of 2028. And with the 1.4 nanometer node, there's more ALD and more Epi. And as we mentioned, these ALD layers are mainly in the front end of line for performance level. And that's where we have many more -- a lot of strength, and that's where we're going to have many more ALD layers. So we are really very happy with -- we'll be very happy with the 1.4 nanometer transition, because of the higher ALD intensity. Also, we have more ALD layers in molybdenum. I think that as we mentioned in our last press release that we are very happy to be in production, high-volume production at the 2-nanometer node with our moly ALD. And with the transition to the 1.4 nanometer, we also have won some process of record layer in molybdenum. So overall, the transition to 1.4 will be very accretive to us, and we'll be very excited with that transition in the future. Francois-Xavier Bouvignies: And the memory side -- Yes, go ahead. Paul Verhagen: I think you said it, but I want to make it a little bit more explicit that just for you guys to be clear that already in this year with the pilot for 1.4, which is also, of course, increased layers, as you know, we already see a very, very meaningful contribution of 1.4. So that's not only in '27, but it's already starting in '26. Francois-Xavier Bouvignies: Good to know. And maybe you didn't address maybe the memory layers and maybe for '27. And then you mentioned market share higher in A14. So can you maybe explain a bit the higher share here? I mean, is it because just your time is getting higher than the others? Or you just have more layers than you expected? -- more than before? Hichem M'Saad: Yes. So the 1.4 nanometer, what's the difference between the 1.4 nanometer node and the 2-nanometer node. So they are both gate-all-around. But for the 2-nanometer node, that's an architecture change. So customers didn't want to be very aggressive in putting many functional layers because of the change in architecture. But once we move to 1.4, they have added many goodies, which we call performance layers. And those layers are really mainly ALD layers. And they are all in the front end of line, where we play significant. That's where our strength is. Yes. So definitely, we see more ALD layers in 1.4 nanometer. Second thing, as you shrink, those -- and with the gate-all-around structure, as you shrink those layers become much more difficult because of the 3D nature and the shrinking. And with that, the since every layer becomes much more difficult, that also slows down the process. And with that, you need more equipment from that point of view. The other thing we see is that also there is a higher epitaxy intensity going forward. So overall, that's very positive. Operator: Next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. To come back on the Q2 guidance, which is about EUR 100 million of what the consensus was expecting. So I'm just trying to understand what led to this acceleration, if it's more advanced logic or memory. And if you could comment also on the lead time at the moment if they are increasing? And is there a difference between the two different segments? And I have a follow-up. Hichem M'Saad: I think that the acceleration is happening in mainly in the 3-nanometer to 7-nanometer node. in addition to the gate-all-around node. So what we have seen lately is that Agentic AI is becoming more important. And with that, that tends to favor using the CPU instead of GPU. So the 3 to 7-nanometer node is really mainly driven with CPU. And we see much more demand from our customer in that node, and that's really happening super fast at this point in time. We also see strength in memory continuing. So overall, the market is really strong in the leading edge, both logic and mainly logic and foundry, that's really the highest part of the market. Second is really also DRAM is also increasing. Stephane Houri: And about the lead time, sorry. Hichem M'Saad: So regarding the lead time, I mean, lead time has increased because of the supply chain constraints right now. I mean there's a huge demand everywhere. So yes, the supply chain has increased, and that's really the customer specific. We've been able to expect that to happen. That's why we can -- we have increased our capacity to from like EUR 700 million per quarter in Q4 of last year to about EUR 1 billion per quarter this year. And it's going to continue to increase in the second half, as we have mentioned. Stephane Houri: Okay. And that's exactly my follow-up. I mean you're going to be at least EUR 1 billion per quarter in the second half run rate and there's probably some additional growth coming in 2027, given what you said and what we see in the market. So at what point will you fill all your plants and notably the Singapore plant and that you will have to again increase the capacity? Hichem M'Saad: I think our manufacturing capacity is -- can take care of our business. I think we have expensive manufacturing capacity in Singapore and Korea. So we're ready for much higher volume. I think what's limiting -- if there's any limit is really the supply chain that's limiting the capacity than anything else. But I think that we'll be able to manage that in the second half. So that's why we're confident of increased volume in the second half of 2026. Operator: Next question is from Sandeep Deshpande, JPMorgan. Sandeep Deshpande: Maybe you can give a comment on what has changed in your customer behavior versus what you were -- you had seen from your customers the last time you reported in -- reported your results. Has something substantially changed given your very strong guidance into the second quarter? And then I have a small follow-up. Hichem M'Saad: I think that the market is really strong all over. Has there been any significant change? I think the change that we have seen is really on the PC part where for -- on the CPU part where it used to be that AI is mostly driven by GPU, but we see that CPU part becoming more important than before. And we see that's the strength we see in the 3-nanometer to 7-nanometer node, which was not there before. So that's really the strength we see. It's mainly the CPU-driven part for artificial intelligence. Sandeep Deshpande: And then when you look at the WFE, I mean you had said 15% to 20% at last results. I mean, given your guidance for the second quarter and your indication on the second half of the year, it looks like you're going to grow well over 20%. So what is your perception on WFE at this point for this year? And I mean, despite your lower exposure in the memory market, you are growing incredibly well. And so is this mainly associated with the second half ramp also with 1.4 nanometer where your content is growing, your number of layers you have is growing very substantially. So this is essentially share gain in the WFE market? Paul Verhagen: Yes. Let me take that, Sandeep. So yes, to give you a very short answer, that's part of it, absolutely. But also basically, I think as Hichem already said, but maybe in different words, we're firing in all cylinders. Every segment of the market is growing significantly. I mean, advanced logic/foundry, mature logic/foundry, memory of which, in particular, DRAM, we see a high growth and even power with analog for power-related AI data center applications from a low base, but as a percentage, still high growth. And of course, also pilots 1.4, that I started with, adds a decent amount for this year already, yes. Operator: Next question is from Adithya Metuku, HSBC. Adithya Metuku: Firstly, I wanted to talk about 2027. I know you gave these targets of EUR 3.9 billion to EUR 4.6 billion, top line at a EUR 125 billion WFE number. So call it EUR 4.2 billion midpoint. If you look at WFE numbers now, people are depending on whose numbers you take 40% to 50% higher than that EUR 125 billion in 2027. So my first question is, should we assume that, that EUR 4.2 billion could be maybe 40% to 50% higher from 2027? What are the nuances we need to keep in mind when we think about where WFE is going and how your revenues might go in 2027, you've clearly talked about outperforming WFE, I presume that will continue. So just any pointers you can give around how we should think about these targets you gave at the CMD 40% higher, 50% higher? And I've got a follow-up. Paul Verhagen: Yes. Let me take that. So indeed, I think we said EUR 3.8 billion to EUR 4.7 billion at CMD, where we assumed EUR 120 billion WFE, which today's view is indeed significantly higher, but there's one big difference. The assumption that we took at that time, which was somewhere September last year on the composition of the mix is very different from what we see today. So we had by far the largest part of the total WFE basically logic/foundry, while now the relative share of memory is significantly larger than what we assumed. And although we grow a lot in memory, but still our relative share of memory in our business is still relatively small. So that's why you will not see the full benefit of that increased WFE dripping down into our numbers. Having said that, based on everything we see today, we believe that '27 will be a strong year. But adding 40% to 50%, I would not recommend you to do that. That would give some distorted figure. At the same time, it's a very wide range, EUR 3.8 billion to EUR 4.7 billion is almost EUR 1 billion range. So also even within that range, there's still a lot of room to maneuver. And more than that, at this stage, I don't like to say. Adithya Metuku: Got it. Okay. We'll leave 40% or 50% of side go with 30% then. And just quick follow-up. On the MATCH Act, can you give us some color on how you're thinking about any potential impact for you guys as you think about your China revenues? Yes. Any color you can give around how you might be affected? I know it's hard to quantify numbers, but any qualitative color would be great. Paul Verhagen: Yes. So the MATCH Act indeed is being discussed as we speak. If it will happen or not is uncertain. It might or it might not. In what shape it will happen is also uncertain because at the end of the day, it is important, literally the point and the commerce are very important there, especially in relation to how to interpret what is exactly restricted. We're in, of course, discussion with relevant authorities, as you can imagine. So it's very hard, and I would love I could give you some more color to give decent color at this stage. Obviously, if something like that were to happen, it's not a positive, that might be clear. But how much, I'm really not in a position yet. It's too -- it's literally too unclear and too uncertain still on what might happen. So I don't like to speculate on that. Operator: Next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first one is regarding your very strong short-term momentum. You mentioned that just now it's all driven by the CPU-related incremental demand. I just want to confirm that, have you seen any customer from both logic and memory perspective, pulling forward? Are you asking you to accelerate the shipment of equipment because end market demand is coming so dramatic in the short term. So therefore, it's like a pull forward from 2027 at all? Hichem M'Saad: I think every customer wants the tools now instead of tomorrow. I think the demand is really high. And for us, it's which customer we ship to first than the other one. So I think like we mentioned, we are fully booked for this year. From that point of view, we have a strong demand in all parts of our business, really every part of our business very high demand. And yes, we see customers the demand is even increasing. So I mean, we -- our book is full. So we have to do our best to be able to satisfy the demand that we're getting right now. Tammy Qiu: Okay. And the second one is, last quarter, we discussed that the 1.4 nanometer is mainly driven by one customer versus others have been having discussion with you, but still a bit distant away from pilot production, et cetera. I'm just wondering where is the status of those remaining customers? Are they getting closer to make the decision on pilot production? Or are they still further down the line? Hichem M'Saad: So as we mentioned that we see -- we are working with all customers to the 1.4 second generation with a 1.4 nanometer technology node. And we see that business strengthening in all the customers from that point of view. Some of them is at a marginal increase and the other have a higher increase, but I'm not here to speculate on which customer, which, but we see at least a marginal strength in some and a significant strength in other customer. But saying this, I think more likely, like I mentioned that 1.4 nanometer would be more than one customer. Tammy Qiu: Just to confirm, have you seen any progress during the quarter, i.e., all of them have moved forward or just one of them moved forward comparing to last quarter. Hichem M'Saad: Can you repeat your question, please? Tammy Qiu: So basically, the time line of the 1.4 nanometer, last quarter, you mentioned that one is active preparing for pilot production, remaining two is still in discussion firmly at this stage. I'm just wondering, this is three months after, have you actually seen other customers together with a leading customer or moved forward in the time line for 1.4 nanometer? Or just one customer has moved forward instead of all three of them? Hichem M'Saad: I'm going to repeat my answer, where we see 1.4 nanometer strengthening broadly with some strengthening marginally in some customers and significant increase in other customers. Operator: Next question is from Jakob Bluestone, BNP Paribas. Jakob Bluestone: I want to come back to Adi's question around your ability to sort of take part in growth in memory. And my question is, when do you anticipate the transition to 4F² and FinFET for the cell periphery in DRAM to impact your revenues? So is this something that would impact in '27? Is it '28? Or do you think it's further out? Paul Verhagen: I can take that question. Yes, I think because I think last time already, we mentioned that the pace of adoption customer by customer is different. There might be even a customer that might completely skip it. We don't know yet, but that's to be seen. And I think for us, based on what we see and think we know today, I think you should take into account '28 as the first year where we start to see a positive contribution related to 4F². [ Might ] -- maybe a little bit earlier, I don't know yet, but I would -- I mean time line is still a little bit uncertain and very different from customer to customer. So I think the best color I can give right now is in '28. Hichem M'Saad: So add to what Paul has mentioned here, we see a strength in memory in 2026 and also increasing for us in 2027 and beyond. The biggest increase for us will happen really in the move into 4F², where we have more ALD layers and more also Epi intensity. But also we've seen some customers put in FinFET in their node in their road map. And with that, we're working with them and we might -- and since we have been very prominent in our FinFET technology in logic. So that we see some customers really pulling in that technology node. And with that, we probably will get some more layers as customer put in their FinFET technology node. So the biggest increase would be '28 and beyond, but also we see some increase in 2027. Jakob Bluestone: Understood. If I can just ask a quick follow-up as well. You mentioned a few times the sort of pickup in 3 to 7-nanometer transition, and I don't know if you can give any color on whether that's your largest customer or kind of more broad-based? Hichem M'Saad: Which transition, are you talking about, sorry? Jakob Bluestone: 3 to 7? Hichem M'Saad: Yes, I think it's really broad based. That's really broad-based. It's not only one customer, it's very broad-based. Operator: Next question is from Ruben Devos, Kepler Cheuvreux. Ruben Devos: I just had one on Epi in HBM. I believe you talked about significant Epi engagements with another HBM customer and expect good news this year. So of course, curious whether two months on has anything firmed up on that additional qualification? And would that be, let's say, fully incremental to your memory plan in '26? Hichem M'Saad: Okay. So to answer your question, yes, we talked about that, and we are engaging with our customer on epitaxy. There's really nothing else to say right now, but we'll let you know if there's any news from that point of view. It's really working with customers on a couple of customers on epitaxy. And hopefully, we can share some good news with you in the next investor call meeting. Ruben Devos: Okay. And then second one, really to just get a feel of maybe the aftermarket sales, right? I mean you've had a stretch of very good performance in the last few quarters, again, 23% up the past quarter. Outcome-based is about 25% of the mix. So it looks like, I mean, the target you said at the Investor Day of 12% CAGR is becoming more of a floor. I was curious whether you could talk a bit about, yes, the extended visibility you might have now in aftermarket sales. And I can imagine a margin uplift to realize if you manage to make a transition more towards outcome-based. But also besides that, are you able to sort of have the customer pay more per tool for the servicing packaging in general? Hichem M'Saad: I think that for service market, okay? What I mentioned, the service market is really good as you transition in a newer technology node because of process complexity. It's very important to -- a customer need more support from us and for the more advanced node. And with the advanced node also, we see a transition to much tighter specification on wafer-to-wafer and also repeatability on chamber-to-chamber matching and also on system-to-system matching. And with that, we have to provide a new solution to customers to improve the uptime and the availability. So we are very really -- we think that the surface business is going to increase in the future as you transition to tighter and tighter technology node. And we see that happening in the area of automation, in the area of robotics, in the area of optics. And those are really the solution that we're providing our customers. So the growth is going to be good in that part of the market. You mentioned that 12% growth. To be honest with you, right now, every part of the market is growing a lot. This year, the market is growing over 20%. I mean, latest, you see Gartner talking about 25%. So everything is great. It's really just spending my time, okay, to make sure that we can execute on getting customers the tools in time and make sure that the availability and the execution is top notch. Operator: Next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: First one for Hichem, please. Just looking at the technology execution and just trying to scale maybe how much upside there is to that? If I look at your long-term revenue guide, the high low range is kind of 20%, 25% between the low and the high. Obviously, part of that is the strength of the cycle. Maybe part of that is also conversion of existing evaluations and layer wins. Maybe could you just share how much of that is upside potential from layer wins? So if you could just think about that in the context of your go-forward revenues? And then I had a follow-up. Hichem M'Saad: You said the percentage I didn't hear you well on the percentage, which percentage are you talking about, please? Timm Schulze-Melander: Yes. So if we look at your EUR 3.8 billion to EUR 4.7 billion revenue guide, so part of that is going to be cyclical. Part of that's going to be your execution in terms of technology wins. I'm just trying to think is that half off, but some kind of scale of that? Hichem M'Saad: If you look into the business and where we are, one thing I can tell you, I'm really very excited about our technology road map. I think that things are going in our direction. If you look into logic, you see more and more layers coming in with 2-nanometer and also with 1.4 nanometer. ALD intensity is increasing and [indiscernible] intensity is increasing, and we're winning share in that part of the market. If you look into memory, memory is moving more and more into FinFET more and more in 4F², which needs more Epi, needs more ALD. So we're going to have more layers, and we feel very confident about it. And if you look into logic -- if you look into power, wafer, analog, we are really -- if you look at the power, wafer, analog, the power part of the market is the only part of the power, wafer, analog that's strong right now. And that's being driven by data centers, power devices for data center. If the wafer part and the analog part goes up, it's going to be even accretive to us. So the service business is also good. In the service business, we're going more and more by automation. And we really -- we're getting some -- getting into even robotics and that customer and leading customer, we're even selling them, okay, some robots to improve the system availability and so on. If you look into advanced packaging, that's an area that we mentioned that we have entered last year. It's a new area for us. I can tell you that we have so many -- believe me, so many interactions with customers. And we have to prioritize which one to do and some customers tell them, guys, maybe we don't have -- we cannot really help you there. And -- but with the customers that we're really engaging right now, I can see that they really like to work with us as a company because we're looking into the advanced packaging through a different option. We're looking into that as, okay, what can we do to disrupt the technology? What can we do to provide a solution that's better than what it is right now. How can we -- a solution to make sure that, okay, we reduce the -- to reduce the thermal mass on advanced packages coming with a new material that improve thermal conductivity. We're working with customers to make sure that we can seal the devices much better. So there is no moisture going in the packages. We're working with customers to actually improve the speed of connection between one chip to the other one, working with them on some innovative photonic layers. So I'm sure that with all of this really, we feel very confident where things are are going to go from that point of view. And depending where the market is going to go, I'm very confident that we're going to at least match the WFE market growth or actually have a higher growth than WFE. It's a great time for ASM right now. And we -- I see customers really want to work with us. I think our execution has improved. I think our competitiveness is getting even better than before. And what I can tell you, it's the best time to be in semiconductor. Timm Schulze-Melander: A very impressive runway. Maybe just a quick follow-up for Paul, just some housekeeping, actually. You talked about rising utilization rates, but actually Q1 aftermarket sales were down sequentially. And on your guide, I think last quarter, your guidance range was plus minus 4%. This time, you've widened that range to plus minus 5%, which doesn't maybe sit that well with a sort of improving visibility. Just wondered if there's any color you could share in terms of what you're seeing. Paul Verhagen: Yes. So actually, the range is, I think, already referred to is related to supply chain challenges. So far, we've been able to manage it. But at the same time, we have to be on top of it to make sure that we get what we need to deliver what we need as per our customer preferred COD customer request date. So that's a little bit where the range comes from, Timm. It's not so much demand. It's more what can we deliver on time given the supply chain constraints that so far manageable again. But yes, we have to be on top of it and nothing can go wrong here. Timm Schulze-Melander: So that's what was in the aftermarket in Q1 and maybe there's some catch-up in Q2? Paul Verhagen: I don't know if there's catch-up in Q2. I mean I think had a very good Q1. I think we delivered more or less what we wanted to deliver, and we will target to do the same in Q2. Victor Bareño: Thank you, Timm. We still have a number of participants in the queue, but we are running out of time. So let's take one final question. Operator, can we have the last caller? Operator: Final question is from Javier Correonero, Morningstar Equity Research. Javier Correonero Borderia: In the interest of time, I will just ask one. So your Axus acquisition 3 months ago, it is small, but I think there is a lot to unpack there when you think longer term. So Axus is specialized in silicon carbide processing. So I was wondering if you could explain a little bit more what's the rationale of the acquisition here? Is it like more silicon carbide content as we move into the 800-volt data center? Or is it TSMC potentially adopting silicon carbide interposers in the next few years or both? And of course, it is very early and small acquisitions, but do you have an estimate of what service of addressable market this acquisition could open once it is properly integrated with ASM [indiscernible]? Hichem M'Saad: Okay. So thank you very much for the question. So yes, we have acquired this company called Axus Technology, which is -- we're very excited about the acquisition in CMP. They have a very great CMP technology and very innovative, to be honest with you. And the -- like we mentioned, we have acquired this for the advanced packaging market because advanced packaging is -- needs more and more CMP layer, many, many, many more CMP layer. So there is room for another player. Also, it's a technology that's all about interfaces. And I think that we have some -- we do have some knowledge in interface engineering so that we will be able to really put our print there. It also CMP helps us with our new materials that we're developing for advanced packaging that I just talked about a few minutes ago because I mean, you deposit the film, but also you need to CMP. So we want to understand what's the interaction about the material that we're depositing the new material that we're depositing and the CMP, because CMP also has a slurry. There's a new -- with a slurry that means we're talking about new chemicals and so on and so forth. So it would help us also develop better materials in ALD, but at the same time, also good polymerization, which is extremely important for advanced packaging. So that's really why we made that acquisition. And then we're working right now on developing the product for advanced packaging, and it's going to increase our SAM absolutely. It is going to increase our SAM and we're in the process of doing R&D and so on in this part of the market. Victor Bareño: Okay. That concludes the Q&A. Thank you all for attending our call today, also on behalf of Hichem and Paul. Thank you. Goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Operator: Good morning, and welcome to the Boston Scientific First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead. Lauren Tengler: Thank you, Bailey, and thanks to everyone for joining us. With me today are Mike Mahoney, Chairman and Chief Executive Officer; Jon Monson, Executive Vice President and Chief Financial Officer. During the Q&A session, Mike and John will be joined by our Chief Medical Officer, Dr. Ken Stein. We issued a press release earlier this morning announcing our Q1 2026 results, which included reconciliations of the non-GAAP measures used in this release. The release as well as reconciliations of non-GAAP measures used in today's call can be found on the Investor Relations section of the website. Please note that on the call, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes certain acquisitions and divestitures for which there is less than a full period of comparable net sales. Guidance excludes the previously announced agreement to acquire Penumbra, which is expected to close in 2026, subject to customary closing conditions. For more information, please refer to the Q1 financial and operating highlights deck, which may be found in the Investor Relations section of our website. On this call, all references to sales and revenue are organic and relative growth is compared to the same quarter in prior year, unless otherwise specified. This call contains forward-looking statements regarding, among other things, our financial performance, business plans and product performance and development. These statements are based on our current beliefs using information available to us as of today's date. and are not intended to be guarantees of future events or performance. If our underlying assumptions turn out to be incorrect or certain risks or uncertainties materialize, actual results could vary materially from those projected by the forward-looking statements. Factors that may cause such differences are discussed in our periodic reports and other filings with the SEC, including the Risk Factors section of our most recent annual report on Form 10-K. Boston Scientific disclaims any intention or obligation to update these forward-looking statements, except as required by law. In addition, this call does not constitute an offer to sell or the solicitation of any offer to buy any securities or solicitation of any vote or approval in connection with the proposed transaction with Penumbra. Boston Scientific has filed with the SEC a registration statement on Form S-4 containing a proxy statement of Penumbra and a prospectus of Boston Scientific that contains important information about Penumbra, Boston Scientific, the proposed transaction and related matters. At this point, I'll turn it over to Mike. Michael Mahoney: Thanks, Lauren, and thank you to everyone for joining us today. The first quarter represented a solid quarter for Boston Scientific with total company organic sales growth of 9.4% versus our guidance range of 8.5% to 10%. First quarter adjusted EPS of $0.80 grew 6%, achieving the high end of our guidance range of $0.78 to $0.80 and Q1 adjusted operating margin was 28%. Turning to our outlook. 