加载中...
共找到 17,943 条相关资讯
Operator: Greetings and welcome to NETSTREIT Corp. First Quarter 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Miller. Thank you. You may begin. Good morning, and thank you for joining us for NETSTREIT Corp.’s First Quarter 2026 Earnings Conference Call. Matt Miller: On today's call, management's remarks and responses to your questions may contain statements considered forward-looking under federal securities law. These statements address matters subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information on these factors, we encourage you to review our latest Form 10-K and other SEC filings. All forward-looking statements are made as of today's date and NETSTREIT Corp. assumes no obligation to update them in the future. In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions, reconciliations to the most comparable GAAP measures, and an explanation of their usefulness to investors. These materials can be found in the Investor Relations section of the company's website at netstreet.com. Today's call is hosted by NETSTREIT Corp. CEO, Mark Manheimer, and CFO, Daniel Donlan. They will make some prepared remarks followed by a Q&A session. With that, I will turn the call over to Mark. Mark Manheimer: Thank you, Matt, and good morning, everyone. Thank you for joining us today to discuss NETSTREIT Corp.’s first quarter 2026 results. I want to begin by thanking our entire team for their outstanding execution, and we carried strong momentum from our record 2025 into the new year, and the organization has hit the ground running. In the first quarter, we saw continued acceleration on the investment front. We closed on $239 million of gross investment activity, driven by well-priced opportunities in our core necessity and service-based sectors including grocery, convenience store, quick service restaurants, auto service, and other essential retail. These investments were completed at an attractive blended cash yield of 7.5% and a weighted average lease term of 14.1 years. Complementing this, we executed targeted dispositions that further enhanced portfolio quality, reduced tenant concentrations, and recycled capital into higher quality, longer duration opportunities. This robust start to the year reflects the depth of our sourcing platform and our team's ability to move quickly across a number of smaller transactions while still adhering to our stringent underwriting criteria. While there have been a few new participants enter the net lease business in recent years—something that has happened in each and every cycle—the market remains extremely fragmented and rife with attractive opportunities. Turning to the portfolio, we ended the quarter with 804 properties, leased to 138 tenants across 28 industries and 46 states. Our weighted average remaining lease term increased to 10.2 years while the percentage of investment grade and investment grade profile tenants remained flat at 58.3% of ABR. Unit-level rent coverage across the portfolio remains healthy, and ticked up slightly to 3.9x. Occupancy remained at 99.9%, but subsequent to quarter end, our occupancy has returned to 100%. In early April, we backfilled our lone vacancy, a former Big Lots location, with a rated TJ Maxx at a more than 20% increase in rent. While vacancies have been extraordinarily rare in our portfolio, this execution highlights the expertise of our real estate underwriting and asset management teams. On the balance sheet, we continue to maintain a conservative and flexible capital structure. Following the capital raising completed in the quarter, our leverage was an industry-leading 3.2x. With substantial liquidity under our revolving credit facility, and the benefit of previously raised forward equity, we are well positioned to fund accelerated growth without compromising our leverage targets. Given the capital raise during the quarter as well as the strong momentum in our investment pipeline and attractive opportunities we are seeing, we are increasing our full-year 2026 net investment activity to a range of $550 million to $650 million. We are increasing the bottom end of our AFFO per share guidance range to $1.36 to $1.39. In summary, the first quarter represented an excellent start to 2026, highlighted by strong momentum on the acquisitions front and opportunistic capital raising, which largely takes care of our 2026 equity needs. Our differentiated strategy—focused on high quality real estate, rigorous underwriting, proactive portfolio management, and a low leverage balance sheet—continues to position NETSTREIT Corp. for sustainable long-term growth and value creation. With that, I will turn the call over to Dan to review the first quarter financial results in greater detail. We will then be happy to take your questions. Daniel Donlan: Thank you, Mark. Looking at our first quarter earnings, we reported net income of $5.7 million or $0.06 per diluted share. Core FFO for the quarter was $32 million or $0.32 per diluted share, and AFFO was $33.2 million or $0.34 per diluted share, which was a 6.3% increase over last year. Turning to the expense front, our total recurring G&A in the quarter increased 9.7% year-over-year to $5.8 million, which is mostly the result of increased staffing and further investment in our team. That said, with our total recurring G&A representing 10% of total revenues this quarter, versus 11% in the prior-year quarter, our G&A continues to rationalize relative to our revenue base. Turning to the capital markets, we completed a 12.6 million share forward equity offering in early February, which raised $230.3 million of net proceeds. This was supplemented by our ATM activity of 4 million shares or $73.8 million of net proceeds. In total, we sold 16.6 million forward shares or $304.1 million of net proceeds in the quarter, which puts us in an excellent position to fund our forecasted net investment activity this year. Turning to the balance sheet, our adjusted net debt, which includes the impact of all forward equity, was $629 million. Our weighted average debt maturity is 3.8 years, and our weighted average interest rate was 4.27%. Including the extension options, which can be exercised at our discretion, we have no material debt maturing until February 2028. In addition, our total liquidity was $1.1 billion at quarter end, consisting of approximately $11 million of cash on hand, $412 million available on our revolving credit facility, $606 million of unsettled forward equity, and $100 million of undrawn term loan capacity. From a leverage perspective, our adjusted net debt to annualized adjusted EBITDAre was 3.2x at quarter end, which remains comfortably below our target leverage range of 4.5x to 5.5x. Moving on to 2026 guidance, we are increasing the low end of our AFFO per share guidance to a new range of $1.36 to $1.39 and increasing our net investment activity guidance to $550 million to $650 million. We continue to expect cash G&A to range between $16 million and $17 million. In addition, the company's AFFO per share guidance range now includes $0.03 to $0.06 of estimated dilution due to the impact of the company's outstanding forward equity, calculated in accordance with the treasury stock method. Lastly, on April 16, 2026, the board declared a quarterly cash dividend of $0.22 per share. The dividend will be payable on June 15, 2026 to shareholders of record as of June 1, 2026. With that, operator, we will now open the line for questions. Operator: Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Haendel St. Juste with Mizuho. Please proceed with your question. Haendel St. Juste: Hey, good morning and congrats on a strong quarter here. It seems like things are clicking on all cylinders here. I was curious about the level of activity in the first quarter. It was close to a record quarter for you. If you think about what that implies for the rest of the year, it seems there is a pretty meaningful slowdown in activity. So maybe some color on what you saw in the first quarter that drove such robust activity and what you are seeing in the pipeline, and maybe expectations near term, given what the new guide implies for activity going forward. Thanks. Mark Manheimer: Thanks, Haendel. It was a very strong quarter, similar to the fourth quarter that we just had. We are seeing very attractively priced opportunities that fit our investment criteria, which I think is a credit to the acquisitions team and the underwriting team. We are getting all that through the system pretty quickly. We are seeing a very similar environment right now. Pricing, we expect to remain relatively the same, give or take 10 basis points. We just want to be conservative with what is going to happen in the back half of the year. We certainly feel very comfortable that we can sustain this level of acquisitions, but we want to make sure that we are out ahead of our capital needs. Haendel St. Juste: That is helpful. Anything more on the competitive side that you can share? There has been lots of geopolitical and macro volatility. Are you seeing some of the private equity players step back a bit here? Your ability to win your fair share of deals seems to not face any headwinds. How are you thinking about the competitive set and whether the landscape near term will be more of the same or perhaps change in the level of volume or competition given what we are seeing in the macro? Thanks. Mark Manheimer: I think it is a credit to the net lease space that there are more people looking to get in. There are a few that have been pretty active. We are not really running into them very often on a one-off basis. Competition has been in the space for a long period of time. If you go back to post financial crisis, you had Cole and ARC and the non-traded deploying a ton of capital—even more than what we are seeing from the private equity world—and there were still plenty of opportunities for the publicly traded REITs that had a reasonable cost of capital to go out and compete. I would not expect that to change. They may look to acquire more than what they have done in the past, but I do not think that is going to have a huge impact on pricing and our opportunity set. Haendel St. Juste: That is great. Thank you, and congrats again. Operator: Our next question is from John Kilichowski with Wells Fargo. Your line is now live. John Kilichowski: Good morning. Thank you. My first question is on the treasury stock method dilution in the quarter. Could you tell us what your expectations are—what is included at the midpoint in terms of expectation of price versus the low end and the high end? Daniel Donlan: I do not want to go too much into detail. We are expecting $0.03 to $0.06. At the midpoint, call it 4.5. I think we have been fairly conservative on the high end, probably assuming even more than kind of 4.5. Our expectation is that we will drift somewhere into the low $20s and stay there. To the degree that does not happen, that would probably be upside relative to what we provided. We kind of stair-step up the price per share from where we ended the quarter each and every quarter this year. There is a healthy amount of conservatism baked into the high end, just from a dilution standpoint. John Kilichowski: Thanks, Dan. And then maybe a follow-up: what is your strategy to manage those forwards? You have some older dated outstanding forward. Does your strategy for managing those change based on the stock price? And how does this impact your growth profile heading into 2027 as you get rid of these and maybe have a faster churn of your forwards into new investments? Daniel Donlan: The dates really do not matter to us. What matters is what are the lowest price forwards that we have. There is a 12-month expiration to these. We have not had an issue extending those. It is really just taking the lowest price forwards and settling those first because those are the most dilutive. As far as our plan for this year, we would like to get done with everything that is still outstanding that we sold in 2024 and 2025. You should expect that to occur ratably over the course of the year. Mark Manheimer: And you hit on something important there too, John. Looking to 2027, we are taking some of that dilution now that just makes it more accretive when we actually do take down the shares and really allows us to have better growth in 2027 and future years. John Kilichowski: Very helpful. Thank you. Our next question comes from Greg McGinniss with Scotiabank. Your line is now live. Greg McGinniss: Hey, good morning. With the G&A guidance maintained, plenty of liquidity, and a good acquisition market, is there any push or need in your mind to increase the size of the acquisitions team given the success they have had and the potential for more going forward? Mark Manheimer: That is a good question. Right now, the acquisitions team is really humming and bringing in a ton of attractive opportunities. The filter has been pricing and where we are getting the best risk-adjusted returns. I do not necessarily think adding more team members automatically translates into a lot more volume, but we are always making sure that we have a deep enough bench. The team gets along great, fits very well with our culture, and is bringing in plenty of opportunities for us to hit our growth goals and beyond. Greg McGinniss: And then on the disposition side, a healthy 6.6% cash yield on those. Anything specific there that you can talk about or the types of tenants or assets that you either sold in Q1 or that you are looking to sell later this year? Mark Manheimer: The difference between this year and last year is you are going to see fewer dispositions. We are always open to selling any asset in the portfolio if someone is willing to pay us an aggressive cap rate, but it is going to center less on tenant concentrations—although you will see a couple here and there with some pharmacies and maybe a couple of dollar stores—and more on where we are seeing potential deterioration, whether corporate credit or unit-level performance. We like to get well out ahead of that. We have been successful doing that, getting ahead of some risks well before they start reaching headlines and become more difficult to sell, which is why our credit loss stats are what they are. Michael Goldsmith: Good morning. Thanks for taking my questions. Investment volume was robust in the first quarter. You took up the acquisition guidance materially and you have the prefunding. What are the factors that would limit your acquisitions going forward? The fourth quarter was strong, first quarter was equally strong. Should we expect you to continue to step on the gas, or what would hold you back? Mark Manheimer: We have visibility 60 to 90 days out. Beyond that, it is hard to predict—not only what the opportunity set looks like, but also the acquisition environment and pricing. With the war going on and a lot of geopolitical [inaudible], we did not want to get too far over our skis. It is something we are likely to revisit. If the market remains the same and our cost of capital remains the same, there is no reason why we cannot keep this clip going forward for several quarters. Michael Goldsmith: As a follow-up, you were able to continue to acquire quite a bit but at a similar cap rate. You mentioned you were happy with the opportunities and the risk/reward. Can you talk about the pricing environment and what would need to happen for it to change and turn less favorable? Mark Manheimer: The number one thing that could make it less favorable also has an offset where our debt would get cheaper. If interest rates come down, you may see cap rates come down along with it. I do not foresee a slowdown in the opportunity set. Go back to 2021, when the five-year was under 1% until the end of the year. That allowed a lot of small family offices to enter the space and put five-year debt on acquisitions. That is coming due at higher interest rates. We are starting to see some of those groups that maybe do not want to refinance looking to sell smaller portfolios. I think that continues through the rest of the year because that really cheap debt through 2021 with five years gets you through 2026 and into 2027. Hard to predict a slowdown in the opportunity set. Interest rates can drive some cap rates down, but we do not really see that happening too much in the short term. Michael Goldsmith: Thank you very much. Good luck in the second quarter. Matt Miller: Thanks, Michael. Operator: Our next question comes from Jay Kornreich with Cantor Fitzgerald. Your line is now live. Jay Kornreich: Hi, thanks. Good morning. I wanted to ask about tenant credit and the watch list. Recognizing it has only been a couple of months since last quarter’s earnings, have there been any changes to the watch list or how you are thinking about bad debt baked into guidance? Mark Manheimer: We do not see much of a change. If you look at the histograms that we provide in the investor presentation on slide 13, you have seen some improvement across the board with unit-level performance as well as corporate performance improving a little bit. We have a few assets under 1x coverage—believe there are three assets that fit that category—and three or four that are CCC+ on an implied rating basis. Those are ones we are paying attention to, but in each situation we feel like we will have a pretty good outcome. I do not see much impacting AFFO for the next several years. Jay Kornreich: Thanks for that. And then on the dilution from the treasury stock method accounting, should we expect that number to come down throughout the year as you settle forward equity, or as you employ future capital markets activity is that $0.04 to $0.05 range more of a sticky number to expect going forward? Daniel Donlan: It is difficult to answer because I do not know where the stock price is going to go. You should expect us to model the stock price rising throughout the year. Even though you are settling more shares and therefore there would be less dilution from those shares, the dilution stays about even because the stock price is going higher throughout the year. That is how you should think about it. It is certainly going to be higher than what it was in the first quarter. Our average stock price in the quarter was $19.26. As we sit here today, it has been in the $19s and $20s. The midpoint assumes you are staying around the $20 to $21 level, and that probably equates to anywhere from 4 to 5 million shares every quarter until you get out to next year. Jay Kornreich: Okay. That is helpful. Thank you. Operator: Our next question comes from Smedes Rose with Citi. Your line is now live. Smedes Rose: Hi, thanks. I wanted to ask more about what you are seeing in the opportunity set. It looked like you leaned into convenience stores a little more in the quarter. You have talked in the past about QSRs and maybe some more fitness. Where do those line up on your interest level right now and any pricing changes around those categories? Mark Manheimer: We did buy more convenience stores in the quarter. That is probably not going to be the case as much in the second quarter. What we will be buying will be a little more diversified than what we typically have bought. In the first quarter, just under half of what we bought were sale-leasebacks, and a lot of that were convenience store operators—more regional operators buying smaller operators. That is our favorite type of sale-leaseback because you typically see fixed charge coverage go up after those acquisitions. Those were attractive opportunities. Right now, we are seeing a more diversified pool of assets that we have under contract and are looking forward to adding to the portfolio. The convenience store space is certainly one that we like. The fitness business is another one that we like as long as we are dealing with more sophisticated operators that provide unit-level coverage and we get comfortable they have enough members at those locations to generate strong rent coverage. We sourced a decent amount of those in the fourth and first quarters, maybe a little less so in the second quarter. Quick service restaurants is always an area that we like; sometimes the pricing can get pretty aggressive there, so it can be tricky, but we did buy a handful of Starbucks in the quarter that were really strong on Placer and are doing very well. Each quarter is a little different, but I would expect the second quarter to be a bit more diversified. Smedes Rose: We noticed that Family Dollar was upgraded to an investment grade profile from sub-investment grade. What drove that? Mark Manheimer: It was really that they were willing to allow us to put that out there. They are a private company now, and we are subject to NDAs. We cannot share everyone’s financial statements and condition. We got them to agree to allow us to disclose that. They have always been investment grade profile ever since they spun out, but now we are able to share that with the public. Operator: Our next question comes from Wes Golladay with Baird. Your line is now live. Wes Golladay: Good morning, everyone. I have a few housekeeping questions. For the TJ Maxx lease that you signed, has that tenant commenced paying rent as of this moment? Mark Manheimer: They have not. They have some work they need to do within the store. It is a relocation store for them, and we have about a year before they actually start paying rent. Wes Golladay: Okay. And we noticed a few loans were extended, but just for a very short period. Can you give us an idea of what is going on and the visibility on them being repaid? Mark Manheimer: You are probably specifically talking about Speedway. That is an ongoing negotiation where that will get extended much further. We may end up acquiring some of the assets—TBD a little bit—but it should have a very positive outcome for us. Wes Golladay: Thank you very much. Operator: Our next question comes from Eric Borden with BMO Capital Markets. Your line is now live. Eric Borden: Hey, thanks. Good morning. You continue to lean into IG profile and non-IG investments. They tend to have better escalators than true IG. Do you have an internal growth target for these assets? How should we think about longer-term internal growth for the overall portfolio? Mark Manheimer: You are right. We try to negotiate better escalators any time we can, and you have a little more leverage when you are doing a sale-leaseback and writing the lease. A lot of the sub-investment grade or IGP opportunities we are doing are in those categories. We try to get 2% annual; that is what we shoot for. On a blended basis, for future acquisitions we are probably going to be more in the 1% to 1.25% range, and that will continue to bring up our average escalators in the portfolio. Eric Borden: Great. Could you quantify what is assumed in guidance for bad debt? Daniel Donlan: At the midpoint, we are looking around 50 basis points. Eric Borden: Alright. Great. Thank you. Operator: Our next question comes from Michael Gorman with BTIG. Your line is now live. Michael Gorman: Thanks. Good morning. If we could go back to the forward equity for a minute. You have been pretty strong and opportunistic there. With more than $600 million outstanding, that, back of the envelope, is about 18 months’ worth of acquisition volume at a conservative leverage level. What is the target runway you want to keep? Is it that 18-month target, or how should we think about that? Daniel Donlan: Our leverage range is 4.5x to 5.5x—that is where we feel comfortable running the balance sheet. We could complete the $650 million at the high end of our guidance and still be at 4.5x. We will be opportunistic with the ATM where it makes sense. To the degree we continue to see opportunities at the same clip we saw in the first quarter, you should expect us to access that market when appropriate. Your assessment of the runway is fair, but we want to stay on our front foot and make sure we are never in a position where we have to raise. Michael Gorman: That is helpful. And then, Mark, thinking about the loan book again. With some of the volatility in the private credit space, are you seeing more opportunities on the loan side to expand that? If so, how are you thinking about that in the investment pipeline? Mark Manheimer: The answer is no. We are looking at providing developers with capital and some acquisition capital here and there for some people like we did on Speedway. We are not lending directly to tenants; we will likely avoid that. I do not expect private credit volatility to impact what we are doing. The opportunity set on the loan side is probably not as good as it was a couple of years ago, so I would expect us to do fewer loans on a go-forward basis. Michael Gorman: That is very helpful. Lastly, on C-stores—important exposure and a space you like, but evolving. 7-Eleven announced about 650 closures last week. Can you remind us how you think about underwriting the space, both existing and new—KPIs, formats, how you think about the sector? Mark Manheimer: The 7-Eleven news reflects that they are a very old company with a lot of older, smaller stores they are doing away with. We do not own any of those. We are constantly looking at a few factors: gallonage—whether it is going up or down—and inside sales. Those are two separate revenue drivers. We want to be sure they are getting enough volume and margins are staying the same. We are seeing consistent performance across our C-store operators, with gallonage up a little. Three years ago, we had 21 7-Elevens; now we have 13, because we are constantly evaluating which ones are doing well. The ones that are not will not stay in our portfolio until the end of the lease. Our weighted average lease term on our 7-Elevens is about 9.5 years, none below 8.5 years, so we have time to deal with that. Our locations are generating positive cash flow and are not related to the recent 7-Eleven news. There is a move toward larger formats across the board, but fundamentals have not changed: strong inside sales, strong gallonage, and the ability to push price without margin squeeze. If you can do that, you will be successful for a long time in the convenience store space. Michael Gorman: Great. Thank you for the time. Operator: Our next question is from Linda Tsai with Jefferies. Your line is now live. Linda Tsai: Given more volatility year-to-date in the 10-year, looking across your key tenant categories—C-stores, grocers, home improvement, dollar stores—have you seen cap rates shift more so in any of these categories? Mark Manheimer: They have been pretty consistent. We really have not seen much change. We have been at 7.5% for ongoing cap rate with a very similar mix of tenants. The tenant mix will probably change a little and be more diversified in the second quarter, but I would expect very similar pricing. We have not really seen much movement across the board. Linda Tsai: Thanks. A big picture question: your AFFO per share CAGR has been high single-digit since 2021. How do you think about the CAGR over the next several years? Daniel Donlan: We would like to maintain that level. This year at the high end, it is 5.3% year-over-year growth, and I think consensus assumes even higher growth next year. To the degree that we can maintain spreads where they are today, in the roughly 190 basis points range, I certainly think we can be north of where we are this year. It remains to be seen where the stock price and debt go. One thing I feel confident in is our team's ability to underwrite assets and get them into the portfolio expeditiously. If the cost of capital is there, the runway to compound earnings is there for sure. Operator: Our next question comes from Analyst with Bank of America. Your line is now live. Analyst: Thank you. Good morning, and congrats on the strong start to the year. There are lots of questions on C-stores, but could you remind us how you are thinking about the grocery category now that it is above 15%, and could we see further growth there? Mark Manheimer: We have seen a lot of great opportunities in grocery with strong performing stores, great credit, and good lease terms. We expect that to continue. There is not as much in the second quarter, so it is a little difficult to predict. I do not think we would let anything get to 20%. Fifteen percent is nudging up against where we are comfortable. We do not want to let things get too far above that. If there is a great opportunity, we do not want to be precluded from moving forward, but I would expect the 15% to 16% range to be pretty consistent for grocery. The same can be said for convenience stores. Analyst: Thank you. And an update on development projects: it is currently a small part of the business with four underway. Can you remind us of yields there? Would you be willing to increase exposure to development if that is what some retailers prefer? Mark Manheimer: If retailers prefer that route and that is the best way to get the best risk-adjusted returns, we would be more aggressive. Right now, we feel like we are picking up about 25 basis points, and it happens to be tenants we really want in the portfolio. You are not getting paid enough for the risk, in our minds, to get really aggressive on developments right now. If you were picking up 50, 75, 100 basis points, it would be more interesting. Pricing just is not there. People are willing to pay up in single-tenant net lease retail for the most part. The development projects are pretty short, so they do not demand much of a premium. We are able to get similar opportunities outside development and put them on the balance sheet right away, which is what we are looking to do. We have had quarters where almost half of what we did was development; now it is about 10%. If that needs to change, our acquisitions team can move quickly to add those, but we do not see that happening anytime soon. Operator: Our next question comes from Upal Rana with KeyBanc Capital Markets. Your line is now live. Upal Rana: Thank you. Mark, appreciate the color you have already provided on investment pace for the rest of the year. Given we are almost through April and you probably have a good sense on May as well, what is your sense on the pace of investments for 2Q? Mark Manheimer: Second quarter looks strong. I do not think you are going to see too much difference in the second quarter. We will see what closes. We are looking at some opportunities we have under our control that may close in June or in July. We are getting closer to being done with sourcing for the quarter. We like the pipeline, the quality, and the pricing. At least for the second quarter, expect a pretty similar quarter to the first. Upal Rana: Great. That was helpful. And just overall on dispositions for the quarter—and you have talked about this previously—is this a pace that we should be expecting for the remainder of the year as well? Mark Manheimer: I think so. Every now and then, an opportunity comes where someone wants to pay something aggressive or take some risk off your hands. If that were to happen, we would certainly move quickly. In general, you may see a quarter here or there that is a little heavier or lighter, but you can expect a pretty similar pace. Operator: Our next question comes from Daniel Guglielmo from Capital One Securities. Your line is now live. Daniel Guglielmo: Hi, everyone. Thank you for taking my questions. Following up on the escalator question from earlier, as the portfolio mix starts to move from larger tenants to adding some smaller growthier tenants, are there differences in how you manage a smaller tenant that may be less visible to the public versus a large tenant that is a public filer and very visible? Mark Manheimer: I do not think there is much difference in how we manage it. We do not want to let any concentrations get very high with some of the public tenants, because you submit yourself to some headline risk that is not real risk as it relates to our portfolio. We are doing the same things across the board: tracking corporate financial performance, foot traffic, and unit-level performance. We want to be proactive, not reactive, on asset management when we start to see potential issues. If we continue to do that over time, you will continue to see very low credit loss stats. Daniel Guglielmo: Appreciate that. With private credit seemingly less available this year than last, are you seeing more smaller operators search for capital funding elsewhere, like via sale-leaseback? Or is it too early to see that flow through to your transaction market? Mark Manheimer: We have not seen that. I would be surprised if we see a ton of it. The private credit guys were not only focused on retail; they were lending to software companies and a lot of different industries that are less real estate heavy. I do not think it will have a huge impact one way or the other, and we have not seen any impact to date. Operator: We have reached the end of the question and answer session. I would now like to turn the call back over to Mark Manheimer for closing comments. Mark Manheimer: Thank you all for joining us this morning. Good luck the rest of the earnings season, and we look forward to seeing you at upcoming conferences. We appreciate the time. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Welcome to the Quest Diagnostics First Quarter 2026 Conference Call. At the request of the company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer session that will follow are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without written consent of Quest Diagnostics is strictly prohibited. Now I'd like to turn the conference over to Dan Haemmerle, Interim Vice President of Investor Relations for Quest Diagnostics. Please go ahead. Dan Haemmerle: Thank you, and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive Officer and President; and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently quarterly filed reports on Form 10-Q and current reports on Form 8-K. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Growth rates associated with our long-term outlook projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Now here's Jim Davis. James Davis: Thanks, Dan, and good morning, everyone. Our strong first quarter performance reflects a focused business, delivering innovative solutions that meet our customers' evolving needs for lab insights. During the first quarter, we grew revenues over 9%, almost entirely from organic revenue growth on broad-based demand for our clinical innovations, expansion into new clinical areas and collaborations with elite health care and consumer health organizations. In addition, we grew adjusted diluted earnings per share by approximately 13%, supported by productivity gains from our deployment of automation and AI across our operations both in and outside our labs. Given our strong first quarter momentum and continued strategic focus, we are raising our revenue and EPS guidance for the year. Now I'll provide more detail on how we executed our strategy across key customer channels and operations during the quarter. Quest operates at the center of health care, delivering solutions that make testing simpler and smarter for our core clinical customers, physicians and hospitals as well as customers in higher-growth areas of consumer health, life sciences and data analytics. In the physician channel, we delivered high single-digit revenue growth in the first quarter on strong demand for our clinical innovations, geographic expansion from greater health plan access and increased volume from our growing business in enterprise accounts. We are also pleased with our growth during the quarter in end-stage renal disease, a new clinical area for us, focused on lab testing for dialysis patients. In addition to volume from serving thousands of dialysis clinics operated by Fresenius Medical Care nationwide, we also added independent dialysis clinics and other providers as clients of our lab and water purity testing. In the hospital channel, we grew revenues at a double-digit rate with the majority of this growth coming from our collaborative lab solutions for Corewell Health, a leading health system in Michigan. Our Co-Lab solutions combine our scale, clinical depth and operational excellence to improve quality and cost efficiencies. Our implementation with Corewell Health is proceeding smoothly. We are also advancing our joint venture with Corewell Health with plans to open a state-of-the-art lab in Southeast Michigan next year. Hospitals value our flexible solutions that enable them to free up capital while benefiting from our expertise and innovation. Our pipeline of potential Co-Lab collaborations as well as potential outreach and independent acquisitions remain strong. In the consumer channel, we deliver solutions that empower people to own their health. Similar to recent quarters, we generated significant revenue growth during the quarter, both from questhealth.com and from our portfolio of top consumer health collaborations. Growth from questhealth.com featured robust double-digit customer repeat rates and notable demand for new solutions such as our Elite health profile and autoimmune and hormone tests. Quest is a trusted health care brand with broad reach, which enables us to drive efficient customer acquisition for questhealth.com. In addition, we are the preferred lab engine for top consumer health brands and a key part of our growth this quarter was due to consumers accessing our lab insights within the apps and wearables of our collaborators. Our customer channels are also growing as we continue to deliver advanced diagnostics in 5 key clinical areas: advanced cardiometabolic and endocrine, autoimmune, brain health, oncology and women's and reproductive health. We delivered double-digit revenue growth across several of these areas in the first quarter. I'll comment briefly on a couple of examples. In the areas of brain health, Alzheimer's disease is a progressive dementia that affects over 7 million people in the U.S. and is expected to affect nearly 13 million Americans by 2050. For several quarters, we've spoken about delivering double-digit revenue growth from our AD-Detect blood test for Alzheimer's disease, a trend that continued in the first quarter. To understand this growth, consider that until recently, clinicians typically diagnosed Alzheimer's using PET/CT scans, which are costly and inaccessible for many. While these scans are highly accurate at identifying mid- and late-stage disease, they are less sensitive at detecting Alzheimer's in early stages before major impairment has occurred. Years ago, we recognized the power of blood testing to reveal disease earlier and more affordably so more patients could benefit from the emerging therapies with potential to slow progression sooner. Today, Quest provides a range of tests under the AD-Detect brand, featuring sensitive mass spec tests for amyloid beta and ApoE, a genetic risk marker to complement p-tau217 and p-tau181. We also developed a proprietary algorithm that combines multiple biomarker results to establish Alzheimer's pathology with sensitivity and specificity of 90% or greater. At the same time, we are seeing that physicians are becoming more confident using blood test to aid diagnosis and guide pharmaceutical treatment decisions often in lieu of imaging. As blood tests are increasingly used both in primary and specialty care, we expect to remain a leading source of diagnostic innovation and insights for managing this disease. In other areas, we drove double-digit revenue growth across much of our cardiometabolic and endocrine portfolio, including for tests for Lp(a) and ApoB as well as for kidney, liver and reproductive hormones. New guidelines from the American Heart Association recommend Lp(a) and ApoB testing for the first time, underscoring the clinical value of these important biomarkers. We are also encouraged that the guidelines now recommend screening for high cholesterol at young ages as new research has found dangerous cardiovascular events are increasingly occurring in young adults. In oncology, we recently announced a research collaboration with City of Hope, a cancer and research treatment organization to study the use of our Haystack MRD test to aid recurrence monitoring and treatment decisions in clinical trial participants with solid tumor cancers across 14 U.S. sites. In addition to driving top line growth through innovation and collaborations, our focus on operational excellence aims to improve productivity as well as quality and the patient experiences. Through our Invigorate program, we expect to continue to deliver 3% in annual cost savings and productivity improvements. We have spoken in the past about our growing use of AI and automation in our labs. And while that continues to be a major focus in the first quarter, we stepped up our deployment of these technologies in several other areas. As one example, we boosted productivity by 40% in the first quarter among customer service agents that used AI to triage and route customer emails to speed responses. We are also deploying AI to make testing simpler and smarter for everyone, including our patients. Our new Quest AI Companion transforms complex biomarker data and reference ranges on test reports into clear plain language. By empowering patients with lab insights, our AI tool, which is powered by Google Gemini, can help shift the doctor-patient relationship to be focused on shared decision-making instead of data gathering, potentially improving care outcomes. Patients have engaged Quest AI Companion approximately 350,000 times since we rolled it out to users of our MyQuest app in the first quarter. Lastly, we are scaling the planning and design work for Project Nova, our multiyear initiative to transform our order-to-cash processes and systems and are on track to implement our first wave of solutions in the fall of 2027. And now Sam will provide more details on our performance and 2026 guidance. Sam? Sam Samad: Thanks, Jim. As Jim mentioned, our solid first quarter results reflect the disciplined execution of our strategy. Consolidated revenues were $2.9 billion, up 9.2% versus the prior year, and consolidated organic revenues grew by 9% in the quarter. Revenues for Diagnostic Information Services were up 9.4% compared to the prior year, reflecting strong organic growth in our physician, hospital and consumer channels. Our total volume measured by the number of requisitions increased 10.9% versus the first quarter of 2025, with organic volume up by 10.8%. Fresenius Medical Care and Corewell Health contributed approximately 7% to organic volume growth in the quarter. Our organic volume growth in the quarter was 3.8%, excluding the favorable impact from these 2 relationships. As expected, Fresenius Medical Care and Corewell Health's business mix impacted total revenue per requisition, which was down 1.3% compared to the prior year. As a reminder, the business mix from these 2 collaborations includes a greater proportion of routine tests than most of our clinical testing. Excluding this business mix impact, total revenue per requisition increased by approximately 2.5%. Unit price reimbursement was relatively flat, consistent with our expectations. Reported operating income in the first quarter was $399 million or 13.8% of revenues compared to $346 million or 13% of revenues last year. On an adjusted basis, operating income was $447 million or 15.4% of revenues compared to $406 million or 15.3% of revenues