2026 has proven to be a more challenging year than we initially expected. And to that end, we are guiding to organic growth of 5% to 7% for the second quarter and reducing our full year guidance to 6.5% to 8%, reflecting unanticipated headwinds and changing business patterns that I'll cover in more detail on this call. Our second quarter '26 adjusted EPS guide is $0.82 to $0.84, and we now expect our full year adjusted EPS to be $3.34 to $3.41, representing growth of 9% to 11%. I and our company does not take this change lightly. As in Boston Scientific take great pride in ourselves and consistently executing against the guidance and goals we provide. Importantly, we remain convicted in the future of Boston Scientific. We have a strong global team committed to high performance, and we continue to invest in key new and existing markets which we believe will enable us to deliver on our fundamental goal of driving differentiated performance over the LRP. I'll now provide some additional highlights of our first quarter, along with some comments on our outlook. Regionally and on an operational basis, the U.S. grew 11% with double-digit growth in five out of our eight business units. Europe, Middle East, Africa grew 1% operationally. Growth in the quarter was driven by FARAPULSE, coronary and vascular therapies in Neuromod, offset by the discontinuation of ACURATE and POLARx, largely impacting the EMEA region. Last year, we did announce our intent to discontinue POLARx Cryo catheter but have accelerated that timing given some recent safety events and the availability of nonthermal ablation technologies. As we look forward, we expect that growth in demand will continue to improve with the annualization of the ACURATE discontinuation in 2Q and ongoing momentum from FARAPULSE, WATCHMAN and other key products. Asia Pac delivered a strong quarter and grew 12% operationally, led by double-digit growth in a number of countries, including Japan and China. First quarter growth in Japan was led by our differentiated PFA ecosystem with OPAL, FARAVIEW and FARAPULSE as well as strong reception of WATCHMAN FLX Pro. But within the quarter, we're pleased to have received PMDA approval for the de novo indication of our coronary drug-coated balled agent DCB can expanding the patient population eligible for this differentiated technology. China also delivered strong growth, inclusive of the impact of the VBP led by our Interventional Cardiology portfolio, particularly our imaging technologies. We are making consistent progress against our FARAPULSE goals in a competitive market in China and received NMPA approval within the quarter for OPAL HDx Mapping system with FARAVIEW, further building out the PFA platform. Now some commentary on our business units. I'll start with urology. Urology did have a difficult quarter in Q1 as sales grew 1% organically, falling short of our expectations, driven primarily by the stone management and single neuromodulation businesses. Within Stone, underperformance was driven by China VBP as well as some key product gaps in the core Stone portfolio. We expect the recent FDA approval for insurers to unlock value within our StoneSmart ecosystem alongside LithoVue Elite and we also anticipate launching additional new products in 2026 and including insulin [ urethoscope ] later this year. Our sacral neuromodulation business continue to see impact on commercial model disruption. And importantly, within first quarter, we have hired and trained a significant number of new sales and clinical reps we do anticipate improvement in the Pelvic Health franchise throughout the year as S&M commercial organization capability stabilized, along with the addition of Ecoin Tibial Nerve stem with the closure of Valencia Technologies in April. We expect our Urology performance to improve throughout the year. However, we now expect our full year uro growth to be low to mid-single digits in 2026. Endoscopy sales grew 7% organically, with strong results across the business and better-than-anticipated performance from AXIOS as we're able to ramp supply and available product sizes. As we look to the second quarter, we will continue to see some impact from AXIOS while also navigating other transient supply chain disruptions in endoscopy. Importantly, we expect improvement in the second half of 2026 as the underlying business is very strong, and we anticipate resolution of the supply chain issues. Neuromodulation had a strong quarter with organic sales growing 15% with our comprehensive portfolio growing low double digits, excluding the impact of the outlook. Our paint business grew mid-teens, inclusive of a strong quarter of outlook, as I mentioned, which closed at the end of January. Intercept continues to perform well, supported by compelling 5-year data demonstrating the long-term efficacy and cost effectiveness of this treatment for clinic low back pain. In DBS, we saw continued adoption of the Cartesia X leads an accelerating uptake of the Illumina 3D programming algorithm in the U.S. Cardiovascular delivered organic sales growth of 11%. Within those businesses, we'll start with ICVT, Interventional Cardiology Vascular Therapies grew organic sales of 8%. This business grew 9% organically, driven by double-digit growth in our ordinary therapies franchise, with strength in agent and ongoing momentum with our Imaging portfolio. And earlier this year, we completed enrollment in our fracture trial, studying the size of the IVL device in coronary arteries with data to be presented at EuroPCR on May 19 and we continue to expect launch in the U.S. in the first half of '27. Our Vascular Therapies business had a nice quarter, growing 7% organically driven by double-digit growth in TCAR and [ Bartina ] and this is offset by a large VBP impact on their arterial business in China, which is expected to annualize in second quarter. We expanded our launch with our seismic peripheral IVL for above the knee with positive physician feedback on performance. We expect to ramp our manufacturing supply chain over the course of the year and continue to anticipate launching our below-the-knee indication in the second half. In first quarter, positive data from [ Hipyto ] was presented at [ ACC ] evaluating eco clot anticoagulation versus anticoagulation alone, providing new clinical evidence that can help physicians make more informed decor patients with acute pulmonary embolism. We remain excited about the opportunity to ask the number team and highly differentiated portfolio of Boston Scientific. We anticipate that the deal will close in the second half of '26, subject to the Penumbra shareholder vote on May 6 and the receipt of the remaining regulatory clearances. Our Interventional Oncology business had a nice quarter with organic sales growing 15% driven by our broad offering of cancer therapy technologies. Within the quarter, we received FDA clearance of any day dosing and niche limited market release. Any day dosing is enabled by the TheraSphere 360 management platform line positions to schedule treatments on more days of the week and offering more streamlined ordering and operational efficiencies. Cardiac Rhythm Management sales declined 3% in the quarter. Our low-voltage business saw some impact in the quarter as we navigated our physician advisory and came up against a tough comp within our first quarter of 2025 change-outs. On the high-voltage side, we saw some impact from the Middle East complex impacting this particular business. In first quarter, our diagnostics franchise grew low double digits with continued strength across our broad diagnostic portfolio. And overall, we anticipate that our CRM business to return to growth in the second quarter and expect low single-digit growth in the year, supported by our full launch of the [ Lutroin ] second quarter within the U.S. Turning to WATCHMAN. WATCH grew 19% organically in the first quarter, which was below our expectations, with pressure on volumes in the U.S. as the quarter progressed, we believe this reflects the annualization of the initial concomitant adoption tailwind and a softening in stand-alone WATCHMAN cases driven by hospital capacity related procedure prioritization and evolving reimbursement dynamics. Importantly, we remain focused on expanding physician and patient education within the approximately 5 million patient indicated population today. And we expect data from CHAMPION to support a return to 20% market growth over the LRP. In late March, CHAMPION data was presented as a late breaker ACC with the trial achieving all primary and secondary endpoints, reinforcing the safety and efficacy of WATCHMAN and highlighting the high burden of clinically relevant bleeding on oral anticoagulation. As the next step, in addition to submitting for a label update, we are working with medical societies to support consideration of changes to LAAC guidelines using the totality of WATCHMAN clinical evidence ahead of any update to the National Coverage Determination. We also have additional data being presented at [ HRS ] this weekend, a champion post-ablation analysis which will provide further insights on this patient population. Across the globe, the results from CHAMPION provide important evidence to support the expansion of the patient population eligible for WATCHMAN over time in large markets including the U.S., Japan, China and Europe. For full year '26, we now expect global WATCHMAN growth to be mid-teens, with low to mid-teens in the U.S. In the U.S., while concomitant demand continues to strengthen, we anticipate overall WATCHMAN growth to decelerate with tougher comps and expect stand-alone WATCHMAN procedures to improve over the course of the year as it takes time for the totality of this clinical evidence to translate into [indiscernible] practice. We remain very confident in the long-term outlook of the business, supported by great clinical evidence, market development and new product innovation. Turning to EP. Organic sales grew 22%, 18% in the U.S. and 30% internationally. International growth was driven by our innovative portfolio, including our expanded OPAL Mapping footprint in catheter utilization with strong double-digit PFA growth in Europe in a highly competitive environment supported by the launch of FARAPOINT. U.S. growth was driven by continued expansion of the OPAL, strong catheter utilization in FARAPOINT, our PFA focal point catheter, which is performing ahead of our expectations and has moved into full launch. Looking ahead, we now expect our global EP business to grow approximately 10% in 2026. And within the U.S., we are updating our full year expected growth to be in the mid-single-digit range. with continued strength internationally at plus 20%, inclusive of full year impact of approximately $35 million from the discontinuation of POLARx. This outlook is the change from previous commentary but we feel is prudent and reflects ongoing competitive dynamics, offset by strength in our evolving FARAPULSE PFA catheter and mapping portfolio. We are highly confident in our ability to maintain our leadership position in PFA both in the U.S. and internationally through investment in commercial capabilities, ongoing clinical evidence, our expanding mapping footprint, in an impressive next-generation catheter watches included our FARAWAVE Ultra in the first half of '27. And this weekend, AVANT GUARD cited FARAPULSE new patient population of drug-naive persistent a patients will be presented as a late breaker at HRS. Additionally, we will see data from our first-in-human ELEVATE PFA study setting FANAFLEX, which is our large global map in a blade catheter for more complex arrhythmias. We anticipate initiating in our IDE later this year and continue to expect launching FANAFLEX in the U.S. in 2028. We've in closing, I'd like to share again my confidence in our team and the future of Boston Scientific. While this year has proven to be more challenging than we anticipated, we believe Boston Scientific is competing in the right markets, with a WAMGR growth of approximately 8%, we continue to be uniquely positioned to drive differentiated top line growth. We will continue to do this through strategic internal innovation, clinical evidence, external DC and M&A investments, along with our disciplined approach to expanding operating margins. All of which have resulted in our track record of delivering double-digit adjusted EPS growth. I'm very grateful to our talented team of global employees who work every day to advance financial life and I'm confident in the sustainability of our top-tier financial performance. With that, I'll hand it over to Jon. Jonathan Monson: Thanks, Mike. First quarter consolidated revenue of $5.203 billion represents 11.6% reported growth versus first quarter 2025 and includes a 220 basis point tailwind from foreign exchange, which was in line with our expectations. Excluding this $104 million foreign exchange tailwind, operational revenue growth was 9.4% in the quarter. Organic revenue growth was also 9.4%, in line with our first quarter guidance range of 8.5% to 10%. Q1 2026 adjusted earnings per share of $0.80 grew 6% versus 2025, achieving the high end of our guidance range of $0.78 to $0.80. And results include an approximate $0.01 headwind from FX. Adjusted gross margin for the first quarter was 70.5%, which represents a 100 basis point decline versus the first quarter of 2025 and primarily driven by tariffs as well as inventory charges related to the discontinuation of our POLARx Cryoablation system. We now expect full year 2026 adjusted gross margin to be slightly below full year 2025, largely driven by lower-than-expected product mix benefit and incremental investments in our global supply chain and quality systems. First quarter adjusted operating margin was [ 28.8% ]. We continue to expect full year 2026 adjusted operating margin expansion of 50 to 75 basis points, driven by OpEx leverage as we drive strong spend controls and continue to implement efficiency initiatives and optimize our organizational structure. On a GAAP basis, first quarter operating margin was 21.2%. Moving to below the line. First quarter adjusted interest and other expenses totaled $112 million, in line with expectations. And our adjusted tax rate for the first quarter was 11.7% and which was in line with expectations and includes a benefit from stock compensation accounting. Fully diluted weighted average shares outstanding ended at 1.495 billion shares in the first quarter. And free cash flow for the first quarter was $170 million with $348 million from operating activities, less $177 million in net capital expenditures. We now expect full year 2026 free cash flow to be approximately $4 billion. As of March 31, 2026, we had cash on hand of $1.453 billion and our gross debt leverage ratio was 1.8x. Our top capital allocation priority remains strategic tuck-in M&A, followed by share repurchase. In alignment with this strategy, we recently closed the acquisition of [ Valencia ] Technologies, which complements our Urology business, and we expect our announced acquisition of Penumbra to close in the second half of 2026. In addition, as previously disclosed, our Board of Directors recently approved an additional $4 billion under our existing share repurchase program bringing our total authorization to $5 billion. While we have been restricted from being in the market, we intend to repurchase approximately $2 billion of our shares during the second quarter subject to market conditions and applicable securities loss. I'll now walk through guidance for Q2 and full year 2026. We now expect full year 2026 reported revenue growth to be in a range of 7.0% and to 8.5% versus 2025, excluding an approximate 50 basis point tailwind from foreign exchange based on current rates, we expect full year 2026 operational and organic growth to be in the range of 6.5% to 8.0%. We expect second quarter 2026 reported revenue growth to be in a range of 5.5% to 7.5% versus second quarter 2025 excluding an approximate 50 basis point tailwind from foreign exchange based on current rates, we expect second quarter 2026 operational and organic growth to be in a range of 5.0% to 7.0%. We continue to expect full year 2026 adjusted be line expense to be approximately $440 million and under current legislation, including enacted laws and issued guidance we now expect a full year 2026 adjusted tax rate of approximately 12.0%. We now expect full year 2026 adjusted earnings per share to be in a range of $3.34 and to $3.41, representing growth of 9% to 11% versus 2025, including an approximate $0.04 headwind from foreign exchange. We expect second quarter adjusted earnings per share to be in the range of $0.82 to $0.84. In closing, we recognize that revising our guidance is a significant decision and not one that we made lightly. We believe our updated guidance appropriately reflects the unanticipated headwinds, and we remain highly focused on executing our full year 2026 guidance of 6.5% to 8% organic revenue growth 50 to 75 basis points of adjusted operating margin expansion and 9% to 11% adjusted earnings per share growth. For more information, please check our Investor Relations website for Q1 2026 and financial and operational highlights, which outlines more details on first quarter results and 2026 guidance. And with that, I'll turn it back to Lauren, who will moderate the Q&A. Lauren Tengler: Thanks, Jon. Bailey, let's open it up for questions for the next 35 minutes or so. In order for us to take as many questions as possible, please let yourselves to one question. Bailey, please go ahead. Operator: [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Robert Marcus: Great I wanted to ask whether Mike or Jon, came 3 months ago on the fourth quarter call and provided the guidance. And I think a lot of people were expecting a lowering today based on some of the third-party data we've seen, so it's not that surprising. But I guess the question is really what happened during first quarter that really prompted it? When did you realize it? And what gives you the confidence given there's going to be some deceleration throughout the year that the LRP is still valid and that growth can improve in 2027 here. Michael Mahoney: Yes. Thanks, Robbie. I would say first quarter, we're overall, we're pleased with that result. The 9.4% growth and on track for our margin and EPS. Essentially, what we saw, there's really three main contributors to the takedown of the guy, which is not in my happiest moment and very disappointed in that. as we're a company that consistently delivers on our commitments. So this is a guide down that we quite think are not proud of, but we think it's the right thing to do. And that reflects the current environment and the loss of the proper prudent guided deal. But we can talk about the future of the company, but speak and then at the time the takedown particularly, it's really focused on the three areas: primarily EP, WATCHMAN and Urology. And if we start with WATCHMAN, we saw a very, very excellent growth engine on 2025, we grew almost 30%. We saw a really strong consistent volume trends in January. So there is no signal to any WATCHMAN weakness until we leased out the early days of kind of early to mid-February, we started to see declining WATCHMAN volume for the first time. And as we did the analysis on that, we can talk more about it. Essentially, it is a strong increase in concomitant growth in a deceleration of stand-alone WATCHMAN. And we go through all those details now. That's the first primary one. So we see a declining WATCHMAN trend growth throughout fourth quarter, the first quarter and therefore, in our guide, we think it's prudent to assume that in that guidance range. We can talk more about the rationale and reasons for that. The second primary reason is EP, our EP business had a very nice first quarter. we are absolutely confident that we will remain the PFA market leaders in the U.S. and globally in '26. And we have a very rich cadence, just an R&D review last week with the team. The launch of the next 2.5 years, that's very impressive. But that being the case, even though the market is strong, we didn't lose a bit more share than we anticipated. So again, what we did in this guide anticipated greater share erosion than we're particularly seeing and still allows us to be the market share leader in PFA, but we're guiding globally to approximate 10% [ NEP ]. And the last reason making up is urology, which I mentioned that difficult first quarter, [ Neuro Mine ] had a real tough year a couple of years ago, and that business is growing double digit. I'm not saying euro is going to return to double digit right away. But right now, we're suffering in our core stone business and in the [indiscernible] neuromodulation area. We have very active execution plans in place to fix sickle neuromodulation, which we believe will be better as the years that the quarters go on. And then, of course, now we have some key product launches that will impact that business and help it quite in 2027. But it's essentially going to be a below market year in urology. So those are the three contributors overall to the guide down. Never all done very objectively. We think it's prudent. And we think it's the best guide to provide, to give shareholders confidence and to set up the business the right way. As you look forward in the LRP, we're not going to make a comment on the LRP top line growth at this point. We feel that will be under some slight pressure clearly given the 2026 guide. We will update that more in the future when we go through our strat plan process. We are comfortable with the 150 basis points of margin improvement in LRP, and we're comfortable with delivering double-digit EPS growth of the LRP. And I guess, lastly, that the long answer I'm giving you is we compete in a 8% WAMGR market. We almost always grow at or above this WAMGR. And this setup for '26 would show us at market at the high end of our guide or below that WAMGR. This is not Boston Scientific, it's not what we do. And in '27, we have a number of key product launches, we'll have far easier comps than we do this year. And we're very bullish about '27 and '28, we can detail that more. But start from long response, hopefully, that helped a little bit. Operator: Our next question will come from Joanne Wuensch with Citi. Joanne Wuensch: Mike, I think you just summarized what everybody needed to hear in that answer. Can you sort of walk us through a little bit how you're thinking about the quarters over the next couple of quarters, particularly for EP, WATCHMAN and Uro I'm sort of trying to think about the gist of Robbie's question. How do we get from first quarter to fourth quarter and then the jumping off point into 2027. And I just want to make sure those are somewhat set up appropriately. Michael Mahoney: I'll take a shot and Jon you can clean up the part of the math here. So we think second quarter is our toughest quarter of the year. We had a nice first quarter. Second quarter, we had very challenging dollar sequential quarterly growth comps on a dollar basis, in particular with EP and WATCHMAN. So that's our toughest quarter there. And so we also think with some of the impacts of some transient trends and [ EP and endo ] and some other areas that will be fixed for the second half of the year. So we think second quarter is our toughest quarter, that's the guide, [ 5% to 7% ] and the full year guide, as you know, is 6.5% to 8%. Jon, do you want to touch on any sequence and more. Jonathan Monson: Yes. Thanks, Joanne. So maybe stepping through WATCHMAN and EP. So you heard Mike mentioned in his prepared remarks, we expect global EP to grow mid-teens for the year. So that would imply Joanne low double-digit growth for the rest of the year for our global WATCHMAN business. So that's how you should think of WATCHMAN for the rest of the year. Global EP at 10% for the year implies mid- to high single-digit growth for the rest of the year. So if you then think of the rest of the business, as mid-single-digit growth. That's about where we landed in the first quarter. Expect to see some acceleration there within urology, CRM to pick up. So that's how you should expect the phasing as we go through the year, say, relatively consistent, slight uptick in the second half. They call it roughly 7%. And as we see Uro and CRM drive better growth as we move through the year. Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Larry Biegelsen: I guess on EP, just maybe a little bit more color on the market and share assumptions, how they've changed. Where is the share pressure coming from Mike? And on U.S. EP, sales have been flattish for the past 3 or 4 quarters. Should we expect relatively flat U.S. EP sales for the rest of the year? And what does that mean for 2027, I think people are trying to understand when you can get back to market growth in EP? Michael Mahoney: Yes, I think John gave some of those numbers for the year, we expect Global to be approximately 10%. In the U.S. particularly, we expect mid-single-digit growth for the U.S. business, which implies a flat 2Q to 4Q. That's a low single digit -- in international about 20%. So call it flat to low single-digit U.S. mid-single digit for the year. . And then -- so that's the story there. What's different about it from our previous commentary where we've said we were a growth at market. We're disciplined and we're disappointed to bring that guide level down, but we think it's appropriate. The aim to be and we have high comments that will maintain PFA leadership in the U.S. internationally, globally in '26 and throughout the LRP. And we are very excited about the product launches that we have, in particular, the three big ones coming up, '27 are third generation FARAPULSE, differentiate [indiscernible] platform, and we think a very disruptive FANAFLEX platform all in the next 2.5 years. But today, we are seeing increased competition. There's three other large players in the marketplace. We've made commentary before Medtronic continues to be a solid competitor, J&J is enhancing their footprint in PFA and Abbott is early stages of launch in the U.S. In Europe, we really proud of our European performance for all three of those companies are performing, and we continue to grow that a 20%-plus clip where we quite frankly have a quite advanced mapping capability and platform and doing very well there. So we do expect a little bit more share [ erosion ] than we've anticipated in the past in previous guidance, but we think this is the appropriate guide to do and allows us to continue that PFA market leadership while we're bringing that platform forward. And importantly, our makers, which we've made a massive investment over the past 2.5 years continue to get stronger and stronger every quarter. We continue to install more and more OPAL mapping platforms. Our maps get more sophisticated, and we continue to add new catheters to the mix along with FARAPOINT, which we recently launched. So we'll continue to grow the Matthew platform, continue to invest in that commercial capabilities, you'll see more direct investments in WATCHMAN in particular. So we'll invest both commercially and marketing, and they're both our WATCHMAN and our EP businesses. But we're confident we'll maintain PFA leadership, but we are going to see a bit more share than we anticipated earlier in the year. Operator: Our next question comes from Rick Wise with Stifel. Frederick Wise: I was hoping you would might talk a little bit more about the WATCHMAN outlook in more detail. I mean, CHAMPION data, obviously, was excellent. But perhaps there was more controversy about the data, the reaction to the data than I expect didn't perhaps than you expected. How are you addressing some of the concerns that you were left how are you changing the narrative about the risk of WATCHMAN? And maybe how specifically are you going to tackle the growth rate factors that impacted this quarter? Michael Mahoney: Yes, I'll ask Ken to add comments here. First on some of the factors. And first of all, we're very proud that we essentially created this category, leading clinical science created a concomitant category. And this category grew 30% last year, and we expected mid-teens growth this year. And we're seeing the evolving practice patterns as this product continues to evolve with great clinical data and changing practice patterns. So with that extraordinary growth in [ AF ] ablations and WATCHMAN, we are seeing some practice pattern changes that I highlighted that we saw really become more acute in February. We're seeing terrific concomitant demand. Bottom line, we are seeing pressure in kind of the stand-alone WATCHMAN implant business, which historically has not been a challenge for us. Those challenges with a stand-alone WATCHMAN area a bit multifactorial. You've seen a bit more switch to the EP from the interventional cardiologist as the venture cardiologist is less exposed to the concomitant procedure. They've got more structural art procedures to do and there's been the reimbursement cut in that area. But you're seeing strengthening amongst the EP physician group. So those are some of the trends that have really moved it just recently more towards -- a bit more towards EP, a bit more towards concomitant and less than stand-alone. And that's also -- our customers are also adapting to operational workflow. They're adding new labs. They're moving to ASCs because they've experienced multiyear growth of, call it, 25% in WATCHMAN, multiyear growth of 20%, 25% in ablation. So there's significant demand and pull plus the approval of new structure of our procedures. So the hospitals themselves are investing in labs, particularly concomitant AFib are money winners for hospitals. So they're making the investments, but they're also moving through their own workflow challenges. You've seen a consistent backlog for WATCHMAN, which I guess which is good and high demand for super AFib. So on what are we doing to make it better? We're doing a lot right now to make it better. The most impactful thing quickly is commercial investments. We are putting more focused commercial investments directly at the WATCHMAN business. Today, we have a lot of strength because the same territory rep in many cases, is serving both the EP customer EP and WATCHMAN, where we're going to augment them with additional focus on WATCHMAN specifically, and put a little more emphasis and focus directly at that interventional cardiology call point. And we'll be making quite a bit of marketing investments to really highlight the outstanding data that we believe the first study of its kind that met its primary endpoints and champion that can get detail. So commercial investments, Medicare investments, marketing investments, position activation investments to all to leverage CHAMPION. It's also important to note that Ken can talk and sorry, too much coffee. Today, 25% of all watchword procedures are oncoming. We do expect that to grow to 50% over the LRP. So that view hasn't changed. What we've seen is an offset a bit in standalone watchman procedures. Ken, do you want to talk more about that? Ken Stein: Yes. I don't know too much to add,. Again, I think the first thing I'd say it, in terms of question, it just takes time to disseminate data and to educate physicians on the results of things like CHAMPION. And of course, we were not able to get out and pre-promote ahead of the data release and ahead of the publication in the New [ Northera ] Journal of Medicine. Having said that, the trial at all of its primary safety and efficacy and end points and all of the important secondary