last year. This increase in operating income was primarily due to organic revenue growth and increased productivity, partially offset by the impact of wage increases and to a lesser extent, weather. Reported EPS was $2.24 in the quarter compared to $1.94 a year ago. Adjusted EPS was $2.50 versus $2.21 a year ago. Adjusted EPS grew in the first quarter versus the prior year, largely due to organic revenue growth, increased productivity and lower interest expense, partially offset by the impact of wage increases and weather. Cash from operations was $278 million in the first quarter versus $314 million in the prior year. Cash from operations was lower than a year ago due to the timing of operating receipts and disbursements and higher bonus payments in the current period versus a year ago, partially offset by an increase in operating income. Turning now to our updated full year 2026 guidance. Given the solid performance in the first quarter, we are raising our full year revenue and EPS estimates. We now expect revenues to be between $11.78 billion and $11.9 billion, a growth rate of 6.8% to 7.8%. Reported EPS to be in a range of $9.58 to $9.78 and adjusted EPS in a range of $10.63 to $10.83. Cash from operations to be approximately $1.75 billion, capital expenditures to be approximately $550 million, share count and interest expense to be consistent with 2025, and our 2026 guidance reflects the following considerations. Our revenue guide does not include any contribution from prospective M&A. Operating margin is expected to expand versus the prior year. With that, I will now turn it back to Jim. James Davis: Thanks, Sam. We are very pleased with our start to the year. More than ever, people are turning to our lab insights to illuminate their path to better health. In summary, our first quarter results reflect a strong focused business delivering innovative diagnostic solutions to meet our customers' evolving needs for lab insights. We grew the top line on broad-based demand for our clinical innovations, expansion into new clinical areas and collaborations with elite health care and consumer health organizations. We also grew the bottom line with productivity benefits from automation and AI. Given our first quarter momentum, we are raising our guidance for the full year. I'd like to thank each of my nearly 57,000 Quest colleagues for living our purpose every day, working together to create a healthier world, one life at a time. Your passion and commitment are the engine that empowers Quest to deliver diagnostic insights that improve health and transform lives. Now we'd be happy to take your questions. Operator? Operator: [Operator Instructions] our first question comes from Michael Cherny with Leerink Partners. Michael Cherny: Congrats on a nice quarter. If it's possible to unpack the organic volume dynamics a bit, clearly, that was a standout, especially against a broader macro backdrop. How should we think about the impact of mix, the impact of commercial activities on your part? And if you can, can you just reaffirm the same expected contribution from Corewell and Fresenius relative to what was embedded in your guidance to start the year? Sam Samad: Yes. Sure, Michael. This is Sam. So let me just start with some of the facts about Q1 that we talked about in the prepared remarks. Organic volume growth was 10.8% in the quarter. Total volume growth was 10.9%. So the contribution to volume from Fresenius and Corewell was about 7%. And so if you exclude those from organic volume growth, the organic volume growth, excluding those 2, was 3.8%. The revenue per requisition in total was down 1.3%. If you exclude the impact of Corewell and Fresenius, it was actually up 2.5%. So a solid revenue per requisition. If you look at the impacts within that revenue per requisition, excluding Corewell and Fresenius impact, if you look at what's driving that 2.5%, which is a really strong revenue per req, I would say test per requisition was really the key driver. We continue to see a step-up in terms of the number of tests per requisition. This is being driven by a lot of the things that we have shared over the course of last year and this year, more advanced diagnostics testing, more early detection options and screening options, our consumer business contributing to it as well. So we continue to expect that, that test per req continues to be solid and has benefited Q1 rev per req significantly. Now I think your other question was how should we think about the balance of the year. As we think about Q2 to Q4, we're looking at continued growth in terms of organic utilization. A continued impact, I would say, on revenues from Fresenius, we said it was about a $250 million impact for the year in terms of revenue growth impact from Corewell. So that's, I think, what you should be thinking about in terms of the impact of Corewell. And Fresenius would be an additional roughly, let's call it, between $80 million and $100 million on top of that. So between those 2, it's about a 3.3% increase to our revenue that's embedded in the guide. And we expect an impact on volume, I would say, somewhat consistent with what you saw in Q1, but still expect very strong utilization as we go forward and expect strong revenue per requisition, excluding the impact of those 2 businesses. And Jim had a couple of comments there. James Davis: Yes, Mike, the mix impact has really benefited our business from an organic revenue standpoint. And specifically, our commitment to consumer health and wellness and these partnerships in the wellness industry have really helped us nicely. There's really 2 things there. It's both the absolute test per req, which has a big impact, mixes us up from a test per req standpoint. And then the advanced types of tests that are being ordered on these panels from advanced cardiovascular test to autoimmune testing to hormone testing. And then the last thing, and this comes mostly from our physician channel, both neurologists and primary care physicians. As I mentioned in the script, our Alzheimer's book of testing more than doubled year-over-year. So we're really, really seeing nice lift from our Alzheimer's set of tests. All of those things together, Mike, is what's really driving this nice organic test mix. Operator: Our next question comes from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I guess on just a couple of things on a short-term basis. Can you talk about sort of any embedded like weather and sort of flu expectations for the short term in the quarter? And then if we think about going forward for the rest of the year, can you talk about sort of any other expectations in terms of puts or takes on timing for the quarter, particularly in regards to margins on that second part of the question. James Davis: Yes. Liz, on the weather, I'll take that first, and Sam can comment on the second part. If we look at it on a year-over-year basis, it was like a $9 million revenue impact, $7 million operating income. So -- but that's on a year-over-year basis. So now we know in January, it was a rough month. We had some weather in February. But honestly, what we did see in March is that the people who canceled appointments during those bad weather events, about 70% of them made appointments and came back to Quest. So the follow-on from canceled appointments was really good. And that only comes from us e-mailing out to patients, texting patients and really trying to encourage patients to come back from missed visits. Sam Samad: Yes, and with regards to the weather, as Jim said, so we had some impact in the quarter, some negative impact year-over-year, but a good recovery in the last month of the quarter. Now I think the second part of your question, Elizabeth, was on the go forward, what should we expect? If you think about at least from a year-over-year compare, we are expecting in the second half of the year this year that we're going to have some negative weather, which we usually have. Usually in the summer, we'll have the hurricane season and some negative weather. So that's embedded in our guide expectation. And if you compare it to last year, last year was actually a very mild weather season in the summer from -- I think we virtually had no to -- very little to no hurricanes in the summer of last year. So there is some embedded expectation of some more negative weather in the next, let's call it, in the summer versus what we saw. And in terms of the cadence over the next 3 quarters, I think you should expect that similar cadence to last year to some extent with maybe more of a contribution in the first half than what you saw last year than in the second half. So I would call it just over 49% of our revenue and EPS in the first half, just over 50% in the second half. So that's kind of a cadence to think about also to give you more precision on how to think about revenue and EPS. Operator: Our next question comes from Patrick Donnelly with Citi. Patrick Donnelly: Maybe similar, Sam, on some of the moving pieces on the cost. Can you just talk about the Project Nova piece, how the investments are progressing there? Wondering if potentially higher expenses tied to some of the macro conflicts caused you to move those investments around at all. I think it was $0.25 dilution. Is that still the right way to think about it? And again, where those investments are kind of heading and when we see the fruit of those would be helpful. Sam Samad: Yes. Thanks, Patrick. So let me break down some of the impacts that you mentioned. Yes, Nova expectations are still $0.25 for the year, as we shared last quarter. In terms of the cadence of those expenses, slightly changed from my comments on the Q4 call. I think we're expecting now more of those expenses to happen in the second half of the year than in the first half of the year. We had some expenses in Q1. That's going to ramp in Q2. And I'd say we're going to see probably more than 60% of those expenses be in the second half of the year. So that's one portion in terms of just thinking about the cadence of the year. I think it goes back to also the question that Elizabeth asked. And then if you think about the macro, I mean, listen, we're impacted by, obviously, fuel costs. We have a fleet of transportation vehicles. We have a fleet of planes. We have some fuel expenses that were going to be impacted by the higher fuel costs. That, I will size it for you as somewhere in the $7 million to $10 million range, and it's embedded in our guidance. Our expectation is that fuel costs will continue to be elevated somewhere at the $4 per gallon and above. And that embedded in guidance is somewhere in the $7 million to $10 million of fuel cost that, again, will impact the next 3 quarters. So we've sized it. We've included it. It's not that significant, but it's still somewhere between $0.05 to $0.07 of EPS. Operator: Our next question comes from Ann Hynes with Mizuho Securities. Ann Hynes: Just on the organic volume front, was there anything that came in better or worse than your expectations? And maybe just on the ACA, I know the subsidies ran out in December. Did you see any meaningful impact versus what's embedded in your guidance in Q1? James Davis: We didn't, Ann, on the ACA subsidies. I think it's too early to tell. As we've said in the past as well, we can't tell 100% with every requisition, is it an ACA req or not. Not all the commercial plans code the reqs that way. But we think about 60% of our reqs, we know discrete are ACA. And so based on that, we're not seeing any impact to date. On the organic growth, it was strong across the board. I mean our hospital reference business had up 3%. It was very strong. Our Co-Lab business, obviously, with Corewell was up significantly double-digit growth. Our physician business organically was high single digits as we indicated on the call. So it's broad-based. And then obviously, the contribution from all the consumer health in both our direct channel plus our partnerships were strong, strong double-digit growth in that area. So it was pretty broad-based and across all segments that we serve. Sam Samad: And just one clarification, Ann, on the ACA to add to Jim's comments, we have built in, in our guide still the expectation that we do see a 30 basis point impact to revenues as a result of ACA disenrollments or higher subsidies. The enrollments have been good in Q1. We just need to validate that actually the enrollments lead to utilization and some people don't drop off. So we kept the assumption in our guide of 30 basis point impact. But to Jim's comment, we haven't seen really that negative impact in Q1. Operator: Our next question comes from Jack Meehan with Nephron. Jack Meehan: I wanted to ask you about PAMA. So the survey kicks off in 10 days or so. How is your prep work in terms of participating in that? And then just your latest thoughts on how you think the Medicare rates for 2027 will shake out that whole process? James Davis: Yes. Jack, so we're ready. Obviously, we submitted last time. We're going to submit this time. That's the law. And we're going to abide by the law and submit the data after May 1 of this year. I think the period is open until -- basically until the end of July. As you know, Medicare actually this year provided some guidance as to what labs need to submit. So anybody that makes more than $25,000 a year from a revenue standpoint from Medicare requisitions is supposed to submit -- that would really say there's over 2,600 hospital labs that are going to need to submit. Now whether that happens or not, we can't tell. We'll have to wait and see. CMS also came out again and said, if you don't submit, there's potential fines of upwards of $10,000 per day to those that don't submit data. Now they didn't collect those fines last time. So again, it remains to be seen. At the same time, we're going to drive the RESULTS Act as fast and furious as we can. There's a few things that still have to be completed in order for the bill to get through this year. Number one, there has to be a tech assessment done. CMS does that. That is underway. And then second is the CBO scoring. We think that process is underway as well. There's over 80 cosponsors for the bill. There was a hearing already this year in the health subcommittee of Energy and Commerce. It was a good hearing, very positive. So we're hopeful. But we're also mindful of the fact that there's summer vacations coming up and then obviously, elections. And so there's a lot to get done before the end of this year, especially with those 2 things coming up. Now in terms of rates for 2027, I think it's too early to speculate. If RESULTS Act gets done, it would keep rates as is for 2027. If the RESULTS Act does not get done, and we rely on this data collection process. If everybody submits, Jack, we're hopeful that the data will come out and show that our rates should actually go up. If you think about it this way, the last time there was a data submission, there were probably 2 companies that submitted over 80% of the data. And so the 2 companies probably -- and we're one of them and our nearest competitor is the second one, we probably have at best 17% to 20% share of the Medicare market, right? We were disproportionately lower in that portion of our business than in other segments because it's any willing provider. So when only 2 providers submit -- basically 2 providers submit 80% of the data and you have less than 20% of the market, it's obviously going to lead to a very skewed data set. So we're hopeful that the other 80% submit. We know that, that other 80% is paid 2 to 3x Medicare rates by most health plans. And you put all that together, Jack, and it should indicate a price increase. Operator: Our next question comes from Luke Sergott with Barclays. Anna Kruszenski: This is Anna Kruszenski on for Luke. We were hoping to hear more about the consumer business and how that momentum has been building with your recent partnerships. And we saw that Function Health acquired a mobile lab testing company during the quarter. So just any color on how you're thinking about that potentially impacting volumes to Quest? James Davis: Yes. So our consumer business, again, we think of it in 2 segments: our own questhealth.com, our direct-to-consumer business, that grew very nicely in the quarter, somewhere -- let's just call it somewhere between -- in the high 20s. And then all of our partnerships. We have value-added resellers that we provide lab testing to. These include 2 of the wearable companies that we've talked about in the past. And I would just say that the growth in that combined non-Quest Direct is even stronger than our own direct channel in the quarter. Yes, Function Health did acquire Getlabs. We think that's a real positive for Function Health. There's many parts of the country where even though we have 2,000 patient service centers to conduct blood draws and urine collections, there's parts of the country where we simply don't have some of the coverage, and that includes areas in the upper Midwest, the Great Plains. We also know that there's a segment of customers that would prefer a home draw. And so Function having this capability now, Getlabs will acquire the specimens, bring them to our Quest PSC or have them transported to directly and we'll continue to do that lab testing. So we think it's a positive. Sam Samad: And the one addition I'd make to Jim's comments is the growth that we're seeing from some of the collaborations that we have, the wellness companies that we're partnering with is broad-based. We're seeing a lot of growth from different players and a broad ecosystem that we're very encouraged about. Operator: Our next question comes from Eric Coldwell with Baird. Eric Coldwell: A couple of weeks ago, we had this odd day in the market where labs were getting hidden on a Friday afternoon, I think it was. And apparently, there were rumblings or rumors going around about some impact from the CMS' CRUSH RFI. I don't think that's a big deal, but I'd love you to put that in perspective and maybe talk through what you see happening in the government in terms of various fraud, waste and abuse initiatives and then your exposure to any tests that are in question and what potential impacts, positive or negative may come out of this in the future? James Davis: Yes. Thanks, Eric. And we're glad you don't think it has an impact because we don't think it does either. But just for those who may not have heard of CRUSH, it stands for Comprehensive Regulations to Uncover Suspicious Health Care. And first of all, I want to say we applaud the government's efforts to crack down on any fraud waste or abuse. So certainly applaud those efforts. The second thing I'd say is if you look at the test, first of all, it came out of an OIG report, right? There was an OIG report that looked at 2024 Medicare lab spending, and the report noted that lab spending was up 5%. And as you know, Medicare enrollees are probably flat to down. So why would it be going up 5% if pricing stayed flat across the industry. And what the report noted is that there were 10 tests that drove the majority of the increase, okay? Now 7 of those 10 tests were PLA codes, meaning they're very proprietary tests to individual laboratories, okay? We had nothing in those categories, okay? The other 3 categories were genetic or molecular-based tests. And when we look at our billing or our revenue from those tests, it was de minimis, okay? So it really, really wasn't a factor at all. So we don't put Quest in the bucket of driving that 5% increase in Medicare spend. Now the last thing I'd say about the report, and we all ought to be concerned about this. If you looked at that report, it did show that routine and wellness tests that are critical to preventative health and wellness, critical to making the country healthy again, those test categories were actually down. And what I'm talking about is basic CBC panels, CMP panels, those panels and information that really illuminate chronic care conditions, progress towards those conditions or people that aren't making progress. And those are absolutely the kinds of tests that we want to see growing across the Medicare population in order to make sure that people's chronic conditions aren't worsening and become a bigger cost and health burden to the country. So in summary, Eric, we don't think it's an issue, and thank you for asking the question. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: On consumer, I have a follow-up. I understand there's a broad range of types of partnerships that you're engaged in and the economics may vary. But can you speak to the overall margin profile outside of the Quest Direct business? And how should we think about the pipeline of future partnerships. Do you have -- are you talking with several different types of platforms from a wellness or wearable standpoint. And then a follow-up, just a broader question. You gave some interesting stats on AI and automation. And just how do we think about your targets or your goals on that front from an efficiency gain standpoint and what you can leverage from an AI use case? Sam Samad: So this is Sam. I'll take the first question around the margin profile, and then I'll hand it over to Jim, who'll talk about the pipeline and AI. I'll keep it simple. I mean the margin on these deals, both in terms of the deals and collaborations that we have, whether they're wearables collaborations, whether they're wellness companies, but also the margin profile on the questhealth.com business is on par, if not slightly better than our overall enterprise average. These are tests that are out of pocket at least on questhealth.com. And then it's a client bill business with the wellness companies that we engage with. It's all cash pay. So there's no denials. There's no patient concessions. So it's clean business in terms of just at least the complexity or the lack thereof. And it provides a really good margin profile for us. James Davis: Yes. So Erin, yes, we continue to pursue other partnerships. It's part of our goal. As we've said before, we're trying to empower people to own their own health. We want people to be the CEO of their own health care. And there's -- if we find other partnerships out there that meet our brand criteria that are in line with the mission of our company, then we'll certainly support it. And there's others out there that we continue to talk to. So we're encouraged by the growth in both our direct channel as well as the growth that we're getting through these partnerships. In terms of AI and automation, certainly, we continue, I would say, 60%, 70% of our efforts are in the 4 walls of our laboratory because that's where still opportunity exists. Anytime we see somebody looking through a microscope, we ask the question, is what you're looking at? Can we digitize that image? If you can digitize an image, you can apply algorithms to that image. And if you can apply algorithms to that image, it can assist whoever is reading that image and make a higher quality diagnosis as well as improve the productivity. So there are still plenty of areas in our laboratory where we have laboratory technicians or MDs looking at data or looking at slides or looking at pathology, and we know there's ways to automate that. We've made tremendous progress in cytology. We've made great progress in microbiology, hematology, and there's still other areas for us to go. Outside of the laboratory, as I mentioned in the script, we've deployed some tools in our call centers. Our call centers are a big part of our operations. So anything we can do to improve the productivity of the call centers as well as e-mails and text messages that come into the company, we're certainly going to drive that. The last thing I mentioned is we did put that Quest AI assistant out on our MyQuest application. This empowers people to now ask questions about the lab results that we've just provided to you. And we were pleasantly surprised by the use of that AI tool for people trying to decipher what all of these 40, 50, 60 analytes could possibly mean. We think it's a great way to educate patients so that patients can have more proactive discussions with their clinicians, and we think it's a win-win for the industry. Operator: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: Sam, if I'm taking your comments correctly, it sounds like the north of 49% comment for one -- for the first half of the year is pretty consistent with what you said before. But then you also commented that you're pushing maybe more of the Project Nova expenses to the second half. There's some higher fuel costs that are going to be impacting the second half of the year. So within your guidance, what's the offset that makes the second half a little bit better? And then just one quick follow-up to Eric's question on CRUSH. Part of the proposal talked about prior authorizations and looking at that. And can you discuss that aspect of it, which isn't necessarily just on the molecular test, but I don't know if they're talking more broadly about how prior authorizations might be handled and if there's anything we should think about with regards to that part of the proposal? Sam Samad: Yes. Thanks, Kevin. So let me start with the second half, first half comment. I would say some of the fuel costs that I mentioned, I mean they basically start now, right? So it's not like just the second half that you have to phase those across. And again, I don't want to make too much of them because it's $7 million to $10 million of additional fuel costs. It's not that significant, but I was just giving it for completeness and to give a full view as to EPS. But they do start now, and they impact Q2 and they impact the second half. Nova steps up in the second quarter. But obviously, the first half, because it's -- because Q1 was lower in terms of Nova spend, the second half is going to be over 60% of the Nova expenses, but it does step up in the second quarter. In terms of why we see the contribution being over 50% in the second half, I mean, I think it's really primarily the margin profile across, again, those 2 partnerships, those 2 important partnerships that we have, Corewell and Fresenius, that margin profile improves in the second half, notably for Fresenius as that business ramps. I've said before that, that business a year in starts to approach the average enterprise margin. It's just the ramp up. There's some ramp-up costs that initially impact us. So I think you start to see some improvement in the margin profile of those businesses and then just the normal seasonality of the business with the strength of utilization. So that's really what I'd point to. James Davis: Yes. And then, Kevin, in terms of your questions on CRUSH, again, I'll remind you that there were 10 tests that contributed to the vast majority of the growth in the spend. 7 of those 10 tests, we have no participation in and 3 of those 10 tests, it's de minimis. So it really Quest was not a driver of those increased costs. In terms of pre-authorization, CMS did put out a request for information, a response. They asked people to comment on the CRUSH initiative. Our trade association did that. I can tell you that pre-authorization is not something we would ask for. But rather, I think what's appropriate is CMS ought to require some type of certificate of accreditation for the labs that are performing these higher complexity tests. That's a way to ensure that those labs that are producing these tests and some of these tests are absolutely necessary in health care today that you know they're being done by certified labs with good quality and a commitment to science, technology and excellence. Operator: Our next question comes from Andrew Brackmann with William Blair. Andrew Brackmann: Jim, I want to ask on the advanced diagnostics strength and all the color that you gave on that business. Can you maybe just sort of talk about any specific investments that are going to those areas in 2026 or in 2027? Just sort of anything to call out with respect to maybe specific clinical trials in some of those areas or sales team increases. I really just sort of want to get a sense of the opportunities that might exist there to maybe further accelerate that growth. James Davis: Yes. Thanks, Andrew. Yes, again, some of these advanced diagnostics tests were certainly a strong contributor to the mix that we saw in the quarter in the organic rev per req increase of 2.5% that Sam cited. But the biggest area again is brain health. As I indicated, the business more than doubled from Q1 of last year to Q1 of this year. We are committed to the space. There are other biomarkers that we are investing in and doing research on in addition to the AB 42/40, in addition to the ApoE, NFL. And then commercially, we procure the p-tau181 and 217 assays. But there's other biomarkers we're working on. We're in constant discussions with the therapy makers who are collaborating with us on looking at different biomarkers that help identify the disease at the earliest possible point. We continue to invest in advanced cardiometabolic testing in various biomarkers, one specifically in the HDL arena that goes beyond just the basic HDL test. And then obviously, I'd be remiss if I didn't talk about Haystack, we continue to invest in the space. We've made progress quarter-over-quarter. As we discussed in the script, we have a great partnership now with City of Hope, which is a leading cancer treatment detection and treatment center on the West Coast. And there's all types of clinical partnerships that we have there. We've discussed a few in the past, Rutgers and MGH. So we continue to invest in that area and continue to make progress. Sam Samad: Yes. And Andrew, maybe to add to Jim's comments, a healthy portion of our $550 million capital investment goes towards our esoteric labs to drive capacity upgrades given the growth that we're seeing in that business, in that advanced diagnostics business. So I don't want to -- I'd be remiss if I didn't mention that as well because in addition to the investments that Jim talked about, which are more on the business side that we do have a significant portion of capital investments going towards those tests as well. Operator: Our next question comes from Tycho Peterson with Jefferies. Noah Kava: This is Noah on for Tycho. I wanted to ask a few on oncology. I believe the partnership with Guardant for Shield went live 1 month ago. If you could speak to early adoption there. And then just on Haystack, what should we be expecting in terms of the phasing of EPS contribution throughout the year and kind of getting to breakeven? James Davis: Yes. Thanks, Noah. Yes, we announced a partnership to distribute -- do blood collections for the Guardant colon cancer CRC test. And so it started in the quarter. We are listing the test on our test menu so that Quest physicians can order that test and patients, regardless if it came from a Quest physician or another physician, patients can bring that requisition to a Quest PSC and we'll draw the blood and send this specimen on to Guardant's lab. I would say it's early. We just got going in the middle part of the quarter. So I can't make a comment yet on the volumes, but it's certainly starting to take hold. On the Haystack margin profile, Sam, I'll ask you to comment on that. Sam Samad: Yes. Thanks, Noah. So Haystack, listen, we're making some really good progress on the test with regards to the order experience, the commercial, both ramp in terms of resources and the uptake in terms of tests ordered. I think oncologists are starting to recognize just the impressive profile of the test with its low limits of detection. Making good progress on the reimbursement front. We have submitted to MolDX, the technical assessment to get Medicare Advantage reimbursement. We have PLA codes now that are basically priced a $3,900 baseline and an $800 monitoring reimbursed price. So we're making really good progress. It's early days to talk about EPS ramp in terms of the dilution or the improvement over the course of the year. We'll provide updates as we go. Again, it's a test, and we have many tests in our portfolio, both in terms of AD, advanced diagnostics and routine tests. So I don't want to be overly focused on just one test. But we -- obviously, it's an important business for us, and we're making good progress on it. Operator: Our next question comes from Lisa Gill with JPMorgan. Lisa Gill: I just was wondering the current M&A environment. I appreciate that there's nothing in your guidance for '26. But are you seeing anything different? Are you seeing any incremental opportunities in the market? I heard your comments earlier around hospitals and their need to submit their rates. Is that changing any of their views around the potential for reimbursement cuts for Medicare going forward? So just anything on an update on the M&A side would be helpful. James Davis: Yes. Thanks, Lisa. The M&A funnel is good. We have a mix of various health system outreach types of deals that are there. And there's not a ton, as you know, of remaining independent labs across the country, but there's still some out there, and we still take a look and sometimes they proactively come to us. I don't think that the Medicare reimbursement changes are affecting a hospital's view of their outreach business. You got to remember, in general, Medicare is our best payer here at Quest Diagnostics. And in general, it's the worst payer for a health system. So if the worst payer goes down a little bit in pricing, I don't think that affects your viewpoint on outreach. What I do think affects their viewpoint on outreach is the commercial view of the lab market in the lab industry. And I think you got a lot of really smart health plans that are starting to wake up and say, "Hey, why am I paying these health system labs 200% to 300% of what we pay 2 of the leading independents across the country." And furthermore, that 200% to 300% price premium that they get, it affects patients. It affects co-pays. It affects co-deductibles. It affects employers who are paying for this health care. And so there's nothing easier to get a quick hit, a quick win from an employer standpoint, from a patient standpoint is to normalize these rates. And we strongly advocate that health plans ought to pay all labs the same amount of money for outreach work. It doesn't do anyone any good to penalize patients and penalize employers who are paying for the majority of the health care cost in this country to reimburse some labs 200% to 300% of what the 2 leading independents are getting paid. Operator: And our last question comes from David Westenberg with Piper Sandler. David Westenberg: So I wanted to talk about the convergence of multiple factors, AI, wearables, consumer-initiated testing. Just given the fact that these AI wearables, et cetera, and consummation tested gamify longitudinal testing, it seems like there would be an increase in longitudinal testing. So am I thinking about this the right way? And how should we think about test per patient right now and where it could go in the next 5 to 10 years? Are you monitoring test per patient right now? And is it trending indeed the right way? And maybe one of the things that I might want to look at is something like are the Function Health people, for example, also doing their annual labs? And is that increasing? I mean where is the momentum going with this? James Davis: Yes. So that's a great question, David. Look, we continue to think that this convergence of consumer health, wellness, wearables and AI are going to have a profound impact on how people think about their health care going forward. I don't think the physical of today where you go see a doctor, they do a physical in the office, they order labs generally after they've done the physical and then the information flows back to the physician, back to the patient and maybe somebody calls the patient and says, here's a few things that are out of range and here's what you should do about it. I honestly think that the future, the physical of the future is going to be really before you ever see the doctor, you're going to download your wearable information. You're going to get your lab work done ahead of time. And all that information is going to be fed into an AI engine and it's going to provide you the patient with a report. It's going to provide the physician with a report. And then when you actually go and see the physician, the physical exam itself is informed by all of that information. And then it becomes more of a discussion between you and the physician on the things that you really need to work on from a biometric standpoint, sleep, diet, heart rate variability, blood pressure, stress, the things that you really need to work on to improve your biomarkers. This linkage between biomarkers and biometrics is so incredibly important. Just this past March, I believe it was March 13, there was a really interesting article written in Nature, some work that Google Health did. It was a study between us, Google Health and Fitbit that really highlighted the linkage between biometrics and biomarkers and the use of artificial intelligence to actually calculate some of these biomarkers in between lab tests. So what we're actually seeing is, I think, this trend that you check your biomarkers, combine it with your wearable data, combine it with artificial intelligence, it's just making people more and more conscious of their -- of what's going on inside their body. And then I think as you indicated, we're likely to see an increased trend of consumers continuing to test certain biomarkers to check to make sure that the things that they're working on, the things they're trying to optimize are actually improving. Okay. Operator, I think that wraps up today's call. I want to thank everyone for joining our call today. We certainly appreciate your continued support. Have a great day, everyone, and good health to all of you. Operator: Thank you for participating in the Quest Diagnostics First Quarter 2026 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866) 388-5361 for domestic callers or (203) 369-0416 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on April 21, 2026, until midnight Eastern Time, May 5, 2026. Goodbye.
Ahmed Moataz: Hello, everyone. This is Ahmed Moataz from EFG Hermes, and welcome to IDH's 2025 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, Chief Executive Officer; Sherif El Zeiny, VP and Group CFO; and Tarek Yehia, Director of Investor Relations. As usual, the company will start with a brief presentation, and then we'll open the floor for Q&A. IDH's management, please go ahead. Tarek Yehia: Good afternoon, ladies and gentlemen, and thank you for joining us for the full year results. My name is Tarek Yehia, I'm Head of Investor Relations. Joining me today Dr. Hend El Sherbini, our CEO; and Mr. Sherif El Zeiny, our CFO. Dr. Hend will begin the call with a summary of the main highlights from the year. After that, I will discuss in more detail the main macro and geopolitical trends seen across our markets. After my presentation, Mr. Sherif will offer a deeper analysis of our financial performance. We will then open for Q&A. With that, I will hand it over to Dr. Hend for her introduction. Please, Dr. Hend. Hend El Sherbini: Thank you, Tarek, and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. I'm pleased to report that 2025 was another very strong year for the group with robust operational and financial performance across our core markets and continued progress on our strategic priorities. The results we are presenting today reflect not only improving market conditions in key geographies, but also the tangible impact of the strategic initiatives we have been implementing over the past 2 years, particularly around network expansion, service diversification, digitalization and operational optimization. Throughout the year, we continue to strengthen our leadership in Egypt and Jordan while making very encouraging progress in Nigeria and Saudi Arabia. We are also very pleased with the sustained improvements in profitability across the income statement, which continue to validate the scalability of our model and our ability to translate growth into stronger returns. More broadly, we are encouraged by the increased resilience of our platform, which today combines scale, a richer service mix and improving efficiency across markets. Turning to our performance in more detail. During 2025, we continue to build on the strong momentum established over the prior year, delivering 37% revenue growth year-on-year supported by growth across both volume and value metrics. Test volumes increased by 11% during the year, with all operation geographies contributing to this expansion, supported by stronger patient engagement, deeper penetration in both walk-in and corporate channels and improving refer flows. At the same time, our average revenue per test rose 24%, and reflecting a richer test mix, broader uptake of radiology and specialized diagnostics [indiscernible] of the pricing actions introduced earlier in the year. These trends also helped us further strengthen our average test per patient metric, which reached 4.6 tests per encounter, demonstrating the continued depth of patient relationship and our success in expanding cross service utilization across our platform. In Egypt, momentum remained very strong throughout the year, supported by solid growth in both volume and value alongside strong brand equity and a more supportive macroeconomic backdrop. Test volumes in Egypt continue to expand steadily, while average revenue per test saw a strong uplift driven by favorable mix dynamics, including higher value radiology, radiotherapy, specialized diagnostics and corporate channels. Egypt remained the core engine of the group performance, contributing 84.6% of total revenue in 2025 and continuing to demonstrate strong scalability, resilience and operating efficiency. The continued expansion of our physical network in Egypt remained a key growth driver during the year. Over the past 12 months, we added 137 new branches in Egypt, bringing the total to 724 locations nationally at year-end. These new sites have helped deepen our presence, not only in Greater Cairo, but also in underserved and fast-growing regional cities. Allowing us to better serve both contract and walk-in patients. Our household service remains a strategic differentiator, sustaining its strong contribution of around 20% of Egypt's revenues continues to demonstrate the effectiveness of our post-pandemic strategy and reinforces our position as an early mover in home-based diagnostics in the region. Al Borg Scan continues to demonstrate strong momentum as a key component of our long-term strategy to build a more integrated diagnostics platform. During 2025, we took an important strategic step with the acquisition and integration of Cairo Ray for Radiotherapy, which broadened our capabilities in radiotherapy and strengthened our position in oncology diagnostics. This transaction enhances our ability to participate more meaningfully in higher-value specialized diagnostics and supports our ambition to build a more comprehensive offering for patients and referring physicians. We expect radiology and radiotherapy to play an increasingly prominent role in our growth mix over the coming period, supported by expanding service capability, greater patient awareness and growing demand for specialized imaging and treatment support service. Over the past 2 years, a key strategic priority for IDH has been the successful launch and upscale of our Saudi operation. I'm pleased to share that our presence in the Kingdom continued to progress very encouragingly during 2025. With strong momentum supported by growing demand, deeper market visibility and sustained improvement in both volume and value metrics. During the year, Biolab KSA generated SAR 5 million in revenue, representing a 252% year-on-year growth as test volumes and patient throughput increased sharply, and the business benefited from the expansion of the network to 3 branches. This growth continues to highlight the effectiveness of our ramp-up strategy in the market, which is designed to accelerate revenue growth and establish Biolab KSA as a recognized provider in the large but highly fragmented [ Saudi's ] diagnostics market. At the same time, we continue to advance our growth approach, which includes targeted marketing campaigns to build brand recognition, selective promotion initiatives to drive patient acquisition and ongoing efforts to strengthen physician and patient engagement. While still in the early stages of development Biolab KSA is demonstrating strong operational traction and reaffirming our belief in the long-term potential of Saudi Arabia as a key pillar in the group's regional growth strategy. As always, profitability remains a core focus for us, and we are very pleased to see sustained improvement across all levels of the income statement. We continue to benefit from strong operating leverage, tighter cost controls and better resource allocation across our subsidiaries, including Nigeria, where Echo-Lab delivered a full year of positive EBITDA, marking a key milestone in its turnaround and confirming the potential of this high-growth market. Overall, both COGS and SG&A as a share of revenue continued to decline, supported by disciplined cost management and our growing digitalization efforts. COGS to revenue fell from -- fell to 57.3%, while SG&A declined to 15% from 16.9% last year, underscoring the success of our optimization initiatives. Consequently, our EBITDA margin expanded to 34.9% from 29.7% last year, while gross profit margin rose to 42.7% compared with 38.1% in 2024. These efforts, combined with strong top line growth and improved pricing and mix have translated into meaningful margin expansion and greater earnings quality with adjusted net profit increasing 79% year-on-year. I'm also very pleased to share that the Board of Directors has declared a dividend of USD 0.0085 per share for the year ended December 2025, presenting a total distribution of USD 4.9 million. This reflects our commitment to delivering sustainable shareholder value while preserving the flexibility to fund attractive growth opportunities. In parallel, we remain prudent in our capital allocation approach, and we'll continue to reassess distribution in line with evolving market conditions and investment needs. Before handing the call back to Tarek, I would like to briefly touch on how we view the business as we move into 2026. We entered the year with a stronger platform, broader geographic footprint and improved profitability profile, which we believe positions us well to continue expanding access to high-quality diagnostics while driving sustainable growth. Our focus remains on deepening our leadership in Egypt, accelerating the ramp-up in Saudi Arabia, building on the turnaround achieved in Nigeria and continuing to improve operating efficiency across the group. At the same time, we remain mindful of evolving regional developments including the escalation of the U.S., Israel conflict with Iran in early 2026, which may introduce heightened uncertainty across the region, particularly in markets such as Jordan and Saudi Arabia. With that, I'll hand the call back over to Tarek and Sherif, who will take you through key trends across our markets and a more detailed breakdown of our financial performance of the year. Thank you very much. Tarek Yehia: Thank you, Dr. Hend. So far this year, we have continued to operate in a relatively stable condition with supportive macro trends and constructive trajectory across all our key markets. In Egypt, we saw inflation continue to ease materially compared to prior periods, helping support a more constructive operating environment for both business and consumers, improve ForEx liquidity and a stronger investment confidence continue to a more stable backdrop for Egyptian pound during much for the year, which in turn supported planning visibility and reduce pressure on imported inputs. More recently, however, management has been closely monitoring, evolving regional developments, including escalation of U.S. conflict with Iran in early 2026. Similar to Egypt, Nigeria also saw gradual improvement during 2025 with reforms and relative currency stabilization, helping support a recovery in patient activity and more predictive operating conditions. Over in Jordan and Saudi, the health care demand backdrop remained broadly supportive through 2025. Also both markets continue to be exposed to wider regional geopolitical developments. Jordan continued to benefit from a stable health care system supporting consistent demand for diagnostics, while Saudi continued to benefit from structural reforms momentum under Vision 2030. Recent geopolitical development in the region have increased uncertainty and continue to monitor the potential implication for economic activity and patient volumes. Turning quickly to our latest full year results. Egypt continued to deliver a strong broad-based growth with revenue rising 41% year-over-year supported by both volume expansion and significant increase in average revenue per test, particularly driven by radiology, radiotherapy and higher value diagnostic. Meanwhile, Jordan continued its solid performance reporting revenue growth in both Egypt and local currency terms, test volumes increased by 21% year-on-year, supported by Biolab ongoing promotional digital outreach and loyalty initiatives. In a market where volume-led growth remains critical for long-term sustainability, we are pleased to see Biolab's strategy continue to support strong demand and patient retention. In Nigeria, Echo-Lab achieved a full year of positive EBITDA, supported by successful implementation of turnaround strategy and improving operational conditions. We are increasingly confident in the long-term potential of our Nigeria subsidiary to expand its service offering and capture significant upside offered by this growing market. In Saudi, the ramp-up continued very encouraging with revenues increasing supported by stronger brand visibility, network expansion and patient growth. With the third branch now operating and the group aiming to launch 3 additional branches over the coming months, we expect a further growth in revenue and scale in the Kingdom. Finally, in Sudan, operation remains significantly constrained by the ongoing conflict with only 1 branch partially operating and no material change to the report at this stage. I will now hand the call over to Mr. Sherif, who will provide a more detailed overview of our cost, profitability and balance sheet position for the year. Sherif Mohamed El Zeiny: Good afternoon, ladies and gentlemen, and thank you for your time today. As Tarek mentioned during my presentation, I will focus on costs, margins, profitability and our working capital and liquidity position before we open the floor to your questions. In line with the priorities we set out at the start of the year profitability for fiscal year '25 improved materially supported by our group-wide efforts to enhance operational efficiency and maintain tight control over spending. A major focus area over the past 2 years has been digitalization where we have continued integration data tools and analytics into our internal platform, procurement systems and financial planning process to improve decisions making and cost discipline. These efforts, combined with stronger operating leverage and better resource allocation helped drive meaningful improvements in efficiency with both COGS and SG&A as a share of revenue declining versus last year. More specifically, our COGS to revenue ratio improved to 57.3% in '25, down from 61.9% in '24, supported by disciplined inventory management and stronger purchasing costs. The most notable improvements came within raw materials, which decreased to 19.3% of revenue from 22% last year, reflecting our scale advantages and smarter procurement practices. At the same time, total wages and salaries as a share of revenue remained well controlled, underscoring our balance between supporting our staff with operation -- appropriate salary adjustments and continuing to optimize headcount and productivity. As you can see in bottom right chart, these efficiency gains translated directly into stronger profitability with gross profit margin expanding to 42.7% from 38.1% last year and adjusted EBITDA margin rising to 34% from 29.7% in '24. On the SG&A front, spending remained well contained. With SG&A as a share of revenue declining to 15% despite continued investment in strategic growth initiatives. The main increases within SG&A were in wages and salaries as well as advertising and marketing expenses, reflecting annual salary adjustments, selective additional -- additions to support growth and continued marketing investments in Saudi Arabia alongside targeted campaigns in Egypt and Jordan. Even with these investments, the group continued to capture operating leverage highlighting the scalability of the business and the impact of tighter cost discipline across function. Moving to our bottom line. We reported net profit of EGP 1.3 billion in '25, up 29% year-on-year. As highlighted earlier, fiscal year '24 included elevated ForEx gain, which created a high comparative base and distort direct comparisons. When controlling for ForEx expects in fiscal year '24 and nonrecurring items in fiscal year '25, adjusted net profit increased 79% year-on-year to EGP 1.26 billion with an associated margin of 16.1%. As always, we maintain a disciplined approach to working capital management while supporting growth and preserving a strong liquidity. Similarly, we saw our cash conversion cycle improved further to reach 104 days in December '25 versus 155 days at the end '24. It is also important to mention that, as expected, we saw a decline in Days Inventory Outstanding, a stronger sales momentum and more efficient inventory turnover during the second and third quarter of the year following the seasonal Ramadan slowdown in March. Finally, as 31st of December '25. Our total cash reserves stood at EGP 2.1 billion compared with EGP 1.7 billion in '24, with a net cash balance of EGP 472 million versus EGP 226 million last year. This strong liquidity position supported the Board's decision to declare dividends of USD 4.9 million while preserving flexibility to fund attractive growth opportunities. Thank you for your attention. We now welcome any questions you may have. Thank you. Ahmed Moataz: [Operator Instructions] We've actually received a couple of questions in the chat. I'll take them one by one, so that you're not confused. Within the volume growth that you've seen in Egypt, would you say that it has been driven by both existing and recently opened branches or it's entirely driven by recently opened ones and the like-for-like within the mature ones are either flat or declining? Tarek Yehia: Actually, it is both the new branches that we opened during the year and all the existing ones, both were contributing to the sales. Ahmed Moataz: Understood. The second question is on your plan for Saudi in terms of branch openings. Do you have a set in place number of branches you intend to open in '26 and beyond? That's one. And the second, would you be able also to provide us on when you expect EBITDA breakeven for the operations in Saudi and maybe also revenue contribution, not just right now, but maybe a longer-term revenue contribution? Tarek Yehia: Saudi during 2025 have existing 3 branch, and we are planning for next year is 6 branch -- in 2026, another 6 branch to reach by end of 2026, 9 branches across all Saudi as much as we can. And EBITDA is turning positive by 2028. Ahmed Moataz: All right. The following question is on Sudan update, but you've already mentioned that till now, there is no update. You only have 1 branch opened. Another question is on guidance for 2026. If you can provide on that? And also, if you can also disclose the magnitude of price increases that you've already done in January of 2026. Tarek Yehia: For 2026, we are expecting an increase of 25% on sales, a 10% increase in prices and 15% from volume. We're keeping an EBITDA of range -- same range of EBITDA of around 33% to 34%. Ahmed Moataz: Understood. The last part is with the recent weakness in the Egyptian pound and also the geopolitical issues that are somewhat reflecting in higher either freight costs or importation cost, maybe also raw material costs. How do you see this impacting the business? And also how much coverage of inventory do you already have that is secured into the business that would kind of save -- act as a safe haven before you start to see that impact on your P&L? Tarek Yehia: Business till now is not affected in Egypt, and we are securing inventory in order to keep the operation up and running, and we secured the inventory until August. Ahmed Moataz: Understood. [ Jena ] has 3 questions. You've answered -- the first one, I'll just say it out loud, so that's covered by everyone. Please provide revenue, EBITDA and net income guidance for 2026. You've already answered this, but maybe if you have guidance for net income. You've mentioned revenue and EBITDA. The second is -- you've answered most of the second question. The only thing is, that hasn't been answered, what's the percentage of total test kits that are imported? And another follow-up is how many months of test kit stocks do you have? I'm not sure if when you answered and said till August, this covers the test kits or your entire raw materials? Hend El Sherbini: So we import all our kits. So nothing is produced in Egypt, almost nothing. We -- and yes, we have a coverage till August. Ahmed Moataz: All right. And for the entire business, what is the annual target for a number of branch openings going forward? Tarek Yehia: Around 200 across Egypt, Saudi and Jordan. Ahmed Moataz: This is for 2026? Or this is an annual target in general? Hend El Sherbini: This is for 2026, but it includes clinics and hospitals. So they are not -- they're just the regular branches. Ahmed Moataz: Okay. Understood. Andrea is asking -- or actually, first, congrats on the results. Can you please provide any details and guidance on the share of radiology revenue as a percentage of total as it has stayed flat at 4.7% despite the Cairo Ray acquisition. Tarek Yehia: It's still 5% of revenue. Ahmed Moataz: You mean the target in general is 5%, right? Tarek Yehia: The actual is 5%, and it will be increased over years when the business is picking up more and more. Ahmed Moataz: Okay. [ Jena ] is asking with almost $40 million of cash on your books, are you looking to do a buyback? Hend El Sherbini: We have -- we actually have an approval for a buyback. However, we haven't decided to do that. But it is an idea that we're discussing. Ahmed Moataz: Understood. Someone is asking a follow-up on a prior question, which is do you have any revenue targets for Saudi Arabia in 2026? Tarek Yehia: Yes. The target is SAR 18 million. Ahmed Moataz: Right.[ Zoher ] is asking your branch openings target in 2026 for Saudi was 6. Why has this now been pushed out? Tarek Yehia: No, it is the same 6. We have 3 existing in 2025, and we're increasing by another 6 in 2026. Total will be by end of 2026 is 9. Ahmed Moataz: All right. Another follow-up from [ Zoher ] is why decide such a low dividend payout when the CapEx in Egypt ahead is low, given the clinic and hospital model that you have? Tarek Yehia: As we are balancing between investing and distributing dividends, we declared these dividends, and we are seeking more investments in order to grow. So we will revisit if needed, but still we keep it as it is now. Ahmed Moataz: Understood. [ Anup ] is asking household service percentage of revenue has been stable at around 20%. Is this the level of saturation for the service? Or is there further potential to increase household service contribution to total revenues? Hend El Sherbini: We're continuously expanding household service, expanding the team and the service and the value creation for our patients. Right now, it's 20% of revenue. However, the revenue itself is increasing. So the -- I mean the revenue coming from household is also increasing. But I think we still have a big room for growth in household. Ahmed Moataz: Understood. [ Zoher ] is asking if you can provide CapEx forecast or budget for 2026? And if you can break that down by geography? So Egypt, Jordan and Saudi. Tarek Yehia: CapEx is around 5.9% of total sales versus last year of 4.8%. The main CapEx will be for Egypt. Some will go for the new branches. Some goes for IT warehouse, then followed by Saudi and followed by KSA. Ahmed Moataz: [Operator Instructions] So the final question we've received for the time being is how much of your Egypt expansion do you expect will come from hospitals and clinics. Tarek Yehia: It's around 9% coming from this new business, we are going in-house and clinics -- hospitals and clinics. Ahmed Moataz: All right. We haven't received any further questions. So I'll pass it back to you in the case you have any concluding remarks. Otherwise, I can conclude the call now. Hend El Sherbini: Thank you very much, everyone. Ahmed Moataz: All right. Thank you very much to IDH's management and to everyone who participated today. Have a good rest of the day, everyone. Sherif Mohamed El Zeiny: Thank you very much. Bye-bye.
Operator: Good day, and thank you for standing by. Welcome to Atos Group Q1 2026 Performance Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Philippe Salle, Group Chairman and CEO. Thank you. Please go ahead, sir. Philippe Salle: Thank you very much. Good morning, everybody. I am today with Jacques-Francois, and we're going to talk about Q1. So let's go directly on Page 6, on the business highlights. So first point is solid financial performance. I think we are quite happy, let's say, with the start of the year. We have always said that's the lowest point of the year. And then we gradually, I would say, improve the growth. Further progress in the execution of the Genesis plan. So the Genesis is doing also very well. We will finish the first Genesis plan probably by mid of this year. And we have extended the plan, I would say, with another savings to be finished probably by the end of 2026. The idea, of course, is to have the full savings of the new, I would say, the extended plan in the course for the year 2027. We have a positive business momentum, and I will come back to this. With, I would say, book-to-bill that is the highest for the last 5 years. And so now, we have a clear focus on our strategic pillars. Agentic AI, we have launched a manifesto. Sovereign, we have launched also a manifesto internally, and it's going to be externally in the coming weeks. And, of course, Cyber, where we are #1 in Europe. So if we go on the key numbers on Page 7, order entry is EUR 1.5 billion. It's 89% for Atos. It's 87% with Eviden. And of course, as you can imagine, with Eviden, the order entry was a little bit low in Q1 with the war. We definitely think that it's going to be much better after, let's say, the war, but we don't know, unfortunately, when it's going to be finished. Revenue is EUR 1.7 billion plus. It's roughly EUR 1,640 million what we call with the go-forward perimeter, the go forward, it's without Build that we have sold on the 31st of March and Latin America, and we expect to close Latin America next week. If it's not next week, beginning of May, but we will try, I would say, to finish this transaction, let's say, next week, which means that the perimeter is roughly the perimeter going forward. There are still some countries we want to close, but are very small. But in terms, let's say, of sale, I think it's finished. Net change of cash, I think very good news. It's minus EUR 47 million. So you have to understand that we have EUR 71 million of restructuring. So it means that we have produced roughly EUR 24 million of cash. And also, we have the Build cash consumption. Unfortunately, we are not able to estimate that cash consumption for now. We will do this, in fact, when we're going to close H1 -- just for information, build EBITDA was around minus EUR 25 million; CapEx, minus EUR 30 million. So EBITDA minus CapEx is minus EUR 55 million. We estimate that probably there is a positive working cap, but it's possible, of course, that Build has an impact of, let's say, around EUR 10 million, EUR 20 million, EUR 30 million, we'll see. So it means, in fact, that the production of cash is much higher than, in fact, EUR 24 million. And then the liquidity EUR 1.7 billion, it's a little bit above last year, December 2025. And remember also that we have bought already EUR 62 million of the EUR 1.5 [indiscernible]. So of course, there is less cash, but we have also less debt. So let's go on the 3-year for the Genesis. So I'm not going to highlight -- remember that there were 7 pillars in Genesis. There are a lot of things that we are doing. So the first one, is the growth. So as I say, we have redesigned completely for me the engine of growth. And it's going to, I would say, produce a lot of, I would say, of course, results in the coming months now and years. So I would say the teams are in place, most of them. We have, I would say, also put a focus with Florin, the CTO on our 3 strategic pillars, so Agentic, Sovereign and Cyber. We have now launched this morning for 2 or 3 months campaign also in France, I would say, to, let's say, push the image of Atos. And I would say the main, I would say, message is that Atos is back. And as I say on the term, the target operating model, in fact, in sales is completely in place. You will see also, for example, that the pipeline has increased almost by EUR 1 billion in 1 quarter. And that's -- I would say that gives, of course, a very good signs for the rebound that we estimate that will happen, in fact, in Q3. In terms of country review, so we sold iDEAL, it's a company that was in Nordics. It's mainly, in fact, Norway and Finland. So we closed the deal on end of Jan. South America, as I say, next week, and Build was done also end of March. In terms of operational costs, I think we are continuing, I would say, the progress. The billability rate now is above 80%, and it's, in fact, close to 85%, the target that we have. We are now, let's say, recalculating a little bit differently this billability rate because we take into account the average salary of the people that are not billed versus, I would say, the salary of people that are billed. And then there is -- and we see that there is, of course, a discrepancy and there is no, I would say, magic, but usually the people that are more costly, unfortunately, are more on the bench than the people that are billed. So I would say we will not recalculate, I would say, this rate, but we will adjust it, I would say, to the salaries. Legal entities, we continue to simplify the number of entities. We want to shave, I would say, the number of entities by hundreds still. And then we are also putting some AI internally. And right now, for example, we are testing AI on the revenues. So in fact, we are looking at all the contracts that we have, it's several thousands, and we look also at the options I would say, the paragraph in the different contracts that we have signed where we can extend the pricing or bill a little bit differently. So it can give, I would say, some rooms of improvement in terms of margin and revenues for the teams. But Genesis is going very well. The Genesis, the initial plan will be finished mid-'26. So we estimate that the EUR 650 million saving plan is almost complete. And that's why we have extended now the plan to have, I would say, a plan that will finish end of '26. So it means it's a target above EUR 700 million. In terms of workforce on Page 9, as you can see, so we started the year at 63,000. We continue, I would say, the restructuring, and we also managed the levers versus hirings to be negative. So we finished at 61,000. You take out Build to 2,500. So we are now at a little bit below 59,000. If you take South America, we are probably close to 56,000. So that's probably where we will be probably at the end of next week. And I would say we will -- I definitely think that we can -- we will land around 55,000 when Genesis will be complete. So we are almost there. We go on Page 10 on the order book. So first, the book-to-bill is very strong, 89 for -- and in North America, it's above 100. Just for the analysts, that's the -- I always say that the book-to-bill is a proxy, unfortunately, of growth. And I think we have a very good example. The book-to-bill of North America is above 100. They continue to decrease, unfortunately, in terms of top line in Q1. The book-to-bill of U.K. is below 100 and now they are growing. So as I say, unfortunately, it's not an immediate, I would say, readings when you have a book-to-bill at below 100 that it means that we're not going to grow. I don't think that it's the case. We are still looking to find a better measure. It's not an easy one, but we are working on it. I hope that we can probably share some, let's say, results in H1 or at the end of the year. The qualified pipeline, as I say, is up roughly close to EUR 1 billion. We are now at EUR 13 billion roughly of qualified pipeline, so almost 2 years of revenues, a little bit less than 2 years, of course. The renewal rate also is 94%. The good news is that we don't have big renewals now going forward. So in fact, for this year, I think we are not going to lose any other contracts. It has been done, of course, in the course of '25. The 2 big contracts in the U.S. have been renewed. One has been signed, in fact, in end of March with CNA. It's a very big contract, $480 million. And we're also discussing probably to extend the contract to more than this $500 million. We will have probably -- we're still in negotiation in the course of Q2. And the second one also is in California. We have won the contract. It will be signed in the course of April or May. It's done. We are just waiting, I would say, the signature of the client. And then for the U.S., it's done. We don't have big renewals, in fact, in other parts of the world. There is a medium-sized contract, in fact, in BN right now. We are waiting the answer probably next week. And that's all, which I think is very good news. And that's why we are very confident on the rebound of the top line in Q3. And then as you can imagine, we have a good traction in cloud, in cyber and in data AI because we are growing, in fact, in these 3 service line, let's say. You can see below some contracts that we have renewed. So for example, CNA in the U.S., it's a very big contract. There is some CM&I, there is a digital workplace and cyber, and we are also now looking for digital applications and the data AI, in fact, for the client, and it's an insurance company. So I definitely think that Agentic has a big impact in fact, in this company. We have, for example, with Gigalis in France, renewed a 4-year plan with cyber. It's what we call framework agreement. So it means that we have after that the possibility, I would say, to tender, put people or put, I would say, new projects in place. Most of the work, in fact, are not in the book-to-bill. So we are very cautious on this. And that's why it doesn't -- I think probably the book-to-bill is a minor, I would say, minor of probably what is going to happen on the revenues going forward. In the U.K., we have won a very good contract with the Ministry of Housing at GBP 63 million 7 years for digital applications. And for example, in the Germany, Austria, in Austria, we have won also a very big contract with OBB, EUR 48 million for 9 years. But I think that there is good traction. I see that there is more and more, I would say, appetite. Doors are open from the clients. I think it's much better than last year. And definitely, I think now we need to win, I would say, the contract. So I would say we are back to a normal business. If we go on Page 11, this is the 3 pillars in terms of technology. This is where we're going to invest most of our R&D and push, I would say, very hard. So Agentic, sovereign, and cybersecurity. So Agentic, as I say, we launched already the manifesto. We have already studios in place in the 4 big countries, and we have now signed different clients. And there is an ecosystem around us of start-ups that will help us, I would say, deliver the Agentic and the agents in the different scenarios of our clients. Then with the sovereignty, so there is a manifesto also that we're going to produce. It has been already shared with the top 200 within Atos in fact, last week, and we're going to share it externally in the course of next week or probably beginning of May. There is a lot of appetite, as you can imagine, right now, especially in Europe. And then cyber, of course, there are a lot of things going with this. We see also some developments with Agentic there. And of course, we have a very strong position, as you can imagine, in Europe, and we are pushing now also cyber in North America. Now if I go to the next page. So the next section is the Q1 revenue performance. So I can go through, I would say, the main numbers. So first, as you can see, when we looked at the Q1 restated, it's roughly EUR 2 billion. We take out the scope and the foreign exchange, the divestitures. So in fact, the perimeter going forward, which is without Build and without IDL and of course, without Latin America was roughly EUR 1.8 billion. We finished at EUR 1,640 million, which is roughly minus 11%. And as I say, we were, in fact, anticipating, let's say, a weak Q1. It will be much better, in fact, in Q2, and we are still looking to make the rebound in Q3. If you look, in fact, on Page 14 by region, we were probably a little bit, let's say, not surprised, but North America probably is too weak, the sentiment, in fact, the economic sentiment is a little bit, let's say, challenging in this area. The rest is okay. As you can see, U.K. now is growing at plus 5%. We estimate also that Germany will be on positive growth in Q2. So we see, I would say, region by region that I would say we are coming back to a positive territory in the coming quarters. If I go, let's say, region by region, so I start with Germany on Page 15. I think Germany is doing quite well. As you can imagine, also the EBIT now is positive in Q1. It was negative last year. And by the way, just for information, the EBIT of the group has more than tripled with our bill in Q1 versus last year. We don't publish, of course, the EBIT -- we will do this, in fact, in H1. But I would say we see the benefits of Genesis now going -- falling through, I would say, the P&L already, of course, in the beginning of '26. Then you have, I would say, some contract wins. I'm not going to go over, but I would say we are stabilizing, I would say, Germany. And as I say, we estimate that the rebound will happen in the course of this year. Now North America is probably the most difficult, let's say, region. In fact, the start of the year was probably lower than anticipated, but we are signing, in fact, a lot of new contracts and the book-to-bill is 10 -- so it's big. And definitely, now we estimate that we're going to ease, let's say, this contraction of revenues in coming quarters. You can see some below some big wins. The biggest one, of course, is CNA. And also, we have another one on CM&I at $30 million, as you can see below on the bottom, I would say, of the page. 17% is France. So France is still also challenging. Remember also that we did not have a budget in January and February. So it freezes a lot of our public and defense customer and public and defense in France is 40% of the revenues. So we know that the start of the year is probably, of course, lower than anticipated in the budget for us. But we have some very good signs for example, with SNCF, SNCF when I arrived last year, they said that they want to stop to work with Atos. And finally, we work -- we won a very big contract with them. So it means that the doors are open, as I say, in many customers. Gigalis also, it's a big contract we have won also for cyber. And you can see also other, I would say, wins and qualifications. U.K. on Page 18. So that's the rebound of the U.K. and also the profitability also is skyrocketing, as you can imagine. So we are very happy. And there is more to come. I think we have win also a big contract in Q2 that will be probably public. So I would say we are quite confident right now in the U.K. And as I said, that's the first region to come back to growth, and there will be more, of course, in the coming quarters. Last, international markets on Page 19. So we have taken out the 28, 30 that's Latin America. So in fact, without Latin America, it's around EUR 220 million, so minus EUR 12 million. It's mainly, in fact, impacted by one client in Asia, in fact, that is stopping the CM&I contract because they want to manage internally, I would say, their data. The good news is that we suffered, in fact, in '25, and we continue to suffer in '26. But at the end of the year, this ramp down is completely finished. So it means that we are quite confident that we will restart growing, in fact, in the course of '27. You can see also some wins that we have in Singapore, Spain and Slovak governments. Last, in fact, and it's not -- it was not international, sorry, is, of course, at Benelux, so Benelux or BN, what we call with Atos. This is also a slow, let's say, start of the year, but we are, I would say, quite confident also that this region is doing very well. We have win also different with Eurocontrol with -- in the automotive sector with DAF and also in the financial services, as you can see. Now Eviden as you can see on Page 21. So without Build, in fact, the revenues were EUR 71 million, and we are roughly at EUR 69 million. It's roughly flattish. In fact, we have been impacted by the war because part, for example, for Vision AI, a big chunk of our business is in Middle East. So we definitely think that it will be much better after the war concludes, but when nobody knows. But I would say we have a good traction in terms of also contracts, and we are very confident that we will accelerate both in the book-to-bill going forward and also, I would say, in the top line. So that's it for me. I give the floor now to Jacques-Francois for the liquidity position. Jacques-François de Prest: Thank you, Philippe, and hi, everyone. So on Page 23, as a reminder, the publication of the quarterly liquidity position is part of our regular reporting requirements, which have been defined and agreed with the group's financial creditors. So the certificates are available on our website. Our liquidity position remains strong at the end of March, thanks to the limited estimated cash consumption over the last quarter. In Q1, the net change in cash is estimated to be approximately minus EUR 47 million, which includes EUR 71 million spent related to the restructuring. This figure is reported without any use of the account receivable factoring or without any specific optimization on trade payables. This number is also reflecting the results before the estimated impacts. So you can -- we take them from the left to the right on the slide. So a, the change in the unsolicited payments received in advance of the invoice payment due date during the year. So that's the minus EUR 115 million. Then you have the exchange rate fluctuation, which amounts to approximately minus EUR 2 million. You have the M&A impact, which is plus EUR 257 million, and you have the debt repayment of minus EUR 62 million. So these amounts are excluded from the net change in cash, which I announced is minus EUR 47 million. And that brings us as a result, as of the end of March '26 to have the Atos Group's liquidity at EUR 1.736 billion, which is to be compared with EUR 1.705 billion at the end of December '25. And this is more than EUR 1 billion above the minimum requirement of EUR 650 million set by the credit documentation. So with that, I'll now hand over to Philippe. Philippe Salle: Okay. So just for the outlook, just I give you the numbers now with the FX at the end of March. So it's a little change just because, of course, as you can imagine, the dollar is weaker. So it gives in euro, let's say, a smaller revenues at the end of '25 with the FX of March. So we are still at EUR 7.1 billion. So compared to EUR 7.1 billion, of course, at the end of '25, EUR 312 million as the EBIT. We are now close, as I said, to 56,000 people without. And we are now in 54, sorry, countries of operation. So as I say, we continue also to close some countries will below 50 by the end of the year. Now if I go on Page 26 for the guidance of this year. So remember that at the beginning of this year, we say we will try to touch a positive, let's say, organic growth with, let's say, the start of this year and, let's say, the economic sentiment, we estimate that it's not going to be possible. So we have narrowed, I would say, the range. It's between minus 1% and minus 5%. So we still keep, I would say, the worst case at minus 5%. We think we will do probably better than that. And the best case, let's say, to minus 1%, so roughly a flattish revenue. Operating margin confirmed at 7%. As I say, we have tripled -- more than tripled the EBIT, in fact, in Q1. So we are very confident on the profitability of this group for '26, of course, and a positive net change in cash. So in fact, you've seen that we have already spent EUR 70 million with Genesis in Q1. Genesis this year is probably between EUR 150 million and EUR 200 million. So we have, in fact, spent more than, I would say, the average that we should have by quarter, and it's normal because we are accelerating the plan. And of course, the EBIT of the Q1 is always the lowest. So it means that it's a good sign, I would say, for the cash going forward. And then I would say for 2028, next year and 2028, we are still looking for an acceleration of the top line, still targeting around 10% of profitability. And of course, the deleveraging will continue. In fact, I would say with this year, the deleveraging, in fact, will be seen already in fact, in '26. And in fact, with hundreds of millions of cash next year because, in fact, the Genesis in terms of cash outs next year will be very small. We will produce a lot of cash to either do M&A or deleverage, I would say, the balance sheet. With that, I can now, with Jacques-Francois, take any questions that you have on the Q1 results. Our Q1 performance, it's not really results because we don't produce the P&L. Operator: [Operator Instructions] Our first question comes from the line of Frederic Boulan from Bank of America. Frederic Boulan: If I can ask 2. Firstly, on demand. So you flagged a strong order book momentum, a number of big contract wins. Can you discuss a little bit the nature of discussions with clients, any impact on demand from the current macro? I mean you flagged that for Eviden, but would be keen to hear any broader impact on the overall demand environment? And then specifically around pricing, it would be good to understand where you see price points in the deals you've been signing recently, how it's comparing versus, let's say, a year ago? And is this pricing driven by any kind of competitive or AI factors? Philippe Salle: Yes. So on the second point, Frederic, for example, CNA, the margin is 25%, which is roughly in line with the former margin that we have with CNA. Remember that the goal we have is to be around 25%, 26%. It's very important. And I'm very adamant on this. So I think probably, and that's why also the book-to-bill also last year and this year is probably lower than what we can achieve because we are still watching very closely the margin that we want to produce. Profitable growth, remember, is the goal for us. It's not very difficult to buy some contracts, but I would say it's far-ridden, of course, as you can imagine, since now beginning of '25. In fact, in some contracts, for example, like CNA, and it probably goes with the sentiment of the clients. Everybody, of course, is talking about AI. Nobody probably understands the impact of AI because it's very difficult right now to see what is going to happen. There are a lot, of course, disappointments, in fact, with some clients trying to put some agents because it's not that easy. And my view is that Agentic is the new revolution. It's coming, but it will take probably 2 to 5 years to be really in force, probably more in the U.S. at the beginning and after in Europe. So we see that in these contracts, for example, for its 8-year contracts, we're going to give, for example, some savings after year 3 and 4 in terms of -- let's say, in terms of Agentic. But in fact, we -- as I probably said already, since we don't know exactly the number of savings, in fact, we're going to share part of the savings that we're going to produce. But it's difficult, in fact, for clients and even for us to see the impact -- the real impact, I would say, of the savings we're going to have. So there are a lot of studies, and I'm sure that you've read some of them saying that we can divide by 2 by 3 by whatever. Unfortunately, there is one cost that nobody knows, it's the price per token. And we definitely think that this will probably say out in the future. And so it means that, in fact, there is a price for agents. There is probably, of course, less people cost in the contracts going forward. But the sum of the 2 right now is still, I would say, unknown. So I would say everybody is talking about AI. Everybody wants to us, let's say, to give some rebates or not rebates, but I would say, to apply, let's say, Agentic in our delivery and then give, of course. But I would say it's too soon even with the big contracts we are signing right now. They understand that there will be an impact, but it's too soon to say that there is a big impact. And as I say, for us, we're going to protect the margin. So we estimate that the margin of '25 probably will be more after that. And then we can probably produce more output on a given framework. Now the sentiment, I would say, of clients, it depends on the sectors. I think there are some sectors that are probably more difficult than the rest. Automotive is one, transportation, luxury goods. And other sectors, we don't see, in fact, a big impact on right now, let's say, the economy, the banking sector, insurance sector, defense, of course, and public, where we are very strong health care. So I would say it's a mix of sentiment, but you know that in economy, unfortunately, the fact that we -- there is a lot of uncertainty, it doesn't give, I would say, the sentiment to clients that they can spend more, specifically with AI. So I would say that for the moment, probably there is a postponement of some contracts or projects. They are looking