endpoints, we do still anticipate that we will get a big labeling, updated guidelines and eventually an updated national coverage determination. It just takes time for that to play through. I think the other thing just to reiterate what Mike said, in parallel with that, we see the opportunity to continue to improve some of the operational efficiencies that are required just to unlock more operational capacity for handling these procedures. We see hospitals building out more dedicated to these procedures, the move of simple relations to ASCs will further unlock capacity. And again, just a high level [ like stay ], not only see a very large opportunity for continued growth in concomitant procedures. And maybe the one statistic I'd add to what Mike said, just to remind everyone, roughly 50% of ablation for AFib in the U.S. today are done in patients who are at high risk for stroke, [ Chagas ] score of 3 or higher and who are potentially candidates for the common procedure. Operator: Our next question comes from David Roman with Goldman Sachs. David Roman: I wanted maybe just to toggle over to the other 70-plus percent of the business that's non-EP in WATCHMAN. And I appreciate some of the dynamics that you walked through on the call. But maybe you could unpack a little bit for us in more detail kind of where you see that cohort of the business going, some of the specific product launches that you expect to see in '26 and '27 in that we should be watching? And the extent to which that piece of the business can get back towards kind of an 8% growth level where it was, call it, before the accurate discontinuation. Michael Mahoney: Sure. Thank you for the question, David. The area that's not getting the spotlight on it is ICVT, [indiscernible] Cardiology Vascular Therapies Group, which again has a one-timer accurate, which will anniversary thankfully in May, which will help that business. But that business is extra very high level, driving the double-digit growth in China despite VBP, a very global business. Agent is continuing in our imaging businesses, in particular, continue to exceed our internal expectations, which is terrific. And we're excited about the seismic launch that it's really been in the small scale thus far within our [ Copal ] Vascular business has been very well received by physicians and that fracture trial will read out at PCR in a month or so. And we expect to have that coronary approval as we enter 2027. And we're focused right now on building up the manufacturing supply chain to enable a meaningful launch for seismic for both coronary and below the knee and above the knee applications in '27. So they also have a number of kind of singles than doubles key product launches in vascular to continue to widen that portfolio out. The Interventional Oncology business grew mid-teens and I talked about a key workflow launch that they additionally had along with some second M&A that they're executing on. And hopefully, the shareholder vote goes positive for us with Penumbra on May 7. And we're really excited about that team, which is extremely talented and brings a really differentiated portfolio and gaps that we have across Boston Scientific in that category. So particularly in combination, stand-alone, but [indiscernible] that business did extremely well in the future, ideally with Penumbra, that's a very unique, powerful growth driver for the company over this LRP period. And I think a lot of the discussion will still be on WATCHMAN EP, but much more will pivot to that area given the launches and momentum in that area. Lastly, I would just try to summarize the MedSurg overall. Some EP, we've had some challenges right now in Urology. We're not happy with the 1% growth in the quarter. We have clear line of sight to how we're going to adjust and to fix that as that business will improve in 2026, but not the level that we expect our business to perform at. And we'd be highly disappointed if we were closer to market growth for that business in 2027. Endoscopes doing well. They've got a nice set of product launches coming over the next 9 months. And our erode business is growing double digit. So overall, MedSurg is a tick lighter in '26 that we anticipate. And we see that business will improve as the kind of quarters move on and '26 we'll have a stronger '27. Operator: Our next question comes from Travis Steed with Bank of America. Travis Steed: On the WAMGR, I think there was a slight change to the WAMGR from 9% to 8%. I wanted to touch on that. And on the LRP, was the message more were not achieving at 10%? Or was it more we'll kind of wait and see how it all plays out because I'm thinking about '27, you sound pretty bullish on '27, no headwinds, you have product launches. So just kind of curious... Michael Mahoney: On the WAMGR drivers, I think we're pretty clear at the Investor Day that we were 8% moving to 9% over the LRP. So that's -- I believe that was the message in the WAMGR. So we call it 8% moving towards 9% because we're in the right high-growth markets. So I think that's consistent. LRP, I mentioned it in the previous commentary. So what we are confident in giving you now is we're confident in our ability to continue to have the discipline to improve margins up about 150 basis points. We're confident in our ability to execute double-digit EPS over this LRP period. And on the sales side, obviously, with the guide at 6.5% to 8%, that puts pressure on the 10% plus guide we gave in LRP. So that -- I would say that's likely an upside scenario at this point. But it's premature for us to give you an LRP organic revenue growth number at this point and let us work through our strategic plan. and launch cadence, and we'll update that over the course of this year. Operator: Our next question comes from Josh Jennings with TD COWEN. Joshua Jennings: I just wanted to touch on the EPS guidance revision. I think some may be concerned that with the deceleration in high-margin products, U.S. EP franchise and WATCHMAN franchise, there may be incremental pressure there. But any more details you can share just on any offsets or the impact on profitability with the revised outlook for U.S. EP and WATCHMAN? Michael Mahoney: Yes. Thanks, Josh. So we will see less mix benefit than what we expected at the start of the year. So that's why we expect our gross margins now will be slightly lower than 2025. But what we're doing is really driving leverage across OpEx. So most immediately, we put in much more restrictive spend controls across the company. So what we're doing is we're reducing spend that isn't correlated to revenue generation or that isn't pointed at our key product pipeline programs that we have in place. We also had more broadly a number of or structure optimization initiatives in place that includes scaling our centralized shared services. We've got a number of AI automation, other initiatives already in place, Josh, that drive cost efficiency and productivity. And so we're looking at those for what we can accelerate. And then as it relates to the R&D portfolio, we're looking across each of the businesses there, ensuring that we're appropriately fueling and appropriately focusing on the most impactful programs. But then those that are less impactful, we're looking at how we can trim those. So we've got a number of initiatives, Josh, focused on how do we drive our OpEx toward the most impactful areas of the business and revenue generation and then everything else we're squeezing. Operator: Our next question comes from Marie Thibault with BTIG. Marie Thibault: I wanted to double back to urology. I think you mentioned you have some active execution plans in place for improving the sacral neuromodulation business. Can you just dive a little deeper into that? I know that, that's something you've been focused on for a couple of quarters. Maybe it's going a little bit slower than hoped. So if you can just give us an update on how that is going. Michael Mahoney: Yes, it's definitely gone slower than we anticipated. We had we just had too much commercial turnover is the bottom line over the course -- take it over the course of the last 6 to 9 months. And we certainly learned from that. We made adjustments to it. But at this point in time, we feel we have the right leadership structure in place from region managers on out that are so key to driving a business like this. We have quite a bit of turnover at the manager level, clinical rep level and territory level. And so a lot of learnings from that as we look forward to Penumbra. But I would say on the management side, that's all been filled up on the region of managers, which is important. And we've had nearly 100 people that have been hired in our various stages of training, both clinical reps and territory reps to really strengthen that commercial team, which is really needed not only for case coverage, but also to drive the appropriate patient activation events and pull-through to appropriate procedures, which is really part of the business and an area that [ Axonics ] did really well. So we're also leveraging a lot of the internal capabilities from WATCHMAN and others. But it's primarily been a commercial disruption issue that has lingered farther than we wanted it to. But at this point in time, we have made the appropriate hires, the appropriate training, the appropriate investment, and we are confident that we'll see an improvement in that business as the quarters progress. Operator: Our next question comes from Vijay Kumar with Evercore. Vijay Kumar: Mike, I just -- I had one question on this buyback. Generally, when we see companies announced large deals like Penumbra, $15 billion deal, we generally see buybacks being suspended. So my question is, is the $2 billion buyback in 2Q, is that signaling anything on the deal in -- Jon, I think you mentioned you had $1.5 billion of cash on hand. How you're funding this $2 billion buyback? Are you going to raise any debt? Why now? Jonathan Monson: Thanks, Vijay. So we intend to -- the $2 billion, we've got $1.5 billion on the balance sheet now, and we project our cash over the second quarter. We'll fund that through cash on hand. We've been restricted from trading. We will be restricted at least through the Penumbra shareholder vote on May 6. But as soon as we're not restricted, we intend to repurchase are $2 billion worth of shares, as I've mentioned. And why now is we look at the stock price. We look forward at the outlook for the company that we have, our confidence in the company, the pipeline. We think that's a great use of our capital. Operator: Our next question comes from Matthew O'Brien with Piper Sandler. Matthew O'Brien: I was hoping to talk a little bit about the Penumbra. I know the vote is coming up here in just a few weeks. Just curious about Boston's comfort level in adding additional cash to that transaction, if required, just given the pullback in your stock and the degradation in the value of the overall transaction. If that were to be the case, would you still be committed to the deal at the current -- or the previous valuation if a higher cash component is required? Michael Mahoney: Yes, I would just comment on the numbers in general. We've gotten to know their leadership team extremely well. We really focused on the way spirit of the momentum of the ICT team we have and the potential addition to Penumbra, we think is a very, very powerful business in combination over time. We've said many, many times that we essentially plan to run a number of as a business unit consistent how we do Boston Scientific, global presidents, keeping their strong commercial team intact, keep an R&D pipeline. So we have a very solid way to maintain and enhance the Penumbra momentum post closing. We had the shareholder vote on May 7. We're hopeful and confident that, that will be approved as planned. Operator: Our last question will come from Matt Taylor with Jefferies. Matthew Taylor: I just wanted to follow up on some of the comments that you made about the outlook for WATCHMAN and PFA. Was wondering for more clarity on WATCHMAN in terms of how stand-alone was growing. You mentioned it was decelerating. Was it actually declining in Q1? And what's the outlook for stand-alone this year and next? Michael Mahoney: Yes. I'm not going to call out the specific number for outlook on concomitant specific and what stand-alone a little bit. I think we gave a pretty good guide as to what we see as the appropriate guidance for the full year on WATCHMAN, which is global mid-teens U.S. low to mid-single digits in cash. Low to mid teens, sorry. Low to mid-teens for U.S. WATCHMAN and international plus 20%, mid-teens growth globally. So that's our outlook, which is obviously a slower outlook than what we saw in first quarter, but it reflects what I mentioned earlier on a overcoming some very, very strong comps, overcoming some efficiency issues that we see that I highlighted before. and more of a trend towards stronger and stronger concomitant and a less strong weakening trend in stand-alone. Now over time, we aim to try to improve that based on the CHAMPION results, investments we're making. But as I mentioned, you have concomitant strengthening stand-alone currently less strong. Lauren Tengler: Thank you for joining us today. We appreciate your interest in Boston Scientific. If we were unable to get to your question or you have any follow-ups, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Bailey will give you all the pertinent details for the replay. Thank you, everyone. Operator: Please note, a recording will be available in 1 hour by dialing either 1 (877) 344-7529 or 1 (412) 317-0088 using the replay code 45-39-327 until April 29, 2026 at 11:59 p.m. Eastern Time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Unknown Attendee: [Presentation] Ladies and gentlemen, please put your hands together for our CEO, Graham Lee. Graham Lee: Good morning, everyone. Thank you. It has been a strong year, 25 actually, 25 years of meaningful innovation, 25 years in which we have continued to earn and deepen the trust of what is now more than 26 million active clients. And that's because of you. So thank you. Thank you to you, all of our people, wherever you are. It is your energy, the energy that you bring and the ownership that you take and your client obsession, which brings these results, which makes our business strong. Thank you. We want to make a meaningful difference. We want to make a real difference in people's lives, and our role is enabling them to grow. All of the building that we do, the new solutions we bring to market, they unlock growth. They provide economic opportunity, and they are based on the same founding principles that we've always had. Our fundamentals, our fundamentals are clear, and they speak to how we treat our clients, to how we design for them. And of course, our CEO culture, 25 years in, our culture is still our most important competitive advantage. The CEO is how we show up, how we make decisions. And it starts with the client. It starts with putting the client first, obsessing for the client and understanding what they need. Our results come by putting our clients first. We put our clients first over and above short-term profits because we know that creating shareholder value comes from creating client value, not the other way around. It does feel a little bit like every year, as we're giving our annual results presentation, something significant has just happened in the world, whether it is a war, a special operation, a global pandemic. There always seems to be some curveball that has just about happened. And the truth is it will always be volatile. Our environment is always going to be uncertain around us, and there will be ambiguity out there in the world. But here at Capitec, we are not uncertain. Together, what we need to work on together, that's not ambiguous. We are a resilient company, and we are resilient by design. We build resilience each and every year, and we make our choices deliberately to build that resilience. We built our business model to be able to take on all shocks and still serve our clients well despite, and that continues from here. It feeds into how we look at our financial statements and the prudency with which we provide. It speaks to how we train our people to how we develop our systems because this environment will always be our reality. South Africa started the year really strongly from a global macro perspective. And of course, that -- we've seen that upended by the recent supply chain shocks, the recent oil price shocks. But that resilience that I talked about, that resilience that we built, that will bring us through and will bring us through strongly. Consumers and businesses in South Africa will remain under pressure, and we will support them through that pressure. Clients vote with their feet. And we've continued to grow our client base despite it already being so large. So 26 million clients now across all of our ecosystem, including Avafin. Even more pleasing than that total growth number is our growth in active app clients. That's up 19%. That's 15 million clients who are active on our app in the last 30 days. 15 million adults actually. And if you look at Stats SA, which shows that adults have a population around 45 million. That means roughly 1/3, more than 1 in 3 of all adult South Africans used our app to bank in the last 30 days. Fully banked clients continue to grow and business and entrepreneurs, that's up 71%. The big number, quite literally, the big number in the middle, is 23%. Our headline earnings is up 23% to ZAR 16.8 billion. And this comes from balanced growth. As you can see, that growth is balanced in both the net interest income as well as the noninterest income, what's coming from transactions and Connect and VAS and insurance. If you look at the balance between those, the proportions, just over 2/3 of all of our income from operations comes from the noninterest side. And the strong growth in credit is at good quality. The 8.1% credit loss ratio did tick up slightly, but that was within our plan, within our expectations, and it's a result of our book growth and the change in mix, particularly in business bank, in lending more on the scored unsecured side. It's been really pleasing growth across all of Capitec Connect, insurance and value-added services. All of this was done investing in the future with discipline, with cost control discipline, which meant that our operational expenditure grew by only 12%. And that positive jaws that, that creates means that our ROE grew to 31%. If you look at the detail of the income statement a little bit further, we're not going to go through everything. I just want to point out 3 things. So firstly, under the credit impairment charge, overall, the company had went up 21%, but that was lifted quite a lot by Avafin. And the reason for that is the nature of the business, the nature of the business model, which is short-term unsecured lending in which those loss ratios are expected planned for and priced for. If you exclude them, then the credit impairment charge for South Africa grew by 13%. Then there are 2 big numbers, total net insurance income up by 38% and the taxation up by 34%. This was the first full year in which we sold all of our new policies on our own license. And previously, in previous financial years, there was -- in the sale, there was a net out of the tax and the income. And so what you really see here is a grossing up of both, which is why both of those percentages are so high. And then overall 23% growth. That's true both with and without Avafin, if you see it across the board. The sources of our income are increasingly diversified. The Personal Bank remains our biggest contributor, both in terms of earnings contribution, but also because that's the launch pad. That is the launch pad from which all of our other businesses fly. Value-added services, connect and insurance, that now makes up more than 50%. But I want to make the really important point again, that only comes from the data, the brand, the distribution and the clients of the personal bank. And then business banking and Avafin are still early in their growth journeys. They are our big opportunities for the future. I'm going to let that big number sink in with you all for a second. Our business model is one that scales because of our clients. That scale creates economies, and we share those economies back with our clients. In the last financial year, the total amount that was given back to our clients is ZAR 1 billion in client savings. Now that breaks down like this. In the fees we dropped from last year to this year, we gave back ZAR 228 million in reduced fees. That left ZAR 228 million real rands in all of our real clients' real pockets. In addition to that, we reduced the prices of our card machines. We made our discount rates, not just transparent but lowered them significantly. And that gave back ZAR 213 million. We dropped our international card fees, and we charged 0 Forex margin. That contributed another ZAR 61 million. Then if you look to Connect, Capitec Connect and the data that it brings is one of the most valuable rewards our clients can receive. We lowered our Connect prices from the last financial year, and that saved our clients ZAR 330 million. And in the rewards that we gave, it summed to ZAR 108 million. Then finally, our 1% giveback on our credit card. That saved ZAR 107 million. All of that totals to really quite a significant number. The Personal Bank is our heart. And that also has diversified income. The earnings in Personal Bank are well diversified between both the net interest income and the net transaction income. Overall, both are up just over -- well, one's up 16%, one's up 17%. And you can see the steady growth over the course of the last couple of years, both great growth on top of a really, really large base. One of the reasons -- one of the drivers of that was the continued acceleration in digital payments, digital transactions. As you can see on the left-hand side, cash volumes are only up 10%, and a driver of that was cash send. I'll come back to that in a second, whereas card and digital volumes are up much more significantly. Digital alone, the lighter blue is up 25% in the year. There is steeper growth in send cash. And one of the reasons for that is that it's increasingly being used as a mechanism for the clients to do a cardless cash withdrawal. If you unpack the noncash payments, looking at the noncash payments in total, digital payments now make up more than half. The strongest growth you see in the pay wallets, that is Apple Pay. Google Pay, Samsung Pay. But you also see really pleasing growth in every single mechanism by which clients make payments. E-commerce is up 32% international and cross-border, our clients transacting outside of South Africa. That's up 29%. The lowest is in traditional plastic. Connectivity has become a utility. It's a basic human need really to live, to learn, to connect, obviously, but also to bank in this world. And with Capitec Connect, we've designed a mobile solution, a mobile connectivity solution that stays true to the Capitec fundamentals. If you look at our active 3 client base, that's up by 67% in the last year. That's incredible growth. And the usage is up even more. It's up 3x, 40.5 petabytes. I know in the past, we've played with how many songs and movies and that is, but I mean, the number bytes itself is just astounding. What's also really great to see is our voice calls are also going up significantly. And the reason why that's so important is that's an indicator. It's an indication of the client using that SIM as their primary SIM. We've also just launched right now free Connect to Connect calling. So one Connect client will be able to call another to Connect client completely free of charge. And then -- you guys can feel free to jump in with the applause at any time. It works for me. And then just looking at part of that giveback, the 78 million of free data, that was 3 petabytes that we gave to our clients. We couldn't just stop at bringing connectivity. You have to put the device itself into our clients' hands. And so we've launched Connect devices. A highly curated, carefully chosen set of devices, which we know have the highest quality, but which come entry, mid and upper end. And we've made that incredibly simple to use, incredibly simple to order and a great experience to receive. It's available in cash, but it's also available on credit, and our credit pricing is transparent. There isn't a deposit. There isn't that first payment due after 7 days, just very simple, easy to understand, ZAR 181 a month at its lowest. And we back that up, not just with the free calling. So all of your voice Capitec to Capitec is free, but also 5 gigabytes free a month. So pretty much it's your first year of connectivity taken care of with no network locking. Credit is at the heart of our business, and we manage the associated costs and risks prudently. If you look at our credit loss ratio, it's where we want it to be. We have good growth off a large base at good quality. The book growth this year was 9.4% in Personal Bank credit, but the real growth story is in the credit card, which was 32%. If you look at the disbursements, 27% to ZAR 68.7 billion. That's driven both by applications from new clients as well as annuity disbursements. And I think there's a really important point to make. What's most important is that this is driven by the quality of the data that we have. It's driven by the sophistication of our models. And we are saying yes to more clients, not because we've lowered the bar, but because we know them better. We've continued to diversify where clients get that credits and who those clients are. Purpose lending has been a real success in the last couple of years, and FY '26 was no exception. It's up 94%. And this speaks to the great experience clients get when they are able to fund what they need in the place that they are buying their car, or buying the materials that they're going to use to build their home and increasingly their education. More and more of it has done self-service on the app by making it more available, more accessible, that in itself leads to growth. And because of those -- because of those interventions, innovations and more, we also continue to increase the number of clients who choose to bank with us, including with credit. Clients earning more than ZAR 50,000 who took credit with us. That value went up by more than 50%. That robust growth came on the back of robust credit card growth. So new limit sales and annuity disbursements are pretty evenly matched from a percentage growth perspective. And we've created access to more than 120 -- sorry, 110,000 new credit clients through changing how we look at them, how we look at repayments and how we look at their exposure, which means that we've been able to bring in young adults, 147,000 of them to help them grow their credit score and grow credit disciplines. And that credit card really is the best one for travel. Why? Because there are no international fees, there are no Forex margins or commissions, and that means that when you travel with our card, it's the best rates in the market. We, of course, give the normal package of other rewards that goes along with that, but that 1% cash back on top of the 0 international fees or margin means that our clients save a great deal when they use our card to travel rather than another. We encourage and support savings. We have a deliberate pricing strategy to encourage clients to be more deliberate, more purposeful in how they save. And that deliberation has led to a growth in our market share. So we now have 13% market share across all fixed and notice deposits. And that really came because of our strategy, how we communicate it, how we communicate with our clients, why it's better for them to be -- to plan for their savings, to be deliberate in their savings. And that means that all of our savings plans grew by ZAR 15 billion. Mostly that was supported by the really strong growth in the notice deposit. This is new to us. And what you can see is really strong growth across both, but particularly in that 7-day product. When we first discussed launching this, there was a lot of questions about the value of that product. And clearly, clients are voting with their feet again. This creates a real ability for clients without a long-term commitment to save more, earn more interest and make their money safer. And because of that, we paid ZAR 858 million interest to our clients just for notice accounts in the year. Insurance is deeply embedded in our business now. This is the first full year in which all of our sales have been on our own licenses, and it has been an incredible effort, an incredible journey by probably most of the people in this auditorium right now. Lives assured in funeral cover is the best way, I think, to look at the organic growth. So we've had a great year, and we need to unpack that, but there are a lot of moving parts. Lives insured, there are now 16.6 million, and that's clear and easy to understand. The total sum assured is now more than ZAR 508 billion, and all of our policies sold now. All of the new policies are on our own license. And with the transition, 43% of everything is now on our own license. The net insurance result for funeral cover grew really significantly. 58%. But as I said, there are a lot of moving parts to that. So this is one of the more complex slides in the deck, but it's really important to understand that this waterfall helps us break down all of those moving parts. So in moving from the ZAR 1.8 billion that we had in FY '25 to the ZAR 2.9 billion that we have for FY '26, you can see the left-hand side together. That 33% growth is the business being better. That is in growing our book, growing the number of clients, growing their lives assured but it's also improvement. It's also improvement in our operations, in our claims and in our collections, which makes that business more profitable. If you look more to the right-hand side, those are the moving parts that are largely in the income statement itself. That reinsurance, a very significant number. That is the description of what -- of the additional earnings we've gained in taking over control of funeral cover, the whole book of funeral cover from Sanlam. That was largely canceled out by yield curve moves later in the year. And we've been looking carefully at what the impact of the yield curve is in the years looking forward. But just in the first month, we've seen a significant reverse of that as a result of changes in the interest rates. Moving on to Life cover. This is still young for us. But already, we are over ZAR 100 billion in sum assured. And if you look at how clients choose to use that, and remember, we give our clients choice. Our clients can choose when they set up their policy, how it's going to be paid out to their beneficiaries, whether it's going to be paid out in a lump sum, whether their children's education and needs is going to be taken care of through a trust or whether it's going to create a monthly income for their family to keep taking care of their family after they're gone. And as you can see from that pie chart, a little over half is in the lump sum with the rest spread between the children's needs and the monthly income. Moving on to Business Banking. The byline says it all. We were debating as we prepared these slides that, that appeared to be a little bit wordy, but I really like it. It says what we need to. We are empowering business. That's our goal. That's our purpose. And we're doing it with a very simple combination of more affordable, better service. faster credit. And the market has responded well to that offering. If you look back 2 years to February '24, we had 174,000 active clients, and that was when we rebranded. We rebranded from Mercantile to Capitec business. And we grew on the back of that to 266,000, 1 year ago. That's when we simplified our pricing, but we didn't just simplified it. We didn't just simplify it. We made it the same as personal banking. That's a dramatic change, a very significant cost in the fees we charge, in the fees that our clients pay and it is a first and only in the market. Every business pays just the same as what a personal bank client pays, and we saw the strong growth in that. Then in December, we launched our entrepreneur account. More on that in a second. And there you can see the tick up from there so that we ended the year with 456,000 active clients split between established businesses, entrepreneurs, merchants and Forex clients. All of those savings, focusing just on Business Bank, saved ZAR 217 million for our clients, and 172,000 of those 15 million app clients are now businesses. That entrepreneur account, so excited about this because what we have here is a bridge between our Personal Bank and our Business Bank. This is the account that we've launched for sole proprietors and people with a hustle, and people who want to do something meaningful with that hustle, maybe even more than one. So that's free. We charge a client fee. We don't charge an account fee. We charge a client fee, and this is part of what you get as a client in order to be able to manage your various different hustles, clearly, well with transparency, you can open up to 4. There's no paperwork. You can run your business off it, including acquiring, and our clients have taken to it with all of the passion that we knew that they would. If you look now at lending, that ZAR 30.4 billion book, that's a decent book now. Karl Kumbier, the CEO of our Business Bank, he was very deliberate in making sure that we highlighted that. And it is worth highlighting, up 30%. The most exciting part, so we've grown our intuitive and more traditional secured book very significantly in the year. But I'm not focusing on that. I'm focusing on what's more transformational, which is the score lending book. Our scored lending book. Scored lending is automated, quick, fast. It is more accessible through our scored overdraft on app. It's available to more people. Those everyday earners through our pay-as-you-trade, small amounts taken every day and that creates more accessibility. It creates more access to funding for small businesses who use that funding to grow their businesses. If you look back, ZAR 738 million in Feb '24, and then we launched in December, the pay-as-you-trade, and you can see the kick there so that we ended the year with a book of ZAR 3.1 billion, and we're not stopping there because this is one of the ways in which we grow the country around us. Our merchant acquiring business is also growing fast. In the last year, we've grown significantly so that we now have 112,000 active merchants because we have the best machines. They're the fastest, wherever you go and you ask a vendor, they will tell you. But it's also transparent pricing, easy to understand and the lowest. Across the whole year, merchants trading on our merchant acquiring devices, our POS devices did turnover of almost ZAR 100 billion. Moving on to Avafin. I really am excited by the work being done in Avafin and the work being done by the management at Avafin. Avafin gives us a solid foothold in all of the markets in which we're established. And I know that it has significant potential to create so much value for clients in all of those markets. If you look at the last year and focus on the profit, it will appear as if we had a year that went backwards, and you shouldn't see that because what you should see is that we are investing in the future. When we acquired Avafin, one aspect which was obvious immediately was that the rates were too high, and we needed to rethink our product from the perspective of our clients. We need to increase the tenor and reduce prices and that we have done in FY '26 across all markets. Now there have been mixed results to those experiments and to those new products, but we iterate, and we improve. And we start to see real benefit coming, particularly in Latvia, where the book has doubled. And I think we've created a blueprint for what we can do in the rest of the European markets. On the back of that, growth in the actual loan disbursements was very strong, EUR 629 million just in the year, and we continue to invest in the future. An additional key challenge that we identified is the overreliance on third-party online websites and API partners in order to bring us our distribution. It's a limiting factor. It's not good for the client, and it pushes up prices. So our focus in the year ahead, in addition to continuing to change the product for our clients and reduce prices is also increased distribution and to take control of direct distribution, direct distribution through digital, which you will see, for example, in Poland with the launch of the app that's coming. It's also physical distribution. Our engagement with Latvia Post in Latvia, our branches in Mexico, our cooperation with retailers in Mexico to give us the physical presence that we need to be able to serve our clients directly and break that overreliance on API partners and websites. And all of this we do, leveraging the platform and the infrastructure that Capitec has so that when Avafin does it, we are able to execute more effectively, more efficiently and more securely. Focusing now on group OpEx. We always reinvest in our future, and we also always remain disciplined as we do so. Our total expenses increased by 12% to ZAR 20.2 billion. If you split that out, what you can see is that ZAR 7 billion of that is salaries. That's up by 12%, growing and investing in people. If you look at all of our IT expenses, including salaries, that's up by 18% with all others up by 10%. Now all of these numbers are the whole group, including Avafin. If you take Avafin out and look just at South Africa, salaries, excluding Avafin are up 11%, and that other is up by only 7%. We are proud of the positive impact on communities and people. Through the Capitec Foundation, we are working inside 33 public high schools with our whole school approach. And that whole school approach is -- those are not one-off workshops or days away. They are sustained, deliberate multiyear efforts in which we have touched and improved the lives of nearly 23,000 learners and made a meaningful difference, a meaningful lift, particularly in maths, maths results. And those maths outcomes, they come at scale. All of you, our employees show up too, 3,400 people contributed to early childhood education in more than 1,000 interventions. And then MoneyUp. Since its launch, South Africans have taken more than 3.7 million MoneyUp courses and micro lessons. Free mobile practical financial education open and available everywhere, anytime. And this means something because the better you understand the money, the better you're going to be able to manage your life and for you to be as more resilient. What makes me personally most proud is when our people grow in their careers. If you look at all of the interventions we put in place in the last couple of years, particularly learning and development and training people to not just do the job that they're doing really well, but to be able to take the next step in their careers and the step after that and the step after that, if you look at what we've done on wellness and the opportunities we create through internal mobility, what that's led to, amongst other things, is a really significant drop in our attrition rate to 8.89%. That internal mobility program, the deliberate support and reaching out for people to be able to take the next step in their careers, even if that step is completely different to what they're doing today, has led to promotions. And that means an internal hire rate of more than 2/3. We continue to invest in hiring youth, 87% of all of our external are youth, and we invest in their training with more than 1,000 learnerships, bursaries, graduate development programs. Changing gear. I would like to share with you some of the creative solutions that are enabling us to serve our clients better and to protect them better. So fraud prevention, making sure that our clients are safe, their money is safe, their data safe is our top priority, and we've made significant strides. More than 650 of our best people, people in this room work on this. That's how important it is to us. We've made significant strides and our interventions saved our clients ZAR 673 million in fraud that was stopped before it happened in the last year. Looking at what we've either just launched or is coming soon. Additional simple solutions that create value in our clients' lives available on our app. We have Capitec Pay live in third-party apps, including Checkers Sixty60. You will soon in the next day or 2 or 3, see bus tickets, Intercape bus tickets live on our app for the first time, our next value-added service, bringing the affordability, simplicity to our clients when they travel. This is the first of our travel offerings. And you can now send money through our cross-border remittances to 26 countries. We recently have spent a lot of time talking about the Smart ID process that we've launched together in partnership with the Department of Home Affairs. And this application process in our branches, I think, is an excellent example of the public and private sectors working together brilliantly for the benefit of South Africans. We are live now in 86 branches, and we will soon be in 100. The plan we're working towards is to be in over 350 by the end of the year. We've had 71,000 successful applications to date. And that is going to grow and grow as we roll out more branches and word gets out. Looking at what we're doing with respect to AI. I think there are so many important points on this one. But firstly, the most important point to lead with is this is not a future aspiration. This is real in our lives now, and it is already at work, at work for us. We've invested significantly, and we have active and valuable implementations across the whole business that create value by personalizing service for our clients, by protecting them, protecting from fraud in all manner of financial crime and protecting them in the moments that need it. and empowering them, empowering all of us. Almost every single person working at Capitec, touches a Gen AI tool every day, whether it's in the branches or the BSC through Neo and Pulse, those abilities to understand our clients in context and serve them more quickly, more thoroughly more correctly. But also directly, almost 5,000 people are using these Gen AI tools split across Claude Copilot and Microsoft 365 Copilot and ChatGPT. All of those 5,000 people on average using it 4 times a day. And we're not stopping clearly now. More and more and more will happen. And there's a very important message. What we are not trying to do here is save costs. Our strategy is not to save or reduce headcount. Our strategy is to use these tools to make all of us so much more, to be able to serve all of our clients so much more and get to that big vision in the future without scaling costs. Looking at that big vision in the future. The next 25 years starts as always, every day. And we first protect and grow what has made us strong. We protect and grow our personal bank, and we do so by making sure that we prioritize those things which make our system stable and keep our clients secure and develop, deliver beautiful client experiences to them in the moments that really matter to them. Looking slightly further on, we are acting now significant action today, significant execution today to accelerate our key businesses that will create so much of our growth in the 1- to 3-year time horizon. Slightly further into our earning future, we are delivering and growing embedded finance and our enterprise payments businesses that will then kick up our growth significantly in 3 to 5 years. And then looking even further beyond that, we have already started to build and capacitate our new businesses. What Capitec means outside of South Africa in addition to Avafin as well as a data and media business and insights and media business really that can bring new value to all of our clients, especially our business clients. And all of it, of course, is built on that foundation that we started with, our culture, who we are, the platforms that we use and our business model, our approach to seeing and serving the whole person that is our client. And so I would like to end as I began with very sincere gratitude. Thank you to all of our teams, all of our people. Again, it is through you that we've delivered these results, and I'm very privileged to be able to stand here with you to deliver them. Thank you also to our Board members for your excellent guidance, to our shareholders for your support and to our clients, thank you for continuing to trust us. Thank you. So we have covered a lot in a short space of time. And so Grant has joined me up on stage, and we will together do our very best to answer any questions that you might have. Unknown Attendee: Can you hear me? Is it on? Grant Hardy: Sorry, you can just send the mic on, yes, for Lange, please. Unknown Attendee: The first question is from Harry Botha, Bank of America. Can you unpack the net interest income growth in the second half of '26? Were there any noteworthy headwinds, particularly in interest expense? And then the second question, do you want me to do it after. Second question is what percentage of your business bank relationships are likely primary relationships with consistent transactional account activity? Grant Hardy: Okay. So the first question, we did address partly at half year. What we did at the start of this year is on our main accounts, we had a tiered balance in the prior financial year. So we used to pay interest based on the amount that was in your account. And we moved that from, let's say, a tiered approach to a flat rate, which is currently 2%. What that then allowed us to do is to pay a higher interest on the various savings pockets. So anytime access accounts, notice deposits as well as fixed. So that drop in the interest expense has effectively been caused by moving the main account balance to a flat rate. We didn't see any further acceleration of people moving balances faster in the second half of the year than the first half of the year. Graham Lee: Then answering the second question. By client number, the significant majority of small businesses have their primary relationship with us. And that is something that we expect to continue to see growing as a proportion. Grant Hardy: Yes. Just to add to that, I mean the accounts that we highlight on the business bank side, those are active clients who are using those accounts. So there will be cases where they may or may not have credit elsewhere. And obviously, we then try to bring them across to be fully banked with Capitec from a business banking perspective. Unknown Attendee: And then the next set of questions are from Charles Russell at Standard Bank. First question, can you unpack the 9% higher deposits and funding versus the 8% lower interest expense? Grant Hardy: Okay. I think that touches back to Harry's first question. So it is moving that main accounts to a flat rate. Remember that 2% is 2% more than the majority of the market is paying on many accounts, where it's actually closer to 0. And then -- yes. Graham Lee: And then, of course, we also did have a declining interest rate trend in the year. Unknown Attendee: And then do you have a sense of the size of the addressable market for the simple life product, for the life? Graham Lee: It's a really interesting question that we consider really carefully ourselves all the time. When we're talking about simplified life, what we're not trying to do particularly is swap-outs with people who've already got existing life cover elsewhere. What we're looking to do is grow a brand-new market. And exactly what that market is, it is quite hard to get your hands around exactly the size of it. But what we do know is significant. It's significantly bigger than what we have today. Unknown Attendee: A few questions from Ross Krige at Investec. First question, are there any more major fee giveback plans in the pipeline for the coming year? Grant Hardy: I think Graham highlighted in his presentation, giving back to our clients in growth work hand in hand. So we're consistently asking ourselves, are we giving back enough? We want to make sure that the value we provide for our clients gets better and better. And the scale that we have, we continue to pass that benefit back. So I don't think that is something that never stops. Graham Lee: Yes. And then just to add to that, if you don't mind. We do have some plan, but even more importantly than that, the way that we're set up both in terms of how we run the business, but also how we think is we're going to continue to look for more opportunities, and we'll be agile in those opportunities to give back. Unknown Attendee: And then please comment on how you see the personal bank credit loss ratio evolving in the coming year in the face of rising macro uncertainty. Grant Hardy: Well, look, I mean, that's a very, very tough one to answer. The unsecured lending book is really based on how the economy performs. There's a lot of, let's say, fluidity in that and what's happening globally. We, as always, try to be prudent and very agile in our approach to unsecured credit. I spend over 40% of my time, specifically on let's say, the unsecured credit side. So we keep our ears to the ground and make changes as we can. At the moment, we think the book is well placed. But obviously, as the year plays out, we'll have to adjust to that and see how that plays out. Graham Lee: Absolutely. And if you look at the drivers of that credit loss ratio this year and think through how it's going to unfold in the year ahead, one of the drivers is strong book growth. We are still growing that book strongly, and you can expect it to tick up slightly as a result of that. One of the other drivers is the change in mix to more scored and unsecured lending in the business bank side, and that empowers small businesses. So we're going to grow that book even faster, and it will tick up slowly as a result of that in addition to, I think, the context of the question, which was the global uncertainty. That will also add some upside, I think, to that number, but we definitely see it growing within our appetite and as per our plan. Unknown Attendee: And then a few questions from James Starke. First question is on the expected credit loss coverage ratio, a decline from 25.5% -- declined to 25.5% from 27%, partly reflecting the release of the forward-looking overlays. Could you outline the macroeconomic assumptions embedded in the provisioning model? And what triggers could prompt a rebuild of overlays if the conditions deteriorate? Grant Hardy: Thanks, James. So I think firstly, it's also if you look at that Stage 3 book for the personal bank, you saw the percentage of the book in Stage 3 actually decrease. So you are seeing the book looking healthier, which is driving, let's say, a portion of that release. It was quite interesting because the U.S. Iran conflict broke out on the 28th of Feb, which was in the day of our year-end. So we have built in a fourth severe scenario, where we allocated probability to. That scenario specifically had oil being over $100 for an elongated period of time. So interest rates increasing as well as inflation and devaluation in the rand. We adjust that as we -- things move. I mean even in March, we've changed the weightings again and applied more to our severe scenario as well as our low scenario. So I think that situation is fluid, and we manage it as we have more information. Unknown Attendee: And then another question from James. Business banking, loan and deposit volume growth has been impressive. How should we think about the tempo of growth in this area going forward? Grant Hardy: Look, we haven't provided guidance specifically on it. If you see it's grown at 30%, I think that should continue into the foreseeable future. We really focus on the product, making sure that it's right, making sure that the client is getting the best product and the outcome then takes care of itself. But I think we should be able to continue the run rate that you're seeing come through at the moment. Unknown Attendee: Graham, I think this 1 is for you. On international expansion and acquisitions, please, can you expand on the nature and extent of this ambition, touching on market segments, geographies and lines of business? Graham Lee: Sure. So where we are right now is still properly planning for the future. What we knew is that in order to be able to take the second, third and fourth steps we had to take the first step. And that first step is creating and filling a team of the best to focus only on developing the strategy that we've started doing. And part of the initial work is really filtering the world, filtering the world for what the opportunities are that are available to us, looking for both territories that suit us in our future strategies as well as overlay what our strengths are compared to what are the gaps in the market. We're right at the beginning of that still. But what the step we've taken forward is a dedication of really excellent people to that strategy. Unknown Attendee: And then the last question from James. This is about Avafin and its trajectory. Avafin contributed ZAR 128 million to headline earnings with a credit loss ratio of 53.2%. Please discuss the expected profitability growth path forward. Grant Hardy: So the focus with Avafin is about building the foundations of which to take the business forward. The business is profitable, but we're not focused on profitability in the short term. It's about making sure we set the business up right in the long term. Graham mentioned some of the challenges we face in terms of API partners and how we currently acquire clients. So we are trialing things in some of the countries, for example, partnerships with retailers in Mexico, opening a few branches to see how those go in Mexico. So don't think about short-term profitability. For us, it's all about the long term and making sure we set the business up for success. Unknown Attendee: Perfect. And then a few questions, one from Muneer Ahmed. Can you comment on the recently announced partnership with Wise? What benefit does the partnership bring that you didn't bring before in international payments? Graham Lee: So really, what we're looking at is serving our clients better always, including being able to bring down prices, increased speed and so forth. In the international payment space, there is a lot of drag. There's a lot of drag in both time and in cost. And so one of the solutions is multiple rails and redundancy in those rails, making sure that we can select the best rail to bring that international payment to our clients' account the fastest, and at the lowest cost. And what you can expect is to continue to see an expansion in those choices available to us so that we can make the right decision for our clients. Unknown Attendee: And then the last question from Ross Krige, Investec. Please elaborate on the data and media solutions within future growth -- in the future growth slide in terms of what that offering might look like? Graham Lee: Sure. So this is really far out. And thinking about it in the context of income is really much too early. But what we do know is this. We do know there will be significant power, significant value created when we bring together the strengths of our personal bank and our business bank. To some -- to a very large extent, we are doing that together already with a single service model with serving entrepreneurs across both. One of the other ways that we bring additional momentum to the flywheel is bringing insights to our business clients, help -- giving them the insights to enable their businesses to grow. We see ability to lower friction in their processes, saving them time and cost through properly curated data services and in helping them grow their business through getting to the right media, getting their messages out to the right audience. Unknown Attendee: And that is the last of the questions. Graham Lee: Thank you. Grant Hardy: Thank you very much. Graham Lee: Thank you. So thank you very much, everybody. We are now going to cut the external feed, and we'll move across to a town hall just with Capitec people. Thanks a lot.
Operator: Good day, and welcome to the Wabtec First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kyra Yates, Vice President of Investor Relations. Please go ahead. Kyra Yates: Thank you, operator. Good morning, everyone, and welcome to Wabtec's first quarter 2026 earnings call. With us today are President and CEO, Rafael Santana; CFO, John Olin, and Senior Vice President of Finance, John Mastalerz. Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on the Investor Relations tab. Some statements we are making are forward-looking and based on our best view of the world and our business today. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully, as you consider these metrics. I will now turn the call over to Rafael. Rafael Santana: Thanks, Kyra, and good morning, everyone. At Wabtec, we are focused on advancing mission-critical transportation and industrial technologies. We are committed to building a more efficient, high-performing global platform that drives and compounds long-term value for our customers, shareholders and for our employees. We are inspired by the progress we are making, and we remain dedicated to executing this strategy as we report out our first quarter results. With that, let's move to Slide 4. I'll start with an update on our business, my perspectives on the quarter and progress against our long-term value creation framework, and then John will cover the financials. The team delivered a strong first quarter with operational results ahead of our expectations. EPS also benefited from nonoperational benefits driven by currency fluctuations and taxes. The momentum that we had as we exited 2025 was clearly advent in our first quarter operational execution, pipeline conversion and our overall financial results. Sales were $3 billion, which was up 13%, and adjusted EPS was up 19% from the year ago quarter. Total cash flow from operations for the quarter was $199 million. Backlog remains a key strength. 