exactly probably waiting, let's say, to see how the economy is going to rebound after the war. So there is more wait and see in some clients, let's say, for some projects. And that's why -- that's what we see for the moment. My view is that the projects will happen. But in fact, if you, of course, extend or postpone, let's say, by 3 to 6 months, it has an impact, in fact, in the -- for the '26 year. And then, of course, it will be good news for, let's say, end of this year and of course, in 2027. Operator: [Operator Instructions] Our next question comes from Sam Morton from Invesco. Sam Morton: Two questions, please. The first is on the bond buyback. So I think you bought back EUR 62 million of the 1.5 lien. Certainly the last time we spoke, I think you've been buying back the second lien. So I'm trying to understand what's the change in strategy there? And then secondly, any update you can provide on the refinancing, that would be really helpful. Philippe Salle: Yes. I think Jacques-Francois is going to answer your 2 questions. Jacques-François de Prest: Sam. So yes, the change of strategy is more or less in line, I think, with what we announced in the Q4 publication call, where we said that at the end of fiscal year '25, we thought the second lien was really very low actually and bought opportunistically a little bit of that. So last year, this was EUR 2.5 million of second lien. Now when we look at the NPV, the second lien has gone up. And it's true that the EUR 62 million amount we have bought back on the market, on the open market was only 1.5 lien bonds. Again, we noticed that -- how can I say, this bond was momentarily trading below due to geopolitical situation, nothing to do with the performance of the company. So since we had a little bit excess of cash, we decided to take advantage of that. We signaled that, and we implemented this program, which is not finished, by the way. It might be pursued in the coming weeks or months. That's the first question. On the second question, the refi, well, we are monitoring the market. The company is ready. So we have nothing to announce today other than we are checking how the market is evolving. We have some banks advising us. And when we think there is a good window allowing for a good operation and a good pricing, you and investors might hear from us. Operator: Our next question comes from the line of Laurent Daure from Kepler Cheuvreux. Laurent Daure: I have 2 really quick questions. The first is on revenue trends during the year. I think if I take the midpoint of your guide minus 3%. How do you see the phasing from Q1 to Q4? And what are the main drivers of improvement? Do you still have some contract ramp-up that makes the revenue trend much better, maybe starting in Q2? Or is it comps impact? Any granularity on how you see the year shaping would be helpful. And my second question is on the bond buyback. To clarify, you made EUR 62 million. are you cautiously looking at your balance sheet? Could you do much more than EUR 62 million, like EUR 200 million, EUR 300 million? Is it a question of liquidity of those bonds? So anything on the strategy on that would also help. Philippe Salle: Yes. So in fact, for the -- we estimate Q2 will be around minus 6% and then positive in Q3 and Q4, the positive, then you calculate whatever you want. The central scenario, let's say, at minus 3% for me probably is okay. And of course, if you have minus 11%, minus 6%, then plus and plus, if you divide it after that by 4, you are probably around this minus 3%. So I would say the central is around minus 3%. The worst case is at minus 5%. Then for the bond buybacks, the question for us, of course, we have probably plenty of cash, as you can imagine. And also, in fact, we're going to produce some cash this year. So if we start at minus EUR 50 million, of course, we're going to produce EUR 50 million plus now in the coming quarters. We want to buy, in fact, 1.5L bond, in fact, and that's the one we are looking at that is below EUR 100 million. So I think it's a good, let's say, buy for the group because it's cheaper than, I would say, the par, in fact, on -- for the bonds. And remember that the bond is around 9% yield. We are -- remember that we are also looking at refinancing. So that's why we have to be a little bit cautious between the refinancing. And remember also that we have some repayments of the 1.5L with the proceeds of M&A that should occur, in fact, at the end of the year. So it's an equation, I would say, with all these variables. So we will see if we continue to buy back bonds or we refinance first and then we continue to buy back also, we will see. Laurent Daure: So at the end of this year, you have to pay back with this half of your proceeds from M&A. Is it right? Philippe Salle: Exactly. The proceeds of WorldGrid, the proceeds of Latin America of [indiscernible], of course, it's small amounts for the 2 and the proceeds of Bull, it could be EUR 500 million plus. So remember that we have this EUR 500 million plus cash out that will happen at the end of the year. Jacques-François de Prest: May I complement, Laurent, this is as part of the credit documentation. We have a couple of moments in time in the near future where we are going to do the liquidity test. There is a bar at EUR 1.1 billion of liquidity. At the end of June, we are testing that on a forward-looking basis meaning that the company will -- we will do our forecast internally and the amount which are above EUR 1.1 billion at the end of December, we will use them to reimburse as a mandatory early repayment the 1.5 lien tranche. That's the first test. And the second test is we take the liquidity position, the actual liquidity position at the end of December. And again, against the EUR 1.1 billion, the amounts coming from the M&A proceeds will be used to repay early some -- the EUR 1.5 billion lien capped at the amount, which leaves us above the EUR 1.1 billion position. I hope it's clear. Laurent Daure: To be even clearer, if you do all that, what is your best estimate in terms of interest savings in '27 versus 2026 at the group level? Jacques-François de Prest: I'm afraid there are too many unknowns in the question to give you a number. Philippe Salle: If we do the refinancing, there are a lot of things that could happen again in the course of this year. So it's too soon to give you already, let's say, guidance on interest rates for '27. We can probably give this with the Q3 results. So probably in October I think we will have a better view. Operator: Our next question comes from Benoit De Broissia from Keren Finance. Benoit De Broissia: I have just one very quick question. It's -- you had one black contract in the U.K. involving Aegon. I noticed that Aegon sold its U.K. subsidiary in the weeks -- in a few weeks ago. Do you think that you could renegotiate with the purchaser, the contract you have and that is set to terminate in a few years in 2034, '33, if I'm not wrong. Philippe Salle: It's a very good question. Yes, the end of the contract is 2034. Yes, you have noticed that Aegon U.K. has been sold. So we are talking now to the buyer. It will be in May. In fact, we need to wait. And of course, the buyer has already a platform. So the good news is that do they want to keep only one platform or not and then stop the platform of Aegon, which then, of course, will stop the contract. It's too soon because, of course, we haven't talked yet, I would say, to the buyer. So we will have, of course, a better view in the coming months. But I think for us, it's a good news because I definitely think that they will not keep -- in terms of economies of scale, it doesn't make sense for them, I would say, to have 2 platforms. I think that their platform also is very efficient. So we will see how they want to play this. So there is a possibility effectively that they ask us to stop the platform that we have and then transfer the data to their new platform. So it means that the contract can end in the course, for example, of 2027. We will see. I don't know yet. It's too soon. But it's a very good question. It gives a good opportunity for us, yes. Operator: Our next questions will come from the line of Ryan Flew from PVTL Point. Ryan Flew: Just one quick one for me. So you've given quite clear guidance on sort of the cash add-backs or the adjustments to net change in cash to get to a true sort of unlevered or pre-debt repayment cash generation. Can you just help steer us on your '26 guidance? And clearly, there's a range there, but it feels from the adjustments you've discussed that actually the net change in cash will be considerably better than just positive. So just any further sort of color you could give would be really helpful. Philippe Salle: Jacques-Francois? Jacques-François de Prest: Well, Ryan, thanks for your trust and your faith. At this stage, our commitment and our guidance is to be free cash flow positive. I'm sorry, I will not deviate from that. Bear in mind that we have -- Philippe mentioned, the Genesis cash out impact is between EUR 150 million and EUR 200 million. So that's not nothing. And we have all the other lines of the cash flow statement, which are still consuming some cash. So yes, we're shooting for more, but our commitment is to be free cash flow greater than 0. Philippe Salle: But as you say, it's probably a conservative guidance, let's say. Operator: Our next question comes from Derric Marcon from Bernstein. Derric Marcon: Two questions from me. The first one on the book-to-bill. I just want to understand if it's -- the 87% is applied to the reported figures or the fully planned scope. And in this book-to-bill, talking about in absolute term, what's the proportion between renewal and new business? That would be helpful to have this figure. And my second question is on the M&A, the EUR 257 million you mentioned, can you reexplain what is included in this figure? Philippe Salle: Okay. So the 87%, it's Atos and Eviden. Atos only is 89% because as I say, Eviden has suffered from the war more than -- I would say the impact is more influenced, I would say, than Atos. And Eviden is more Europe, Middle East, in fact. So that's why probably I think the impact is higher. We definitely think that the rebound will come, but of course, we need to have more, let's say, stability. Then the book-to-bill between renewables. Derric Marcon: Is it from the go-forward perimeter or on the reported perimeter? Philippe Salle: Yes, the go forward... Derric Marcon: EUR 1.7 billion or the EUR 1.6 billion. Philippe Salle: No, no, it's only on the perimeter without Latin America and Bull. So 87%, 89%. 87% is the go forward and 89% is only Atos, okay? And it's Atos without Latin America, 87% is with Eviden without Bull. Then the renewals versus -- we don't have this number available right now. I cannot tell you. So we will come back to you on this one. And remember also, you're right that with renewals, of course, as I said, it inflates also the book-to-bill. And that's why it's a proxy for the book-to-bill. Be careful on this. It's not because the book-to-bill is below 100 that we're not going to grow on the company. I definitely think that it's possible. And in fact, we have shown this in the U.K. Then for Bull. So Bull, in fact, remember, there is a lump sum of EUR 300 million at the beginning, plus 2 earn-outs. The EUR 300 million is the EV, the EUR 250 million is the equity. So in fact, we went from EV to equity without the provisions and the pensions, okay? So it means that the EUR 250 million was the equity check that we had for Bull without the 2 earn-outs. Then the EUR 250 million, we take out the carve-out cost. We estimate around EUR 50 million. A part of it was expense, I would say, in the course of '25, the rest, of course, in Q1. We estimate around EUR 50 million. So it means that the net cash for us is close to EUR 200 million, okay? Remember also that Bull has a negative cash flow in Q1. We don't know how much. So we need to take this also into account. So the EUR 200 million will be probably less, EUR 170 million, EUR 180 million. I don't know yet exactly how much. As I said, it depends on the working capital we're going to have on Bull, but it's quite tricky for us to calculate the working capital of Bull, because, in fact, for some of activities of they were on the same company as Atos or the other, Eviden. And that's why even on the bank accounts, unfortunately, we need to look line by line on the cash, I would say, to reconstruct, let's say, working capital. And that's why we're going to give you the figures with the H1 figure, in fact. So that's roughly EUR 200 million without carve-out cost and I would say, equity check, probably less with the cash outflow of Bull in Q1. And then we still have the earn-out. The first one is maximum EUR 50 million, and we estimate we can gain around, let's say, EUR 40 million plus. We will see, I would say, they need to close their accounts. And it's, I would say, linked to the gross margin of Bull. And then the second earn-out is on the EBIT of Bull in '26. But of course, as you can imagine, the EBIT of Bull in '26 is not in my hand, unfortunately. So it's difficult to see what is going to happen on the second earn-out. So we will see what happens on the first one. It's going to be a negotiation that will start, I would say, after the closing of the accounts. Unfortunately, Bull is not very, let's say, quick on the closing accounts. So we will have probably -- numbers probably after the summer. Derric Marcon: And so to get -- Philippe, to get to the EUR 257 million mentioned in the liquidity position. So you have Bull EUR 200 million after carve-out, if I understood correctly, plus other things like Scandi or Latin America... Jacques-François de Prest: So I can say the angle Philippe took was the angle of explaining the story for Bull. Now in the carve-out costs, some of that has been spent in '25 already, a little portion in Q1 '26, and there is a bit more to come in the rest of '26. The vast majority of the EUR 257 million you can see is coming from Bull, the vast majority of that. You have then a plus EUR 10 million and the minus EUR 10 million, which comes from the disposal of some other relatively small assets and some deduction for the carve-out cost for Cartier, but you can assume that 95% of that is Bull. Derric Marcon: Okay. And Latin America and Scandi will come later in the year? Jacques-François de Prest: Scandi has been closed. Scandi has been closed already. That's what I was referring to as other proceeds. That has been completed in Q1 already. And for Latin America, the closing is scheduled in the coming weeks. So there is not a penny yet of proceeds from Latin America in our Q1 numbers. Operator: We have no further questions from the line. Allow me to hand the call back to management for closing. Philippe Salle: Okay. Can you ask one more time if there are other questions or not, and then we can close. Operator: [Operator Instructions] Philippe Salle: Okay. If there are no more questions, then thank you, everybody, for this morning. We have some, let's say, a small road show, I would say, with some investors today and tomorrow. And we, of course, remain at your disposal if you have any questions. But overall, I would say we are very confident on the rebound of the company. I'm very pleased, I would say, on the results and very confident that this year of the rebound and in terms of cash flow, I think there is no surprise for us, neither on, I would say, the profitability and cash flow and the rebound will occur in the course of H2. So next time, I will talk to you end of July. So have a good day, and see you in 3 months. Bye-bye. Operator: That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: My name is Chelsea, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I will now turn the call over to Ms. Rachel Vatnsdal, Vice President of Investor Relations. Ms. Vatnsdal, you may begin your conference. Rachel Vatnsdal: Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer; and Matt Gugino, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, quarterly report on Form 10-Q, the slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call and a note containing details of historical and anticipated future financial performance are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will be available until May 5, 2026. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Our Form 10-Q and the supplemental materials I referenced describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2026, and all references to period-to-period increases or decreases in the financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'd like to turn the call over to Rainer. Rainer Blair: Thank you, Rachel, and good morning, everyone. We appreciate you joining us on the call today. We're off to a solid start to the year. Our team executed well in a dynamic environment, leveraging the Danaher Business System to accelerate innovation, drive productivity gains and deliver better-than-expected adjusted EPS growth. On the top line, continued strength in bioprocessing and better-than-expected performance in Life Sciences largely offset the impact of a lighter-than-normal Q1 respiratory season at Cepheid. Now looking across the portfolio, trends in many of our end markets were modestly better than our expectations entering the year. In large pharma and biopharma, commercial monoclonal antibody production remained robust, and we continue to see gradual improvement in R&D spending. Trends at smaller biotech and academic and government customers were stable sequentially with some pockets of improved order and funnel activity. Meanwhile, clinical and applied end markets performed well, consistent with recent quarters. Geographically, we saw an acceleration in our Life Sciences and Biotechnology businesses in China. Now the global environment has become more dynamic since the start of the year, including the ongoing conflict in the Middle East. And while we have limited direct revenue or supply chain exposure to the region, we're mindful of potential pressures from a sustained conflict. That said, we remain focused on controlling what we can control, including leveraging the Danaher Business System to proactively manage our supply chain and mitigate inflationary pressures while continuing to invest for the long term. At the same time, we're enhancing our portfolio through strategic M&A, including the pending acquisition of Masimo, where we believe there are significant opportunities to improve performance over time through DBS and our global scale. With the strength of our balance sheet and robust free cash flow generation, we're well positioned for further capital deployment going forward. So with that, let's take a closer look at our first quarter 2026 results. Sales were $6 billion in the first quarter, and core revenue was up 0.5% year-over-year with a 2.5% headwind from respiratory revenue, partially offsetting 3% core revenue growth in the rest of the business. Despite a lighter-than-typical Q1 respiratory season, underlying momentum across the portfolio improved as many end market headwinds began to moderate. Geographically, core revenue in developed markets were down slightly with a mid-single-digit decline in North America and a mid-single-digit increase in Western Europe. High-growth markets were up low single digits with solid performance across most regions, including mid-single-digit growth in China. In China, better-than-expected growth in Biotechnology and Life Sciences more than offset the expected high single-digit decline in Diagnostics, which continued to be impacted by volume-based procurement and reimbursement policy changes. Our gross profit margin for the first quarter was 60.3%, and our adjusted operating profit margin of 30.2% was up 60 basis points, reflecting the benefit of year-over-year cost savings, more than offsetting the negative impact from lower respiratory revenue year-over-year. Adjusted diluted net earnings per common share of $2.06 were up 9.5% year-over-year. We generated $1.1 billion of free cash flow in the quarter, resulting in a free cash flow to net income conversion ratio of 105%. Turning to capital deployment. In February, we announced our intention to acquire Masimo, a leading provider of mission-critical pulse oximetry and patient monitoring solutions in acute care settings. We followed Masimo for over a decade and believe the company is well positioned with its trusted brand, differentiated technology and attractive financial profile. Looking ahead, we believe there are clear opportunities to run the same playbook that has driven value creation across our portfolio for many years, leveraging DBS to drive growth and expand margins while further strengthening our value proposition with customers. We expect Masimo to be accretive to adjusted diluted net earnings per common share in the first full year post acquisition and to deliver high single-digit return on invested capital by the fifth full year of our ownership. The transaction remains subject to customary closing conditions, including regulatory approvals, and we look forward to welcoming the talented Masimo team to Danaher later this year. Now alongside M&A, we made significant progress on organic growth initiatives across Danaher, including new product introductions and strategic partnerships. These efforts are strengthening our competitive positioning while helping customers improve quality and yield, reduce costs and accelerate the delivery of life-changing therapies and diagnostics. So let me highlight a few examples. In Biotechnology, Cytiva launched Fibro dT, a next-generation mRNA purification platform that improves manufacturing speed and efficiency. By eliminating diffusion limitations associated with traditional purification methods, Fibro dT reduces processing time, increases yield and lowers material usage, enabling more cost-effective higher throughput production of mRNA-based therapies. Additionally, Cytiva will showcase its next-generation automated perfusion system, or APS, at the INTERPHEX trade show this week. APS is a cutting-edge tangential flow filtration platform designed to address key challenges of currently available process intensification systems, including product loss, filter clogging and scalability. In Life Sciences, Beckman Coulter Life Sciences announced a strategic partnership with Automata, combining its liquid handling genomic and cell analysis technologies with Automata's AI-ready automation platform. This partnership is positioned to empower scientists with AI-driven tools in an automated workflows to improve throughput, workflow reliability and data integrity and increasingly autonomous research environment. Lastly, Beckman Coulter Diagnostics continued to make progress on menu expansion for the High Resolution DxI 9000 Immunoassay Analyzer with FDA clearance of the HBc IgM assay for acute hepatitis B. With this clearance, nearly all core blood virus assays for the DxI 9000 are now cleared in both the U.S. and the European Union. This closes a historical gap in Beckman's immunoassay test menu and positions Beckman to accelerate new placements, customer wins and growth as the DxI 9000 rollout continues. So now let's take a closer look at our results across the portfolio and give you some color on what we saw in our end markets. Core revenue in our Biotechnology segment increased 7%. Core revenue in Discovery and Medical declined low single digits. Growth in medical filtration and research consumables was more than offset by declines in protein research instrumentation as academic customers continue to face funding constraints. Core revenue in bioprocessing grew high single digits in the first quarter. High single-digit growth in consumables was driven by robust demand for commercialized therapies globally with notable strength in China. Equipment declined modestly in Q1, but we were encouraged to see orders growth of more than 30%, marking the first quarter of year-over-year equipment order growth in nearly 2 years. Stepping back on bioprocessing, monoclonal antibody production remains robust and is expected to continue growing at historical or better rates, driven by new molecules, biosimilars and increased utilization of existing therapies. In fact, we saw a sustained pace of new biologic drug approvals in the first quarter of 2026, building on a robust level of approvals in 2025. At the same time, equipment investment has been relatively muted, which we believe creates a growing need for incremental capacity in the coming years. We're encouraged by improved trends in bioprocessing equipment and believe we're in the early stages of a multiyear investment cycle. We see activity in brownfield projects today with larger greenfield investments expected to follow. Given Cytiva's expansive global footprint, broad portfolio and depth of technical expertise, we're well positioned to benefit from this capacity expansion across biologic drug production. Turning to our Life Sciences segment. Core revenue increased by 0.5%. Core revenue in our Life Sciences Instruments businesses declined low single digits, primarily driven by weakness in North America academic research customers as we expected. While demand at academic research customers remain muted in the quarter, we saw early signs of momentum building in our order book. We continue to see a gradual improvement in large pharma and biopharma investment. Instrumentation demand at biotech customers remain muted but stable, but we were encouraged to see recovery in the funding environment drive improved funnel activity. Core revenue in our Life Sciences consumables businesses collectively grew low single digits. Aldevron grew in the quarter, driven by solid commercial execution and an improved biotech funding environment. And we also saw early pockets of improvement in academic customers and research consumables, contributing to growth at Abcam. We're particularly pleased by Abcam's recent performance as DBS-driven commercial execution has gained traction and cost structure initiatives have driven meaningful margin expansion since acquisition. As end markets improve, we expect continued progress on both growth and margins at Abcam. Moving to our Diagnostics segment. Core revenue declined 4%. Core revenue in our clinical diagnostics businesses grew low single digits, with mid-single-digit growth outside of China. In China, pricing headwinds in the quarter from volume-based procurement and reimbursement policies were consistent with our expectations and the anticipated impact from remaining policy changes remains consistent with our expectations from the start of the year. At the same time, volume growth in China was slightly better than our expectations, an encouraging indicator for future demand and growth as we move past the most significant year-over-year impacts from current policy headwinds. Beckman Coulter Diagnostics delivered another strong quarter with mid-single-digit growth outside of China, led by immunoassay reagents and instrumentation. In Molecular Diagnostics, Cepheid's revenue declined in the quarter as respiratory revenue was down approximately 25% year-over-year, given lower than typical seasonal respiratory infection rates. Cepheid's core nonrespiratory test menu was up mid-teens, led by our 20% growth in sexual health and hospital-acquired infection assays. Now we've seen strong early demand and several notable customer wins for Cepheid's recently cleared Xpert GI panel, a multiplex PCR test that quickly detects 11 common gastrointestinal pathogens from a single patient sample. This strong momentum supports Cepheid's broader multiplexing strategy, and we believe it provides a long runway for continued installed base growth and increased utilization. Now let's briefly frame how we're thinking about the second quarter and the full year 2026. For the full year 2026, there is no change to our expectation of core revenue growth in the 3% to 6% range. This includes an assumption that a slightly lower respiratory revenue outlook of approximately $1.6 billion to $1.7 billion will be offset by modestly better core growth in the rest of the business. Additionally, given our strong Q1 performance, we're raising our full year adjusted diluted net EPS guidance to a range of $8.35 to $8.55 versus our previous range of $8.35 to $8.50. In the second quarter, we expect core revenue to be up low single digits. Additionally, we expect the second quarter adjusted operating profit margin of approximately 26.5%. So to wrap up, we're encouraged by the first quarter momentum across our portfolio and expect growth to accelerate throughout the year as we continue on the path towards consistent, higher core revenue growth. Cost and productivity execution translated into strong Q1 earnings growth, enabling us to raise our 2026 adjusted EPS expectations. During the quarter, we also announced the pending acquisition of Masimo. And with the strength of our balance sheet and more than $5 billion of expected 2026 free cash flow, we're well positioned for further capital deployment going forward. Now we see a bright future ahead for Danaher. Across the portfolio, we're helping customers solve some of the world's most important health care challenges from enabling faster, more accurate diagnoses to accelerating the discovery, development and manufacture of therapies. Over time, we also believe the emerging opportunity in AI will further accelerate the pharma development and commercialization flywheel, improving success rates, lowering development costs and driving increased demand. This in turn is expected to drive incremental demand for our Life Science solutions as well as in bioprocessing as commercial drug production expands. So with the combination of our differentiated portfolio, our talented team and balance sheet optionality all powered by DBS, we're positioned to drive long-term shareholder value while making significant strides in applying science and technology to advance human health. So with that, I'll turn the call back over to Rachel. Rachel Vatnsdal: Thanks, Rainer. That concludes our formal comments. We're now ready for questions. Operator: [Operator Instructions] And our first question will come from Michael Ryskin with Bank of America. Michael Ryskin: Great. Congrats on the results. Rainer, I want to ask a little bit on that progression through the year. As we look at 1Q, you guys did 0.5%. I'm backing into something like 2% core growth in the second quarter, given the various segments. I think that's what the low single-digit implies. So you've got a little bit of an acceleration in the second half of the year. Can you just talk to what's driving that across the segments? I think you're lapping, obviously, some of the respiratory headwinds in some of the Aldevron and VBP, but just confidence in the rest of the business to get that second half ramp and sort of the progression that's implied in the guide through the year? Rainer Blair: Mike, good morning. Well, there's certainly a lot going on in the world today. But as we've said, we're focusing on controlling what we can control, and there's really no change to how we view the progression throughout the year that we laid out in January. In January, we said there are 3 things really needed to happen to support the ramp throughout the year. And all 3 of those things played out as we expected or actually even a touch better in Q1, and we feel good about the balance of the year and here's why. In Diagnostics, the China diagnostic policy headwinds are playing out as we expected and actually patient volumes are higher. We also saw good momentum across the rest of Diagnostics, which showed another quarter of mid-single-digit growth without China and respiratory. And while respiratory was a touch softer, we continue to take share and our core molecular business grew mid-teens. So we expect our broader Danaher portfolio compensates for the touch of softness that we saw there in respiratory. But the quarter also demonstrated strong high single-digit EPS growth even if respiratory was a little bit softer. So those are some important proof points here around the resilience of our portfolio and the work that we're doing. Now as you think about bioprocessing, here, we see strong underlying commercial biologic drug production continue and it drives strength in consumables, and notably, we are really encouraged to see improvement in our equipment order book with over 30% year-over-year growth. Now turning to Life Sciences and the progression there, both China and Life Science consumables globally performed better than we expected. And that includes growth at Abcam and Aldevron, which is really encouraging. And we saw a broad stabilization in our life science end markets with pockets of improvement. So we're also seeing better funnel activity there as a result. So all in, look, we feel really good about how we started the year, and we believe this momentum continues. Matthew Gugino: And Mike, maybe just to give some details around the numbers and the specifics here on the progression. So the way we're thinking about it is core growth, low single digits in the first half of the year, sequential improvement from Q1 to Q2, you see this reflected in the Q2 guide. Together, the headwinds that we've talked about, China diagnostics, respiratory, some of the comps in Life Sciences, they're collectively about a 300 basis point, maybe a little bit higher impact in the first half of the year. These essentially go away by the end of the year and why we believe we'll exit Q4 in that mid-single-digit range. So for the purpose of the guide, the way we've laid it out is we're not really assuming any improvement in our end markets to exit the year at that mid-single digits, and that's why we feel comfortable about that progression through the year. Michael Ryskin: Okay. That's both those super helpful answers. And let me squeeze a follow-up on the bioprocess specifically. Like you talked about, Rainer, strength in consumables, the 30% or greater than 30% equipment order book. It doesn't sound like you're assuming any of that will come through later this year? Or could you see some benefit in the fourth quarter? Should that inform how we think about equipment growth next year? I mean just sort of how do we take those end points -- those data points of consistent high single-digit consumables and order book turning to think about [ BT ] later this year and into 2027? Rainer Blair: Well, we continue to see that strength in consumables. And so we see that progressing through the year consistently. Equipment, what we're seeing there in the order book certainly underwrites and reaffirms the year-over-year improvement that we expected. Recall last year, we were down double digits. This year, the guide assumes that we're flat on equipment. But we do like the activity levels here in equipment, and that marker of 30% year-over-year growth is an important one that is certainly supportive of the out years, and we'll have to continue to see how customer readiness plays in here. Sometimes these equipment orders come and it gets to be a little bit lumpy as customer readiness is a real important factor here as to when you actually end up recognizing the revenue. So we certainly see the guide underwritten here going forward, and we think positively about what this means certainly for the out years. Operator: Our next question will come from Vijay Kumar with Evercore ISI. Vijay Kumar: And want to pass along my congratulations to Matt Gugino and Rachel. Good to have you both on the call. Rainer, maybe my first one for you on your comment around Masi acquisition. I think initially, when people saw the deal, it was a little confusing. People thought this was a MedTech deal. But maybe just walk us through on this strategic rationale. I think you guys mentioned call point synergies between Radiometer and Masimo. My understanding is Masi, some of their tech board sales are perhaps tied to players like Philips, GE HealthCare. So how do you see the call point synergies and potential for DBS driving high single-digit ROI for the business? Rainer Blair: Thanks, Vijay. Look, we see the Masimo transaction as a very typical Danaher deal. And by way of update, the process continues to progress well there, and we're excited to get the Masimo team on board. So all things are positive in that regard. And look, we've been following Masimo for over a decade based on the learnings that we had with Radiometer, which is really our Diagnostics acute care strategy, where we believe that Masimo is a mission-critical player, differentiated technology, all the things that we like to see when we talk about our 3 dimensional acquisition framework. This is a great end market with long-term secular growth drivers. Two, this is the premier asset in pulse oximetry and other applications in acute care diagnostics. It's supportive of what we're doing at Radiometer. In fact, there's geographic synergies as well as Masimo is a little stronger than Radiometer in the U.S., and that reverses as you think about Europe. So those are all very positive. And really, these solutions sit next to each other here in these acute care settings. So to your call point synergies, they are significant, and they are direct synergies as well. And then I'll also add, from a financial profile, this is a transaction that's accretive at all levels, whether it's growth, whether it's gross margins or operating margins. And at the same time, we've been able to identify some pretty significant value reserves here to help us drive that return on invested capital to that high single-digit ROIC in year 5. Matthew Gugino: And Vijay, just to follow up, I mean Rainer talked about some of the synergies here, but what we outlined here a couple of months ago when we announced the deal was, we expect both cost and revenue synergies, $125 million of cost synergies realized by year 5, call it, $50 million of that is on the gross margin side, $50 million on the OpEx side and about $25 million of public company costs and then about $50 million of revenue synergies. Rainer outlined some of the opportunities there where we can probably help Masimo through our Danaher Diagnostics platform, get stronger in positioning around the IDNs or integrated delivery networks. And then there's probably some opportunity for Masimo to help us, including Radiometer, in the U.S. So really excited as Rainer said, to get the team on board here later this year. Vijay Kumar: That's fantastic. Matt, maybe my second one was on margins. I think typically, you guys have some seasonality Q1 to Q2 on respiratory, but I just feel like second quarter, maybe margins, the step down. It's a little bit more than what we saw in the last 2 years. Maybe just talk about sequential margins just given Q1 was such a good execution from a margin standpoint? Matthew Gugino: Yes. Sure, Vijay. I mean like you mentioned, I mean, we typically see a several hundred basis point step down in operating margins Q1 to Q2, that's driven by that typical step down -- seasonal step-down in respiratory. There's probably a little bit more FX impact here Q2 versus Q1, just given where the dollar has moved over the last couple of months. And then also, I think given the Q1 beat here, we wanted to take some of that beat, accelerate some growth investments from the second half of the year into Q2. So the way we're thinking about it is we just did -- we're expecting mid- to high single-digit earnings growth in the first half of the year, all in, and that puts us on the right path here for the rest of the year as we go forward. Operator: Our next question will come from Scott Davis with Melius Research. Scott Davis: Congrats. Can you talk about raw materials, just resins, cost? Rainer Blair: Sure. So with the spike in oil prices and the associated increases in petrochemical derivatives, we have our eyes firmly focused on what's going on there. And while we see some of that pressure out there, it hasn't been really meaningful yet as it relates to our own cost position. That said, we're incredibly vigilant there and leveraging the Danaher Business System as well as our contract positions to mitigate any pressures that are there. And I'll just say, as you would expect of us, Scott, here with the Danaher rigor, we -- every month, with every business, every operating company work through the entire P&L to understand what measures we're taking and how raw material volatility might affect the business. So we are all over that proactively, and to date, we haven't seen any meaningful pressure there. Scott Davis: And same with Middle East, Rainer? Rainer Blair: Well, the Middle East is really driving a good part of that pressure, Scott, in the sense that the volatility in oil prices are driving that. In terms of supply from the Middle East, that really doesn't affect us. So our supply chain is not directly affected by the Middle East, but of course, the indirect effects that you're alluding to here are something that we have to address head on. Operator: Our next question will come from Jack Meehan with Nephron Research. Jack Meehan: One of the big topics in the market at the moment is AI, wanted to get your thoughts on that. The first question is, as you look across the business segments, how do you think AI is influencing customer spending behavior? Your referenced bioprocessing could be a beneficiary. I was curious what you also thought about Life Sciences and Diagnostics, any signs of increased or reduced spending in the business? Rainer Blair: Sure. So let me get started here. You were a little bit in and out in terms of the volume on the question, but I think I've got it. Let me start with the conclusion here, which is we think AI is going to be a growth accelerator for the pharma and biotech industry, both in the near and in the long term. And the reason for that is we think that AI will accelerate the drug development and commercialization flywheel and result in better development pipeline yields. So as you know, the average yield in the drug development pipeline today is just above 10%. There's an enormous opportunity here to improve the yield of the pipeline and to accelerate the biopharma flywheel along with the flywheels of life science tool providers like ourselves. And so this improved yield drives both growth and profitability and reinvestment in the pharma industry. And that, of course, in turn, drives more investment into discovery, including wet lab validation, development in the clinic as well as commercial drug manufacturing. So in the short term, what we're seeing actually is incremental more demand, which we expect to accelerate in the building of biologic models. Autonomous science is the current buzzword that refers to the building of biologic models, and of course, that requires automation, which we're very well represented in. It requires more analytical instruments and it requires more reagents as well. So that's the short-term impact as this practically new market segment of autonomous science starts to play out here, and that plays out first in discovery and then continues to accelerate through the development pipeline. And of course, we're very well positioned here with our life science tools. I mentioned automation, analytical instruments that, of course, increasingly are AI-enabled reagents that support all of those models going forward. And that's a several year driver. These