12-month backlog was up 13% from the prior year, while the multiyear backlog exceeded $30 billion, up 38%. This backlog results provides strong visibility and reflects continued momentum across our businesses positioning us well as we execute against our strategy. Our financial position remains strong. We continue to execute against our capital allocation framework and expect to continue to compound long-term value for our shareholders. Shifting our focus to Slide 5. Let's talk about our 2026 end market expectations in more detail. While key metrics across our Freight markets remain mixed, we continue to be encouraged by the overall strength and resilience of our business. We are seeing solid momentum in our international markets and the pipeline of opportunities across geographies remain strong. In North America, carload traffic was up 2% in the quarter. Despite the [ static ] growth, the industry's active locomotive fleet was down slightly, while Wabtec's active fleet trended up when compared to last year's first quarter. Internationally, carloads continued to grow at a robust pace across core markets such as Kazakhstan, Latin America, Africa and India. Significant investments to expand and upgrade infrastructure are supporting our international orders pipeline. Looking at the North American railcar build, demand for new railcars is down compared to the prior year and is projected to be approximately 24,000 cars for 2026, which is down 22% from 2025. The industry forecast remained unchanged from last quarter. Finally, turning to the Transit sector. We continue to see positive underlying indicators for growth. Ridership continues to increase in key markets such as Europe and India, and we are seeing strong backlogs at car builders supported by higher levels of public investments for fleet expansions and renewals. Next, let's turn to Slide 6 and highlight several recent business wins. During the quarter, we secured a multibillion-dollar, multiyear mining order for drive systems and aftermarket parts. This win reflects our close collaboration with our customers and the strength of our differentiated technology and life cycle support offerings. In North America, we secured a $210 million multiyear modernization with [indiscernible] BTA that highlights our ability to innovate and deliver fleet scale upgrades that improve reliability, efficiency and life cycle value for our customers. We also continue to make progress on innovation as we are executing the first EVO Modernization build to support our commercial rollout of this new product. This represents an important milestone as we transition from development to commercialization and begin to scale this technology across our installed base for years to come. Moving to our Transit segment. We signed a $54 million brake and couplers order with Kawasaki for the New York City Transit, further validating the positive impact of the recent Dellner acquisition in enhancing our Transit portfolio. Overall, these successes continue to demonstrate our leadership in the markets we serve, the strength of our pipeline and the commitments of the Wabtec team to deliver meaningful results for our customers and for our business. Moving to Slide 7. Before turning it over to John, I want to briefly discuss our acquisition strategy and history. Our strategy remains disciplined, targeted and focused on driving long-term value creation. Since 2020 we have deployed over $4.5 billion of capital across many acquisitions, largely centered on bolt-on and year-end adjacent opportunities that enhance our portfolio and further strengthens Wabtec's position as a leading industrial technology company. These transactions are highly strategic. They expand our capabilities, they deepen customer relationships and they deliver strong synergy potential while meeting our financial objectives. Capital deployment has been highly focused on the quality of the assets purchased and on their investment returns for our shareholders. We have remained patient and selective in an effort to improve portfolio resilience and position us for profitable growth over time. With regard to our most recent acquisition of Inspection Technologies, Frauscher and Dellner, these businesses are off to a great start with Wabtec. While still early, they are delivering ahead of our acquisition plan. On integration of these acquisitions, we continue to execute very well. Currently, our teams are making solid progress where our integration plan is firmly in place and early synergy realization is also tracking as expected. We're already seeing early benefits and expect synergy run rate savings to scale meaningfully over the coming years. Overall, our approach to M&A is to execute, targeted high ROIC acquisitions supported by repeatable integration model aimed at delivering sustained profitable growth as we accelerate the compounding of value for all of our stakeholders. With that, I'll turn the call over to John to review the quarter, segment results and our overall financial performance. John Olin: Thanks, Rafael, and hello, everyone. Turning to Slide 8. I'll review our first quarter results in more detail. As a reminder, last quarter, we expected first half of this year to be characterized by robust revenue growth behind continued organic growth, coupled with the revenue benefit from our recent acquisitions. Furthermore, we expect our margins to expand modestly in the first half of 2026 as we lap very tough comps from the first half of 2025 and experienced significant headwinds from tariffs. As Rafael mentioned, our first quarter operational results came in slightly better than expected. This performance included the impact of an exit from a low-margin Digital project, which was fully reflected in the quarter. In addition to the better-than-expected operational results, we experienced better-than-expected nonoperational results. This favorability was generated in two areas. First, other income was significantly favorable on a year-over-year basis, which resulted primarily from the impact of currency fluctuations on our international assets and liabilities. Next, we experienced favorable timing and our effective tax rate. In the quarter, our adjusted effective tax rate was 22.2%. Our expectations for the full year remain at approximately 24.5%. Having said that, Sales for the first quarter were $2.95 billion, which reflects a 13.0% increase versus the prior year with strong contributions from both the Freight and Transit segments. Excluding the impact of currency, Q1 sales were up 10.4%. Organic growth in the quarter reflects the Digital portfolio exit. Excluding the impact, organic growth was in line with our expectations for the first quarter. For the quarter, GAAP operating income was $517 million. The increase was predominantly driven by higher sales. GAAP operating margin was down in the quarter due to a noncash purchase accounting adjustments resulting from our recent acquisitions. Adjusted operating margin for Q1 was 21.9%, up 0.2 percentage points versus prior year. This modest improvement was achieved despite the year-over-year tough comps, tariff-related headwinds and Digital portfolio exit. GAAP earnings per diluted share was $2.12, which was up 12.8% versus the year ago quarter. During the quarter, we had net pretax charges of $41 million for purchase accounting adjustments and transaction costs associated with our recent acquisitions as well as restructuring costs, which were related to our integration and portfolio optimization initiatives to further integrate and streamline Wabtec's operations. In the quarter, adjusted earnings per diluted share was $2.71, up 18.9% versus the prior year. Overall, the quarter reflects the strength of our execution, the resilience of the business and solid momentum as we move through the year. Turning to Slide 9. Let's review our product lines in more detail. First quarter consolidated sales were up 13.0%. Equipment sales were up 52.5% from last year's first quarter. This was driven by higher locomotive deliveries and increased mining sales. Our Services sales were down 17.3% due to lower modernization deliveries as we expected, which was partially offset by core Services sales growth. In Q2, we expect to post another quarter of strong Equipment growth and lower year-over-year Services revenues driven by lower modernization deliveries. Component sales were down 6.3% versus last year due to the industry's decline in the North American railcar build and due to lower revenue from our portfolio optimization efforts partially offset by increased industrial product sales. Digital Intelligence sales were up 75.7% from last year. This was driven by contributions from the Inspection Technologies and Frauscher acquisitions. In our Transit segment, Sales were up 17.8%, driven by a partial quarter of the Dellner acquisition and growth across our Products and Services businesses. Foreign currency exchange had a favorable impact on sales in the quarter of 6.8 percentage points. Moving to Slide 10. GAAP gross margin was 36.0%, which was up 1.5 percentage points from first quarter last year. Adjusted gross margin was up 2.3 percentage points during the quarter. GAAP operating margin was 17.5%, which was down 0.7 percentage points versus last year. Adjusted operating margin improved 0.2 percentage points to 21.9%. Operating margin was positively impacted by cost recovery from contractual price escalation, increased productivity and iteration savings, partially offset by rising manufacturing costs, higher year-over-year tariff costs, unfavorable mix and the Digital portfolio exit. Adjusted and GAAP SG&A expenses were higher year-over-year due largely to the SG&A expense associated with our acquisitions. Engineering expense was $56 million, $10 million higher than first quarter last year, primarily due to acquisitions. We continue to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as a leading industrial tech company focused on improving our customers' fuel efficiency, labor productivity, capacity utilization and safety. Now let's take a look at segment results on Slide 11, starting with the Freight segment. As I already discussed, Freight segment sales were up a strong 11.3%. GAAP segment operating income was $450 million, driving an operating margin of 21.3%, down 0.8 percentage points versus last year. GAAP operating income included $24 million of purchase accounting adjustments resulting from our recent acquisitions and restructuring costs for our integration and portfolio optimization initiatives. Adjusted operating income for the Freight segment was $550 million, up 12.7% versus the prior year. Adjusted operating margin in the Freight segment was 26.0% up 0.3 percentage points from the prior year. The increase was driven by higher gross margin of 2.1 percentage points, partially offset by an increase of 1.8 percentage points of our operating expense as expressed as a percent of revenue. The key driver of this is due to the mix of higher gross margin businesses as a result of our acquisitions of Inspection Technologies and Frauscher. Finally, the Freight segment's 12-month backlog was $6.68 billion. Our 12-month backlog was up 10.1%, while the multiyear backlog of $25.18 billion was up 41.0%. Turning to Slide 12. Transit segment sales were up 17.8% at $835 million. When adjusting for foreign currency Transit sales were up 11.0%. The acquisition of Dellner added a partial quarter of revenue, adding approximately 5.8 percentage points of sales growth. GAAP operating income was $121 million, which reflected the quarter's robust revenue growth and operating margin expansion. These strong results were partially offset by $6 million of restructuring costs and the costs associated with our acquisition of Dellner in the first quarter. Adjusted segment operating income was $138 million. Adjusted operating income as a percent of revenue was 16.6%, up 2.0 percentage points from prior year, driven by increased gross margin, which was partially offset by higher operating expenses as a percent of revenue. Finally, Transit 12-month backlog for the quarter was $2.57 billion. Our 12-month backlog was up 20.7%, while the multiyear backlog was up 26.4%. Now let's turn to our financial position on Slide 13. First quarter cash flow generation was $199 million, resulting in a cash conversion of 40%. We are off to a solid start for the year, with cash flow up slightly versus last year's first quarter cash flow of $191 million. Our balance sheet and financial position continues to be very strong as evidenced by: first, our liquidity position, which ended the quarter at $2.09 billion, and our net debt leverage ratio, which ended the first quarter at 2.3x. Our leverage ratio remained in our stated range of 2x to 2.5x, even after funding the purchase of Dellner during the quarter for approximately $1 billion. We continue to allocate capital in a disciplined way to maximize returns with an expectation of compounding our earnings for our shareholders. During the quarter, we repurchased $242 million of our shares and paid $53 million in dividends. With that, I'd like to turn the call over to Rafael to talk about our 2026 financial guidance. Rafael Santana: Thanks, John. Now let's turn to Slide 14 to discuss our 2026 outlook and guidance. Overall, the team delivered a strong first quarter with operational results ahead of our expectations. EPS also benefited from nonoperational favorability driven by currency fluctuations and taxes. Importantly, we continue to see underlying demand for our products and solutions across the business. That demand is reflected in a strong pipeline and both our 12-month and multiyear backlogs provide clear visibility into profitable growth ahead. Our team remains fully committed to driving top line growth, margin expansion and executing with discipline. With that backdrop, we are increasing our previous adjusted EPS midpoint guidance and we now expect adjusted EPS to be in the range of $10.25 to $10.65, representing approximately 17% growth at the midpoint. Our revenue guidance remains unchanged. Now let's wrap up on Slide 15. As you heard today, our teams continue to execute against our value creation framework and our 5-year outlook driven by strength of our resilient installed base, world-class team, innovative technologies and our customer-focused approach. With solid underlying demand for our products and continued focus on operational discipline, we feel strong about the company's future and our ability to deliver profitable growth and long-term shareholder value. Additionally, our recent acquisitions are running ahead of plan and strengthening our financial position. I believe Wabtec is well positioned as a leading industrial technology company with the capabilities and foundation to drive sustainable, profitable growth for years to come. With that, I want to thank you for your time this morning. I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra? Kyra Yates: Thank you, Rafael. We will now move on to questions. But before we do and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question. Operator: [Operator Instructions] The first question comes from Ken Hoexter with Bank of America. Jonathan Sakraida: Great. So just maybe, John, a little bit of update on the tariff mitigation given the recent 232 updates. What -- talk about the impact. We've got a lot of questions over the last few days, the impact that you see on the business. Rafael, if you want to talk about if it's affected orders or slowed down things just what's gone on and maybe the cost implications for you? Rafael Santana: Let me start, and I'll let John go into the details. Number one, as we look into tariffs, any tariffs that have been announced up to this point are included in the guidance. The other comment I would make, we're not seeing any impact with regards to revenues. We continue the guidance as per the same time, last time. What we are seeing is we are executing better in the business, and that's reflected with the guidance on higher profit rate for the year. But, John? John Olin: Thanks, Rafael. Ken, when we look at all the activity that's been in the market with regards to the tariff regime change of the Section 232, as we look at the way it was and the way it will be, two things come to mind. Number one, is there, is no difference. We're largely indifferent between that from a financial standpoint. The second thing is, from an administrative standpoint, the new tariff regime is certainly much easier to administer. But again, no overall impact to that. As Rafael had mentioned, as you look at our guidance, everything that we know with regards to tariffs is built in there and really business as usual. We continue to pull the levers on our four-pronged approach, while, as Rafael had mentioned, this is a heck of a headwind on a year-over-year basis from a gross perspective. The team is doing a fantastic job at mitigating these tariffs. As we've talked, we're going to see timing of this. We're going to feel margin pressure in the first half of the year because of tariffs and that pressure will dissipate in the back half as we start to lap a more steady tariff cost and lap some of the costs that were in last year. But we're moving fine with regards to our plan to cover the tariffs, Ken. Ken Hoexter: Great. And if I can get my follow-up on just the outlook and the long-term outlook sounds great, still everything on track and great backlog growth. But in the near term, I just want to understand the messaging here. So you've taken the midpoint up about $0.20. I guess you had a huge tax benefit this quarter. You had the below-the-line gain John, you talked about. So if you add the two together, is that the $0.20? Or is there something going on on the cost side that you're trying to tell us is getting better? And I don't know, tax normalizes itself. And so that's not the guide. I just want to understand maybe more details on that messaging for that outlook. John Olin: Sure, Ken. When we look at the $0.20 increase. It's reflecting two things. And the way to think about it is roughly half of it, call it, $0.10 is due to the operational side of things and the other $0.10 is due to the nonoperational. So let's take a look at both of those, Ken. As we look at the operational, as Rafael had said, we came in slightly favorable to our expectations and we manage an exit of a Digital project. So we went back and looked at that and how much of that was structural versus timing and all those types of things. And we're doing a better job even though our costs are rising quite a bit. We're doing a good job of managing them through all the levers that we commonly pull. And so we took that across the remainder of the year. And then we netted out that against higher costs that we're seeing, and that's largely Ken, in terms of inflation. And while we do have price escalators, the timing of that and the fact that 40% are not covered by price escalators has our costs rising. And this is largely behind metals. We're seeing copper, aluminum, steel up. We're seeing precious metals up, silver impacts us as well, and transportation costs are up as well as we're seeing some pressure on memory chips in our Digital business. So when we take all of that in aggregate with the structural improvement that we had in the first quarter and that we think will extend to the remainder of the year, that nets out to a $0.10 increase to the overall EPS guidance. The second piece, as you pointed out, Ken, and you're thinking about it exactly the right way, is $0.10 is nonoperational. That is driven by two pieces and one is the currency fluctuations. Ken, we don't know if currencies are going to go up or down from here. But what we've said is that other income, which was up on an adjusted basis, $23 million is largely going to stick. Now that could be right or wrong, but that's the way we're thinking about it. In terms of the tax piece is we had favorability in the quarter, but actually, it will be a little bit of a headwind for the remainder of the year as we still expect the 24.5% full year rate. So again, very good news. We are holding our revenue forecast. We came in right where we expected to on revenue. And so I think the way to think about this is that we're holding revenue and it will be a little bit more profitable as we go forward and as we run the company in a better fashion. Operator: The next question comes from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: I just wanted to maybe talk a little bit more about the revenue part of the guidance. So you had a -- I guess if you could talk a little bit about why that was unchanged? I guess when I look at the backlog and the strength in that continuing of strong book-to-bill kind of 3 quarters back to back of strong growth in that sequentially and year-over-year. Just curious if there's any offsets to the degree of confidence you're seeing of maybe how much of your revenue is perhaps [ cover ] from fiscal year '26 or just how we should think about that unchanged guide in light of the backlog? Rafael Santana: Angel, let me start here with a few comments in terms of potential headwinds and [ ops ] drivers as we think about the year. On the headwinds, I think we would probably highlight the Freight car deliveries potentially being further down than what it is. Certainly, what John mentioned in terms of the inflation in our input cost, electronics continue to be one that is certainly a headwind and obsolescence as well. On the flip side of that, I'll probably start with obsolescence because that can drive, I think, some upside for us in terms of the opportunity to continue to modernize subsystems for our customers. The strong momentum on acquisitions being ahead of plan for the quarter. I think that's also a positive. I think we're seeing really -- we're gaining traction on new product introductions and that's really across more than a couple of businesses, and we're seeing incremental demand on existing projects. Maybe midterm, longer term is North America CapEx recovery. But what I would say is despite of these dynamics, I mean we're faced right now with probably the most significant financial headwind this business has had since '19, which is the tariffs. We're executing well. We've been able to mitigate those. The business momentum is strong. And we feel we're ready to deliver on both the guidance that we've given and the long-term projections. Angel Castillo Malpica: That's very helpful. And maybe just, I guess, clarify on that tariffs point, I think it sounds like the Section 232 is essentially neutral to your tariff expectations, but on a net basis. But I think previously, you talked about the first half as being kind of peak pain from a tariff standpoint and first quarter gross profit margin was very solid. So just curious, as we think about the cadence of the incremental tariffs or any of these changes or your assumptions and the cost you mentioned or inflation, is gross profit margin in 1Q, should we view that as kind of a low point for the year? Or how should we think about the cadence of the quarters? John Olin: Yes. Second question has got several of them in there, Angel. The first part of it is on tariffs. As we've talked about, and I think our team has forecasted them very well, right? A tariff comes in, it's got a flow through inventory and then it comes out of inventory. And we saw our tariff obligation grow through the beginning of last year and through August as the 232s really began to take hold. So what we've said all along is that it's going to be about 3 quarters out as we start to see this stuff rise. We saw a significant rise in the absolute level of tariffs moving from Q3 to Q4, an exponential gain, right? And we're seeing a similar thing as we move into Q1. Now in Q2, we're going to start to see a plateau in terms of the absolute, and again, the 232s was largely neutral. So we don't expect a big change to that. And as that now plateaus in the back half in terms of overall tariffs, we're going to see the base kind of creep up here, not a ton in the third quarter, but we'll see some more of that in the fourth quarter in which we paid tariffs in the previous year. So again, we feel we got them forecasted. But as I mentioned, Angel, it will provide headwinds on our margins, squeeze our margins in the first half, and that will dissipate in the back half as we start to lap the year-ago piece. The second thing is when you talk about the cadence, last quarter, we spoke very much about -- we're going to see higher revenue growth in the first half than the second half, and that's largely due to how we lap the acquisitions that we have, and in particular, Inspection Technologies. I think you're seeing exactly that in the first quarter. We're right on what we planned in terms of revenue growth. The second piece is we said we would see modest operating margin growth. And we saw that in the first quarter of the 0.2 of a percentage point gain. So we're feeling really good about where we're sitting, again, with a little bit of underlying favorability that we're extending and taking our guidance up for. When we look at the second quarter, the remainder of the half, we haven't changed our perspective of that at all. I think as you look at the second half, you should think about it's going to mirror pretty closely the -- I'm sorry, the second quarter is going to pretty closely mirror the first quarter in terms of revenue growth, in terms of margin growth, and in terms of EPS less the operational benefit that we had in the first quarter. Operator: The next question comes from Scott Group with Wolfe Research. Scott Group: So on the backlog strength, how much, if any, is just assuming backlog of some of the acquisitions? Or is this all sort of net new orders? And ultimately, I'm trying to just understand like how to think about this backlog translating into revenue. It's up like 13% exiting Q1. Like is there a path to as we look ahead, like sort of high single-digit type organic in rest of the year? John Olin: Great, Scott. I'll take the first part of that. And then I'm sure Rafael, have something to say with regards to the backlog in general. When we look at our first quarter backlog, we're very happy we're seeing momentum, underlying momentum in that backlog. But on the face of it, we are being favored by the Dellner acquisition in particular. Dellner's backlog is very similar to the remainder of the companies. So when we look at the 12-month backlog, Scott, we posted a 12.8% growth rate. But Dellner accounts for about 3 percentage points of that on an enterprise-wide basis. And on a -- just a Freight basis, when you look at the 12-months, it accounts for about 12 percentage points of that backlog growth that we -- I'm sorry, in Transit that we saw in the Transit group. Transit was up 20.7%, 12% of that was driven by Dellner. Multiyear is very similar. When we look at the multiyear backlog, we were up 38.1% on an enterprise-wide basis, and about 3.5 percentage points of that is driven by Dellner, and Transit was up 26% in terms of their backlog and about 15.5% of that was Dellner. Rafael Santana: Scott, the only thing I would add is, I mean, we've talked a while now and about this very strong pipeline of opportunities we have. And we're continuing to convert that into backlog. This is really strong momentum across both geographies and a number of sizable opportunities that we're advancing. I think a piece of it is really anchored in our installed base. So think about Service agreements that really drive recurring revenue for those fleets. They're going to be running out there. So that service, parts, upgrades. So that's a positive. At the same time, on the Equipment front, we are continuing to expand on existing agreements. And as we extend this technology differentiation in the market, we're seeing customers investing and extending some of these agreements. So our overall installed base continues to grow in that regard. Internationally, we will continue to see strength here. We see it certainly in Freight across Africa, Australia, Brazil and East Asia, in Transit it's predominantly, as I think about India and Europe. And in North America, which would be my last comment, while the overall fleet renewal remains muted, we continue to see very specific customers investing for cost reduction, efficiency, service and reliability, and that continues to provide, I think, a strong opportunity to that. Scott Group: Okay. Helpful. And then maybe just, John, I just want to clarify your comment about Q2, similar with 1Q. When you say similar to 1Q, what you're talking about the $270 million or more like the $250 million, if you exclude the tax and the other income or some -- I wasn't sure exactly what you're trying to say? So I just -- hopefully, you can just clarify. John Olin: Just in general, Scott, the second quarter is going to look a lot like the financial performance of the first quarter in terms of revenue growth, in terms of margin growth and in terms of absolute EPS, with the exception of the nonoperational items, we don't expect to repeat. So it would be in the same range as the first quarter. Operator: The next question comes from Ben Mohr with Citigroup. Benjamin Mohr Mok: I wanted to just ask about your 12-month versus multiyear backlog and get a sense from you in terms of the 12-month backlog being up 13% in 1Q. Do you get a sense that they should normally convert to organic growth in, say, roughly 1 to 2 quarters? And then the greater than 12-month backlog is up 50% year-over-year. How should we see that converting to revenues flowing into 2027? Should we see a lot of that flowing in 1Q '27? John Olin: This is Ben -- I'm sorry, Ben, this is John. Looking at, in particular, on the 12-month backlog in the multiyear, what we always stress is there is a fair amount of volatility in these. It's not straight and direct line to that. And I'd love to share an example with you of that on the 12-months. In the prior 2-years ending in the December quarter, we had a low growth in our back -- 12-month backlog of 1.4% and a high growth of 14.5%. And when you average those about 8%, that's exactly what we had in revenue growth over that 2-year period of time. I would not say that it translates on a 1-month lag or a 2-month lag. But over time, it is going to emulate what our revenue growth is or at least 70% of that coverage in the revenue growth. But I do think that there is volatility in it, and we're not always going to see that straight line or that straight connection. Where we're at today, we feel real good about it. In terms of the multiyear, that is a really tough equation to answer when you're talking of some contracts that are 1.5 years long or 2-years and some that are 7-years and so on and so forth. I think the takeaway with regards to the multiyear is we've seen very good growth on it. And this is what Rafael has been talking about for the last year in terms of that international pipeline. And I think the takeaway is that we're seeing markets around the world and the replacement market in North America being very strong, and they're looking and seeking our Equipment, and we're supplying it, and we've got good visibility into the future now, certainly with the multiyear at over $30 billion. Benjamin Mohr Mok: Great. Maybe as a follow-up, you mentioned the organic growth in 1Q was actually in line if we exclude the Digital portfolio exit. And so we'd imagine that should be roughly kind of the mid-single digits, roughly around 5%. Can you talk to cadence of organic revenue expectations through the rest of '26 to meet your mid-single digits. Any other expected exits that can drive it differently? And then maybe as a second part, we've been getting asked a lot about the [ Alstom ] recent guide pull on their internal and supplier bottlenecks and affecting the ramp up, including the [ Coradia ] platform, where you have a door and HVAC contract in Norway. Any outlook and thoughts from you on possible delays of payment from that? John Olin: I'll take the first part of your question, and Rafael will talk about [ Alstom ]. So Ben, no, there's -- we don't provide cadence in terms of our organic growth. And this is largely a function of our large equipment and when it's planned to go out. And we've got quarters that we're expecting a little bit under the average. As you aptly pointed out, we expect our organic growth to be in the mid-single-digit range on a full year basis. But that isn't to be taken that every quarter is at 5%. And they move around depending on how we're delivering it. We do not see any other exits that we're showing in the first quarter outside of a portfolio optimization program, right? And -- so we're going to continue to do the things that strengthen this company's foundation to reduce complexity and to improve profitability and invest in the things that require our focus. This Digital project was not one of those, and it was exited in the first quarter, and we feel great that it's behind us. But overall, organic growth in the quarter was on track when you exclude that, and we still expect organic growth to be in the mid-single-digit range on a full year basis. Rafael Santana: Ben on [ Alstom ], your specific question. Number one, I'm not going to comment on any customer specifics. What I will tell you is that most of our business in Transit is done with transit operators. We provide what I'll call mission and safety-critical systems. Those are things like brakes, couplers and doors, and we're continuing to see strong demand and commitment from governments that continue to invest in public transportation there. The project delays, that has been a reality, which it's been amplified during COVID. I think our teams continue to manage that well. With that being said, we're continuing to see record backlogs there for our customers, and we're continuing to partner with them to improve on-time delivery, improve quality, improve costs. So that's very much -- that continues to be how our teams are progressing and managing that well. Operator: And the next question comes from Jerry Revich with Wells Fargo Securities. Jerry Revich: Good morning, everyone. Over the past couple of years, you've had a nice ramp-up in international orders. Can you just talk about, based on outstanding bids, tenders, your expectations? What do you expect the bookings opportunity to look like for your international business over the balance of this year? Rafael Santana: Thanks for the question. I think that's -- if I have to look at some of the opportunities. I mean, international looks quite strong, and it's connected back to my early comments on really some of that being anchored into the installed base. Think about some of the fleets that we've added and the need to service, the need to provide really support from those services. So that's recurring revenues quite strong from that perspective. It's, of course, tied to some of the geographies I have mentioned here, and I do expect the continued conversion of some of that. But it's not limited to that. If you think about the Equipment front, it's what I also mentioned, which it's really connected to expanding some even existing agreements, on customers interested on taking additional units. And as we provide here really more technology differentiation, I think we're also advancing it there. So -- but I think what's important to highlight here is this pipeline of opportunities continue to be strong despite of the fact that we are really staring right now and at a backlog that's an all-time high. We continue to expect strong conversion here. It's now very completely balanced. It goes with kind of called the lumpiness of some very sizable orders, but it's positive. It's reflected in the 12-month backlog, and it's reflected really on greater visibility than we've had since '19 here for the future year. So that gives us really, I think, a strong ground to continue to improve the footprint. Jerry Revich: And Rafael, on that note, obviously, shipments can be lumpy, but it looks like based on contract ramps in Kazakhstan, Guinea, a couple of large miners. It looks like on paper, your deliveries in the international markets should still be up '27 versus '26, even though this is a big delivery year just based on existing contracts. Is that the right way to think about it? Or is India production coming down or any other moving pieces that we need to keep in mind as we think about deliveries in '27 given your backlog comments and what looks like a step-up in contract time for shipments? Rafael Santana: Yes. It's early to start self providing, I'll call comments in '27, but what I'll tell you the way we manage the business, it's really on -- based on what I'll call a multiyear coverage. And it's really looking at our visibility across 12, 18, 24 and 36 months, and that has continued to strengthen, which really reinforces our confidence on really -- on our ability to continue to deliver sustained profitable growth over time, very much aligned with the guidance we've provided, not just for the year, but the long-term guidance we've provided. So that's the strongest visibility we've had. Operator: And the next question comes from Tami Zakaria with JPMorgan. Tami Zakaria: My question is not related to rail per se. Can you remind us whether you have any LNG or natural gas variations of your marine engines or even locomotive could be used for non-rail power generation. The reason I ask, we've seen recently some industrial [indiscernible] marine engine makers to power data centers, for example. So just curious, are you receiving any business credits that might be looking to use your locomotive, the marine engines for power generation for industrial purposes? Rafael Santana: Let me make a couple of comments. I'll start with Marine. We certainly have an engine that fits into marine. It's Tier 4 compliant. It's one that really plays on the niche and we're continuing to support customers there. When it comes down to the power gen, we do have an engine that's, of course, able to generate power in that regard. We've seen a very specific and limited opportunities connected to that, Tami. But well, if you think about a locomotive, it's really a generator on wheels providing power to the traction motors that really make that train move. So -- but we've seen, I'll call it, very specific and limited opportunities there. Tami Zakaria: Understood. That's helpful. And one quick follow-up. Your Equipment revenue is up more than 50% in the quarter. Could you provide some color how to think about the rest of the year? Would growth be lumpy through the next 3 quarters? Or how should we sort of think about it as we try to model it? John Olin: Yes. Tami, this is John. Remember, this is a function of the fact that our new locomotives go through the Equipment Group and Modernizations go through the Service Group. So -- and when we do a run of locomotives, we like to stick with the same customer in the same model. And so from time to time, you're going to see this flip, right? A year ago, in the first half, we saw Services running very much favorable and Equipment was down. And that was just a function of during the first 2 quarters of last year, we were running more of the mods than in the back half of the year, and we saw that flip in the back half. And the way to look at our first half is going to be stronger growth in our Equipment Group as we do more new locomotives and a little bit less on the Service side. and that will somewhat temper in the back half. But overall, we've talked about we expect the combined mods and locos on a worldwide basis to be up and versus in North America, we would expect the combined mods and locals to be down a little bit on a full year basis. And -- but you're going to see this lumpiness, as Rafael mentioned earlier, between our groups and Equipment and in Services and really need to look at those more together. Rafael Santana: I mean the only thing I would add here is on modernization when we've made that comment before, that's down. It's down significantly. It's down double digit, and it's largely driven by the North American market. Operator: And the next question comes from [ Steve Volkmann ] with Jefferies. Unknown Analyst: I sort of Yes, I had the same question, but I want to ask it slightly differently. When you look at the backlog, actually the 12-month backlog, it sounds like what you're saying is the services kind of recovers in that scenario. And I'm trying to figure out how I should think about that impacting margins? I assume that would be a tailwind, but any color there would be great. John Olin: So Steve, by and large, as we look across our backlogs, the backlog typically has more profit in it today than it did yesterday. So with regards to that, yes, we see higher profitability in the backlog that we're generating today versus in the past. And then that's what we wake up to do every day, and that's the value that we add to our Equipment that we're able to reflect in that backlog. Again, we're going to see movement and variation in the 12-month backlog. But as we look in the first quarter, we're very pleased to see it at 12.8%. When you take out currency is about 1 percentage point, when you take out the Dellner piece, that's about 3 points. So we're still in that 8%, 8% to 8.5% range and feel good as we look forward. Unknown Analyst: Okay. Great. And then maybe just slightly differently. You seem to be getting some good improvement in gross margins, but also making some investments, I guess, on operating expenses. And what's the outlook for that? When should we start to expect sort of more leverage on SG&A? John Olin: So let's talk a little bit about that. So during the quarter, we had a gross margin up to 2.3 percentage points, and we saw SG&A as a percent of revenue up 1.2 percentage points, Steve, and that netted out to 20 basis points that we were off. So what's driving the gross margin is our continual and significant focus on productivity, lean propagation. Certainly, Integration 3.0 has been running favorable. Portfolio optimization and being more selective. So that is helping our top line across the company. The other piece that we're seeing in gross margin is the fact that M&A is coming in at a higher level than the average. So we're getting a benefit on that in the year. And then the third piece, Steve, is what I would call acquisition mix. Right? We are mixing in across the year about $800 million of revenue and the mix -- the revenue that's coming from both Inspection Technologies and Frauscher their margin structure is more one of higher gross margin but also higher SG&A. And so when we mix that in, that's driving some of that lift that we're seeing in gross margin, but it's also driving the lift that we're seeing in SG&A as a percent of revenue. I think we've got another strong quarter in the second quarter because we'll have evident in on still a year-over-year very good comparison. We purchased -- I'm sorry, Inspection Technologies at the beginning of the third quarter. And so we'll start to see that growth dissipate a little bit, and it will really just be Frauscher that will be driving it. So that's just more of a structural change in the overall P&L. Operator: And the next question comes from Harrison Bauer with Susquehanna. Harrison Bauer: Just taking a step back, I'm curious if either Rafael or John, if you could assess maybe some of the competitive dynamics for both new and mod locomotives in both North America and internationally, particularly if there's any competitive pressures from any of your competitors? And how maybe the North American rails are looking at their options as they need to pivot to potential growth in the future? Rafael Santana: Think number one, competition is very active out there. I do want to highlight that. I'm not going to go into any specific comments with regards to specific competitor, but we are continuing to win share of wallet with our customers at large. And it's really a function of us really continue to extend this technology leadership that we have on our platforms. It's not only the technology in new products but also the ability to continue to extend the life of some of these assets with really increased efficiency, increased safety, increase availability, and that's continuing to provide that. But it's a very active in the marketplace. We're having to work hard to make sure we continue to drive our win rate up. Harrison Bauer: And maybe as a follow-up, do you think that with some of the help of the commercialization of your EVO platform later this year that you could see some benefit to your Services revenue growth and in the second half and potentially if whether or not you can grow Services revenue on a full year basis this year versus last year? Rafael Santana: So here's still a way we ought to approach it. We're very happy and encouraged with what I'm seeing across our technology stack. This includes, as you described, the EVO Advantage program. We do expect that to unlock significant opportunities here in terms of modernization for us, not just to continue what you saw on the modernization story, but continue to amplify that. I think the advancement we're making on what I'll call automation and digital does include things like [ 0:0 ], which we're on track to get approval this year. And if you connect that to the next generation of positive train control, I think we're redefining and we're expanding our addressable market which will further support profitable growth ahead. The only one -- I want to highlight to you here just in the sense of technology is we're making strong progress in hybrid battery electric programs. I think you've heard from us last quarter on the recent extension of the agreement we had with New York City Transit, which is opening not just new opportunities for us, that's really, I'm going to say, redefining and expanding addressable markets that we can go after. So that's a positive for the business. It will support services. But we'll redefine the opportunities we have about the business at large. Operator: The next question comes from [ Steve Barger ] with KeyBanc Capital Markets. Steve Barger: Just a couple of quick ones for me. following up on 232, you said there was no real financial impact from the rule change. Is that because you've shifted to more local for local in terms of how you're supplying final production? Or is that just how the math works for your product mix crossing the border. John Olin: I think it's a little bit of both, Steve. I mean, mix is neutral. But we've done a lot of work on mitigating those tariffs, right? And the gross tariffs are pretty burdensome, but on a net basis, our operations and folks have done a fantastic job -- but on the face of that, that doesn't change. It doesn't change dramatically with the tariff regime change. But overall, when you net the two together, both the mitigants as well as the change in the 232 top line or gross tariffs were neutral. Steve Barger: Got it. And then now that you've had Dellner for a couple of months, can you talk about what it brings you in terms of ability to sell Transit deals and how we should think about any margin impact on Transit over time? Rafael Santana: So I'll start with #1 products on where they play. So very positive from that perspective. It's a function of the technology it has, the reliability it brings -- and I think what we're seeing here is an opportunity to amplify on where we win share of wallet with customer share. So we're already penetrating with a couple of customers that we would have traditionally done last business, so that's a positive there. And we're on track to execute on the cost synergies. So it's really an opportunity on both [indiscernible] of this spectrum to operate the business, better execute for the cost synergies which we had planned for on the other side, on the flip side of that, drive growth synergies, which we had not planned for in this context. So we remain very positive about some of this. And I think we also have the opportunity to continue to expand on building on that pipeline of opportunities and converting that into orders, multiyear orders in the case of those. John Olin: And Steve, it will certainly bring up the Transit margin. Remember, we bought Dellner at higher than the company average, and the company average is higher than transits. So this will have a positive impact on Transit margins. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kyra Yates for any closing remarks. Kyra Yates: Thank you, Dave, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Zurn Elkay Water Solutions Corporation First Quarter 2026 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bobby Belzer, Vice President and Corporate Controller for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bobby Goldner. Unknown Executive: Good morning, everyone, thanks for joining call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions. Todd Adams: Thanks, Bobby, and good morning, everyone. I'll start on Page 3. 2026 is off to a decent start as first quarter sales grew 11% organically. EBITDA grew 18% to $116 million, and our margins expanded 160 basis points to [ 26.8% ]. In the quarter, we generated $43 million of free cash flow and repurchased $50 million of Zurn Elkay at roughly $47 a share. We're very comfortable with our full year outlook for free cash flow of approximately $335 million and anticipate revisiting that along with the rest of our outlook after Q2. Just a couple of thoughts from me before I turn it over to Dave. From a market perspective, we generally see the same market conditions we outlined when we provided our outlook in February. The same is very much true for the pricing environment. Next, there's been a lot of announcements in moving parts related to tariffs over the course of the quarter. The Supreme Court ruling on the [indiscernible] tariffs and subsequent refunds, the implementation of 122 tariffs changes to the 232 tariff scheme and the opening of new studies on future Section 301 tariffs. We've also continued to advance our own supply chain footprint initiatives. And what I will say here is that we are very much on track to meet or beat the objectives we set out to achieve at the beginning of the year. As it relates to all these tariff changes and potential changes in our outlook, our view is that assuming some of the known changes to 232 tariffs, and projecting some likely net adverse changes stemming from the potential 122 and 301 changes, we are highly confident that without receiving any refunds or implementing any future price increases, the discrete impact of tariffs within 2026, which we said was to be price/cost positive remains unchanged. This leads me to my final point on our full year outlook. I think the way to describe the way we think about our outlook is to be both deliberate and conservative. As you can see with our first quarter results and second quarter outlook, we're running ahead of what was likely assumed for the first half of 2026. As I just discussed, we have high confidence that we will continue to manage through the tariff dynamics extraordinarily well. Second, as of now, there isn't anything I can point to that would make the second half worse than what we had anticipated. So I think it's safe to say our first half outperformance flows through to the year. That's where the deliberate methodology enters into our approach. The reality is that there's 8 months left in the year. And depending on today, there's simply a lot going on in the world. So rather than try to change a bunch of digital assumptions day by day that frankly will become more clear as the year goes on, we're simply going to update the second half after Q2. So with that, I'll turn it over to Dave. David Pauli: Thanks, Todd. Please turn to Slide #4. Our first quarter sales totaled $433 million, which represents 11% core and reported growth year-over-year. In the first quarter, we generally saw our end markets perform in line with the guidance we provided 90 days ago. Growth in our nonresidential end markets was partially offset by softness in residential. We've had solid execution on our growth initiatives and those initiatives helped drive our sales performance to the higher end of the outlook we provided 90 days ago. . In addition, during the first quarter, portions of the U.S. experienced some unusually cold weather. This resulted in some incremental break fix activity that we think plays out to about 1 point of growth over the first half. Turning to profitability. Our first quarter adjusted EBITDA was $116 million, and our adjusted EBITDA margin expanded 160 basis points year-over-year to 26.8% in the quarter. This continues a trend of year-over-year margin expansion that we have delivered since the Elkay merger. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization as well as mix as our higher profit margin products are growing the fastest. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with leverage at 0.5x. Our 0.5x leverage is inclusive of the $50 million we deployed to repurchase shares in the quarter. During the quarter, we also upsized and extended our revolver. We transitioned from a $200 million revolver to a $550 million revolver that extends 5 years. This gives us even more liquidity as we move forward. Balance sheet, leverage, liquidity and cash flow generation are in a great spot as we continue to evaluate our funnel of M&A opportunities. I'll turn the call back to Todd. Todd Adams: Thanks, Dave. And I guess I'll move to Page 6. I think the takeaway here could be [indiscernible] your work and work your plant, which when you boil it all the way down is the essence of the Zurn Elkay Business System. When you look at some of these attributes of our business, most of these have been cultivated through focus and intentional actions to build a business with a wide competitive moat that is flexible, repeatable and scalable and even when the external environment or circumstances aren't optimal. Stemming from our strategic planning process, all the way through to our strategy deployment process, being disciplined and intentional on playing the game, we can win consistently at a high level as our ultimate priority, whether it's our geographic focus, the product categories we're in, the end markets we prioritize are the actions we take on product or market exits or even more importantly, the new product development and adjacencies we're entering. It's all connected. If you followed us, one slight change that you may notice here is the slight change in our mix towards retrofit replace which 5 years ago was 45%. But as we deployed our strategic plan with an emphasis on growing drinking water and filtration, coupled with growth in our water and safety control products, and portions of our genetic and environmental business were now evenly split, which over time, only makes the business more resilient and in aggregate is margin mix positive for us. We're really excited about the trajectory and future of Zurn Elkay, and it stems from the culture we've established and the people we have. Throughout this year, we're going to expose everyone to more of our team on these calls, so investors gain a further appreciation of the management depth and passion that exists here and the appreciation for the people who really make all this happen each and every day. Now I'll turn it back to Dave. David Pauli: Thanks, Todd. I'm on Slide 7. Todd just talked about the focused and intentional decisions that led to the business we have today in Zurn Elkay. Slide 7 helps to illustrate the results in the form of profit. These decisions have produced over the last several years. On a trailing 12-month basis, our adjusted EBITDA margins have improved 630 basis points from Q1 of 2023 to Q1 of 2026 and on a point-to-point basis, our adjusted EBITDA margins are up 730 basis points over the last 13 quarters. That starts with 19.5% margins in Q1 of 2023 compared to this quarter's adjusted EBITDA margins of 26.8%. The foundation of our EBITDA margin improvements all center on our Zurn Elkay Business System, the belief in continuous improvement and the focus on getting just a little bit better each and every day. The margin improvement over the past 3 years is a combination of a number of drivers that I'll walk through. First, part of the Zurn Elkay Business System is sharing ideas and wins across the organization so that we can replicate successes. We've highlighted our #CI for continuous improvement process in the past. But as a reminder, these are associate-led and submitted ideas that save time, eliminate waste and improve day-to-day processes across the organization. While no single #CI on its own is material, they do become material when we have thousand submitted across the organization each year. The second item I'd point out is our unit volume growth in the most profitable areas of our business. Water Safety and Control, Flow Systems and Drinking Water have all seen growth over the last several years, while we've exited via 80/20, the lowest margin products within the portfolio. Third, after delivering on over $50 million of synergies associated with the Zurn Elkay, we continue to make positive structural changes beyond those identified in the synergy case. Consolidating our footprint to reduce overhead, introducing and sustaining the Zurn Business System lean tools into the Elkay manufacturing facilities and continuing to challenge our strategy around internal manufacturing versus sourcing. And lastly, our supply chain has been a clear competitive advantage that has allowed us to improve profitability while successfully navigating the tariff environment. Now to the guidance on Slide 8. For the second quarter of 2026, we are projecting core sales growth to increase 8% to 9% over the prior year, and we anticipate our adjusted EBITDA margin to be in the range of [ 27% to 27.5% ]. which is 50 to 100 basis point expansion year-over-year. Within Slide 8, we've included our second quarter outlook assumptions for interest expense, noncash stock comp expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. As Todd mentioned earlier, our first quarter actual results and second quarter guidance puts us ahead of our expected first half performance, and our plan is to revisit the second half of 2026 outlook when we announce our Q2 results. One other comment on guidance. Our full year outlook does not take into account any potential tariff refund benefits and assumes that the current tariff structure in place as of today remains in place throughout 2026. We will now open the call up for questions. Operator: [Operator Instructions] Our first question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Great start so far to the year. I was hoping you could offer a little more color on drinking water trends. Pro filtration has obviously been in the market for another quarter. Any updates on adoption and the impact on overall platform growth or detachment rate would be very helpful. And with consolidated progress at 11%, I assume drinking water growth was quite robust in the quarter. Are you willing to share top line performance in Q1? Or how your team is thinking about . David Pauli: Sure, Brian. It's Dave. So Drinking Water in the quarter performed very well, in line with where we thought it would be going into the quarter. The installed base continues -- the installed base of filtered bottle fillers continues to grow at double digit. The filtration piece of the business continues to grow above double digit. You mentioned Pro Filtration. We've seen really nice adoption of Pro Filtration. That product was developed around feedback that we received from customers, end users, facility managers. And so seen really great adoption of that and the attachment rate associated with that is very high, just given some of the technology changes. So overall, drinking water had a really nice first quarter and we see that Pro Filtration continuing to accelerate as we go. As you know, we have a dominant share of specs, and our team is currently working just to update those specs. So legacy product to Pro Filtration. So in a good spot with Drinking Water. Bryan Blair: All good to hear. And I guess a level setting question as a follow-up. You just walked through the drivers of rather impressive EBITDA margin expansion over the last 3 years. And if we set aside Elkay synergies as kind of onetime structural lift. The rest of it is #CI in one form or another. Given the level of profitability that you now have and assuming that mix does not meaningfully shift or continues to positively transition. You've spoken to low 30s, maybe a step up to 35% as normalized incremental margins for the business. Are we at a point now where it would be reasonable to speak to a higher figure going forward? Todd Adams: Yes. Brian, look, I think Dave mentioned it in his comments, we while we had a nice quarter in drinking water, I think it's also important to recognize water safety and control in our Drains business is growing just as fast. And so when you think about those 3 categories, the margin profile in each of those is really good. And I think the combination of CI, obviously, the Elkay synergies, all the work we're doing on supply chain helps. But I think there's another thing to think through, which is a lot of the new products that we're introducing come at margins replacing the old products or the new products are even better. So it's a really nice dynamic where we've got an operational sort of lever that we're continuing to work at to all those things. But then as we introduce and launch new products, those are coming to market at attractive margins. And so I think in time, we may modify that. But for the time being, I think it's a good framework to think through as we invest in some of these new products to bring them to market. But I get your point, and we'll revisit it when we feel like we're ready to. Operator: Our next question comes from the line of Andrew Krill with Deutsche Bank. Andrew Krill: I wanted to dig in, I guess, more on the change of OE versus retrofit up to 50-50 split. Just -- is there any way you can quantify like a target over time where you think this can go? Many other industrials, they can be 2/3, 75% more aftermarket. Like is there any reason you can't get to that over time? Todd Adams: Yes. I think, Andrew, a good portion of our business is still new construction, an important part that actually ultimately feeds the retrofit replace. So I think I think it's unlikely that we'll get to a 75 retrofit replace sort of percentage. But I do see in the coming years that has the opportunity to drift higher. 