biologic models are in the single-digit percentage of information coverage required, very different than large language models. These biologic models require significantly more information in order to become general use type of model. So that's the short term. And as I indicated then in the long term, what we're going to see is the cycle time of pharma development being compressed and the hit rate, i.e., the yield to be increased. And that flywheel is going to be very good for patients. It's going to be very good for the pharma industry and those partners like ourselves that support that industry. Now as you think about that going through development, Jack, sorry, just to finish up, of course, these more commercialized drugs means more business for our bioprocessing business. We're the best positioned there with the broadest and deepest portfolio. I talked about the innovations that we're launching there. And then lastly, a lot of these drugs are going to be more sophisticated. They are going to require more sophisticated, more accurate diagnostics. If they're not personalized diagnostics, they will require near personalized diagnostics to come online. So again, I start with the conclusion, which is AI is a tailwind in the short and in the long term and is healthy for all market participants, and of course, we're very well positioned there. Jack Meehan: Excellent. Yes, it's clear. There's a lot of exciting things across the business. Maybe for you, Rainer, or for Matt, just extending that from a DBS perspective, are you seeing any tangible signs of productivity benefits from AI in the business? Any cost savings or revenue targets that you'd be comfortable sharing at this point? Rainer Blair: We are getting to the point, Jack, where DBS and AI are synonymous to us in terms of accelerating cycle times and driving efficiencies, and we bring those together. So we talk about AI-enabled DBS and DBS-enabled AI in one sentence, and that will continue to drive efficiencies. Let's just tee it up this way. As you think about the conversation I just had as it relates to the pharma development pipeline, think about Danaher's flywheel also being accelerated by AI-enabled DBS. That will result in more and better products that are AI-enabled, it's going to result in lower costs that we gained through efficiencies, and together, that's going to drive growth and earnings expansion going forward. Operator: Our next question will come from Tycho Peterson with Jefferies. Tycho Peterson: Rainer, I want to go back to bioprocessing. I appreciate you touched on order trends and how that may translate to revenues. But wondering if you can unpack a little bit more what you're seeing pharma versus biotech versus CDMOs? Secondly, are you seeing any replacement cycle demand? We've heard about replacement cycle heating up a little bit as we've done some checks. And then how are you sizing the China opportunity in biotech? I think it was around $1 billion, $1.3 billion if you go back a couple of years, but how are you sizing that opportunity today? Rainer Blair: Thanks, Tycho. Well, starting with China here where you ended up, China continues to be in recovery mode. We're very encouraged with what we saw in China here in the first quarter with double-digit growth in the bioprocessing business. The China biologics and -- driven by the biotech market that you referred to is accelerating. The monetization of the therapies being developed there has been resolved with both the license deals that you see with multinationals, but also the stock exchange and IPOs, once again, functioning properly. And so we expect that to continue to be a growth driver here as we get back to normality. So is the original $1.3 billion that we saw there at the peak in the cards? Well look, we're on the way to improved markets. We're happy to see that. We want to get through 2026 here to see that continued positive progression on China. As it relates to the equipment orders that we saw there, we think that continues to be very constructive to our hypothesis around 2026 and beyond. Both the funnel activity is encouraging as well as you saw that year-over-year orders growth. As I said, that underwrites how we're thinking about the year here. And let's see how the next quarters progress to see whether that has any impact here in 2026, but certainly, it will as we go beyond 2026. Tycho Peterson: Okay. And then maybe just shifting over to Life Science. Encouraging to see the turn there. I think you talked about improved funnel activity, obviously, Aldevron. I think coming out of 4Q, you hadn't assumed Aldevron will grow in the first half of the year. So that's encouraging to see. And then A&G consumables a bit better for Abcam. I guess maybe just talk a little bit about where you're feeling better as we think about the remainder of the year for the Life Science business? Rainer Blair: So in Life Sciences, and you just touched upon it in the consumables area, we expect it to be slightly down here in the year, albeit off of an improved second half of the year. I think as we go forward, we see positive growth for our Life Science consumables business here. For the full year, while that might be a little bit lumpy as we go through the next quarter or 2, we do expect that to go from slightly negative to slightly positive, and that's quite encouraging. And then we also saw China. China is continuing or, let's say, starting up and investing again also in Life Science instruments that was nice to see here in the quarter and the funnels there continue to be quite constructive. So all in all, we see some nice pockets of improvement there. Pharma was strong, continued to improve here quarter-over-quarter. Clinical was robust. The applied markets are playing out as we thought. Only academic remains a bit muted, albeit stable. So we're encouraged here by what we saw in Life Sciences in the first quarter and expect that to play out positively for the rest of the year. Operator: Our next question will come from Casey Woodring with JPMorgan. Casey Woodring: So nice to see the greater than 30% bioprocessing equipment order growth in the quarter, but I assume that number is probably coming off of a lower base year-on-year. So can you just give us any sense of what orders grew sequentially in 4Q or what book-to-bill was in the quarter? Any sense of how those came in relative to your expectations? And then, I'd also be curious to hear more about the brownfield versus greenfield investment dynamic that you talked a little bit about? You highlighted brownfield investments are flowing through and said greenfield would be expected to follow. Just curious on your expectations of when we could potentially see those greenfield orders start to flow through? Is that something you wouldn't be surprised to see in the second half? Rainer Blair: Yes. So Casey, the first quarter orders growth was the first positive year-over-year orders growth that we have seen in nearly 2 years. So by definition, then the comp is a little bit lighter. But if we look at the activity level here quarter-over-quarter, while the first quarter orders were actually down a little bit sequentially, that's absolutely expected as a result of the first quarter activity seasonality step down. So we always see that, and that's why that year-over-year comparator is so important. But at the same time, we see our funnel activity continue to be robust on the equipment side. So I wouldn't focus as much on that as a data point that we're seeing year-over-year growth now, whereas previously, it was sequential growth. So very encouraged, as I mentioned earlier about what we're seeing in the equipment orders. Some of those orders are starting to get a little bit larger. And that dovetails into the second part of your question. So we see equipment orders growth and the funnel activity driven by 2 different dimensions. The first one is that we have seen underinvestment in the industry for the last 2 years as it relates to capacity. Despite the fact that we've seen very robust growth, our consumables business demonstrates that the activity level has been robust and strong here for the last couple of years now. And that means that capacities require expansion. We have biosimilars coming on the market. We have new compounds coming on to the market and, of course, a little bit of underinvestment. So that really explains what we're seeing there, both in terms of brownfield investments as well as the one or the other additional line or even greenfield investment. The second vector is this reshoring dynamic. And here we see, again, increased dialogue, already some funnel activity, even the one or the other order here for brownfield expansions as it relates to reshoring. So we're really encouraged by what we're seeing here. On the equipment side, as I say, it underwrites our hypothesis for the year, and it further supports how we think about the equipment progression and the bioprocessing strength beyond '26. Casey Woodring: Great. That's helpful. If I can just squeeze one more in quickly. Rainer, you talked about solid growth across nonrespiratory within Diagnostics, and you held the guide for the year in Diagnostics, even with the lower respiratory number. So maybe can you just walk through what exactly is offsetting that lower respiratory number for the year? And what's getting better in that nonrespiratory piece that's enabling you to hold the guide? Rainer Blair: Well, there's a couple of things going on there, Casey. The first one being that we continue to take share at Cepheid in the core business, which is very important, and our hypothesis around Cepheid continues to play out. We're launching new assays there. The gastrointestinal -- GI panel is doing very well. Our MVP panel is doing very well. So even within Cepheid, you see strength here that is playing out. And then in our nonrespiratory business and you take out China, we continue to see mid-single-digit growth there with our innovation strategy playing out. We've launched at Beckman Coulter an entire series of new instruments and equipment there, none more important than the high resolution DxI 9000, which opens up entirely new pieces of menu to us. We've closed that blood virus menu gap. And of course, we have that fast track device certification for Alzheimer's disease testing. So we continue to see positive momentum there. And then we haven't even talked yet about the implications of Masimo joining the portfolio. So then the last point I would make, as it relates to China, VBP and the guideline discussions that we have, we're in a very strong dialogue with the China government here. And we've had visibility of what has been going on there for some time. So we feel good about our assumptions around the $75 million to $100 million headwind there in China, and that's only been validated by what we've seen in China here in the first quarter, even if the patient volumes were actually a little higher. Operator: Our next question will come from Dan Brennan with TD Cowen. Daniel Brennan: Maybe just on M&A, the balance sheet is in good shape post Masi. Just wondering how you're prioritizing M&A today if you look at your 3 business segments? Where do you see the biggest opportunities? It's a question we get a lot from investors. And kind of what does the funnel look like? Do you think you could see another sizable deal this year? Rainer Blair: We're very encouraged by what we're seeing in the funnel. As you know, multiples have come in and our 3 -- vector filter on M&A is becoming more and more relevant here. As we've talked about so often, one, our bias to capital deployment is M&A; two, we will not compromise on our discipline as it relates to being in the right end market with the secular growth drivers that we like to see, two, having a premier asset that has defensible positions or the opportunity with real value reserves. And then lastly, of course, the financial model has to work. And what we've been seeing in the current context is that the financial models are becoming more viable. So just to reiterate, one, the Masi deal for us was one that we have envisaged for a long time and the timing of that deal is defined ultimately by the processes that are run and we were ready with the balance sheet and the point of view to execute on that deal, and we're really excited about that. And that fits right into our acute care strategy. Now what is not is a broader investment thesis around the broader MedTech market on the one hand. But on the other hand, it is also not indicative of our point of view as it relates to Life Sciences, Diagnostics and Bioprocessing. We see here plenty of opportunity to deploy capital and are fully prepared to do that as the opportunities arise. Matthew Gugino: And Dan, I mean, from a balance sheet perspective, post close of Masimo, we'll go to about 2.5x net debt EBITDA. Given our strong free cash flow of $5 billion plus per year as well as EBITDA generation, I mean, this leverage will come down fairly quickly. So it gives us the ability to remain active on the M&A front even in the near term. So feel good about how we're positioned from a balance sheet side of things. Daniel Brennan: Yes, that sounds great. And maybe back to a question, I think Mike started off the call with. Your core growth is anchored at 3% this year. I think consensus is around 5% next year. So assuming the consensus is in the right ZIP code, can you just walk through the key levers to generate 5% growth next year, including what could push down or higher up in your LRP towards the high single-digit level? Matthew Gugino: Yes, Dan, I mean it's April of 2026, I think we're a little bit too early to talk about '27, but I'll just kind of go back to what we talked about with Mike here at the beginning of the call, where we're talking about low single-digit core growth in the first half of this year. There's about 300 basis points or a little bit more of impact from the headwinds that we talked about. China Diagnostics, respiratory, the comps in Life Sciences, that's why we feel comfortable about exiting Q4 in that mid-single-digit range. And really getting through those headwinds enable us without really any improvement on the end market side to get comfortable into that mid-single-digit range. Operator: And our last question will come from Doug Schenkel with Wolfe Research. Douglas Schenkel: Matt, maybe a follow-up on your comments there at the end in response to Dan's question. What gets you to the high end of guidance for the year? Is it really just what you described there moving past the headwinds and maybe those actually reversing in a more robust way than we're seeing right now? And maybe related to that, as we sit here today, should -- would you recommend that we essentially stay at the lower end of the guidance range for the year until we see some improvement, both in terms of those headwinds abating and maybe some improvement in end markets. So that's the first topic. And then another follow-up on M&A. Just to be clear there, from a readiness standpoint, could you do something in any segment as we sit here today, or given the pending Masimo deal, would it be less likely that you would do something in Diagnostics as you're in the process of integrating that business or getting ready to integrate that business? Matthew Gugino: Thanks, Doug. So look, we talked about in January, continue to anchor to that -- the low end of the 2026 core growth guide for planning purposes. In terms of what gets us to the higher end of the guide, I think you need to see a couple of things, Doug. First, you need to see some further improvement across the Life Sciences end markets. I think we're encouraged by what we saw here in Q1, but we need to see some of those policy headwinds further abate, especially in the U.S. and what we've seen there. I think China, good start to the year, but we need to see further growth acceleration as well. And then on the biotech funding side, again, starting to see some improvement, but we want to see that funding turn more quickly into orders. I think the second thing, bioprocessing, we probably need to see it a little bit better than the high single-digit growth. We need to accelerate on the consumable side as well as get that equipment growth going here, again, encouraged by the order patterns, but probably need to see it move a little bit quicker. And then the other thing here that we talked about on the respiratory side, we probably need to see a little bit above normal respiratory season to finish the year here in Q4 back to that kind of endemic $1.8 billion rate that we see going forward. So I think all in all, we're encouraged by the start to the year. We're already at 3% ex respiratory today and encouraged to see some of the underlying trends improve as we talked about. Rainer Blair: And Doug, as it relates to M&A, we have both the balance sheet capacity as well as the leadership bandwidth here to execute additional acquisitions in any of the 3 segments and feel very good about how we've positioned our talent and develop that talent in order to be able to do that. Operator: We've now reached our allotted time for questions. So I'll turn the call back over to management for any additional or closing remarks. Rachel Vatnsdal: No, perfect. That is all we have. You can reach us with questions today. Thank you so much for joining. Rainer Blair: Thanks, everyone. Operator: Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Vesa Sahivirta: Good morning, everyone, and welcome to Elisa's First Quarter 2026 Conference Call. We start with a presentation given by CEO, Topi Manner; and CFO, Kristian Pullola. And after that, we move on to Q&A. And I think we are ready to start, and I give word to Topi. Please go ahead. Topi Manner: Thank you, Vesa, and good day, everybody. Welcome to this Elisa Q1 earnings call. And let's get right down to business and briefly go through the Q1 highlights. During the quarter, our revenue decreased by 1.3%, and this was to a large extent driven by lower equipment sales impacted especially by higher device prices due to the shortages of memory chips worldwide. Telecom service revenue increased by 0.5%, driven by fixed service revenue. The mobile service revenue declined by 0.1% as the full impact of intense campaigning in Q4 was visible in the MSR. International software services revenue increased by 6.9%. During the quarter, however, we sold a small software business in Brazil. Adjusting for this, the comparable organic revenue growth was 7.7% in Elisa Industriq. Comparable EBITDA on group level increased by 2.2%, especially driven by our cost efficiency measures. Cash flow continued to develop strongly during the quarter and increased by 15.7%. What was notable during the quarter was that the churn decreased to 17.2% from 23% level of Q4. So this 6% decrease -- 6% unit decrease in churn is a bigger decrease than the typical seasonality would be. Post-paid voice subscriptions decreased by 2,700. And in the fixed broadband subscription base, we experienced strong growth, 14,000 on the back of the strong customer demand that we are seeing on the market. The transformation program, where we are targeting EUR 40 million of cost savings during the calendar year of '26 is progressing well according to the plan, and we will deliver the communicated savings during this year. So it was indeed a quarter of slower growth, as stated, driven by equipment sales. What impacted the revenue was a small divestment that we made, EpicTV that impacted the revenue with EUR 3 million. However, it did not have any EBITDA impact as such. The biggest increases in revenue came from the international software services and from digital services. EBITDA during the quarter landed at EUR 203 million in accordance with our own expectations. EBITDA margin increased to 37%, partially reflecting the little bit different mix of revenue resulting from the decrease in equipment sales. In telecom service revenue, as stated, we grew with 0.5%. And there, we did see the full impact of the lower price levels in Q4. The upsells from 4G to 5G, however, continues intact. I will come back to this a little later. And then certainly, in the fiber broadband, we saw growth as described a moment ago. The churn during the quarter was 17.2%, and this is broadly in line with the long-term average churn on the Finnish market. And what is notable is that the churn also decreased to a lower level than it was in Q1 2025. So then looking into the mobile KPIs in a little bit deeper fashion. It is good to note that our new sales prices in mobile subscriptions on the consumer side of the business returned to Q1 '25 levels in March. So in the upper right-hand corner in the graph, you are seeing the prices of new consumer mobile subscriptions. And what you also see there is that during the year '25, we saw gradual pressure to new sales margins culminating in the campaigning of Q4. And now we have been seeing the mentioned return to Q1 '25 levels. What is also noteworthy that going forward, there will be a bit of time lag in how the new sales prices turn into mobile service revenue as there are fixed term contracts in the customer base of our competitors. And when we acquire those customers to us, there typically is a time lag of some months before the new prices actually come into effect. The churn we already discussed in terms of sales and marketing costs. During the Q4 last year, we had EUR 5 million of more sales and marketing costs. And then those campaigning-related costs were decreased during Q1 in line with the churn development. However, the sales and marketing costs are still a tad higher than they were during Q1 '25. But all in all, these metrics are pointing to the right direction. Then briefly going through the business segment by segment. In consumer customers, the revenue continued to be weighed by the competitive situation and the mentioned equipment sales. However, the cost savings measures were effective and EBITDA improved with 1.4%. Broadly, the same story in corporate customers business. The equipment sales impacted the revenue negatively. So very much the same phenomenon related to equipment sales was seen also on the corporate side of the business. Our traditional fixed network, PSTN will be ramped down at the end of June altogether. And there we are seeing a decreasing number of customers, and that is weighing on revenue a bit. But as stated, the cost savings measures also on the corporate side of the business were successful and the EBITDA grew with 2.1%, in line with the total Elisa number. International software services, the comparable organic revenue growth was the mentioned 8%. And we took a step forward in terms of profitability during the quarter. The EBITDA grew to EUR 3 million in this business from the EUR 2 million on the same period last year. So we are seeing gradual improvement in the Elisa Industriq profitability, and we expect to continue to see that when we go forward. However, in software business, you will need to remember that there is a little bit different type of seasonality in Elisa Industriq. Q1 and Q4 are typically the strongest, whereas Q2 and Q3 are seasonally softer. In Estonia, our revenue increased by 3.4% and EBITDA increased by 2%, in line with the rest of Elisa. The churn number remained on the level of previous quarters in Estonia and is 11.7%. We are very focused on implementing our strategy. In the mobile part of the business, you saw the key metrics and the development during the Q1 as stated, there's a bit of time lag in the new sales prices turning into mobile service revenue. But during the latter half of this year, we expect to see improved momentum in mobile in line with the guidance that we have been giving. In the fiber business, we see strong customer demand, and we are investing in FTTH as well as FTTB. And also the data center connectivity, fiber connectivity for data centers is a tangible business opportunity. And during the course of this year, we would expect to see some deals coming through in this customer category. In international software services, we are continuously improving the profitability, and we do see further potential in that one by accelerating the growth, but also by integrating the multinational business and various business units better together and realizing synergies in the process. In terms of productivity, we are progressing with our transformation program. And as stated, we will be delivering the targeted cost savings during the course of this year. At the same time, we have taken note of the development of LLMs recently, and that's a clear indication that there is further productivity potential in AI, meaning that we will also continue the AI-driven transformation going forward during the coming years. So these 3 areas, 5G and fiber, international software services and productivity will be the main levers to take us toward the strategy targets that we have communicated. 5G penetration at the end of the year passed 15% -- 50% milestone. And that upsales trend continues to be intact. During the quarter, we reached 53% penetration. And we are especially seeing now big corporates on the corporate side of the business increasing their 5G subscription take-up rate. The average billing increase when we upgrade customers from 4G to 5G continues to be intact. That monthly billing increase is EUR 3. And also in terms of value-added services, we have continued to increase the penetration of security features in our mobile subs -- customer base, by means of new sales. And now the hard bundled security features have been taken up by 700,000 of our consumer customers. During the quarter, we also launched a new value-added service called Who's Calling service, which enables customers to see the caller ID even if they don't have that recorded in their phone previously. And this has been very well received by our customers. We already by now have 130,000 paying customers for this service. What is also notable related to the Estonian market is that in Ookla Speedtest Awards, we got the award for the best 5G network in Estonia, giving us competitive advantage. In the fiber business, in the mentioned way, the momentum is strong, and we continue to invest in fiber. In new -- in digital services related to home services, during the quarter, we published a fifth season of Ivalo, which is the most popular of our Elisa Entertainment original series, getting good reviews from customers. On the corporate side of the business, we continue to win new customers. Earlier this week, we announced that we have been winning the cyber and network business of Valmet, a global large Finnish company, also clearly outlining that we have the capability to serve our large corporate clients globally in these areas. In International Software Services, we continue to have a record high backlog. And the order intake, the bookings during the quarter were strong. We won a number of new customers, big, large global customers in these areas. Some of these are not public references. Some of them are. Boygues Telecom in France is one. And then also for Gridle for our energy optimization business, we won Vantage Towers as a customer in Spain, Vantage Towers being the tower company of Vodafone, the biggest tower company in Europe. What is also worthwhile to mention that in Elisa Industriq business, we saw some revenue delays from customers in Middle East due to the war in Iran. And that brings me to the outlook and guidance for this year. So the guidance remains unchanged with the range of EBITDA that we have been communicated previously, the CapEx guidance and then the guidance-related assumptions, especially related to the telecom service revenue, where we are indicating a range of 1% to 3% growth during the course of the year. So with that, I will hand over to Kristian. Thank you. Kristian Pullola: Good. Thank you, Topi, and also welcome on my behalf. In Q1, we saw solid EBITDA performance despite lower revenues. This was helped by our transformation efforts coming through as well as good cost discipline in general. As Topi said, the temporary sales costs were lower on a sequential basis, however, still slightly up year-on-year. Some of the revenue decline that we saw in Q1 related to divestments and ramp-downs of older technologies. The EBITDA impact of these was limited. The same is true for the decline in the equipment sales, which was driven by increased uncertainty as well as higher device prices on the back of especially memory component shortages. One note here, Elisa has somewhat seasonal business when it comes to Q1 versus Q2. Both are positive -- both of these 2 drivers are positive for Q1 and negative for Q2. As Topi said, in Industriq, we typically see strong licensing revenue in Q1 as a result of annual renewals. And in that sense, there's a negative seasonality going into Q2. Also in TechOps, we do see higher network-related costs in the second quarter when the overall construction activity starts in spring. And for this year, spring has arrived early in Finland, so we will see somewhat more of this impact. Also then maybe a second reminder, just on the yearly dynamics. Last year was solid when it comes to the first half and weaker when it comes to the second half, especially Q4 was weak on the back of the competitive intensity. Thus, we will have a tougher compare in Q1 and Q2 and then kind of easier compares as we work into the second half and especially for Q4. Then when it comes to CapEx, our strict disciplined continued. Our investments are focused on the areas of improving our technology leadership and which will enable us to continue to upsell both 5G and work on the -- work with the fiber momentum. In addition to this, our investment is going into us renewing our IT infrastructure so that we will be able to drive both simplification as well as productivity longer term. On the cash flow side, the first quarter was a continuation of our strong cash performance. We have now seen 5 consecutive positive quarters of positive development for net working capital. We will continue to drive improvements in cash flow as we move on. But of course, improvements in net working capital is going to be tougher and tougher to achieve when we have optimized the different items. Inventories are already at good levels. As I said last quarter, there's more work to be done on both receivables as well as on the payable side. But overall, a solid quarter from a cash flow development point of view. As a result of that, our capital structure continues to be solid. Our maturity profile is good. We did not have any material -- we did not have any material transactions during the quarter. And during the remainder of the year, we will start to focus on proactively refinancing the '27 maturities that we have. Then on capital returns, Elisa continues to have industry-leading capital returns. We saw a slight uptick as a result of having somewhat lower cash balances at the end of Q1 compared to the slightly elevated levels that we saw at the end of the year. And we do believe that with cash flow focus and continued strict discipline on CapEx, we will continue to produce industry-leading returns also going forward. With that, Vesa, back to you, and let's start Q&A. Vesa Sahivirta: Thank you, Kristian. And now we move on to Q&A part. And we have many questions on the line, so we appreciate that we'll keep them short. Thank you. Operator: [Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. Firstly, on your cost or sales and marketing costs. And then secondly, on your visibility on the mobile service revenue trends through the year. On the sales and marketing costs, you mentioned -- you highlighted they're still above where they were a year ago. Can you explain why that is, given churn is back to average levels and the pricing environment recovered? What's driving that heightened sales and marketing cost competition? And then secondly, just on the mobile service revenue trends, it sounds like the first quarter is the trough for mobile service revenue growth. But could you just help us understand how we should see that improvement come through in the second quarter and then into the second half? It sounds like it will be a more meaningful improvement into Q3 than into Q2. How that's going to be balanced between volume and ARPU? And how much visibility you have on that given the lags that you mentioned? Kristian Pullola: So maybe if I start on the sales and marketing costs. You're right, the costs were still somewhat elevated compared to a year ago, but down sequentially. And I think the logic here is that you don't pull back your sales and marketing efforts before you see evidence of the market environment being such that it justifies lower spend. And we started to see the evidence during the quarter. And because of that, we took down the temporary costs during the quarter, and thus, they were still a bit up on a year-on-year basis. Topi Manner: And then, Andrew, related to your question about MSR. So, starting with the metrics that we just went through. So the new sales prices during the quarter returned to Q1 levels in March. And the churn was notably lower than it was in Q4. And now the churn is in line with our long-term average. When you consider the mechanics of how the new sales prices turn into mobile service revenue, you will need to factor in a time delay of some months, approximately a quarter. This is because mobile operators in this market have fixed-term contracts in their portfolio. And when we win customers from our competitors, we do the deal now, but the mobile's subs actually transforms into our customer base with the agreed pricing a little bit later when the fixed-term contract with the competitor actually ends. So this is a mechanic that will need to be factored in. And then related to Q2, what is perhaps a useful reminder is that last year, in Q2, we started the rollout of the security features, the hard bundled security features to our mobile subs, supporting the MSR for that particular quarter. There is no similar initiative in the plans for this year. And thus, when you consider mobile service momentum, that momentum should be visible on the latter half of this year, increasing towards the end of the year. And all this boils down to our telecom service revenue guidance where we are guiding a range of 1% to 3% during the course of the year where mobile service revenue is the main contributor. Andrew Lee: Can I just follow up, so just on the sales and marketing costs. So it sounds like you're reducing those through Q1. As things stand today, late April, sales and marketing costs now today where they were a year ago? Or are they still not back to normalized levels? Kristian Pullola: So I think we are here to discuss the first quarter. But as I said, we are responding to the market situation with our costs. And because of that, the costs started higher during Q1 and ended up lower during Q1. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: My first is on the cost savings. You mentioned EUR 40 million. Just wondering what's been delivered in Q1 and how you expect that phasing to look for the remainder of the year? And then my next question was just around the MSR into Q2. You mentioned that you're not going to have the support of security features, which got launched this time last -- well, Q2 last year. But surely, you will still have a better improving effect because you're going to have more people moving on to security versus Q2 last year because you would assume you'd have ramped up that business. So isn't that still going to be a tailwind in Q2? Kristian Pullola: So maybe if I start with the cost savings. So as Topi mentioned, we are on plan on delivering the full EUR 40 million. And as we have said earlier, the majority of the cost savings kicked in during the first quarter. Some of it is visible in our lower operating expenses and impacting positively the personnel costs because a large chunk of the savings that were implemented came from there. But of course, we also have driven activities outside of headcount reductions, which is visible. Some of it is also coming through the CapEx line item and thus coming through as depreciation -- lower depreciation at a later point. And so in that sense, there will not be much more acceleration of the impact as we move through the quarter because of the fact that the majority is already up and running as we speak. Topi Manner: And then related to your question about MSR and the security features, so if we look at MSR development in Q1 and we decompose that a bit, then clearly, the impact of intense campaigning and the lower prices in Q4 introduced a drag to mobile service revenue during Q1. And that drag was offsetted by the continued upsales from 4G to 5G and the value-added services where the security features are the most important element. And actually, when you look at the upsales isolated. And when you look at the value-added services isolated, they continue to provide the consistent growth that we have been seeing in the past. Then in terms of security features and the mechanics of security features supporting the MSR during the course of this year. What you need to remember is that when we started the rollout of security features last year, we rolled that out to that part of our customer base, roughly 600,000 customers where the customer contracts were of ongoing nature in force until further notice and the terms and conditions allowed us to change the offering and with that, change the pricing of those customers. Now that back book rollout has largely been completed. And what we are now doing is that we are offering the security features to customers in new sales. And the 100,000 pickup that you saw during the quarter is a result of new sales. Operator: The next question comes from Andreas Joelsson from DNB Carnegie. Andreas Joelsson: I was just a little bit curious and I hope you can help us understand a little bit the experience that you have from the higher churn environment that you had in Q3 and Q4. If something similar would happen again, would you react the same way as you did last year? Or have you -- some new experiences that will make you change that action that you took at the end of last year? Topi Manner: No, I think that -- I mean, our market is competitive and every situation in the market is unique. And we continue to monitor the market, and we continue -- and we focus on developing our own competitiveness, our own services in the market. And when you look at the things that we have been doing recently, as an example, we have been increasing the penetration of fixed-term contracts in our customer base as a churn prevention measure. And that measure has been bearing fruit in Q1, as you see in the churn number. Andreas Joelsson: Perfect. Maybe a follow-up on the mobile post-paid subscriber base. It is continuing to decline. Can you explain or tell us a little bit more where that decline is? And then I talk about excluding machine-to-machine, of course. Topi Manner: Yes. I mean if you look at that number, what is important to remember is the market trend in mobile broadband. So mobile broadband subscriptions are declining for us, and they seem to be declining on the whole market when customers are transitioning partially to fiber connections. And we do see a pickup in fiber connections as witnessed by our numbers. So this is something that you will need to factor in. And then when we look at the post-paid voice subscriptions and the development of net adds in that number, then as stated, the churn decreased notably during the quarter. Also, our intake of new customers decreased during the quarter. And this was because we did not respond to all of promotions that we saw on the market. Operator: The next question comes from Fredrik Lithell from Handelsbanken. Fredrik Lithell: Just a follow-up on your last comment that you described in Q1 that you did not respond to all of the promotions you saw in the market. Is that the same to say that you have seen sort of more activity in terms of campaigning in Q1 compared to earlier -- not compared to Q4, but maybe compared to Q1 '25, i.e., they don't need to be more aggressive, but more of them in the market. Is that a fair point? Topi Manner: The market continues to be competitive in Finland. But I think that here, I come back to the slide that we presented. So during the quarter, we saw the new prices -- new sales prices return to Q1 levels in March, and we saw the sales and marketing cost decrease. We saw a significant drop in churn that is clearly more than the typical seasonal drop in Q1 would be. Fredrik Lithell: Okay. That's perfect. My original question was really about the ISS, if I may. I mean you had 7% growth in the quarter, and you depicted a few details around your situation there with the pipeline that seems to be growing and some delays in Middle East. How are these sort of contracts structured? They are not perpetual licenses. Are they SaaS type of contracts with some variable components in them for revenue to grow with volume? Or how does it work in these contracts? Topi Manner: Yes. Absolutely. So as stated in Elisa Industriq business, the organic growth during the quarter was 8%, and we saw a step forward in terms of profitability the way we would like to see in this business. And if we decompose the contract structure a bit, then part of the revenue is driven by licenses. Part of the revenue is driven by recurring revenue, SaaS model and maintenance. At the end of last year, the share of recurring revenue was 50%, and there's some quarterly fluctuation in that share based on how many licenses we have been selling on a given quarter. And then part of the revenue is also driven by implementation projects with customers. And here, in that category of revenue, the revenue recognition is dependent on how the implementation projects move forward with customers. Operator: The next question comes from Derek Laliberte from ABG Sundal Collier. Derek Laliberte: So I wanted to come back on pricing. You mentioned this selective price increases in early Q1. Can you elaborate a bit on the scope and customer response of this? And during Q1 and into early Q2 now, are you still seeing improved rationality amongst the competitors? Or are there still pockets of sort of aggressive or increased aggressiveness on pricing? Topi Manner: Yes. I think that we will need to come back to the Q2 developments when we report the Q2 during the summer. In terms of the market development in Q1, what I would just like to come back to is the slide that we presented that our new sales prices returned to Q1 '25 levels in March and then the decrease in sales and marketing cost and the notably significantly lower churn. So looking at those numbers, I think that you get a good picture of the market development during Q1. Derek Laliberte: Okay. Great. And then strategically for you, I mean, has there been any change here given the current environment in terms of how you're prioritizing ARPU versus subscriber growth? Topi Manner: Yes. I mean our long-standing target on the market has been that we maintain our market share, and we will continue to do so going forward. That is part of our strategy. And what we have also communicated already in our Capital Markets Day a bit more than a year ago is that we focus on providing customer value. Upsales from 4G to 5G in mobile services is a big growth driver for us and so is value-added services, namely security features. So we continue to focus on that strategy, and we bring new value elements, new offerings to customers and to the market all the time. And then during this quarter, a good example is the Who's Calling service that already has 130,000 paying customers. Derek Laliberte: Okay. And finally, on the B2B trends, apologies if you mentioned this, but you have flagged some pressure there. So what did you see in Q1 in terms of, say, demand pricing and the contract renewals? Topi Manner: Could you please repeat the question? So was it about broadband or what... Derek Laliberte: About B2B -- no B2B corporate trends. Topi Manner: Yes. In B2B corporate, if we talk about mobile services, it continues to be a competitive marketplace. Our offering in B2B mobile services is strong with the value-added services and for example, with AI tools, where we clearly differentiate from competition. And then if you look at the other product categories of B2B business, IT services, cybersecurity and these kinds of things, we continue to enjoy some momentum in that one. We are clearly competitive on a market that is tough. The market is characterized by sluggish macroeconomic situation in the Finnish market, impacting corporate customers' willingness to invest. And that, of course, impacts the competitive landscape on B2B business. But at the same time, we are clearly competitive, and we are winning customers, both in IT and especially in cybersecurity, where our capabilities are really strong today. Operator: The next question comes from Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: I just want to come back to the topic of cost cutting, please. Obviously, this year, you've got a big benefit from the EUR 40 million of savings. And you referred to earlier in the call, the idea of sort of using AI to drive further savings. As we look into next year, do you anticipate a sort of similar sized benefit from your cost measures? Or in other words, do you think you can continue to do a similarly sized sort of big headcount reduction? Or should we expect the cost-cutting benefits to normalize as we head into next year? Kristian Pullola: So again, we have nothing new to tell here in addition to the EUR 40 million transformation program that we announced last year. And as I said earlier, which is now kind of up and running in our P&L as savings. In the prepared remarks and in our report today, we do acknowledge that we live in a world where transformation will need to be on the agenda for now, and that's what we're going to do. Transformation related to AI means both improving your competitiveness and driving revenues through that as well as then driving productivity improvements on a structural as well as on a continuing basis. There is no new program or no new amounts to be announced here. We feel that we need to do this to be able to achieve our strategic targets that we have set for ourselves. Topi Manner: And generally speaking, related to the AI, we clearly see that our industry and Elisa in specific, will be benefiting from AI. AI will be increasing our bread and butter business, namely mobile and fixed connectivity. And we have an opportunity to use AI for digital services growth and for software growth. And then in the areas of productivity or in the productivity-related areas, we are working continuously in improving the automization of our customer service. And where we do see possibilities is in the area of AI-assisted coding -- prompting to be exact, improving the productivity of our software development. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is really on your comments earlier about the interest in the market of taking on fiber products. I'm just wondering if you can share with us about your fiber investments, whether you think it could be a good opportunity to organically expand your fiber footprint or you could be looking at some infrastructure opportunities if some of the network is up for sale? And the second question I have is really on your comments earlier about the -- pushing the upgraded security features into your base. I think last year, when you talk about the rollout I had an impression that you would -- it's possible to roll out throughout the base within 18 to 24 months of the launch. But now I think you're commenting on you are actually adding on new sales. Just wondering whether that could create a particular delay of this 18 to 24 months time frame? And if so, any reason behind that? Kristian Pullola: So maybe I'll take the fiber-related question first. So as I said in the prepared remarks, we do see momentum in fiber. Customers want reliable and fast connections for their homes, for their base and fiber is now from an affordability point of view at the price point where consumers are responding well to it. We will -- on the back of this, we are investing in fiber, building additional fiber. As I said a quarter ago, we are leveraging a joint venture structure that we announced last year for the majority of that build. And at the same time, we will be pragmatic and look at, are there more cost-efficient ways of doing that by also looking at the existing assets. And if they are at sale at reasonable cost, then we'll evaluate that against building new fiber ourselves. Topi Manner: And related to your question about the rollout of the security features, yes, the rollout schedule of security features has been prolonged. And the driver of this is that during the -- due to the competitive situation last fall, as a churn prevention measure, we increased the share of our fixed-term contracts notably. And now we have a larger share of those fixed-term contracts in our customer base. And for those contracts, we cannot do the back book changes in similar fashion than we can do for those contracts that are in force until further notice. However, all of this is something that we have already factored in into our guidance. And the guidance assumptions where we are stating that the telecom service revenue is increasing during this year within the range of 1% to 3%. And that mobile service revenue is the main contributor. Operator: The next question comes from Felix Henriksson from Nordea. Felix Henriksson: I have 2. One is very simple, just to double check on MSR. Do you think that growth will further decelerate in Q2 versus Q1 before turning better in H2 given the time delay that you discussed as well as the tough comps? And then the second question is relating to the data center connectivity, which you have started to talk about. Could you expand a bit on the opportunity? What could the potential contract structures in this domain look like? And how large deals are we talking about? Topi Manner: Yes. So coming back to the mobile momentum and mobile service revenue. As mentioned earlier in this call, when we look at the new sales prices and how they translate into mobile service revenue, it's good to understand the mechanic and the time delay, when we win customers from our competitors, a meaningful portion of those customers are having fixed-term contracts with their old providers. And that means that even though we do the deal today, those customers might be moving to our customer base 2 months from now, 3 months from now. And that delay needs to be understood. And then as stated in Q2 last year, we started the rollout of the security features, which provided support for MSR for Q2 last year. Putting all of this together, we should be seeing improved mobile momentum during the latter half of this year, in line with the guidance that we have been giving on telecom service revenue. And then to your question related to data centers, I mean, this market is about to take off in Finland, and we have been seeing data center operators reserving land and quite a bit of that has taken place. We have been also seeing announcements for new data centers starting to come in during the course of this spring. So this leads us to expect that during the course of this year, we will be seeing sizable data center announcements on the market. And we do have a business opportunity in that. We are naturally advantaged in a sense that we have the most extensive backbone network, fiber network in the country, and it's shorter distance to connect to that backbone. And then therefore, we feel that it's realistic for us to get a sizable chunk of that data center connectivity market going forward. It is an emerging market. During the course of this year, we will be seeing most likely deal announcements and then the revenue starts to come in, in '27 and onwards. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: Just 2 questions. Just coming back to Finnish mobile, price rises on new offers in Q1. I was just wondering, was this a deliberate action from Elisa to raise prices? Or did pricing just follow the market? Just wondering your previous comments that you did not respond to some promotions over the past few months. I'm just wondering, are you trying to lead the market as a rational incumbent? Or was it the MNO's pulling back in the quarter? And then just secondly, on cash flow, comparable cash flow is a clear focus for you, but we don't have cash flow guidance. So just 2 parts to this question. Can you clarify if free cash flow is expected to grow over the next couple of years? And secondly, how important is cash flow in assessing the success of the business? Is it as important to you as revenue growth, EBITDA, ROCE, all these other sort of financial KPIs? Topi Manner: Well, to your first question, we are the market leader in this market. And we certainly would like to think that we are rational in managing our business. So then looking at Q1, what you see in the mobile metrics is that we come back to Q1 levels in terms of new sales prices in March. And you see the churn decreasing significantly more than the seasonal drop typically would be and also the sales and marketing cost decreasing. So coming back to my earlier point, I think that, that gives quite a good picture of what happened on the market and for our business during Q1. Kristian Pullola: And again, on the cash question, cash is a critical KPI for us that we both drive as well as assess our success based on. You're correct that we haven't guided specifically on cash flow as of now, something for us to consider for the future. But clearly, it is a measure that we judge our performance based on. And if anything, we'll be doing more of going forward rather than less. Operator: The next question comes from Ulrich Rathe from Bernstein. Ulrich Rathe: I have one clarification and a question. The clarification is you pointed out the mechanics of the customer sale versus the contribution. Can I just confirm that you're not including these customers that you have signed up in your customer base that you report before they actually start to contribute revenues? The second question or the real question is, if we look back at what happened there in autumn, how confident are you, if you look at the market overall, about the sustainability of the current recovery away from this slump? In other words, how stable do you think the market environment is vis-a-vis the causes of what happened last autumn? Topi Manner: Yes. On the first question, so -- no, we count customers into our net adds once they move into our customer base and the revenue recognition starts. So that's it. And then in terms of the market dynamics, I think that, first of all, we just need to come back to this in the coming quarters when we report our Q2 and when we report our Q3. If you look at the long history of the market, you have been seeing previously also these kinds of periods of intense competition like we saw during the latter half of last year. Similar phase was gone through during the years of '17 and '18. Operator: The next question comes from Ondrej Cabejšek from UBS. Ondrej Cabejšek: Two questions from me as well, please. The first one, apologies, I may have misheard on your back book, but I wanted to -- on the back book comments that you made, but I wanted to basically understand if now that the market seems to be stabilizing and the macro situation in Finland seems to be also improving. Are you again planning to kind of put in effect some kind of back book price rises the same way and the same kind of quantum on the -- that you did in 2Q '25, I believe it was around 400,000 customers that you raised prices for. Is there something similar plan for 2Q '26 because I believe that was the kind of assumption going forward? That's the first question. And second question, if I may, on the promotions that have been kind of dragging effective pricing down, are we correct to assume that most of these people or subscribers are locked in for 12 months. And so as they come out of the heavily kind of promoted pricing, I guess, around 2H '25, the assumption would be that they get back to some kind of normal pricing levels? Or what do you expect there as they come out of contract? Topi Manner: Starting from your latter question. So yes, you would be correct to assume that those customers that we took in during Q4, to a large extent, were with fixed-term contracts for 12 months. And then that will be a factor that will be impacting the market, the mobile market at the latter end of this year. And then related to your first question about back book price increases and offering changes, the like of offering changes that we did in the spring of last year with the security features, as stated -- we are introducing new individual services to the market all the time like we, during Q1 did with the Who's Calling service that now has 130,000 paying customers. But we do not have bigger offering changes like the security features in the plans for Q2. On corporate side of the business, B2B side of the business, there might be some sort of inflationary price changes that will be conducted, which is part of the sort of normal cycle in the B2B business. Ondrej Cabejšek: And apologies if I may follow up because the line was a bit choppy. So last year, you mentioned there were -- part of the 2Q price rises were the hard bundled security features, and you do not plan to do something similar this year, but straight price rises is something that is kind of in the plan? And also, yes, if you could please answer that, this is the straight price rises, I guess, is that something that the market is now allowing you to do you think? Topi Manner: No such plans. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have also 2 questions. Still wanted to get a bit more color on the situation at ISS. I think you mentioned some delivery headwinds from the geopolitical turmoil in Q1. Are you anticipating more headwinds going into Q2? And any comments from sort of order intake during the recent months? And then secondly, you booked EUR 4 million of one-off costs in Q1, where this related to the EUR 40 million savings program? And do you still see more coming during later of this year? Topi Manner: Yes. Related to Industriq, we did see strong bookings in Q1 and then quite happy with that. And then related to the war in Iran and the Middle East situation, we saw some revenue delays in Q1, partially because for customers in the Middle East, some projects were delayed. And with that, the revenue recognition was delayed and then partially because the anticipated sales just was prolonged given the outburst of the war in Iran and the impact to places like Dubai. So those were the short-term impacts that we have seen. And then generally, the impact of war in Iran, as a business, I think that we are in a fortunate position that the direct impacts of war in Iran to our business are very, very limited. To Industriq, we will need to see what those impacts are. As stated so far, we have been only seeing limited impact to a handful of existing clients and prospective clients in the Middle East. Kristian Pullola: And I think on the transformation costs, yes, we did book some in the quarter. And yes, they relate to the measures that we have taken. And yes, based on our prepared remarks, we do see that in the current environment, there is an opportunity to do transformation on an ongoing basis. So I would expect that there would also be some such costs also in future quarters as we take the appropriate measures. However, not to the same extent as we had kind of higher costs in Q4. Operator: The next question comes from Max Findlay from R & Company Redburn. Max Findlay: Apologies if the first question has already been answered while I was struggling with the line. So last year in ISS, there were some delivery delays in Q1, which saw revenue deferred into Q2. And in your preprepared comments, you mentioned that there was some revenue delay in this year's Q1. So I guess I'm trying to triangulate these comments with other comments you've made about 2Q and 3Q being weaker quarters generally. Should we expect these quarters to be lower than the 8% achieved this quarter? And then there's been a change in ISS' leadership. Can we expect any changes to strategy to accelerate growth to achieve your 10% organic growth target? And any comments on further acquisitions and disposals? Topi Manner: Yes. So indeed, Mikko Soirola has been appointed as the CEO of Elisa Industriq business. He is a very experienced software leader, having worked in international software space for 20 years. And the better part of last decade, he has been a CEO of successful software businesses. So the job to be done for Mikko is to accelerate growth, to improve the profitability of Elisa Industriq, carry out bolt-on M&A and integrate the M&A and integrate the portfolio of businesses that we have today better to achieve synergies. So it is a new strategic phase that we are entering into in Elisa Industriq. And then related to the first part of your question, what I was referring to is that the typical seasonality in Elisa Industriq business and in many of the other software businesses for that matter, is that Q2 and then Q3 are sort of seasonally softer than the start of the year and especially Q4. So that is something that is good to keep in mind when understanding the sort of dynamics of the Elisa Industriq business on a stand-alone basis and the impact to Elisa numbers. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Vesa Sahivirta: Thank you, and thank you for participating in this conference call. Thank you, Topi. Thank you, Kristian, and we wish you a very great reporting seasons. Topi Manner: Thank you very much. Kristian Pullola: Thank you. Bye-bye.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the 3M First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Tuesday, April 21, 2026. I would now like to turn the call over to Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis at 3M. Chinmay Trivedi: Thank you. Good morning, everyone, and welcome to our first quarter earnings conference call. With me today are Bill Brown, 3M's Chairman and Chief Executive Officer; and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3m.com. Please turn to Slide 2 and take a moment to read the forward-looking statements. During today's conference call, we will be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of these most important risk factors that could cause actual results to differ from our predictions. Please note, throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to Slide 3, and I will hand the call off to Bill. Bill? William Brown: Thank you, Chinmay, and good morning, everyone. We delivered solid operating performance in Q1 with earnings per share of $2.14, up mid-teens versus last year. Operating margin increased 30 basis points to 23.8%, and free cash flow was over $500 million, up double digits. During the quarter, we returned $2.4 billion to shareholders, including $400 million in dividends and $2 billion of share repurchases. We had a light start to the year on the top line with organic growth of 1.2%, driven by pockets of macro pressure. But we saw encouraging order trends that support our outlook for acceleration in the balance of the year. Looking forward, we remain confident in achieving our full year 2026 guidance despite the volatile environment. Our performance reflects strong execution on productivity, cost discipline and commercial rigor. We're building a stronger foundation based on commercial, innovation and operational excellence, underpinned by a relentless focus on strengthening our performance culture. In commercial excellence, we're seeing benefits from improved sales effectiveness and lower customer attrition, and we continue to make progress on cross-selling opportunities. To date, we've closed on approximately $80 million of new business against the 3-year, $100 million target we laid out at Investor Day with a pipeline of $85 million of additional cross-sell opportunities. We've introduced AI tools to drive growth, reduce churn and automate manual work, including an agent that analyzes our sales and opportunity pipeline data to develop customized coaching plans for sales managers to help reps meet their targets. And we believe digital tools like Ask 3M, a new AI-powered digital assistant that helps customers find solutions to design challenges using 3M products, will allow us to reach a broader population of customers. Our pace of new product introductions is accelerating with better on-time performance, reduce cycle times and clear governance and accountability across R&D. We launched 84 new products in Q1, up 35% versus last year, and we're on pace to launch 350 in 2026. This will put us ahead of our Investor Day target to launch 1,000 new products through 2027. We've maintained OTIF service levels above 90%, while at the same time, reduced inventory by 3 days and delivery lead time by 25%, improving our competitiveness with customers. OEE improved over 100 basis points year-on-year as we optimize asset run length, run time and changeovers, creating a stronger foundation for sustained productivity and fixed cost leverage. And cost of poor quality decreased by approximately 100 basis points versus Q1 last year, driven by more structured root cause analysis, significantly increased Kaizen activity and tighter process controls. What matters is that these are not isolated wins. They collectively reflect greater execution discipline and constancy of purpose. And that consistency and momentum gives us confidence that we can meet or exceed the medium-term goals we outlined at our Investor Day last year, even in an uncertain macro environment. While we continue to strengthen our foundation and shift from a holding company to an operating company model, we're beginning a broad-based transformation of the company, simplifying and standardizing processes, reducing complexity, reshaping our portfolio and improving resilience and predictability. We see substantial opportunities to streamline operations and consolidate facilities. The transformation includes both deliberate footprint actions as well as targeted investments in manufacturing and process technology. For example, transitioning from solvent to solvent-free coating, which brings cost capital and environmental benefits. Earlier this month, we closed on the previously announced sale of our precision grinding and finishing business within SIBG, which reduced our footprint by 7 factories. And we closed 1 factory and announced 3 other full or partial closures, bringing our total projected manufacturing site count to below 100. At the same time, we're investing more than $250 million over the next 3 years in standard, easy-to-replicate automation across our plants and distribution centers. By automating material handling in our warehouses, replacing manual slitters with automated systems and automating our current manual visual inspection processes, we are improving safety, reducing labor costs, increasing yield and putting ourselves in a better position to support demand as volumes recover. To illustrate the opportunity, we have 7,000 material handlers and over 600 operators performing manual visual inspections across our network and about 500 manual slitters. When we automated the slitting operation at our [ Novato ] facility late last year, we achieved a 30% increase in square yards per hour productivity. Over time, this transformation will allow us to accelerate towards a structurally higher growth, higher margin potential portfolio of priority verticals. Slide 4 provides a more detailed view of growth and orders by end market. When you look across our portfolio, roughly 60% of our businesses showed relative strength in Q1, including general industrial and safety. Importantly, we also saw strong orders in these markets, which gives us visibility and reinforces that the demand environment in these verticals remains healthy. At the same time, we experienced macro and industry-driven softness in about 40% of the portfolio that we've been highlighting as watch areas. In electronics, we delivered flat year-over-year growth in Q1 versus mid-single digits last year. Our performance in semiconductor and data centers was very strong, while consumer electronics was soft due to industry-wide memory chip issues, which is impacting demand. Electronics orders were up double digits due to significant activity in semis and data centers, which will convert to revenue in Q2 and the second half. In automotive, the market was soft as expected in the first quarter. Global IHS build rates were down about 3% overall and 10% in China, which pressured volumes. And in Consumer, we continue to see soft U.S. consumer discretionary spending with a few pockets of strength in categories with recent new product introductions. POS trends in the U.S. improved over the course of the quarter and were positive in 7 of the last 8 weeks, providing some encouragement heading into Q2. Overall, orders were up slightly over 10% in Q1 and backlog grew double digits, both sequentially and year-over-year, giving us momentum into Q2. This strength reflects the combined impact of our new product introductions, continued progress in commercial excellence and orders for longer lead time products, with some additional benefit from pre-buying ahead of recent price actions. It's encouraging to see order strength continue into the first few weeks of April. Turning to Slide 5. As part of our ongoing focus on portfolio shaping, last month, we announced the acquisition of Madison Fire & Rescue, which will be combined with our Scott Safety business to create a leading global fire and safety business. The combination of Scott Safety's premium self-contained breathing apparatus with Madison Fire & Rescue's premier portfolio in rescue technology and fire suppression creates an $800 million revenue business, growing at a high single-digit growth rate. This strategic transaction broadens our safety portfolio, one of our priority verticals by expanding our market reach and building scale for future growth. It positions us to maintain above-market growth, enhance margins and drive strong free cash flow generation. I also want to highlight our growing data center and associated power utility business with current revenue of approximately $600 million, $100 million inside the data center and about $500 million bringing power to the facility. This is a priority vertical space, where we are introducing new products like EBO or Expanded Beam Optics, a high-performance optical connector engineered to improve installation speed, reliability and operational efficiency within data centers. EBO builds on our existing TwinAx copper connector for high-speed data transmission and positions us well for the copper to fiber transition underway. With hyperscaler validation, a significant order in hand and $1 billion-plus addressable market, we're investing to more than double our capacity to support growing AI demand. We see additional opportunities here as demand expands to ceramics, silicon photonics and on-chip optical connectors. We have strong IP to support this evolving market and a clear road map to develop new products that further drive growth. Overall, I'm pleased with our progress this quarter, encouraged by the pace, op tempo and executional rigor of the 3M team. We're on a multiyear journey and progress won't be linear, but we're building the capability to execute consistently, to innovate with purpose and to allocate resources toward the parts of the portfolio that deliver the most value. I'm grateful to the 3M team for their commitment, hard work and focus as we deliver progress every day. With that, I'll turn it over to Anurag to share the details of the quarter. Anurag? Anurag Maheshwari: Thank you, Bill. Turning to Slide 6, we had a good start to the year, performing ahead of expectations on orders, margins, earnings and cash. Starting with top line, we delivered organic sales growth of 1.2%. SIBG showed continued momentum and grew over 3%, slightly better than expectations. TEBG was flat, lighter than expectations due to ongoing weakness in certain end markets like consumer electronics and auto as well as late timing of order intake within the quarter. In CBG, we did not see the expected recovery in the U.S. consumer market, resulting in organic sales down 1%. Notably, we saw significant strength in orders this quarter driven by progress on commercial excellence and NPI. Overall, orders grew slightly more than 10%, with SIBG and TEBG growing mid-teens, driven by industrial, safety, data center, semiconductor and aerospace. The auto momentum accelerated through the quarter, resulting in backlog growth of 20% over last year and 35% sequentially, positioning us well for the second quarter. First quarter adjusted operating margins were 23.8%, up 30 basis points year-on-year, driven by strong volume and broad-based productivity, which more than offset approximately $145 million of tariff impact, stranded costs and investments. Operating income from the 3 business groups was up $85 million with 60 basis points of margin expansion driven by supply chain productivity, including improvements in cost of quality and procurement and logistics and continued focus on structural G&A reduction. Corporate was a 30 basis point headwind from planned wind down of Solventum transition services agreements. Our sustained operational performance of driving growth and productivity led to EPS improvement of $0.26 or 14% to $2.14. In addition, we benefited from lower share count, timing of tax benefit and FX of selling tariffs, stranded costs and investments. Adjusted free cash flow was $540 million in the quarter or up 10% from strong earnings growth and improvement in inventory, a decrease of 3 days while maintaining service levels of greater than [ 90% ]. In addition, we returned $2.4 billion to shareholders in the first quarter, including approximately $400 million in dividends, reflecting a 7% increase per share and $2 billion through opportunistic share repurchases. Turning to Slide 7, I will provide an overview of our business group performance for the first quarter. First, Safety and Industrial had another quarter of 3%-plus growth as we continue to gain traction on commercial excellence initiatives and realized benefits from new product launches. We delivered mid-single-digit growth across industrial adhesives and tapes, safety, electrical markets and abrasive systems, driven by continued share gains from new product introductions and targeted commercial initiatives to reduce customer churn, strengthen sales coverage and increase cross-selling. Collectively, this growth more than offset continued weakness in roofing granules as the housing market and consumer sentiment remains soft. Even though auto repair claims were down mid-single digits, it was encouraging to see our auto aftermarket business be flat to slightly up after a couple of years of decline from good execution of the key account strategy. Turning to Transportation and Electronics. While growth was flat, orders were up low teens, accelerating through the quarter, resulting in backlog up about 30%. Approximately half of the business delivered mid-single digits growth, including double-digit growth in semiconductor and data center, driven by continued market demand and ramp-up of EBO that Bill referenced earlier. In addition, we saw growth in aerospace and commercial branding from better sales effectiveness. This was offset by the other half of the business, which is exposed to consumer electronics and auto where the market was down. Finally, Consumer first quarter organic sales were down 1%, driven by weakness in USAC as we did not see the expected pickup in retail traffic in the early part of the quarter. We did see pockets of strength. Scotch-Brite grew approximately 10% on the back of new product launches. We also saw good traction in international markets, especially in China and Asia, but it was not enough to offset the impact of USAC, which makes up a majority of the CBG revenue. By geography, in China, we again grew mid-single digits despite soft auto and consumer electronics end market as we executed on our key account strategy and launched local NPIs in a relatively strong industrial market. USAC was up slightly with mid-single-digit growth in industrials being offset by softness in Electronics and Consumer. Asia had another quarter of good growth, with India in the high teens as we drove higher sales coverage across the country. EMEA was down about 1% due to market weakness in auto. Moving to Slide 8. Though the macro remains uncertain, given our good performance in the first quarter, we are reiterating our guidance for the year. Organic sales growth of approximately 3%, earnings per share ranging from $8.50 to $8.70 and free cash flow conversion of greater than 100%. For sales, the strong backlog combined with continued strength in orders in the first 3 weeks of April gives us confidence that all 3 business groups will accelerate growth in the second quarter and through the balance of the year. On margins, we had a solid start with the 3 business groups growing 60 basis points despite 100 basis points year-on-year tariff impact. As we lap tariff pressure in the second half, the continued momentum on productivity and volume acceleration gives us confidence in our expectation of approximately 100 basis points margin expansion for business groups this year. On nonoperational, we expect positive trends driven by a $2 billion share repurchase in the first quarter and lower net interest expense. Overall, we are maintaining our EPS guidance, which includes a contingency, and we will go through the components of the earnings bridge on the next slide. Given the strong earnings growth and good progress on working capital, particularly inventory and continued CapEx efficiency, we believe our free cash flow will be more than $4.5 billion for the year and greater than 100% conversion. Slide 9 shows the trend of key earning elements and the current guidance. We are trending $0.05 to $0.15 higher on earnings from momentum on productivity and lower share count and interest expense. We are facing higher input costs due to the recent increase in oil price, but have implemented targeted price increases to mitigate the impact at the current levels. Given that we are early in the year and we are operating in a volatile macro environment, we think it is prudent to keep a contingency until we have more clarity about the rest of the year. Overall, we are moving with determined pace, and we'll continue to calibrate as the year progresses. Regarding cadence, we expect sales growth to accelerate in Q2 and the back half of the year. Backlog conversion and continued order strength is expected to support growth momentum in both SIBG and TEBG in the second quarter. We anticipate consumer to improve as point of sale is on an upward trend, resulting in normalized inventory levels. On EPS, given the contingencies for the second half, we expect the first-half EPS to be higher than the second half. Our 2026 financial outlook puts us on pace to exceed our medium-term financial commitments that we laid out during Investor Day around growth, margin and cash. And on capital allocation, we have already returned over $7 billion of the $10 billion shareholder returns that we had committed to. Before we open the call for questions, I want to take a minute to thank the team for a strong start to the year and being proactive in this environment to mitigate risk and control the controllable and for their commitment to strengthen the foundation and drive profitable growth. With that, let's open the call for questions. Operator: [Operator Instructions] And our first question comes from the line of Jeff Sprague with Vertical Research. Jeffrey Sprague: Bill or Anurag, just trying to dig into the order commentary a little bit more, maybe you could give us a little more perspective on the pre-buy, the size of it, if you could. And I guess the prebuy would imply getting ahead of price increases and the like. So maybe a little bit of color on how much additional price is now embedded in your organic growth forecast. And just also on these backlog numbers, obviously, the delta sound great, but it's not really a backlog business. So kind of the question, is it law of small numbers on those deltas? Or is there actually significant visibility that you can anchor to as you look into Q2? William Brown: Jeff, thank you for the question. I'll start, and maybe I'll pass on to Anurag on the backlog point. As we said, we had very good orders in the first quarter, up double digits, which was very good. And you're right, we're not really a backlog-driven business, but backlog was very strong coming out of Q1 and continues to build into Q2. Over the course of the quarter, we saw good order growth in January and February, kind of up mid-single digits. But it accelerated quite a bit in the month of March. So it would be well over the double-digit number that we ascribed for the whole quarter. And it continues into April, which I think is very encouraging. Now how much is price? I mean the reality is we do a price increase every year on April 1. So it's hard to discern how much was a prebuy. We think there's some of it. We've signaled to investors -- to customers rather that we're going ahead with a price increase on top of what we went out with April 1, associated with the price of oil coming up. So that could cause a little bit of pre-buy, if you will. But again, it's hard to discern exactly how much would that be. You asked about price for the year. For the year, we had guided before at about 80 basis points. We came in a little bit below that in Q1. We still see -- outside of oil-based increases around 80 basis points. But when you add in oil and the expected price increase from oil, it could be around an extra 50 basis points is what we're thinking at the moment. So price for the year around 1.3 points. I don't know, Anurag, maybe share a little bit about the backlog. Anurag Maheshwari: Yes. Thanks there, Bill. You are right that we are largely a book-and-ship business. We have about 75% of our revenue in a quarter comes from book and ship, but we do get backlog coverage as we enter the quarter. With the numbers that we mentioned, which was about 35% up sequentially to 20% year-over-year, provides us about 400, 500 basis points of additional coverage as we enter into the quarter, which is not insignificant given the growth acceleration that we expect from Q1 and Q2. So I think it's really good to kind of see that we are starting with a very good backlog coverage for the quarter. Combined with the order momentum that Bill spoke about in the first 3 weeks of April, it gives us really confidence for acceleration of growth through the -- through second quarter. And typically, we do not talk about orders and sales because of the book and ship because they converge together. But this time, you could see the big spike. And as Bill mentioned, part of it could be the pre-buy, but a lot of it is commercial excellence, NPI and other initiatives that we are driving, which resulted in order acceleration. Jeffrey Sprague: Great. And then maybe just a quick follow-up then. Just a comment about then accelerating into the remainder of the year. By that, do you mean each quarter will be a faster growth quarter than the one that preceded it, even though the comps are getting tougher in the back half of the year? William Brown: Yes, we see Q2 being better than Q1. And we see the second half being better than the first half, is the way we're currently looking at it, Jeff. Operator: Our next question comes from the line of Scott Davis with Melius Research. Scott Davis: Just to follow up on Jeff's question. Are customer inventories low and there's a little bit of a restock occurring? Or are they balanced? How do you guys kind of see that element right now? William Brown: So we track it pretty carefully on the Safety and Industrial business group, the distribution inventory is relatively normal, I'd say maybe a tick below what we typically would see. We would typically see 65, 70 days, and it's a bit below that. On the Consumer side, it's about normalized from where we were last year, around 13 weeks of supply coming into the year was a bit higher, maybe 13.5. But right now, we're around 13. So on the Consumer side, fairly normal. On the Safety and Industrial side, I'd say normal to maybe a bit light in the channel. Scott Davis: Okay. Helpful. I think you mentioned your factory footprint is down like 10%. Is there another 10%? I mean how do you guys kind of think of where the endpoint on that journey is? William Brown: So it's -- we're going to keep talking about this with investors as we go forward. I mean, at the end of last year, with 108, we sold and closed on PG&F, the precision grinding business, which was 7 factories scattered across Europe, one in Asia, a couple in the U.S. So it was not a large business, but a big factory footprint. So that brought down by 7. We closed 1 in the first quarter. We announced a couple of others. So that will close over the course of this year into next year. So that puts us below 100. The number will be below where we happen to be today. We'll continue to look at that and size it for investors as we go. But clearly, the footprint just under 100 is bigger than we really need today. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start maybe if you could give any color around the second quarter dynamics in a bit more detail, understand the organic sales growth accelerates year-on-year from the 1% in Q1. Also, I think Anurag, you said first half EPS more than second half because of the contingency. So I just want to gauge sort of how much sequentially or year-on-year EPS should grow in Q2? And what's the sort of margin embedded in that guide would be? Anurag Maheshwari: Sure. Sure, Julian. Let me answer those questions. So first, just on the revenue growth. As we mentioned because of the good backlog and the auto momentum, we expect organic growth in the second quarter to be higher than 3%, with all the 3 BGs accelerating. SIBG, which was at 3.2%, obviously going higher than that. TEBG, low single digit. And CBG flat to positive. So that's the expectation of the revenue growth acceleration. Obviously, that's going to come with high flow-throughs. We're going to continue with the productivity that we did in the first quarter will continue to the second quarter. And between volume and productivity, we'll offset all the last quarter of the tariff year-over-year impact for us, a pickup in stranded costs and investments. So you will see operationally for us, it's going to be a solid margin, about 24.5%, and good EPS flow-through coming from that. On below the line, we will see a couple of pennies of headwinds relative to last year. Last year, in the second quarter, we had a divestment of an investment that we had in India, which was about $0.08 to $0.10. Then you see a little bit of tax, which was favorable in Q1 coming back in Q2. So those are two headwinds. Of course, they will be offset by the share buyback, which we did in the first quarter, which is going to help us in the second quarter, plus a little bit on the non-op pension side. So you put all of that together, we should grow more than $0.05 in the second quarter, which for the first half would put us at about $0.30-plus of EPS growth, which is more than half if you include the contingency for the full year. Now the contingency, as I mentioned, we kept it for the second half of the year, depending on how things evolve. If we continue performing the way we do, revenue grows over 3% in the second quarter, which is a good exit rate as we enter into the second half. And if it continues at that a little bit better with good volume flow-through, no tariff headwind, the margins in the second half could be much higher than the first half. Yes. Julian Mitchell: I appreciate all the color. Just one very quick follow-up. That was very thorough. Maybe on the pre-buy dynamics, credit for calling that out, but trying to understand what you're assuming for how much that sort of reverses because you've got organic sales growth accelerating in Q2. We have maybe some sort of -- I don't know if a prebuy is helping that or the unwind hurts that. Maybe flesh out that prebuy sort of dynamic over the balance of the year. William Brown: So Julian, I mean we -- it's hard to discern exactly how much is pre-buy. I mean we get orders coming in, it's quite strong. But we are seeing much better traction on new product introductions, a lot of momentum building on commercial excellence. And keep in mind, part of what was driving Q1 growth, including into early April, are some longer-lead products that will go into semis, more importantly, in data centers, delivering in Q2 in the back end of the year. So you have all these factors in there. I think when I step back and look at the full year, as we said, we'll see acceleration into Q2 and then in the back half. And all these pieces come together. And any pre-buy that's happened will wash out in Q2, but we do see acceleration in the back half on the back of really core operating fundamentals around NPI and commercial excellence. Operator: Our next question comes from the line of Joe O'Dea with Wells Fargo. Joseph O'Dea: On the $0.05 to $0.15 of contingency tied to oil macro uncertainty, can you just outline kind of roughly how you think about the split on the demand side versus the cost side of that and your planning assumptions? And then really looking for any color on the oil exposure sort of across the business, and what you're thinking about that contingency could flow through if you need to use it? Anurag Maheshwari: Okay. Let me start with the contingency, and then I'll -- and then Bill, you can add from there on. On the $0.05 to $0.15 of contingency that we kept, it's actually across the 2 buckets that you mentioned around here. As I mentioned, in the second quarter, we'll be above 3%, we expect -- which is a good exit rate as we go into the second half. So if there is a little bit of an impact on the volume piece because of macro, which we are not currently seeing right now or a little bit of the input cost that goes up, so I guess it gets spread between the two, Joe, to be honest. Our objective right now is to continue driving what we control on the NPI commercial excellence continue to outperform the macro and drive more productivity so that we don't have to use the contingency in the second half. William Brown: And Joe, on the oil price, the way we look at it is really two pieces. One is on the supply side. The other is demand. And on the supply side, we have about 45% of our cost of goods is raw materials and about 1/3 of that -- so it's about $6 billion of raw material spend. And about 1/3 of that is its basis in polychem. So it's ethylene, it's propylene, esters, acrylates, all those various things. And we are seeing some upward cost pressure on that. What we've seen so far and expect is about $125 million of cost increase there, which are offsetting into pricing. As I mentioned earlier on that we expect about a 50 basis point uplift on price coming from that oil-based exposure. How that affects the overall macro economy? What's going to happen with consumer spending, auto? I mean that's still all unfolding as we speak and depending upon what happens in the Middle East, but that's our current assumption as we speak today. Joseph O'Dea: Got it. And then just on the transportation, electronics commercial excellence program, can you talk about where you are on that trajectory? I think you started to see traction in SIBG last year, and that continues, but just the efforts that are underway. And as we think about the growth acceleration, just any quantification of how you're thinking about commercial excellence contributing to better T&E growth as you move through the year? William Brown: Yes. So it's a good question. I mean, they're doing a great job on this. They're falling right behind what we've done in SIBG, which has been very, very successful. I'm very pleased with the traction on the sales force, on pricing discipline, on cross-selling, on churn reduction and looking very hard at attrition with the predictive AI models that we have in place. And the team at TEBG is doing the same sorts of things. I think the cross-sell opportunity is not going to be as robust, but they move very aggressively on improving on the sales force and better incentives, better targeting. We're close, we're on targets. They're tracking attrition rates, which I think is very good. They have the same predictive models tailored for TEBG into that business. So they're making good progress. It's going to roll out over the balance of the year. One of the key things we're focused on is making sure we have the right mix and focus of our sales reps versus application engineers. Are they -- do we have the right mix between the two? And are they calling at the right level in the customer, for example, in automotive at the OEE versus the tiers? So it's a little bit different than what we see in SIBG, but they're working it pretty hard. And I think you're going to see in the back end of the year certainly improvements in TEBG coming from a lot of that commercial excellence work. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: So on the Transportation and Electronics, to just to dig in a little bit further, also double-digit orders. So it seems like we -- a lot of questions into the quarter about weakness in consumer electronics. So does that mean that we are offsetting consumer electronics into the second half? William Brown: Yes, Andrew, it's exactly what's happened and will happen. In fact, when you -- again, when you discern with TEBG, just in Q1, I mean they were flattish, but half of the business was up mid-single digits and half the business was down mid-single digits. And you can really isolate that in the 2 areas, which is auto, auto OEE and commercial vehicles, and consumer electronics. So we show in our slides that electronics as a whole is flattish. What you see there is you see very strong semiconductor, data center business offsetting a weaker consumer electronics business. As we look at the balance of the year, we see electronics start to get modestly positive. Again, I think CE, or consumer electronics, may soften a little bit. But we are seeing better trajectory and growth in the data center and the semiconductor business. Andrew Obin: And Bill, just to follow up on that. At CES, you showcased some pivot in strategy on consumer electronics. You've also talked to your analyst -- your first Analyst Day about the need to rebuild the R&D pipeline, particularly on the electronics side. Can you just talk about how these two internal initiatives impacting your growth and the growth trajectory over the next 12 months, let's say? William Brown: Yes, that's a great question. I mean, we're putting a lot of time and effort into making sure we have good new product introductions in consumer electronics, both for the premium segment as well as for the mainstream segment. Wendy has been talking about this quite a bit. We are seeing good traction here. Unfortunately, the market isn't cooperating with us. We do see a greater downturn in LCD, which is where our strength happens to be. But we do see a lot of innovation in this space. We are gaining some share modestly in the mainstream side. When you look at content per device, 3 or 4 China OEMs have increased their content per device in the first quarter and the fourth one, we saw a pretty good order for us. So I think we're making some progress here. And this comes on the back of a lot of the NPI work that's happened in TEBG, and there's more to come. Operator: Our next question comes from Andy Kaplowitz with Citi Group. Andrew Kaplowitz: So can you give us some more color into what you're seeing in Consumer? I know you talked about share gain actions in Consumer. So maybe you can elaborate on what you're doing there? And how much discounting do you have to do to get there? And should Consumer contribute to your margin performance this year? Or could Consumer margin continue to be pressured a bit over the year? William Brown: So look, I'm pleased with what's happening in Consumer. The market for us, we're 70% U.S. So it's really focused on the U.S. consumer. We sell a discretionary product. As Anurag mentioned, we had a couple of pockets of strength in the year from new product introductions. I think the team has really gotten back to basics, focusing on priority brands and started to innovate again. The reality is we went for a lot of years without a lot of new product introductions, a lot of Class 3, so they're incremental, some are Class 4, but really starting to kind of be more aggressive on new product introductions. And I think we're holding our own and in fact, starting to gain back shelf space because we have new product coming into the marketplace. Yes, it's not a segment that we see upward movement on pricing, we're trying to contain the discounting that happens half the year. Again, the market is a little bit soft. For the year, we expect to see some growth. It will be positive. It won't be a meaningful driver of the overall 3M growth in the year. But again, we're down 1.3 in Q1, down a little bit more than that in Q4. We were up sort of modestly for the first 9 months of last year at 0.3 points. So I mean, they're hanging right around flat to up a little bit. And when the consumer starts to spend more, we'll have the right products with good innovation, great commercial excellence efforts there, and we'll see that business to return to growth. Andrew Kaplowitz: Helpful. Then Bill, maybe just a little more thoughts about portfolio management. You obviously opted for a JV structure with the purchase of Madison, despite seemingly leaning into safety as one of your priorities. So maybe a little more color on why you chose the JV structure there. And then stepping back, can you give us an update on how you're thinking about overall 3M portfolio? I think you've said in the past 2% or 3% of your portfolio is actionable in terms of divestitures, 10% is commodity. Like is that still the right numbers of the company? William Brown: Yes. So look, I'm really pleased with the structure and the conclusion of this Madison, Scott and [ SCBA ] joint venture, where we're a 51% owner, it's going to be consolidated. It's a strategic bolt-on acquisition. And what you just referred to as a priority vertical, it is. It does strengthen our SCBA business. It's a great brand. We have been innovating in this space. We talked last year about some new innovations coming on to the marketplace. This also creates some scale by putting this business together for future organic and inorganic opportunities. Madison and all of its fire and rescue products, have been performing very well. They bring a terrific management team. They're growing double digits. The margins are coming up. So it's -- I think it's a great combination in a space that we like quite a bit. Bain Capital is our partner on this. They're 49%. We know them well. They are very good at post-merger integration, they bring a lot of operating rigor and good expertise on driving incremental M&A while we focus on other areas around the company. So when you put all that together, I think it's a strategic opportunity for us. It gives some optionality for do we pull it back or do we suit something else over time. But the reality is it's a terrific deal. It is going to be accretive to our growth, margins, earnings over time. So I feel pretty good about that particular deal. We closed on PG&F, the Precision Grinding business on April 1. It wasn't very big, but businesses that don't perform sometimes can be difficult to transact on. But I'm very, very pleased that, that one got over the line. We continue to look at the rest of the portfolio. Yes, we're around 10% of our business is more commodity like. We don't have a clear right to win, not a lot of technology differentiation. We said 2% to 3% was in flight, PG&F was part of that. We continue to evaluate this, and we'll talk to investors as we go on what that shaping happens to be. But the reality, the investors should see the transaction on Madison with Scott as an important strategic signal for investors around the things that we want to do to reshape our portfolio to be higher -- structurally higher growth and higher margin potential. Operator: Our next question comes from the line of Chigusa Katoku with JPMorgan. Chigusa Katoku: First, can you maybe recalibrate us on the outlook for U.S. IP and electronics you're embedding and your assumptions for the full year? I think it was U.S. IP flat and electronics up mid-single digit last quarter. William Brown: Sorry, Chigusa. You're talking about IPI, the macro? Chigusa Katoku: Yes, the U.S. IPI. William Brown: Okay. So well, thanks for the question. And I guess, congratulations on the role. Welcome to the call. So just in terms of the macro, as we came into Q1, we saw some of the similar trends we saw in '25 continue. So maybe a couple of comments relative to where we were in January. Global IPI is still around 2%. It's not moved around very much. USAC or U.S. is up a little bit better. EMEA is down a little bit. China is still mid-single digits. And interestingly, those trends are exactly what we saw in our business through Q1. So U.S. up a little bit, Europe down a little bit, China mid-single digits. So it's pretty much aligned with that. GDP is still sort of in that same 2.5% range. Auto builds are still floating around between flat to down 1. It's really early in the year. I think that tends to be more of a backward-looking indicator. But right now, it's sort of flat to down a little bit. U.S. retail is flattish. The place that we're watching a little bit is consumer electronics where the outlook is for a little bit more softness as we get into the back end of the year. But overall, the macro is trending about where we saw it in January and through last year. Chigusa Katoku: Okay. Great. And then on this contingency, I was just wondering what it would take for you to remove this. I think it's prudent that you're including in guidance, but you've been seeing good order trends, you're operationally raising guidance by about [ $0.025 ]. And without this contingency, it would have been a $0.10 raise. So kind of what would it take for this to be removed? Anurag Maheshwari: Yes. Thank you for the question, Chigusa. Listen, we'll probably give you an update in our next earnings call on that. As we go through the next couple of months, we're pretty confident with the backlog and auto momentum on the Q2 revenue. We'll see how that plays out as well as we have executed. We have a very good playbook on -- which we adopted from the tariffs last year in terms of working with the customers and pushing out the price increases over there. So that's an area we will kind of monitor on the yield over there over the next couple of months plus and see where oils are at which levels they are after a few months. And if we continue performing the way we did in Q1, both on the productivity as well as in operational excellence, and come July, we will give you an update on where we stand for the full year. Operator: Our next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: We covered most of the topics. So I just wanted to -- a couple of quick follow-ons. Just going back to the pre-buy comments, just trying to understand, why you think there may have been a pre-buy? Is it because you're trying to rationalize the strong orders? Or is there something else that you're hearing from customers? So just maybe cover that. And then on the 50 basis points of additional price, is that in the form of a surcharge? It certainly seems like it's in the surcharge, so that rolls back if oil comes down. And would that hit in 2Q? Or is that more in the back half of the year? William Brown: So really, Nigel, thanks for the questions. Look, it's hard to avoid the fact that we're pushing pricing a little bit more aggressively. We know there's an inflationary environment. We know price oil is going to go up. We know the impact on our company. We know perhaps what we did 4, 5 years ago, maybe not moved as quickly on pricing when oil came up, which we're correcting for that. I think we're being a lot more attuned to what's going on in the macro. And we're enforcing it better. If a shipment goes out beyond a date, that shipment will have a price increase associated with it. I think the customers have seen that and heard that. And then when you put all that together, it gives us a sense that perhaps there's some advanced buying from these price increases that are going out. So again, we'll know more in the next month, 6 weeks, how much of that might be prebuy, simply because we'll watch the orders through the balance of the year into the balance of the quarter and into May. So that's kind of basically how we're thinking about the prebuy here at the moment. On pricing, we do see right now about $125 million worth of cost impact, which we've been relating to pricing, and that would translate to about 50 basis points. So that's factored into the guidance of about 3% organic for the year, but that's kind of what we're thinking at the moment on pricing. Operator: Our next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to also follow up on pricing and I guess a little bit on price cost. When do these surcharges take effect? I would imagine some point in Q2, but any color on when they take effect would be helpful. And it just seems like with the $120 million of cost inflation that you referenced, Bill, on the 50 bps of price, the plan here is to be, I guess, be neutral on price cost. And I asked because if I remember a year ago, you guys were actually EPS negative on the tariff inflation. Just want to make sure I have that neutral view right. William Brown: So Chris, I think we've learned a little bit. Yes, we're moving a lot faster than we did last year on tariffs, tariffs came on. And I think maybe we're a little tentative at front, but I think we ended up offsetting a good part of the tariffs on cost and price. We're trying to be careful on that. So yes, exactly, we will offset cost increases associated with oil through price increases, and that's the assumption that we're making here. I mean you're right. Historically, we have covered material cost inflation with pricing. So historically, with a 2% material inflation, that would translate into roughly 50 basis points of price. For the year, we are guiding to about 80 basis points, again, a little bit lighter in Q1, but inflation in Q1 came in a little bit lighter as well. So for the year, 80 basis points. With oil coming in, that's driving an incremental 50 basis points of price, so a total of about 1.3 points roughly for the year on pricing. And that's our current expectation. It's not a surcharge. The price is going out embedded into the pricing of our products. And that's kind of -- and it's depending on the product and the geography, but generally speaking, it was less of a surcharge, more being built into the underlying price. Anurag Maheshwari: Yes. And in terms of the rollout in the timeline, we've already started in April in a couple of countries in Asia. And then in the United States, it starts in May 1 and Europe as well. So it is imminent right now with all the letters going out to the customers, knowing when the surcharge is going to impact them, oil price increase is going to impact them. Yes. Christopher Snyder: Appreciate that. And then maybe if I could follow up, just any color you could provide on how firm or how much flexibility is there on these delivery dates for these orders or what's in the backlog? And then I guess asked because I remember a year ago, there was elongation on those orders, I think, tied to some of the preordering ahead of tariffs. And it seems like there could be some of that again now. So just kind of wondering, trying to gauge that as a potential risk into Q2. Anurag Maheshwari: Chris, the delivery is limited to the lead times that we have. So it's not like an order can be placed for 6 or 12 months of delivery. So it's definitely within the time frame that is we always describe. Yes. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Unknown Analyst: This is [ Neil ] on for Amit. So I know we just got first quarter results, but if I could ask about the growth algorithm into 2027 because the outlook suggests some meaningful improvement in trends exiting this year. If I just look at new product introductions, for example, I mean, these are accelerating. And if we add maybe 2 points of macro growth to new product introduction, would that math imply that 3M is growing around 4.5% organically next year? Anurag Maheshwari: Yes. Thanks for the question, Amit. I'll start and Bill can add from there. William Brown: [ Neil ]. [ Neil ] on for Amit. Anurag Maheshwari: Yes, I'm sorry. [ Neil ] for Amit. Yes. So I -- we said this year that we will grow about $330 million, $300 million above macro. And as we get into the second half of the year, from the exit rates, you are right, we will be north of 3.5%, which would imply that we would be above where we are in the first half and above where the full year would be. So we do feel very good as we enter into next year with what we are doing on the NPI as well as what we are doing on commercial excellence and how that is translating. So first is, obviously, we've got to grow in the second quarter about 3%. And if we do grow above the 3.5% in the second half of the year, I think it will give us good momentum to kind of accelerate the growth into 2027. But it's a little bit too early to kind of talk about that, and we'll provide more color as we go through the course of the year. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I was hoping we can address the point-of-sale momentum. I mean that's a surprising number, up 7 on the last 8 weeks, given the pockets of macro pressure. So just your impression here, is this consumer driven? Is it more on the commercial side at all? Just some context and the momentum into April? William Brown: Deane, so it is consumer driven because it's in the consumer business group. I think it's very encouraging for us to see POS up. That's a sell-out 7 of 8 weeks, which I think is really good. It does kind of make us feel a little bit better going into Q2. And that business, Consumer business stabilizing, perhaps growing a little bit in Q2 and the balance of the year, so those are good trends. I think it reflects the team's very aggressive efforts on driving promotions, getting shelf space, driving NPI, being really aggressive at hustling at the customer interface, good on-time performance still in at 95%, 94.5% range. So just really good work. Anurag talked a little bit about a couple of pockets that are growing a bit better, but it's pretty broad-based. We see really good trajectory here through the first quarter now going into Q2 on the clubs, which is not surprising, given where consumers happen to be today. But we feel good about the trends and good about the outlook for Q2 so far. Deane Dray: Good to hear. And I'd love to hear a bit more about the Expanded Beam Optics opportunity. There's a lot of focus on this. It's addressing the data transfer bottlenecks in AI processing. So just where do you stand competitively? How quickly can you ramp on this? Is there any question of manufacturing capacity? Because the take rate on this is one of the fastest growing right now in data centers. William Brown: Well, Deane, exactly. That's why we're so optimistic about it and why we're talking more about it. And the fact that we've had some really good robust IP protection around the technology. It is expanded beams. So it's not a point-to-point fiber connection to the data center. It's sort of like an easy click between two pieces of multi-fiber device referrals that come together. And we can put that together at 80% less time with a less strain technician; better reliability, can operate in a dusty environment, which is why it's gotten some good take rate. We've had at least a validation by at least one hyperscaler, a second one is in testing. I expect that will be positive as well. We had a fairly large order coming in, in Q1 relating to the hyperscaler that has certified it. We are in a ramp-up mode. We will double capacity towards the back end of the year. We're investing quite significantly to expand capacity, relying on other partners in the space. Hyperscalers won't go with a single source of supply. So we've got to make sure we have some dual source, either a couple of factories or us with a contract manufacturer. So all of this is working. We're working the ecosystem. The pace at which this has happened is very encouraging, and the team is pushing hard. I'm really optimistic about where it's going to go from here. This is a polymer EPO as it moves to ceramics, which is more EBO or fiber to the chip. I think it opens up a lot more opportunities with a lot of other players in the space. So look, it's encouraging, which is why we want to share today with investors. Operator: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I'm just going to ask one since we're near the top of the hour, and we've gotten through a lot of the questions on my list. Just on some of the margin puts and takes, so have you guys seen any changes to your full year productivity assumption or stranded costs or growth investments? And I guess was any of that kind of front-loaded into the first quarter? How are we thinking about phasing throughout the year of those 3 items? Anurag Maheshwari: Right. Thanks for the question, Nicole. So we said that we have a contingency of $0.05 to $0.15. So let's say, at the midpoint, it's $0.10. About half of that is because of productivity, and most of that was in the first quarter. So the -- I would say the only two changes that we made from our previous guidance, about $0.05 of that was very good productivity both on the supply chain side as well as the G&A. And a lot of it we saw in the first quarter. And obviously, we try to continue with the momentum that we have. The second $0.05 at the midpoint, I would say, is because of our active capital deployment where we bought back $2 billion of shares in the first quarter of 2.5 billion, which obviously gives us accretion through the course of the year and active cash management with the cash balance that we have. Those are the big changes. William Brown: But we're not changing our productivity guidance, stranded cost guidance at [ $150 million ] tariffs. I mean that all stays the same as it was back in January. Operator: Our final question comes from the line of Laurence Alexander with Jefferies. Laurence Alexander: Just very quickly, can you just address what your customers are saying about potential supply chain bottlenecks, I guess, particularly in the kind of sulfur, helium, methanol derivative chains? And does that -- are those factored into your contingency that you kind of see ways to work around those shortages if they develop in the back half of the year? William Brown: So Laurence, it's a good question. I mean that's probably affecting some of the pre-buy activity perhaps. Look, I think we're all working through this. We're in direct contact with all of our suppliers trying to manage all of our sources of supply, making sure we've got a variety of players that we can go to. So it's on our minds. So I know it's on theirs, and it's going to affect behavior as we go through the next several months, and we watch what's happening in the Middle East and through the Strait of Hormuz. So we'll keep you updated on that, but it's certainly a factor that's on everyone's mind today for sure. So thank you. Operator: This concludes the question-and-answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments. William Brown: So I know we're a couple of minutes late, but thank you all for joining today. And I want to thank again all of the 3Mers for their efforts, for their dedication and executing against our priorities, strengthening the foundation, as Anurag say, controlling the controllables, delivering value to our customers and shareholders. So thank you. Thank you all for joining today. Have a good day. Operator: Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.
Operator: Welcome to Getinge Q1 Report 2026 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead. Mattias Perjos: Thanks, and welcome, everyone. Thanks for joining the call today. As mentioned in the intro here, it's me and our CFO, Agneta Palmer, with you today. And in today's conference, we'll go through performance and some of the highlights in the first quarter of 2026 before opening up for a Q&A. So let's move directly to Page #2, please. And I'd like to start by looking at the development of some of our strategic KPIs. And as you can see here, it's evident that we continue to clearly track in line with plan to increase the share of sales from recurring revenue and also accelerating the share of sales from higher-margin products like, for example, our ECLS offering, our consumables in Infection Control and our BetaBags within the Sterile Transfer product category. This is all supported, of course, by solid and effective quality processes. And if we look at the specifics here, you can see that sales from recurring revenue continue to make up 2/3 and high-margin products closing in on about 70% right now. When it comes to quality, the number of field actions in relation to sales has decreased significantly, and we see this positive trend sequentially continue also into the beginning of 2026. And these improvements, we always act with -- in line with thinking of responsible leverage and an attractive long-term return on invested capital. We can move to Page #3, please. So if we then look at some of the key takeaways from the first quarter, we managed to beat last year's record quarter and grow top line organically. Net sales grew by 0.8% organically with positive development specifically in Life Science and in Surgical Workflows. And on the order intake front, we saw an organic increase of 3.9%. When it comes to our adjusted gross and EBITA margins, they were down in the quarter, mainly due to the strong headwind from currency and from tariffs. And adjusting for the SEK 226 million in currency and tariff headwinds in the quarter, the EBITA margin was about 50 basis points higher than last year's Q1. So the conclusion from that is that the underlying performance in business -- in our business continues to be strong, and it's developing according to the plans, the long-term plans that we have laid out. We also have a strong cash flow and continue to have a solid financial position. So our financial leverage is at 1.5x and well below the 2.5x EBITDA that we have kind of as an internal threshold. We can then move over to Page #4 and some of the key events during the quarter. And if we start with our product offering and our customers, I think one situation that is, of course, evolving on a daily basis is the situation in Middle East, and we continue to monitor this closely. Our first priority is, of course, to tend to our employees in the region and continue to support our customers. And if you look at the region as such, it makes up about 2% of our sales and where Saudi Arabia is half. And so far, the impact on top line and on cost has been very limited for us. To our Life Science customers, we launched a new steam sterilizer dedicated to larger items for use for labs and for research applications. And when it comes to the sustainability and quality perspective, I'm very happy to see that we got the CE approval for Cardiohelp II in the quarter, and I'll talk more about that on the coming slide here. In addition to this, we have in our implants business received EU MDR certificate for the Intergard Synergy, which is a vascular graft with an antimicrobial coating, to minimize the risk of infections. Furthermore, in the quarter, we released our annual report for 2025, including our sustainability statement and the annual report provides a lot of good information on Getinge. So I encourage you to have a look at this if you haven't done so already. We can then move to Page #5, please. So just wanted to elaborate a moment on the positive news about the CE approval for Cardiohelp II. And just to remind everybody, this is a market segment where we are already the global market leader within ECLS therapy, thanks to our strong existing portfolio. With the launch of Cardiohelp II now, we become even more relevant for our customers. And some of the systems' key features are that it's even more lightweight and transportable, meaning that it can be used for both in-hospital and intra-hospital use. It also has an attachable gas blender as an option, which is something that is highly appreciated by our customers. And from an interface standpoint, we have an interface now that is even easier for users to operate, and it includes also several smart monitoring functionalities for better decision support for our customers. We have initiated a limited market release now in the beginning of the second quarter to a handful of customers and very happy to see how positive the reception from our customers have been for this important product. The plan now is to do a full CE market release at the beginning of the third quarter. And when it comes to the important U.S. market, the plan is still to make the submission of the Cardiohelp II system, including our HLS Advanced consumables in the second half of this year. We can then move to Page #6 and talk about the top line for a moment. So overall, we had a solid top line performance in Life Science and in Surgical Workflows. And when it comes to order intake for the group, we grew 3.9% organically. The order intake for Acute Care Therapies decreased mainly due to the temporarily high comparative figures in ventilation, where one competitor last year drastically exited the market. So we're very successful in capturing some of that market share. At the same time, we saw really good growth when it comes to ECLS consumables across the board. And this is, as you know, one of our key categories. In Life Science, the organic order intake increased in the quarter, for example, because of an anticipated improvement from low levels that we've seen in bioprocessing for quite some time. And this is something that [indiscernible] and it's good to see some of the momentum here. [ Surgical Workflows ] grew double digit in the quarter, mainly on the back of the strong development across all our product areas, which is also encouraging to see. Net sales there, we had growth of 0.8% organically for Acute Care Therapies. Organic net sales decreased mainly on the back of last year's consolidation in the ventilation market, that I just mentioned. In Life Science, they had a really strong quarter in terms of deliveries, and they grew organic net sales in all product areas. BetaBags and Sterile Transfer continues to show significant traction and momentum. In Surgical Workflows, the organic net sales increased primarily thanks to growth in Infection Control consumables within service and within our operating table category. With that, we can move over to Page #7, and I hand over to you, Agneta for a moment. Agneta Palmer: Okay. Thank you, Mattias. So overall, the headwind from tariffs and currency continued in the first quarter. Even so, we managed to hold up margins, thanks to continued pricing and productivity. Starting with adjusted gross profit for the group, adjusted gross profit amounted to SEK 3.828 billion in the quarter, heavily impacted by currency and tariffs. Adjusted gross margin was down by 0.7 percentage points in total in spite of healthy contribution from price and mix. If we then look at adjusted EBITA, cleared for currency, adjusted gross profit effect on the EBITA margin was plus 0.3 percentage points, while OpEx adjusted for currency had a negative impact on the margin by about minus 1 percentage points in the quarter. And FX impacted by minus 0.3 percentage points. So all in all, this resulted in an adjusted EBITA of SEK 824 million and a margin of 11.1%. Let's then move to Page 8, please. And here, we can clearly state that we remain in a solid financial position. Free cash flow amounted to SEK 842 million in the quarter. Compared with last year, free cash flow was impacted by improved operating profit and changes in capital. Working capital days continued to be well below 100. We are now at roughly 90 days. On operating return on invested capital, we are at 11.4% on a rolling 12-month basis, which is well above the cost of capital. At the end of Q1, net debt decreased to SEK 9.3 billion. If we adjust for pension liabilities, we are now at SEK 7 billion. This brings us to a leverage of 1.5x adjusted EBITDA, which is well below the 2.5x that we have set as an internal threshold. If we adjust for pension liabilities, leverage is at 1.1x adjusted EBITDA. Cash amounted to approximately SEK 4 billion at the end of the quarter. So all in all, we can conclude that the financial position continues to be strong. Let's now move to Page 9, please, and back to you, Mattias. Mattias Perjos: Okay. Great. Thank you, Agneta. Just a moment then to focus on the impact from tariffs and FX in the quarter. So this was, in total, a drag on adjusted EBITA in Q1 of more than SEK 200 million, so SEK 226 million altogether. Tariffs made up just over SEK 100 million of that. And if we exclude the impact of tariffs and currency, our adjusted EBITA margin in Q1 would have been 12.6%. And there, as you can see, showing then an underlying improvement. As tariffs were first implemented in Q2 of 2025, then we expect the year-on-year comparison to be a little bit cleaner from Q2 and onwards if tariff levels remain. And that's, of course, something we'll continue to update you on. We can then move over to Page #10, please. So I want to talk a little bit more about the long term as well. So zooming out and returning to what we said at the Capital Market update that we had in May of 2024. There, we talked about an adjusted EBITA margin of 16% to 19% by the end of 2028. And I think we're on a steady path of reaching that despite the headwind factors that we have seen, that we were not aware of when we announced this target. The main drivers which will enable this are growth, mix and productivity. From a growth perspective, from regulatory approvals and key strategic product launches such as Cardiohelp II in ECMO that we've talked about here and also launching our low-temp sterilization in the U.S., having the sales restrictions removed for Cardiosave in our Intra-Aortic Balloon Pump business. It's just to mention a few factors here. Specifically, when it comes to Cardiosave, I'm happy to say that we, at the end of last week, got the release for sales in CEE countries in line with the plan for Q2. We also expect that the investment fatigue that we've seen in the pharma industry will improve and some of the decision anxiety that we've seen in the last year will go away here as well. We will also, in addition to this, get our share of the announced U.S. investments and benefit from the recovery in bioprocessing. And of course, we will also continue our diligent and successful work with realizing price increases annually. When it comes to mix, we have been successful in our strategic intent to steer our business towards a continued rotation to high-margin products and consumables. And if possible, we prefer to have products made up of a competent hardware with captive consumables attached to it, similar to what we have in our ECLS offering with Cardiohelp and HLS and in the Sterile Transfer offering with Alpha Ports driving the consumption of BetaBag. Our strong R&D and innovation pipeline is, of course, set to support this. When it comes to productivity, here, we've already done a lot in different parts of the business, and we are still excited that there remain quite a few opportunities across the business as well. One thing to mention, I think, is the heightened extraordinary quality costs connected to the product uplift of Cardiosave and Cardiohelp that is expected now to go down in the second half of 2026 and that we will be on a lower level in 2027 and '28. Furthermore, we will, of course, continue with our production excellence effort, where we also have some very tangible measurable benefits and helping us further optimize our supply chain and remain with an overall tight cost control across the company. So this all supports our assessment that our target for 2028 is still within good reach. Then we can move over to Page 11, please. So for the remainder of 2026, we confirm the financial outlook for 2026. As we all know, there are some geopolitical uncertainties that we need to navigate. But based on the underlying demand and the dialogue that we have with our customers on a daily basis, our expectation remains for an organic net sales growth in the range of 3% to 5%, adjusted for the phaseout of the surgical perfusion product category. Surgical Perfusion is still expected to have some net sales in 2026, but declining from about SEK 250 million last year to SEK 50 million this year. We can then move to Page 13, please. So in terms of summarizing here, the key takeaways from the first quarter. We did achieve organic growth in our top line despite the record quarter last year. Tariffs and FX continue to be a significant headwind, but our underlying performance is improving. Cash flow in the quarter was really strong in the quarter, and our financial position remains solid as well. For 2026, we reiterate our guidance for organic net sales growth of 3% to 5% adjusted for the phaseout of the Surgical Perfusion. And when it comes to our priorities for 2026, you've heard them before, we are focused on addressing the remaining challenges when it comes to quality remediation in Acute Care Therapies. We focus on sustainable productivity