55% I think is a reasonable next way point to think about for us. And as we point out, as Filtration grows, [indiscernible] our installed base for all of our products grows we see that opportunity to grow a little bit higher. . Andrew Krill: Great. And then on the weather comments of the Northeast, I believe Dave said it till about 1 point of a good guy from the first half. Can you just break down what this was in the first quarter, is there any chance it was flattish or down? Like any help on how that impacts 1Q for 2Q would be great? David Pauli: Yes. Even between the 2 quarters, Andrew, nothing oversized in Q1. Operator: Our next question comes from the line of Nathan Jones with Stifel. Good morning, everyone. Nathan Jones: I guess I'll ask some of the dumb tower questions. There's obviously been newly implemented tariffs and you guys are talking about contemplating some additional tariffs after that. Could you -- is there any color you can give us on what you think the incremental growth impact to the business in terms of increased cost is? I think everybody understands that you're very, very good at passing that through to customers. But just any color you can give us on what you think the gross impact is? Todd Adams: Yes, Nathan, there's obviously a lot of to be determined moving parts as 122 likely expires and then the studies from 301 come back and potentially get implemented. What I can say is we're not counting on passing any future price increases through a combination of all the work we've done on products substitution materials, obviously, some of our footprint things, we think hold that steady with some, I will say, conservative assumptions. And I also think it's important to point out that over the last 2 or 3 years as they function of the work we've done, our largest sourcing comes from the U.S. So out of all the countries that we source from, the U.S. is the largest by a decent margin at this point. So in many ways, we've insulated ourselves from it. But I think our working view is that Net-net, it's about the same as we started the year. The assumptions around 122 rolling off, 301 coming in. That's sort of where we see it today. That's what's embedded in our view. Nathan Jones: Okay. Fair enough. I'm going to ask a lot about capital allocation. It's been quite some time since Zurn acquired Elkay. The balance sheet is in great shape. Certainly has plenty of available capacity for M&A. Maybe talk about the maturity of the pipeline, the appetite for more M&A and priorities for capital deployment? Todd Adams: Yes, as we, I think, pointed out routinely on these calls, we run a proper funnel. So we're not -- we don't participate in auctions in a meaningful way. We continue to do some of that cultivation work, I think. Obviously, some of the work we're doing around new products is informing new targets as well. So I would say we're in late stage to mid-stage to early stage on a number of cultivations. We do have an appetite to do those only to the degree that they make sense strategically and then obviously meet the return hurdles that we set out for ourselves. In terms of capital allocation, we've obviously bought back shares routinely. We're going to continue to do that more when we feel like the intrinsic value relative to what we see is understated or less than what we think is fair value. And obviously, we pay a nice dividend. And so those are going to continue to be the priority. So no change. But certainly, optimistic that over the coming quarters, we're going to get some of these things over the finish line. Operator: Our next question comes from the line of Michael Halloran with Baird. Michael Halloran: So first question, just to clarify your comments familiar. So it doesn't sound like you're expecting incremental pricing. Just confirm that 1 way or another. And then the follow-up is when you talk to your customer base, what's the sense of fatigue on the pricing side of things? What concerns would you have if you had to go back to the market with price? Or do you still feel pretty good all else equal. Obviously, you have a value proposition you're pitching and people are pretty aware of the inflation that's out there. So just kind of curious on the puts and takes from the customer base at this point? Todd Adams: Well, Mike, I think when you take a giant step back, in aggregate this year, we're talking about 3 points of price, incremental. So it's not like we've gone out with egregious price increases above and beyond what our competitive set has done. We've got different competitors across all of our different product lines. So some people have been more aggressive than us. Some people have been less aggressive than us in certain spots. So taken as a whole, I think, stability would be a great thing. And I think that's sort of what we see in our outlook, which is the things that we're doing put us in a great spot to not sort of have to put these big digital price increases through that we're going through last year. But that being said, we've got to stay diligent because inflation of commodities and freight. And obviously, this conflict in the Middle East are all sort of bubbling. And so I think we're going to be smart about it. I don't see any meaningful fatigue. But I think it's something that we're just watching very carefully category by category, region by region. And I think we've done a really nice job of staying close to it and expect to continue to operate the same way. Michael Halloran: That makes sense. And then maybe the follow-up question is just any thoughts on the growth adjacencies you've been talking about and some of the growth initiatives that you're highlighting have an impact late this year and into next year. Just kind of any thoughts on some deeper color on what those might be or target areas or anything you might be going to share? Todd Adams: Yes. I mean nothing that we're going to share at this point. Obviously, these are going to be new entrants in the categories that competitors have or maybe even some new competitors. So I think we're making great progress there. I think it's really exciting. I suspect that by the time we get to Q3, we'll be in a spot to share some of those and obviously, as more roll out over Q4 and into the first part of next year, when we're ready, we'll talk about it, but I think very much on track with what we thought as we started the year. but great work by our teams. And I think it's going to be exciting for us moving forward, not just in '26 and not just in '27, but really starting to stack these year in, year out, which will be helpful to our long-term growth rate. . Operator: Our next question comes from the line of James Cole with Jefferies. Unknown Analyst: I guess I wanted to touch on this growth adjacencies a little bit more here. I just wanted to understand the rationale behind it. Like should we think about these initiatives as additive to your like current long-term mid-single-digit growth outlook or more as a way to kind of sustain that level if like other end markets slow or -- yes. Todd Adams: I think it could be both. Clearly, we're not going to predict what the market conditions are in '27 or point. So if they're weaker, this could clearly boost some of that maybe lower market growth. If the market is what it is, I think it would ultimately end up being additive. So I think it could serve both, James. And it really is something that we've done historically. I think given where we are from a balance sheet perspective, a strategic focus perspective, we see a dual-pronged approach here, right? We're going to enter new categories, develop new products, open up additional available market. And as a function of that, I think it's going to aid in some of our cultivation. So I think long term, it can be both. It can support what we have in the event of a weaker-than-expected market. And to the degree the market is okay, it should enhance is sort of the way to think about it. Unknown Analyst: Great color. And I guess as a follow-up, I just wanted to touch on 1Q outperformance like. Can you talk about the primary kind of drivers of the outperformance since growth came in stronger than expected even accounting for a favorable impact from weather. So can you kind of break that by core sales growth into like volume and pricing and potentially mix? David Pauli: Sure. So if you look at the 11%, 5% price in the rest volume, you mentioned the weather thing. That was about 1 point in the quarter. And then just in terms of the outgrowth we've talked about it a little bit just in terms of our Water Safety and Control business, our Drains business, our Drinking Water business, growing very nicely in the quarter. I think if you look at some of the initiatives that we set out and have talked about last year into this year, looking at areas of the U.S. where there is maybe a little bit more construction activity over resourcing those. So we've seen some nice wins from a regional growth perspective in terms of areas that we've intentionally deployed resources to and focused on. So I think that's helping to deliver some of the over performance we saw in Q1. . Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. . Jeffrey Hammond: Just had a couple kind of end market question. So in the Q, it looks like commercial bucket kind of accelerated. I didn't know if there's anything to parse out there if that captures more of the brake fix. And then I know it's small, like 8% Waterworks, but there's been some peer companies with some short-cycle noise. I didn't know if you could just comment on what you're seeing in that business and if you're seeing anything to that extent. Todd Adams: Yes. Again, I think when you look at commercial, it's a lot of different things. I'm staring at a pipeline chart here from our manufacturer's rep and just in New York, right? I mean, you've got the Core Weave data center. You've got the West Point football stadium. JFK Airport, the U.S. open stadium and parking garages on the come. You've got things like Major League Soccer Stadium in New York, the Brooklyn Borough jail. So I think there's a lot of activity out there, and I think it's representative of being hyper local and finding pockets of growth even in a geography where you may not assume that there's a lot of growth. In terms of Waterworks, nothing abnormal for us in Waterworks at all. So hopefully, that's the color you were looking for. . Operator: Our next question comes from the line of Brett Linzey with Mizuho. Unknown Analyst: Congrats on the quarter. This is Peter Kasson, for Brett. And maybe just 1 more about end markets. Can you kind of talk through your outlook by end markets? You're talking to flat to slightly positive market in total with institutional low singles, commercial flat and resi a little bit tougher. Do you have any updates to that given the 1Q outperformance? David Pauli: No. I'd say if you go back to the guidance framework we gave 90 days ago from a pure end market, we call institutional low single digits, Waterworks, low single-digit growth, the commercial market, we said would be flat and resi down low single digits. And I think we've generally seeing those end markets play out. In Q1, the commercial market might have a little bit better than flat. But I'd say from a long term, how we see 2026 play out, no change to that guidance framework we gave initially. . Unknown Analyst: Awesome. And then maybe just could you give us a sense of the margin differential between some of these lower-margin products you're walking away from and then some of the higher unit volume growth areas that you called out, like the safety and control the flow systems in the drinking water? David Pauli: So in terms of the stuff that we walked away from, intentionally, that would have been substantially lower margin. So think back to the Elkay merger when we exited some low-margin noncore residential sinks that were primarily sold through big box. We're largely out of those types of products at this point. The things that are growing faster that have some incremental margin would be think about filtration within drinking water. Think about some of our water safety and control and drains products that carry a really nice margin that would be ahead of the fleet average. . Operator: [Operator Instructions] Our next question comes from the line of Jeffrey with RBC. Jeffrey Reive: I appreciate all the color thus far. So if we think about the puts and takes around pausing the full year outlook, what are the key variables you're waiting to see it resolved by the time you report 2Q. Is it just tariffs? Is it something else? Todd Adams: Jeff, I honestly don't think it's that deep. I think we had a really nice Q1. We're projecting a nice Q2. I think that certainly, there's going to be more clarity on some of these tariff issues as we get through the summer. But quite honestly, we just are electing like we have in the past to sort of wait and see. I can't point to anything that would say at this point, the market is worse. We're concerned about the tariff issue. So it's really just, I think, being very deliberate about modifying the full year outlook. It's probably not going to foot across in your model. But I think we're sort of really trying to dial in a better view for the full year once we get through the second quarter. Michael Halloran: Got it. I only ask because I think when you see a company kind of paused guidance, it's usually a cause for concern, but obviously, you're doing it from a position of strong 1Q and a better 2Q outlook. Maybe just on visibility into the second half. Can you maybe talk to that the line of sight do you have your backlog? Just any comments there? Todd Adams: Yes. When you look at contractor backlogs as they sit today, as we talk to our third-party reps on activity that is likely to come to fruition in the second half. It's very much consistent with the kind of market growth that Dave talked about. And obviously, some of the outgrowth in terms of regional focus, new product launches, I don't see anything that would derail that at this point. So you're using the word pause. I think we're going to use the word deliberate. But needless to say, I think we're going to end up in a good spot for the year. And we're really just focused on the next 90 days and doing the work to make the second half as good as it can be. Operator: I will now turn the call back over to Bobby Belmar for closing remarks. Unknown Executive: Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our second quarter results in late July. Have a good day. . Operator: This concludes today's conference call.
Operator: Good day, everyone. Welcome to Western Alliance Bancorporation’s First Quarter 2026 Earnings Call. You may also view the presentation today via webcast through the company's website at westernalliancebankcorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead. Miles Pondelik: Thank you, and welcome to Western Alliance Bancorporation’s First Quarter 2026 Conference Call. Before I hand the call over to Kenneth A. Vecchione, please note that today’s presentation includes forward-looking statements, which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-Ks filed yesterday, which are available on the company's website. Now for opening remarks, I would like to turn the call over to Kenneth A. Vecchione. Kenneth A. Vecchione: Good afternoon, everyone. I will make some brief comments about our first quarter 2026 performance before handing the call over to Vishal to discuss our financial results and drivers in more detail. After reviewing our revised 2026 outlook, Dale and Tim will join us for Q&A as usual. Western Alliance Bancorporation’s financial results in the first quarter reflect strong core business performance alongside decisive actions taken on two previously disclosed fraud-related credits. Adjusting for these actions, we generated earnings per share of $2.22, which is consistent with where we were tracking on a reported basis prior to the charge-off announced on March 6. Importantly, these matters are now largely behind us. By removing these lingering distractions, we can refocus attention on the trajectory of our underlying operating performance. I will briefly review these related charge-offs and mitigating actions before discussing our core results. As previously announced, we fully charged off the remaining $126.4 million balance of the loan to a fund of Lucadia Asset Management. We initiated legal action at the time of the announcement and are actively pursuing recovery through those proceedings. Given the nature of this process, the outcome may take time to resolve, and we will not provide further commentary while the matter is ongoing. As discussed last month, we executed security sales, which generated $50.5 million of pretax gains. These gains, together with identified expense savings and other revenue initiatives, substantially offset the impact of this charge. We are also providing an update on the Cantor Group 5 loan. We believe the $29.6 million specific reserve established in Q3 has been validated by current as-is appraisal values across all the collateral properties as well as our updated lien positions. We believe recoveries on this loan will be realized in the future from multiple sources, including springing guarantees from ultra-high-net-worth guarantors and a mortgage fraud policy. Due to the complexity and potential duration of the resolution process, we charged off $26 million of this loan during the quarter. Turning to Q1 results. Deposit growth was exceptional at $5.6 billion on a quarterly basis, putting us ahead of pace to reach our $8 billion deposit growth target for 2026. This outperformance positions us to accelerate deposit optimization programs, which should further reduce funding costs and support net interest margin, even absent interest rate cuts this year. In the first quarter, interest-bearing deposit costs declined 21 basis points, contributing to a 3 basis point quarterly increase in net interest margin to 3.54%. Total loans grew $903 million this quarter, split nearly evenly between the HFI and HFS portfolios. We grew HFI loans 3.2% on a linked-quarter annualized basis and 8% compared to the prior year. We deliberately grew the HFS portfolio with lower risk-adjusted weighting so we could repurchase shares and remain at our target CET1 ratio of 11%. This strategy afforded us the opportunity to delay loan growth into Q2 and reevaluate the credit, macroeconomic, and geopolitical environments. We have not backed away from our $6 billion target. Overall, core asset quality remained steady as net charge-offs for the quarter, excluding fraud-related credits, were marginally higher than the upper end of guidance. We believe the portfolio is past peak stress, particularly within office CRE, as we have seen classified loans increasingly migrate towards resolution instead of further deterioration. Classified assets to total assets declined 9 basis points from the prior quarter to 1.08%. We are positioning nonperforming loans to decline in the back half of the year, with several credits to be resolved by Q3. We continue to manage our capital dynamically in an evolving macro environment. During the quarter, we repurchased 700,000 shares at a weighted average price in the low seventies, reflecting our conviction in the intrinsic value of the franchise. Strong capital generation drove an adjusted return on average assets and return on average tangible common equity of 1.0% and 14.2%, respectively. This supported a stable CET1 ratio of 11% and ACL ratio of 87 basis points, while compounding tangible book value per share 13% year over year. Overall, we delivered strong balance sheet growth, net interest margin expansion, and sustained core earnings momentum underpinned by healthy risk-adjusted PPNR, while also opportunistically defending the stock through accelerated share repurchases. Western Alliance Bancorporation continues to benefit from a highly diversified franchise, differentiated market positioning, and deep integrated relationships with our clients that enable us to perform across a wide range of economic scenarios. At this time, Vishal will now walk you through our results in more detail. Vishal Idnani: Thanks, Ken. In the bottom right corner of slide three, we highlight two earnings adjustments this quarter. The execution of a series of security sales generated aggregate pretax gains of $50.5 million. These gains partially offset the impact of the LAM provision and together reduced net income by $62.1 million, or $0.57 per share on a net basis. As a result, my comments on our adjusted performance exclude these items, as we do not view them as reflective of the ongoing run-rate outlook of the business. Turning to the income statement on slide four, net interest income of $766 million was in line with the fourth quarter and increased approximately 18% year over year. Lower funding costs, driven by declines in interest-bearing deposit costs, helped offset pressure from lower loan yields, while higher average earning assets also supported NII stability. Noninterest income increased 18% quarter over quarter to approximately $253 million. Excluding securities gains realized in both Q1 and Q4, noninterest income would have declined modestly by $5 million, largely due to lower mortgage activity. Service charges and fees increased $15 million sequentially, primarily reflecting strong performance in our Juris banking business, with the corresponding but smaller offset flowing through other noninterest expense. Mortgage banking revenue was stable year over year but declined $18 million from the prior quarter. Importantly, fundamentals across the mortgage business continued to improve, with gain-on-sale margin expanding 18 basis points year over year to 37 basis points and loan production volume increasing 18%. Q1 mortgage earnings were impacted by the sharp backup in interest rates, highlighted by the 10-year Treasury yield rising 33 basis points in March. Elevated rate volatility during the month also created modest headwinds for hedging performance and servicing income. Early April results indicate mortgage banking is reverting to levels seen in January and February before rates backed up. Noninterest expense increased about $22 million from the prior quarter to $574 million. Excluding the FDIC special assessment rebate last quarter, noninterest expense only increased about $15 million. The increase reflects higher compensation expenses related to annual merit increases and other typical Q1 costs. Deposit costs declined from a full-quarter impact of two Fed funds rate cuts in Q4. As mentioned earlier, the increase in other noninterest expense was partly driven by higher Juris banking fee revenue and related expenses. Adjusted pre-provision net revenue was $394 million, up 42% from the same quarter a year ago. Provision expense was $87 million, excluding the LAM charge-off cited earlier. Adjusted net income available to common stockholders was $241 million, representing a meaningful increase from a year ago, and generated adjusted EPS of $2.22, up 24% compared to reported EPS in the prior-year period. Now turning to the balance sheet on slide five. Cash and securities rose meaningfully toward quarter-end, driven by strong deposit growth. As we execute our deposit optimization strategy, we expect the relative size of cash and securities to total assets to return to more normalized levels seen in Q4, while our loan-to-deposit ratio returns to the mid-70s. Total loans increased $903 million from the prior quarter. Diversified and meaningful contributions from mortgage warehouse, Juris, HOA, and regional banking drove $5.6 billion of quarterly deposit growth. We view this outsized growth as providing flexibility to further optimize deposit funding costs throughout the year. As deposit growth approaches our 2026 target of $8 billion, our balance sheet expanded in total by $6.1 billion from year-end to just shy of $99 billion in assets. The slight decline in total equity resulted from more active share repurchases and a rate-driven change in our AOCI position, mitigating the impact from continued organic earnings growth. We opportunistically repurchased $50 million of shares during the quarter, bringing program-to-date repurchases to 1.6 million shares, or $120.4 million at an average price of $76.55. Looking closer at loan growth trends on slide six, HFI loan growth continues to be powered by C&I loan categories. Nearly two thirds of quarterly HFI growth came from C&I, with the remainder concentrated in residential loans. From a business line perspective, regional banking was a primary driver of quarterly growth, led by homebuilder finance with solid contributions across businesses. Interest-bearing deposit costs declined 21 basis points from sustained cost reduction, despite growth in average balances. Overall, liability funding costs moved 12 basis points lower from Q4, mostly from lower deposit costs as well as reduced borrowing costs stemming from less reliance on short-term FHLB borrowings. On the asset side, the securities yield rose 5 basis points from the prior quarter to 4.59% due to a shorter day count. Despite the elevated level of security sales during the quarter, we were able to reinvest at slightly higher rates due to the recent backup in rates. The HFI loan yield compressed 16 basis points following a full-quarter impact of rate cuts made in late October and December. Looking at slide nine, net interest income was stable versus Q4 at $766 million, supported by $1.1 billion of average earning asset growth and lower funding costs. Earning asset growth was driven by C&I loan growth as well as higher held-for-sale balances. Net interest margin expanded 3 basis points sequentially to 3.54%, reflecting meaningful reductions in funding costs. The interest cost of earning assets declined 12 basis points while the earning asset yield compressed only 8 basis points, with rounding accounting for the net 3 basis point improvement in margin. Strong back-loaded deposit momentum increased liquidity toward quarter-end, as evidenced by the significantly higher period-end cash balance despite a slight decline in average balances during the quarter. Turning to slide 10, the efficiency ratio of 56% and adjusted efficiency ratio of 48% both improved by approximately 8 percentage points year over year. We continue to realize strong operating leverage as year-over-year revenue growth outpaced noninterest expense growth by approximately 3 times. As discussed earlier, noninterest expense increased $22 million in Q1, or approximately $15 million when adjusting for the FDIC special assessment rebate recorded in Q4. The increase was primarily driven by seasonally elevated compensation costs as well as incremental expenses incurred to support higher Juris banking fee revenue. Deposit costs declined $8 million due to lower rates, although higher balances driven by momentum in HOA and Juris partially offset the benefit from the rate reductions. On slide 11, you will see we remain asset sensitive on a net interest income basis. When factoring in the potential impact on earnings from mortgage banking revenue growth and also reduced deposit fees, our model now indicates we are slightly liability sensitive on an earnings-at-risk basis in a down 100 basis point ramp scenario. In this scenario, earnings are now expected to rise 1.7%, mostly from improved forecasts in mortgage banking. On slide 12, we highlight several metrics demonstrating core asset quality remains stable, excluding fraud-related charge-offs. Classified assets as a percentage of total assets continued to improve, declining 36 basis points year over year to 1.08%. Criticized assets were largely stable sequentially, increasing modestly by $60 million to approximately $1.47 billion, while special mention loans increased $78 million quarter over quarter. The change was not thematic, and the balance remains $57 million below first quarter 2025 levels. Nonperforming loans and OREO declined 7 basis points quarter over quarter as a percentage of total assets. Now let us move to slide 13 to review our allowance and coverage ratios. Provision expense was $87 million, excluding the LAM charge-off, and replenished other net charge-offs as well as supporting incremental loan growth, primarily in C&I. Our allowance for loan losses remained constant at $461 million, or 78 basis points of funded HFI loans. The total loan ACL to funded loans ratio also remained constant at 87 basis points. Over the medium term, we expect the allowance for loan losses to trend into the low-80 basis point range, reflecting a higher proportion of C&I loan growth within the portfolio. Our total ACL still fully covers nonperforming loans, shifting higher to 105% coverage at the end of Q1 compared to 102% a quarter ago. Looking at capital on slide 14, our tangible common equity to tangible assets ratio declined approximately 50 basis points from year-end to 6.8% due to approximately $6 billion in asset growth, increased share repurchases of $50 million, and a rate-driven change in our AOCI position. We believe our active buybacks in Q1 were prudent uses of capital, given the modest difference between where our stock was trading in early March and our tangible book value per share. Nevertheless, our CET1 ratio remained at our targeted level of 11%. Turning to slide 15, tangible book value per share increased 13% year over year and has grown at an 18% CAGR since 2015. The gap between historical tangible book value accumulation and peers stands at four times. Western Alliance Bancorporation has been a consistent leader in creating shareholder value over the medium and long term. On slide 16, we have provided 10 metrics that highlight how we stack up against our peers on earnings growth, profitability, and other critical factors that drive financial results and create durable franchise value. We view these metrics as important in compounding tangible book value and ultimately generating a long-term superior total shareholder return. For the last ten years, our EPS growth and tangible book value per share accumulation have ranked in the top quartile relative to peers. We are also the leader in tenure and adjusted efficiency. We continue to make strides towards top quartile returns on average assets, deposit and revenue growth, and average tangible common equity. I will now hand the call back to Ken. Kenneth A. Vecchione: Thanks, Vishal. Our updated 2026 outlook is as follows. We reiterate our expectation for $6 billion of HFI loan growth, as our business pipelines remain robust. We will continue to actively evaluate risk-adjusted returns across the pipeline. Vishal Idnani: Should spreads become less compelling, our appetite for some of these loans may change. Our $8 billion deposit growth target remains unchanged. As you heard during our prepared remarks, excellent year-to-date deposit growth provides ample liquidity and flexibility to remix deposit concentrations in order to lower interest-bearing deposit costs, improve the NIM, and better position the bank to achieve EPS targets, while still achieving 2026 deposit balance objectives. As a result, it is reasonable to assume deposit balances should be flat in Q2, with performance returning to more normalized levels beginning in the third quarter. Our CET1 target remains 11%. We continue to evaluate capital levels relative to peers and believe our current position remains appropriate. Accordingly, we do not expect capital ratios to meaningfully change from these levels over the near term. Net interest income growth continues to be projected in the range of 11% to 14%. While the range is unchanged, we now expect results to trend towards the upper end of the range. This reflects three key factors. First, our largely variable-rate loan portfolio benefits from an outlook which now assumes no rate cuts this year, compared to one cut previously assumed in Q2 and one in Q3. Second, our full-year loan growth outlook is unchanged. Third, optimizing deposit composition will provide opportunities to mitigate interest expense as interest income accelerates with loan growth. Taken together, we expect the net interest margin to experience modest expansion relative to full-year 2025 levels. Noninterest income, excluding the impact of security sales, is projected to grow between 13% and 17%. This reflects strong underlying momentum across the franchise, driven by higher expected growth in our Juris banking business and a return to the solid trajectory in mortgage banking activity experienced prior to the March rate volatility. Previewing April’s results, mortgage performance has begun to return to January and February levels. Improved growth in commercial banking fees is also expected to contribute to higher fee income growth. Total noninterest expense is now expected to increase between 7% and 11%. Our deposit cost range of $650 million to $700 million reflects higher average balances from stronger performance in select deposit businesses as well as the removal of projected rate cuts from our 2026 forecast. Operating expenses are now expected to be between $1.6 billion and $1.65 billion, driven by higher variable compensation, incremental costs associated with increased banking fee revenue, and continued investments in new business and technology. Importantly, these projections incorporate the $50 million of projected expense savings identified in early March, which will not impact LFI readiness or our key strategic growth initiatives. Our revenue and expense outlook continues to reflect solid operating leverage supported by continued improvement in our adjusted efficiency ratio. With respect to asset quality, we reaffirm our core net charge-off guidance of 25 to 35 basis points, excluding the two fraud-related charge-offs recognized in Q1. Based on current migration trends and the expected cadence of NPL resolution efforts, we anticipate full-year results will be at or slightly above the midpoint of this range, with charge-offs declining in the back half of the year. Our full-year 2026 effective tax rate outlook remains approximately 19%. And finally, we are excited to host our inaugural investor day in less than three weeks. We look forward to seeing many of you there in person on May 12. We will now open the call for questions. Operator: We kindly ask that you limit your questions to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Timothy Clark with Piper Sandler. Please go ahead. Matthew Timothy Clark: Hey. Good morning. Vishal Idnani: Good morning. Matthew Timothy Clark: Just to touch on the five, you wrote off $26 million, I believe, of the just under $30 million that you had reserved. And I think that suggests you have just around $70 million left tied to that exposure. Can you just give us a little color on whether or not you are relying on personal guarantees to cover the remaining amount here? Because I believe they are suing one another and not sure how easy it is to get at that liquidity. Kenneth A. Vecchione: I think I got your question. On our last earnings call, we said that we were in the process of getting and receiving appraisal values. All the properties have been appraised and all the appraisal values held to what we originally had forecasted or originally had in the old appraiser. That was good news, point one. Second bit of good news was that the liens in front of us were less than what we thought. So what we have done is mapped out several different strategies to resolve this issue, trying to collect on the equity that sits behind these buildings. At this time, we feel taking the charge-off of $26.5 million is reflective of the strategies we are going to put forward to collect the remaining equity value that sits behind all the properties. We have not incorporated any of the ultra-high-net-worth individuals’ guarantees in coming up with the $26.5 million, nor have we captured the mortgage bond, which is up to $20 million after a $5 million deductible. So that is why we said we took the $26.5 million now. We have a number of resolution strategies. This will take some time. We are not going to talk about this every quarter, but as we go through the resolution strategies and finally get to the outcome, we will then turn our attention to the high-net-worth individuals and go after them, and then also whatever we do not collect from them, we will then put against the mortgage bond. So we think the $26.5 million is appropriate now. We do not see any other charge-offs or reserves coming from this point, and we believe recoveries will come later on in the process. I hope that answers your question. Matthew Timothy Clark: That is helpful. Thank you. And then just on the service charges up again, driven by Juris. How should we think about a normalized run rate there? I know it is difficult, I am sure, to guesstimate, but what do you view as a more normal run rate? And I assume we would see a reset in related expenses from that business. Vishal Idnani: It is Vishal here. Thanks for the question. We agree it is hard to do this. These fees tend to be a little bit lumpy. As we mentioned, we have a leading practice with the mass tort settlement here. We did talk about the Facebook Cambridge Analytica settlement that we had, and I think we got more of the revenue from that in the first quarter than we initially anticipated. So that is why you have the elevated number in Q4 and Q1. We do anticipate that number going down in Q2 and Q3, and then in Q4, you could see a higher spike as well. But it is hard to give you more clarity around that because it will just depend on how that comes through. What we will say is that the business continues to do well, and we have won the next large settlement. It is just a matter of timing around that. Operator: Your next question comes from the line of Jared David Shaw with Barclays Capital. Please go ahead. Jared David Shaw: Hey. Good morning. Thanks. Vishal Idnani: Good morning. Jared David Shaw: When we look at the deposit costs on the guide there, how should we think about the ECR beta in this environment with now no cuts? Where should we think that ultimately settles out? Vishal Idnani: Hey. It is Vishal here. Overall, when we think about the ECR deposit beta, I think it is in line with what we were thinking before, which is 65% to 70% when you think about the three businesses that have ECRs. Obviously, they are very specific to each one. In the mortgage warehouse, we tend to think of the beta as up to 100%, maybe in the 90% to 100% range. The other two businesses we have are Juris and HOA. The deposit beta on that tends to be around 35%. So when you blend those together, you get that 65% to 70%. The next piece of your question is our deposit costs went up because we did take the rate cuts out of the forecast. Where do we anticipate that going? We are continuing to push down on the cost. Given the big increase in deposits in the first quarter, we are going to make a concerted effort here to optimize the deposit cost across the company throughout the rest of the year. I would also tell you on the mix of the ECRs, we are planning to hold the mortgage warehouse deposits more flat and focus more growth in HOA and Juris. That should also help push the ECR cost down over the course of the year. Jared David Shaw: Okay. Thanks. And then as my follow-up, looking at asset quality, and maybe the criticized/classified, how are you looking at your exposure to software companies in the tech and innovation sector? Is that driving any credit migration here? Kenneth A. Vecchione: No. It is not driving any credit migration at this time. The conversation that is out in the marketplace is really around private credit. We have a very limited exposure inside of our private credit book to technology, and specifically software companies are under 5% of our total book. More importantly, we have such a granular approach in that book of business whereby all the credit that we have granted to the clients is roughly $4 million on average in commitment and $2 million drawn against the $4 million of commitments. So we are not seeing any problems in that book at this time, and it is not reflected in our criticized or classified asset viewpoint. Operator: Your next question comes from the line of Casey Haire with Autonomous. Please go ahead. Casey Haire: Yeah. Great. Thanks. Good morning, guys. Kenneth A. Vecchione: Good morning. Casey Haire: I have a million questions on NIM. I guess I will start with the loan-to-deposit ratio. Vishal, I heard you say you plan to get normalized cash and get back to a mid-70% loan-to-deposit ratio. Just in terms of timing, how quickly do you expect to get there? And a little more color on the deposit optimization plan if you can. Vishal Idnani: On the loan-to-deposit ratio, that is the target. When you think about our loan and deposit growth targets, $6 billion and $8 billion, that is 75% when you think about the target. I would say by the end of the year, that is the plan. It will also come down to the deposit optimization. We might actually see deposits in the second quarter not at the typical run rate you would see from us given this optimization. Plan for it at the end of the year. Hopefully, we will get there on the sooner side because we are trying to bring loan growth up to the earlier part of the year. On the deposit optimization, we are going to continue to work through that. As you can see from the first quarter, up $5.6 billion in deposits, close to our $8 billion target already, I think it just gives us a lot of flexibility to go to the highest-cost deposits in the bank and see where we can push those rates down. Casey Haire: Okay. Great. And then on the capital front, have you guys looked at the Basel III proposal and what that means for you guys in terms of capital ratio lift? Kenneth A. Vecchione: Yeah. Actually, it is very positive for us. All in, we expect it, based on the rules that we are reading, to increase CET1 by 81 basis points. Operator: Your next question comes from the line of David Charles Smith with Truist Securities. Please go ahead. David Charles Smith: Hey. Good morning. Vishal Idnani: Morning. David Charles Smith: If the operating expense guide is $20 million lower than January following the $50 million in mitigating actions, does that mean that you are expecting an extra $30 million of variable comp for production? Or is there anything else underpinning that as well? Vishal Idnani: You are right. We mentioned $50 million. We are only down $20 million. The answer there is twofold. One, our Juris banking fee income was higher than we anticipated, and therefore, what you are seeing are the expenses which find their way into operating expenses. And the second thing that we said in our prepared remarks is that we expect the mortgage business to do better than we initially planned, and the variable compensation relates to the fact that we will be hiring up people to support increases in mortgage income. So those two or three things taken together bring the operating expenses down by $20 million. David Charles Smith: Okay. And then you mentioned the plan to hold mortgage warehouse deposits flat over the course of the year. If the market is rebounding from a depressed level in March, does that mean that you are expecting to lose share somewhat in mortgage warehouse? Or can you expand on that? Vishal Idnani: So let us be very candid here. We are trying to finesse the deposit growth and deposit pricing in this bank. We are starting with warehouse lending where we have some of the higher-cost deposits. We are going to work with our clients to see if we can move some of those higher-priced deposits out of the bank. We expect that our overall deposit growth for Q2 will be flat because we will be accelerating some of these deposits outside of the bank. We then expect Q3 to have its seasonally high production, and we expect less runoff in Q4 since we moved a lot of the deposits out of the bank in Q2. This is a finesse operation. We will give you more update on this, a little more color, at the investor day as we work with our clients to do this as well. This is a little bit of a tougher one to forecast, but the direction is very clear, which is we are trying to lower deposit costs, lower interest expense, help support NIM going forward, and actually bring up our loan-to-deposit ratio so we do not have to carry this excess liquidity at either a flat or negative drag to the bank. Operator: Your next question comes from the line of Timur Felixovich Braziler with UBS. Please go ahead. Timur Felixovich Braziler: Hi. Good morning. Kenneth A. Vecchione: Good morning. Timur Felixovich Braziler: Ken, you had made a comment about reevaluating credits, the macroeconomic backdrop, and the geopolitical environment when talking about pushing out some of the loan growth into the second quarter. Can you maybe unpack that comment a little bit? And maybe what does that mean for loan composition going forward, if that changes at all? Kenneth A. Vecchione: I think we were just a touch conservative here, and we did not push to accelerate closings in this quarter. We had the time to negotiate. There was not an urgent press from the clients to close before the quarter end, and we just took a little bit of a wait-and-see approach. What we are seeing and what we are feeling and what we are reading—and this is your guess as good as ours—we feel there will be some type of ceasefire that will continue on. We are certainly seeing the robust pipelines that are in front of us, and we are still encouraged that we will achieve the $6 billion on a go-forward basis. Timothy R. Bruckner runs regional; he is sitting here. Tim, do you have anything you want to add to that? Timothy R. Bruckner: Yeah. I think when you really look at Q1 in particular, and it signals a view into our look-forward, we really saw the preponderance of the asset growth in those core commercial full-relationship segments that we have consistently talked about on this call. Where we pulled back a little bit or showed some hesitancy was in some of the asset-specific finance-oriented segments, predominantly the commercial real estate-related segment. So we are really committed to that full relationship. Growth in our pipelines in those segments is robust and, of course, with appropriate sensitivity to the market conditions. Timur Felixovich Braziler: Okay. And then one on credit for me. Just maybe reconcile your comment on being past peak credit with just the pickup in special mention and 30- to 89-day delinquencies. And I am wondering, with the allowance ratio here at 78 basis points, if there is anything incremental that would need to be done there as we get closer to or breach that $100 billion level. Kenneth A. Vecchione: I am going to team up here with Bruckner on this answer, but first part on the special mention: special mention increasing $75 million is really no big whoop, alright, and I would not get nervous about it. When we looked at fourth quarter results for our peer group, for example, which consists of 22 banks, our total criticized assets, which includes special mention, were 15.7% of criticized assets to Tier 1 capital plus ACL. That is well below the peer median of 25.5%. It actually puts us at the third best of the 22 peer group. So, at our size, having something move in and move out does not necessarily mean our asset quality is deteriorating or getting materially better. What we do here—you have heard this—is an early process of early identification, escalation, and then resolution. Timothy R. Bruckner: I would really say on special mention, that is a transitional rating. That is a rating that signals early warning and a potential problem loan, and we use it in a very directed way as transition. If something has the characteristics that, with the passage of time, would result in a problem, we mark that as a problem loan. Our credit process is conservative in that respect, and we push resolution. Early elevation, early resolution is our mantra there. Kenneth A. Vecchione: And on ACL reserves, I think what we said last quarter and still holds true this quarter: as we migrate and change the loan composition here, moving more into C&I, you will see the loan loss reserve move up from where it is today at 78 basis points into the low 80s. You will see that all throughout the year, and I would expect the provision will follow that. So you ought to plan accordingly, and that is very consistent with what we said last time. Operator: Your next question comes from the line of Christopher Edward McGratty with KBW. Please go ahead. Christopher Edward McGratty: Great. Good morning. Kenneth A. Vecchione: Good morning. Christopher Edward McGratty: Ken and Vishal, on the pace of buybacks, you mentioned, obviously, being there to step in when the stock was weak in the quarter. How do we think about balancing the benefit from Basel over time, the low valuation in your stock, and the strong capital position? Is there a scenario where you could perhaps slow or further optimize the balance sheet and just lean more on the buyback given the valuation? Kenneth A. Vecchione: Strategically, what is very important for us is to work to continue to lower deposit costs. We have several businesses—corporate trust, business escrow services, our digital asset group, and Juris Banking—that really depend on credit ratings from the rating agencies, and we are investment grade. It is very important to sustain that or improve those investment ratings. We think keeping our CET1 ratio at 11% is the appropriate thing to do and, slightly over time, continue to migrate that number upward. For long-term value, it is more important for us to maintain the ratings. Secondly, unlike many of our peers, we still see a very strong pipeline in front of us. Longer term, we think having the capital to support that long-term growth will help investors and will support investors’ trust in us as we continue to grow the bank. So, Chris, we are not expecting to go deep back into the market to do stock buybacks. They are not in our models right now. If there is a reason for the stock—if it gets disrupted in the market—then we will come back and look to support it as we did in Q1. Christopher Edward McGratty: Understood. Thanks for that. And then just digging into the mortgage a little bit, could you help us on a Q2 estimate for mortgage revenues? You mentioned trends in April reverted back to early Q1. I know there have been moving parts—servicing and production. Thanks. Vishal Idnani: I can jump in on this. I will make a couple of comments on mortgage banking. We were in line with the same quarter a year ago. Obviously, the business is seasonal. We were down $18 million from the fourth quarter of last year. As Ken mentioned, we are very constructive on the trajectory of mortgage banking in 2026, especially given the current administration’s focus on home affordability. January and February were good months. In March, there was a slowdown with the spike in interest rates. Fortunately, we are seeing that activity come back in April. For the full year, we are expecting revenue from mortgage banking to grow about 15% over last year’s level. Encouragingly, the gain-on-sale margin was up 7 basis points quarter over quarter and up 18 basis points from the same quarter a year ago. That margin improvement is being driven by increased retail recapture volume at AmeriHome, and we hope to see that continue. While volumes were down in Q1 compared to Q4, volumes were materially up 18% from Q1 last year, and the trajectory looks good for the rest of the year. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Please go ahead. Gary Tenner: Thanks. Good morning. I just wanted to check to make sure I understood the way you are parsing that lender finance data on slide 20, that private credit slide. Does that $2.3 billion basically represent the rightmost slide, the NDFI—slide 24—or make up the vast majority of it? Is that the right way to think about it? Vishal Idnani: I think if I got your question right, you are trying to figure out, on page 24 where we break out the NDFI bucket, where that lender finance sits. It is going to be in that business credit intermediary. The large proportion of that 5% of the loans—call it about $3-something billion—is going to be our lender finance book. Our lender finance book on page 20 is $2.3 billion within that category when you look at the NDFI loans. Gary Tenner: Okay. That makes sense, and that is what I was thinking. I am just curious—you point out that the average funded amount per obligor is quite light. I am just curious on the level, the average would be around $40 million I think. So I am wondering what the range is and what the top end of exposure is on the fund level. Kenneth A. Vecchione: The top end for any one credit inside of our private credit portfolio is about $60 million of commitment, of which we have about $30-odd million funded, and that is the largest credit that we have. As we said, it is very granular inside of our private credit book. Gary Tenner: Alright. That is very helpful. Thank you. Kenneth A. Vecchione: I will just add on that: I did a tour maybe three, four weeks ago, as soon as all the private credit noise hit the market, with our largest private credit clients—and you would all know them by brand names. What they were telling us was exactly what we were seeing inside of our book, which was credit was performing well. There were redemption requests mostly coming from the retail side of their LP base, and institutional LPs were remaining confident about performance. We are clearly seeing that as well inside of our book. Vishal Idnani: And, Ken, if I can add just a couple of things on the book. On page 20, you will see how granular it is. The other thing we would flag here in this bottom right bullet is we actually also serve as the trustee on about 60% of this, which helps us a lot in terms of oversight and monitoring the cash flows in and out on a bunch of these deals. Operator: Your next question comes from the line of Analyst with TD Cowen. Please go ahead. Analyst: Hello. So just to piggyback on the earlier question, can I interpret that as within the lender finance, there is no loan that is over $100 million in size? And if we broaden that outside of lender finance—just overall—are you able to share the number of exposures that are over $100 million in size as an example? Kenneth A. Vecchione: No, we are not going to share that, but loans to funds are much larger. Inside of the fund, the composition of the clients inside of that fund—or the borrowers that they are lending to—are the numbers that I just reported. But, yes, we have larger size. We have about 40 major funds that we are doing business with, and the size is larger. Analyst: Got it. And if I look at the lender finance portfolio, the $2.3 billion, when you were talking about the reserve ratio over time in the medium term coming down to low 80s—Is there any change in reserve methodologies that you would embed differently on the lender finance portfolio going forward? Or how should we think about— Kenneth A. Vecchione: Let me just change that statement for you. We are moving the loan loss reserve from 78 to the low 80s. We are not taking it down, okay? You are not going to be seeing releases here. We are looking to build our provision over time. In fact, looking at this last night, from about three or four quarters ago, our peer group has increased their reserve by 11 basis points on average, and over that same time, we have increased our reserve by 10 basis points. But we do not plan to release anything. Vishal Idnani: You may be looking at the total ACL to funded HFI loans, which sits at 87 basis points right now. You are going to see that trend into the low 90s. As Ken mentioned, the loan loss reserve to funded HFI loans is at 78 basis points. That was flat quarter over quarter. We are going to push that into the low 80s. You will see that with the natural movement in the loan balances, and the total ACL to funded loans is going to go from 87 to the low 90s. Analyst: Right. That is what I was referring to. Thank you for the clarification. Is the lender finance portfolio going to grow further from here along with the size of the rest of your loan book, or would you like to slow the growth in this segment for any reason? Kenneth A. Vecchione: I think it will grow as the rest of the portfolio grows. I do not think we are going to put any incremental acceleration to the private credit book at this time. Operator: Your next question comes from the line of Analyst with Wells Fargo. Please go ahead. Analyst: Hi. Thanks for taking the question. I just want to follow up on Timur’s question earlier. What would it take for the loan reserves—the all-in measure, if you will—to go to 1%? Kenneth A. Vecchione: If you want the numeric number, take the percentage and multiply it by ending loans. But if you are wondering what it would take, it would take a change in the economy. We are not seeing that. The economy is strong. We have a process here whereby the first line presents and develops the loan loss reserves. Second line comes in and reviews and comments on it. We have a third line that comes in to make sure that the first and the second lines are doing it correctly. Then we have the Federal Reserve, and our outside auditors come in and review the whole process. So I cannot walk in here and say, “Let us move it up 20 basis points.” I have to have a foundation for that. Everything is based on economic forecasts, and we base them off of Moody’s, and then we look at our overall portfolio. I will remind you, half of our portfolio really has never had a loss. Vishal Idnani: And when you look at the total ACL to funded loans—the 87 basis points—and we have about $8 billion of resi mortgages where we have sold credit, if you just move that out of the loan base, the ACL to funded loans is 1%. Analyst: Got it. Thank you. And then just for clarification, is there a run-rate number you can give for the service fees at all, or did you just give some directional commentary on where it is going over the next few quarters? Vishal Idnani: We are not going to provide a run rate here. We have given guidance for what the fee income is going to do over the course of the year, and you can back out the securities gains and see that growth of 15%. We have also given guidance around what we think mortgage banking will do within there. You can back into the number. We do see that number trending down in the second and third quarter on service charges and fees and then back up in the fourth quarter, but it will get you to the full run-rate guide that we are giving here in the deck. Operator: Your next question comes from the line of Bernard von-Gizycki with Deutsche Bank. Please go ahead. Bernard von-Gizycki: Hey, guys. Just on the resolution process that you previously mentioned during the quarter—the $126 million charge-off against the LAM loan—you identified the $50 million security gains and the $50 million of cost savings. The remaining $26 million, that may be already covered in the updated fee guide, but any updated color on this? Kenneth A. Vecchione: You are right. We took $50 million in revenue and $50 million in expenses. We have not articulated how we are going after the last $20 million or $26 million. We will see if we can work our way to resolving that during the course of the year. But we have enough in front of us to do. Quite frankly, you and many of your colleagues were suggesting that we should not fully resolve the $126 million charge-off, to ensure that we have enough money available for product development, enhanced services, and also to ensure that our loan growth and deposit growth continue on the trajectory that they are at. So we have been taking that advice to heart, and we only offset $100 million against the $126 million as a solve. Bernard von-Gizycki: Great. And then from here, the Investor Day is coming up. Any preview on what you intend to convey? Any big-picture messaging you can share with us today? Kenneth A. Vecchione: We are not like MGM where we give a preview, but one of the things that we are going to talk about is the question we get all the time: why can we grow when other banks cannot? We are going to spend time showing you how we grow and how we think about growth over several horizons, and how the growth that we have is not by accident, and it is not that we run forward to anything that is fashionable today. It has been well thought out for an extended period of time. I think it will be interesting to have you look under the hood and see how we position ourselves for growth inside the bank. Operator: Your next question comes from the line of Anthony Albert Elian with JPMorgan. Please go ahead. Anthony Albert Elian: Hi. Ken, your earlier comment on accelerating some deposits out of the company—I do not think I have heard that before, from a company that has grown as fast as you do. Is that entirely driven by taking a sharper focus on ECR costs now? Will the plan to move deposits out of the company be fully completed here in 2Q? And any other areas of focus as part of this deposit optimization plan? Kenneth A. Vecchione: Stepping back and taking a big-picture look, our bank grows every year about the size of a small regional bank. Most banks do not do that. That is point one. Point two, we had a phenomenal deposit growth quarter. It exceeded our wildest imagination. We thought we would maybe get to $3 billion; coming in at $5.6 billion was far greater than we thought. Third, where those deposits came from—they came in from some of our higher-priced customers, which led us to take a step back and ask, how do we optimize here? What we are trying to do—and as I said earlier, this is a finesse game—we have already started the process to remix, maybe reprice, and encourage some deposits to leave the bank. We are trying to be aggressive on it, and we are trying to get it done quickly by the end of the second quarter. That is why we have given the guidance that our deposits may be flat quarter to quarter. But a lot of this is also going to depend on our clients and what they want to do. That is the game plan, and we will be able to report on it in a little more detail on Investor Day. The goal is to work to bring deposit costs down by doing that. It is either interest expense or it is on the deposit cost side. Anthony Albert Elian: Thank you. And then is the outlook for higher ECR costs entirely coming from now assuming no cuts versus the two cuts previously? Or is this mix shift change—the deposit optimization plan—embedded in the deposit growth outlook of what you expect? Thank you. Vishal Idnani: Sure thing. I would say the large preponderance of it is removing the two rate cuts. More than half of that delta—you will see the deposit costs are going up $115 million at the midpoint—more than half of that is backing those two rate cuts out. The other driver has to do with volume. Volume was much higher in the first quarter. If you actually were to maintain those balances, you are going to just have higher deposit costs as well. The offset to this is what Ken talked about, which we are going to work through here over the next quarter: how do you adjust for that and optimize it? Basically, we are giving you the higher deposit guide here. It includes the base-case run rate we have right now. It is a mix of rate and volume, driven primarily by rate. Operator: That concludes our question and answer session. I will now turn the call back over to Kenneth A. Vecchione for closing remarks. Kenneth A. Vecchione: The only thing I will say is we look forward to seeing you all on May 12 in New York. I think the start time is 08:30 for our first investor day. We look forward to spending more time with you. Thanks again for your time and attention today. Operator: Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect.
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.