improvements and cost consciousness when it comes to navigating the geopolitical uncertainty and also addressing the impact from tariffs. And most importantly, we continue to focus on the work hand-in-hand with our customers, adding value for them and the patients that they serve. With that said, I open up for questions. Operator: [Operator Instructions] The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: A couple of questions. First of all, with regards to the ventilator headwinds you had here in Q1, if I remember correctly, you had pretty good sales development for ventilators also in Q2 last year. So is it fair to assume that the headwind will continue into Q2? That would be my first question. Mattias Perjos: Maybe to some extent, it's not something -- it's not going to be a significant factor, I think, for Q2, but it certainly won't be a big help either. Sten Gustafsson: Okay. Excellent. My second question is regarding Cardiohelp II. And what kind of gross margin should we assume for that product compared to the existing Cardiohelp product? Is it going to be accretive? Or is it fairly similar gross margins on those 2 products? Mattias Perjos: Yes. We don't guide on and disclose gross margin levels on any of our products and Cardiohelp II is no exception. Generally, though, when we work with product development and new launches, we make sure that the products that form the next generation of any therapy or product category have a better gross margin than the generation that they replace, and Cardiohelp II should be no exception to this. Sten Gustafsson: Okay. And one final, if I may. You talk about these lower extraordinary quality costs going forward. Could you please sort of quantify those? I mean we've heard SEK 800 million in the past. And where we are today? How low those will be going forward? Mattias Perjos: Yes. Yes, I think you're right. We said that they peaked at about SEK 800 million in 2024. We saw a small decrease in 2025. We expect another small decrease this year and then a slightly bigger decrease from 2027 onwards. And the end game here is to at least halve those costs. Operator: The next question comes from Erik Cassel from Danske Bank. Erik Cassel: First, I want to get some more color on the composition of the ACT decline. I mean, obviously, you talked about ventilators, but you're also talking about Cardiac Assist, et cetera. And I think last quarter, you said that the demand for Cardiac Assist was quite positive on the hardware side. So I wanted to ask if something has changed on that side. And if you could, if possible, give some more color on how much the ACT Americas part declined by the different parts? Mattias Perjos: Yes. No, thanks for the question. We don't dissect the business that much. What I can say on Cardiac Assist is that we had hoped to be able to resume deliveries in Q1 already of balloon pumps in CEE markets. And that was not the case. We only got the final approval to start this last Friday. So it will be a Q2 event. So that's been a little bit of a drag on sales. And also, it has a direct impact on order intake as well because customers don't order new pumps unless they have received what they're expecting to be delivered. Erik Cassel: Can you say anything on how much the ventilator decline did on that 8.5%? Mattias Perjos: No, we don't disclose subcategory financial parameters, unfortunately. Erik Cassel: But can you say anything if it would have been, say, positive organic growth if it wasn't for ventilators? Mattias Perjos: No, I can't answer that either, unfortunately. Erik Cassel: All right. Fair enough. I got to try. Then on the guidance side, I view it as the wording is a bit softer, perhaps the visibility is worse now and maybe you're even seeing a bit more, say, negative outlook. Can you just talk a bit about what you're seeing for the rest of '26 in terms of the, say, customer behavior and dialogues that you're referring to? Has it become slightly more negative? Or is this just a wording change that I'm dwelling too much on? Mattias Perjos: Yes. No, that was not the intent of the wording change at all. It was really just a way of recognizing that we do operate in a rather volatile environment, and we're mindful of that, but we feel confident reconfirming our guidance here even if the word, semantics, had changed a little bit. Erik Cassel: Okay. Just a last question then. Surgical Workflows, obviously quite strong in terms of order intake, especially for Americas and Digital Health. Is there some specific projects that this relates to that sort of makes it nonrecurring? Or are you seeing a more upbeat environment in the U.S. specifically for Surgical Workflows? Mattias Perjos: It's a bit of both. If you look at DHS, it's always lumpy. I mean they tend to be rather large projects, and we do have that, but there's also a little bit of an underlying better confidence, I think, generally in the market and also, I think in the way we operate in this business as well. We made some tweaks to how we organize ourselves, which hopefully also for the long term has a better, more positive impact. But there's absolutely a bit of -- you cannot call them one-offs because they're not. It's just project business that is a little bit fluctuating by nature. Erik Cassel: Okay. Can I ask one short one? Will you tell us anything on the potential impact of the change in steel content tariffs? Or is that something you're going to not disclose? Agneta Palmer: What we can say there is that it's still under analysis, how it impacts us. It's fairly recent. But the preliminary evaluation is that it's mainly if it hits us. It's components and spare parts, not complete products. And the absolute majority of our exposure is on the complete products. Erik Cassel: So the SEK 500 million for full year still holds, you think? Agneta Palmer: I don't think that we have guided on this, but that sounds like a fair assumption given the current levels, yes. Operator: The next question comes from Filip Wetterqvist from SB1 Markets. Filip Wetterqvist: I have a couple. First one, given recent pricing hikes that we have seen on raw materials such as plastic, steel, aluminum, it seems like you do not see any material effect of this in Q1, and I assume contracts are negotiated a few quarters in advance. But do you anticipate any higher input costs in the coming quarters? Or do you not expect any effect at all from this? Agneta Palmer: Yes. Thank you for that question. If we dissect it a bit into parts. When it comes to freight, which is the more direct near-term impact, we have very limited impact in Q1. But if it's prolonged, yes, there will be some impact in Q2 onwards. When it comes to plastics, et cetera, it's too early to say that we have any effects there. Filip Wetterqvist: Okay. And at the Q4 call, you indicated price increases of around 2% for 2026. Did that materialize here in Q1, meaning the 0.8% organic growth was hampered by lower volumes? Or -- and do you -- are you able to accelerate price increases further there if you see increasing costs here in the coming quarters? Agneta Palmer: Yes. We still stand by that, roughly 2%. It is a gradual rolling during the year. So it's slightly less than that in Q1, but we are progressing well towards that level. Filip Wetterqvist: Okay. But let's say, we see -- so if costs are increasing, you won't be able to translate that onwards to your customers, you still anticipate only a 2% price increase then? Agneta Palmer: This is always an ongoing discussion that we have with the -- all the commercial dynamics and the cost levels that we have. So of course, we will adapt our ways of working if we see that we get higher inflation, but it's not an automatic or sort of something that we can directly pass on. Mattias mentioned it for tariffs and it's similar then for raw material. But we do have very active pricing. Operator: The next question comes from Kristofer Liljeberg from DNB Carnegie. Kristofer Liljeberg-Svensson: I have a few short ones. I hope that's okay. First of all, is it possible to quantify at all the positive effect you expect here from the new ECMO approval in Europe or whether that potential positive effect is more a factor of when and -- yes, when you get the U.S. approval, again? And then could you just clarify a little bit about the Cardiosave status here in Europe and the U.S. filing? And then finally, on tariffs, if it's fair to assume really neutral effect here year-over-year from the second quarter? Mattias Perjos: Yes. I think we can't quantify. But of course, there is a positive effect from the launch of Cardiohelp. I mean this is an important part of our product range. So definitely a net positive, but I can't give you a magnitude of that. When it comes to the Cardiosave status, we got approval to start shipping last Friday. So the first pumps are being delivered in CEE markets this week. And the U.S. filing, there is no change here. We still expect to do that before the half year mark. Agneta Palmer: And then when it comes to tariffs, it's dependent, obviously, on the tariff level, but also on the product mix of imports. But generally speaking, yes, it sounds like a fair assumption to assume that. Operator: [Operator Instructions] The next question comes from David Adlington from JPMorgan. David Adlington: Maybe could you quantify the impact of foreign exchange hedges in Q1, how they roll off through the next 12 months or so? And then secondly, obviously, we're a quarter in now, still no margin guidance. Just wondering if you're willing to give us an idea around how you're seeing margins for the year, whether up, down or sideways? Agneta Palmer: Yes. If we start with FX, we have not changed anything specifically regarding our hedging strategy, and we will not disclose that. But just a reminder, I think we have talked about it on this call before, looking at the natural hedge, around 60% of what we sell in the U.S., we also produce in the U.S. And then the second thing maybe to mention regarding natural hedging and FX exposure is that we work very actively with our payment flows to compensate or offset as much as possible. So those are the 2 things to highlight there, but no quantification of the hedging effects as such. Mattias Perjos: And on the margin guidance, I mean, there's still [Technical Difficulty] said in the presentation, we are confident about the long-term margin guidance of 16% to 19%. David Adlington: Sorry, Mattias, you broke up again. I might have missed the first part of that. Would you mind just repeating the margins for this year? Mattias Perjos: Yes. I just said that we -- there's a lot of uncertainty in the world, as you know. So we are not going to do any margin guidance for 2026. We remain with the top line guidance only, and we remain with the long-term margin guidance of 16% to 19%. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: Yes. I just have a follow-up on ACT. So on ECLS consumables continued to grow despite being up against a rather tough comparison numbers. And I assume there was some flu-related headwinds here given the lower hospitalizations Q1 '26. So I just wonder if there were any one-offs or stocking of consumables that you saw here in the quarter or if it's rather the underlying run rate? Mattias Perjos: You broke up for a second. Can you repeat the question on the ECLS consumables, please? Ludvig Lundgren: Yes. So it seems pretty strong considering the quite tough comparison. So I just wonder if you saw any stocking or one-offs here in the quarter or if it rather reflects the underlying run rate? Mattias Perjos: Yes. No, there were no abnormal events in Q1. I think your analysis of this seems correct. It's a good underlying demand. Ludvig Lundgren: Yes. Okay. And can you just confirm that like the flu-related sales was lower this quarter versus Q1 '25? Mattias Perjos: [indiscernible] confirm that we see the same flu data as you when it comes to hospitalizations. How our customers use the product they buy, whether it's for treating flu or something else, we don't have perfect insight into it. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Mattias Perjos: Okay. Thank you very much. I think I already made the summary before the Q&A. So I just wanted to say thanks, everyone, for joining, and I wish you a good rest of the day. Thank you very much.
Operator: Good morning, and welcome to Forestar Group Inc.’s second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow. If you wish to ask a question during today’s Q&A session, please press [instructions omitted]. Please note this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar Group Inc. Chris Hibbetts: Thank you, Paul. Good morning. And welcome to our call to discuss Forestar Group Inc.’s second quarter results. Before we get started, I want to remind everyone that today’s call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Forestar Group Inc. believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Forestar Group Inc. on the date of this conference call, and we do not undertake any obligation to update or revise any forward-looking statements publicly. Additional information about factors that could lead to material changes in performance is contained in Forestar Group Inc.’s Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.forestar.com, and we plan to file our 10-Q later this week. After this call, we will post an updated investor presentation to our Investor Relations site under Events and Presentations for your reference. I will now turn the call over to Andy Oxley, our President and CEO. Andy Oxley: Thanks, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The Forestar Group Inc. team achieved solid second quarter results, generating revenues of $374.3 million, a 7% increase from the prior-year quarter, on 2,938 lots sold. Our pre-tax income increased 8% from the prior-year quarter to $43.9 million. Our book value per share increased 10% from a year ago to $35.66, and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue. Persistent affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flexibility, which allowed us to end the quarter with more than $1 billion of liquidity. We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise, and a diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively. We will now discuss our second quarter financial results in more detail. Jim. Jim Allen: Thank you, Andy. In the second quarter, net income attributable to Forestar Group Inc. increased 2% to $32.1 million, or $0.63 per diluted share, compared to $31.6 million, or $0.62 per diluted share, in the prior-year quarter. Our pre-tax income increased 8% to $43.9 million, compared to $40.7 million in the second quarter of last year, and our pre-tax profit margin this quarter was 11.7% versus 11.6% in the prior-year quarter. Revenues for the second quarter increased 7% to $374.3 million, compared to $351.0 million in the prior-year quarter. The current quarter includes $42.9 million in tract sales and other revenue, which was primarily from sales of residential and commercial tracts and, to a lesser extent, the sale of a multifamily site. Mark. Mark Walker: We sold 2,938 lots in the quarter, with an average sales price of $112,800. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot-size mix of our deliveries. Our gross profit margin for the quarter was 21.4%, compared to 22.6% for the same quarter last year. The current quarter margin includes $6.3 million of planned option charges related to deposits and pre-acquisition cost write-offs, compared to $0.9 million in the prior-year quarter. Excluding the effect of the net change in write-offs, our current quarter gross margin would have been approximately 22.9%. Chris. Chris Hibbetts: In the second quarter, SG&A expense declined 1% to $37.9 million, or 10.1% as a percentage of revenues, compared to $38.4 million, or 10.9%, in the prior-year quarter. Our headcount decreased 8% from a year ago as we remain focused on efficiently managing SG&A while maintaining our strong operational teams across our national footprint. To support future growth, we expect our headcount to remain relatively flat for the remainder of the year. Jim. Jim Allen: D.R. Horton is our largest and most important customer. Fourteen percent of the homes D.R. Horton started in the past twelve months were on a Forestar Group Inc.-developed lot, with a mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by Forestar Group Inc. We have significant opportunity to grow our market share within D.R. Horton. We also continue to expand our relationships with other homebuilders. Seventeen percent of our second quarter deliveries, or 488 lots, were sold to other customers. We sold lots to 12 other homebuilders this quarter, including three new customers. Mark. Mark Walker: Our lot position at March 31, 2026 was 94,400 lots, of which 63,500, or 67%, were owned, and 30,900, or 33%, were controlled through purchase contracts. 9,300 of our owned lots were finished at quarter-end; the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three- to four-year supply of land and lots and manage development phases to deliver finished lots at the pace that matches the market. At quarter-end, 24,100, or 38%, of our owned lots were under contract to sell. $209 million of hard earnest money deposits secured these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 29% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Forestar Group Inc.’s underwriting criteria for new development projects remains unchanged at a minimum 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. During the second quarter, we invested approximately $279 million in land and land development. Roughly 80% of our investment was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will allow us to return to strong volume growth in future periods. We still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim. Jim Allen: We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with more than $1 billion of liquidity, including an unrestricted cash balance of $362 million and $672 million of available capacity on our undrawn revolving credit facility. During the quarter, we increased the capacity of our senior unsecured revolving credit facility by $50 million. In addition, we collected $130.9 million of reimbursement related to infrastructure costs in utility and improvement districts. Total debt at March 31, 2026 was $793.5 million, with no senior note maturities in the next twelve months. Our net debt-to-capital ratio was 19.2%. We ended the quarter with $1.8 billion of stockholders’ equity, and our book value per share increased 10% from a year ago to $35.66. Forestar Group Inc.’s capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, at floating rates, and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks. Andy Oxley: Thanks, Jim. The Forestar Group Inc. team remained focused on execution in the second quarter, delivering higher revenues and profits and a stronger balance sheet. As outlined in our press release, we are updating our fiscal 2026 lot delivery guidance to 14,000 to 14,500 lots, while maintaining our revenue guidance of $1.6 billion to $1.7 billion. Our teams have a proven track record of adjusting quickly to changing market conditions. We are closely monitoring each of our markets as we strive to balance pace and price and maximize returns for each project. Our national footprint and more than 200 active projects represent a strategic advantage, providing flexibility to allocate capital based on local market conditions. While home affordability constraints and cautious homebuyers are expected to remain near-term headwinds for home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. Consistent execution of our strategic and operational plan, combined with a constrained supply of finished lots across much of our diverse national footprint, positions us well for further success. With a clear strategy, a strong team, and a solid operational and financial foundation, we are optimistic about Forestar Group Inc.’s future. Paul, at this time, we will open the line for questions. Operator: Thank you. At this time, we will be conducting a question-and-answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question today will be from Ryan Gilbert from BTIG. Ryan, your line is live. Analyst: Thanks. Hi. Good morning, guys. Was hoping you could talk a little bit more about your goals for market share in the context of the reduction that we have seen in controlled lots, I guess this quarter, but then also the last couple quarters as well? Andy Oxley: Good morning. What we have encountered is a lot of lots in the homebuilders’ portfolios that they gradually worked through in Q4 and Q1. With accelerating starts and sales in Q2, we anticipate going back to a more robust lot closing pattern in 2026. Analyst: Okay. Got it. And then I was hoping you could expand a bit on the land option charges that you incurred in the quarter. Was that concentrated in a single community or a handful of communities? Was it more widespread? And how are you thinking about that line going forward? Andy Oxley: It was in a handful of communities, but the team remains focused and disciplined on our personal land acquisitions. If a project falls outside our underwriting standards, the team works to bring that project back in line, or we simply move on from the project. As we evaluate these month to month and quarter to quarter, the team tries to work them back into the queue, but our pipeline remains very robust, so we do not have to purchase assets that do not meet our standards. Analyst: Okay. Got it. Last one for me: given the cash position and where the stock is trading, what is your appetite, or how are you thinking about share repurchases here? Jim Allen: We continue to believe that our best use of cash is investing for future growth of the business. However, maintaining strong liquidity gives us flexibility to respond to further changes in market conditions, as well as the ability to take advantage of opportunities as they arise. Analyst: Okay. Thanks very much. Operator: Thank you. Again, that will be star one on your phone at this time. The next question is coming from Trevor Allinson from Wolfe Research. Trevor, your line is live. Trevor Allinson: Hi. Good morning. Thank you for taking my questions. First question is on demand trends you have seen from other builders, other than D.R. Horton. I believe your sales to those builders were down close to 50% year-over-year, and if I recall correctly, last quarter they were up. Can you just talk about the trends there? Is that just a comp issue due to sales to a lot banker? Any color on demand from those other customers would be helpful. Andy Oxley: We are still seeing and hearing strong demand from other builders, so that remains strong. To my earlier point, the industry continues to work down inventory levels, so I think it is really based on the cadence of when those communities are coming online. Jim Allen: And to your point, last year we did have 362 lots that were sold to a lot banker, so that influenced the number from last year. Trevor Allinson: Okay. Gotcha. Makes sense. And then the next question on fuel prices, obviously moving higher across the country. Just remind us what portion of development costs fuel accounts for. Are you able to pass those along to your customers, or any concerns about gross margins as we get into the back half of this year and into early next year from higher fuel costs? Mark Walker: As of today, we are not seeing cost increases due to fuel charges, but we are closely monitoring it. Contractor availability continues to free up, which is contributing to cost and time improvements. Trevor Allinson: Okay. Got it. Thank you for all the color, and good luck moving forward. Operator: Thank you. There are no other questions at this time. I would now like to hand the call back to Andy Oxley for any closing remarks. Andy Oxley: Thank you, Paul, and thank you to everyone on the Forestar Group Inc. team for your focus and hard work. Stay disciplined, flexible, and opportunistic as we continue to consolidate market share. We appreciate everyone’s time on the call today and look forward to speaking with you again to share our third quarter results on Tuesday, July 21, 2026. Operator: Thank you. This does conclude today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Welcome to Wintrust Financial Corporation's First Quarter 2026 Earnings Conference Call. A review of the results will be made by Timothy S. Crane, President and Chief Executive Officer; David Alan Dykstra, Vice Chairman and Chief Operating Officer; and Richard B. Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question and answer session. During the course of today's call, Wintrust Financial Corporation management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference call over to Timothy S. Crane. Timothy S. Crane: Good morning, and thank you for joining us for Wintrust Financial Corporation's First Quarter 2026 Earnings Call. In addition to the introductions that the operator made, I am joined by our Chief Financial Officer, David L. Stoehr, and our Chief Legal Officer, Kate Bogie. We will follow our usual format this morning. I will begin with a few highlights. David Alan Dykstra will review the financial results. Richard B. Murphy will share some thoughts on loan activity and credit quality. I will be back with some closing thoughts, including a look at expectations for the second quarter and generally for the remainder of the year. As always, we will be happy to take your questions. Before we begin, I would like to bring your attention to some changes to the presentation document that accompanies the release of our results. We have modified the design, making some updates to how we present the data based on valuable feedback we have received from many of you. We hope you find the format helpful and informative as we continue to try to provide clear information that highlights our strong market position and our disciplined operating approach. Looking at the first quarter 2026 results, I am very pleased that we delivered a fifth consecutive quarter of record net income. Overall, it was a very solid and straightforward quarter. We continue to focus on our strategic priorities: providing an exceptional customer experience, delivering disciplined and strategic growth across our businesses with a focus on prudent risk management, and investing to build upon our foundation to drive a successful future. That said, despite two fewer days in the quarter, we achieved net income of $227 million, up from $223 million last quarter and $189 million in 2025. While David Alan Dykstra and Richard B. Murphy will provide more detail, in summary, net interest income, net interest margin, and both loan and deposit growth were in line with our expectations. We delivered solid growth in noninterest income, led by our wealth management business. Expenses were well managed, and credit quality remained stable. I would highlight that all of our growth is organic. We continue to see good new customer acquisition and market momentum as our clients appreciate our differentiated approach and relentless focus on customer service. In fact, during the quarter, we were recognized once again by J.D. Power for Illinois banking services and by Coalition Greenwich with multiple awards for our commercial middle market banking services. These awards are evidence of our continued success in delivering for our clients in ways that many of our competitors cannot. Overall, a solid quarter. Let me turn it over to David. David Alan Dykstra: Great. Thanks, Tim. Let me start with the balance sheet. Specifically, deposit growth was right at $1.2 billion during the quarter, representing an 8% increase over the prior quarter on an annualized basis. This deposit growth helped to fund continued solid first quarter loan growth of approximately $1 billion, representing a 7% growth rate on an annualized basis. Yields and rates on the major balance sheet categories were slightly lower because of the recent market declines in short-term interest rates, with loan yields moving down 13 basis points in the first quarter from the prior quarter, while interest-bearing deposit costs declined 16 basis points from the prior quarter, thus resulting in a slightly improved gross spread. I would like to note that loan growth during the quarter was heavily back-end loaded; accordingly, period-end loans were approximately $1.2 billion higher than average loans for the first quarter. That is giving us a great start on achieving higher average earning assets in 2026. Turning to the income statement, this was a very solid operating quarter, producing record levels of quarterly net income. Net interest income declined slightly compared to 2025. The benefit to net interest income from an increase of $555 million in average earning asset growth and a 2 basis point increase in the net interest margin was almost enough to offset having two fewer days in the quarter. The net interest margin was 3.56% for the first quarter, and the two fewer days in the quarter positively impacted net interest margin by 2 basis points. The net interest margin has ranged from 3.50% to 3.59% during the last nine quarters, exhibiting sustainability of our net interest margin. The provision for credit losses was relatively consistent with prior quarters, remaining in the $20 million to $30 million range experienced in all the quarterly periods of 2025 as the overall credit environment or asset quality has remained stable as we enter 2026. Regarding other noninterest income and noninterest expense sections, total noninterest income amounted to $134.1 million in the first quarter, which was an increase from the $130.4 million recorded in the prior quarter. The increase was primarily a result of strong wealth management and operating lease revenues. Mortgage banking activity continued to be subdued, and production-related volumes and revenue were essentially unchanged from the prior quarter. As to the noninterest expense categories, total noninterest expenses were $382.6 million in the first quarter, which was slightly lower than the $384.5 million recorded in the prior quarter. Increases in salaries and employee benefits were primarily due to annual merit increases and were offset by lower OREO expenses, travel and entertainment, and various other small expense decreases. Overall, expenses were very well controlled. Additionally, both the quarterly net overhead ratio and efficiency ratio improved slightly relative to the prior quarter. In summary, I will reiterate this was a very solid quarter. The company accomplished good loan and deposit growth, a stable net interest margin, a record level of net income, sustained growth in tangible book value per share, and a continued low level of nonperforming assets. With that, I will conclude my comments and turn it over to Richard B. Murphy to discuss credit. Richard B. Murphy: Thanks, David. As detailed on slide 6 of the investor presentation, the solid loan growth of approximately $966 million, or 7% on an annualized basis, was broad-based. Commercial loans grew by $719 million, including growth in mortgage warehouse of approximately $286 million. Commercial real estate loans grew by $222 million. The Wintrust Life Finance team continued to build their portfolio by $103 million. Our residential mortgage group also had a very solid quarter. From a credit quality perspective, as detailed on slide 14, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Nonperforming loans decreased slightly from $185.8 million, or 0.35% of total loans, to $182.8 million, or 0.34% of total loans, and remain at very manageable levels. Charge-offs for the quarter were 14 basis points, down from 17 basis points in the prior quarter. We believe that the level of NPLs and charge-offs in the first quarter reflects a stable credit environment as evidenced by the chart of historical nonperforming asset levels on slide 15 and the consistent level of our special mention and substandard loans on slide 14. This quarter is another example of our commitment to identify problems early and charge them down where appropriate. Our goal, as always, is to stay ahead of any credit challenges. Turning to slide 21, I want to briefly highlight our exposure to nondepository financial institutions, which totals approximately $3.2 billion, or about 6% of our overall loan portfolio. Importantly, the majority of this exposure is in areas where we have longstanding experience and strong performance. Of our $3.2 billion exposure, approximately $1.8 billion is tied to our mortgage warehouse business, a line of business we have been in for over 30 years with deep client relationships, robust operating systems, and well-established risk management practices. In addition, about $341 million consists of capital call facilities, which are structured with strong underlying investor support and have historically demonstrated very favorable credit characteristics. The balance of the portfolio is broadly diversified across a granular group of relationships with leasing companies, captive finance companies associated with commercial borrowers, insurance carriers, and broker-dealers. Overall, we view this portfolio as well diversified and aligned with our disciplined approach to specialty finance focused on areas where we have expertise, strong structures, and a track record of consistent performance. Also, as noted in the last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total loan portfolio. As detailed on slide 18, we continue to see signs of stabilization during the first quarter as CRE NPLs remained at very low levels, decreasing from 0.18% to 0.12%, and CRE charge-offs continue to remain at historically low levels. On slide 24, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at $1.7 billion, or 11.7% of our total CRE portfolio and only 3.1% of our total loan portfolio. We monitor this portfolio very closely, and we will continue to perform deep-dive analysis on a quarterly basis. The most recent deep-dive analysis showed very consistent results when compared to prior quarters. Finally, as we have discussed on previous calls, our team stays in very close contact with our customers, and those conversations continue to reflect measured optimism around the business climate. That concludes my comments on credit, and I will turn it back to Tim. Timothy S. Crane: Great. Thank you, Rich. At the beginning of the call, I briefly mentioned our three strategic priorities: delivering exceptional customer service; generating disciplined and strategic growth across our businesses with prudent risk management—and I would add through all market cycles; and investing in our foundation and the future of our bank. I want to spend just one minute on the first one. Whether high-tech or high-touch, we offer a more personalized level of service than our larger bank or money center bank competitors. And relative to our smaller competitors, we offer more tools and sophistication to meet their needs. As a result, we occupy a unique and advantaged position in what we believe to be attractive markets and in attractive businesses. In the second half of the year, we will open several branches to continue to expand market share and to build franchise value in key communities. We will also supplement that with continued investment in the digital capabilities that provide flexibility and convenience for our customers. For us, it is all about the customer. This unwavering focus is largely what has led to the consistent results we have delivered. So what does this mean for the second quarter, and to a degree for the remainder of the year? We expect outsized loan growth in the second quarter largely from our property and casualty premium finance business, which is seasonally very strong in Q2. Longer term, our pipelines are solid, and we expect to deliver mid- to high-single-digit loan growth for the remainder of the year. Combined with the stable margin David mentioned earlier at around 3.5%, we expect solid net interest income growth in the coming quarters. As always, we will work hard to fund our loan growth with a similar level of deposit growth, expanding our base of deposit clients and building franchise value. Expenses will be seasonally higher in Q2 as a result of a full quarter of annual salary increases, increased marketing expense, and you can expect a normalized tax rate for the remainder of the year. That said, we expect overall expenses will be well managed in line with our revenue growth and will result in operating leverage for the year. With respect to capital, we have reviewed the new proposals. With the proposed standardized approach, we estimate an approximate 6% to 7% reduction in risk-weighted assets, or said differently, about a 60 to 70 basis point improvement in CET1 if adopted in their present form. We are evaluating the ERBA approach, which is a bit more involved and requires some assumptions at this point. If it turns out to be more beneficial, it would likely be a result of the treatment on investment grade loans and some of the retail activity. Overall, we feel good about our momentum and believe we are well positioned for the remainder of 2026. One final note, I would like to take a moment to thank two of our longstanding board members who will conclude their service at our annual meeting next month. Pat Hackett joined our board in 2008 and has served as chairman of the board for the past nine years. And Bill Doyle joined the board in 2017. Both Pat and Bill have provided invaluable guidance over the years, and we are grateful for all they have done to help us deliver value for our shareholders. I also want to congratulate Brian Kenny, who is expected to succeed Pat as chairman pending his reelection at the upcoming annual meeting. We are very fortunate to have an engaged and thoughtful group of directors. Their perspective and insights are helpful to me and our entire management team and are certainly a big part of our success. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Our first question comes from the line of Jon Glenn Arfstrom of RBC Capital Markets. Your line is open, Jon. Jon Glenn Arfstrom: Good morning. Maybe, Rich or Tim, a question on the period-end loan growth you talked about, with period-end being higher than average. Anything you would call out in terms of the trends from early in the quarter versus the period-end strength? And then any impacts you have seen from some of the macro uncertainty in terms of the pipelines? Richard B. Murphy: We had some payoffs at the first part of the year that subdued some of that growth. It was just timing, nothing more than that. We had good momentum through the quarter. We did have some strong warehouse line growth right at the end of the quarter that helped as well. I would not say anything atypical—just timing on prepayments and some end-of-quarter warehouse line growth. As it relates to overall sentiment, we still feel pretty good. The customers we talk to feel the economy, certainly in the Midwest, still feels pretty good. Our pipelines in the C&I space right now are probably as good as they have ever been. Part of that is optimism; part of it is where we sit relative to the competition in Chicago. Right now, it feels like we are in a pretty good spot there. Jon Glenn Arfstrom: Maybe for you, David, on mortgage. It is probably the quarter to ask about mortgage given some of the typical seasonality, but I think it was a little better than I expected. What outlook do you have for the typical seasonal increase in volumes, and warehouse balances as well? David Alan Dykstra: It was a little bit better first quarter than we might expect because during part of the quarter, rates got down below 6% for a little bit of time, so applications picked up. Then rates popped back up and applications came down to scraping the bottom again. We are hopeful about a good spring buying season again this year, but given current rates, we are not seeing a huge pickup yet. We think rates have to get down around 6% or below for there to be any meaningful pickup. Barring that, we probably stick with mortgage revenue in the $20 million to $30 million range, as we have been fairly consistently for a number of quarters; about half of that is servicing income. For mortgage warehouse, that will depend on rates. If the 10-year comes down and mortgage rates get close to 6%, we should do pretty well; if they stay in the mid-6% range, it is probably subdued. Timothy S. Crane: I would only add on the mortgage warehouse that our growth is a little larger there than mortgage in general because we have taken share from some competitors and continue to add very high-quality, generally larger, mortgage originators. Jon Glenn Arfstrom: Appreciate it. Timothy S. Crane: Thanks, Jon. Operator: Thank you. Our next question comes from the line of Nathan James Race of Piper Sandler. Nathan James Race: Tim, going back to your comments around the insurance finance portfolio and the outsized growth that you expect in Q2. Overall loan growth was, I think, 19% in-quarter annualized in the second quarter of last year led by the P&C portfolio. Are you seeing any softening in volumes given what is going on in the P&C market these days? And what are you seeing within pricing as well within that book? Timothy S. Crane: We do not have as much tailwind as we have had from premium growth in prior years. I think premiums are pretty flat to maybe up slightly as opposed to up quite a bit in prior periods, so that will play a little role. But we continue to grow units, which is encouraging for the growth of our business. Pricing is fairly rational in that market. A lot of these are smaller loans where clients are managing cash flow, and small rate differences do not move it much. We continue to expect a good second quarter from a volume standpoint, and pricing is rational. David Alan Dykstra: We have made significant investments in technology associated with that business, and the volume reflects that. Our customers see us as the go-to provider in that space. The overall market can move up or down; our job is to be the premier provider in that space, and it continues to show in the numbers. Nathan James Race: Great. For David, could you provide a guidepost for expenses in light of seasonality and the full-quarter impact of increases within the comp line for the second quarter? Are you still thinking about mid-single-digit year-over-year growth for 2026? David Alan Dykstra: The first quarter tends to be a low expense quarter. The last three years, we have seen it dip a little from the fourth quarter—that trend is consistent. Our outlook is mid-single-digit year-over-year expense growth, 2026 versus 2025. We generally have a pickup in the second and third quarters because of advertising and marketing spends for baseball and summertime sponsorships. We also have a full quarter of the base salary increase that went into effect February 1 versus two months in Q1. T&E is seasonally low in Q1, so expect a little increase there. If you look at increases from prior years’ second quarters directionally, that is a guide to what to expect. Nathan James Race: On the margin, can it grind higher from here if the Fed remains on pause, particularly with some hedges rolling off and more rational deposit pricing competition? I imagine new loan production is accretive to the portfolio yield of about 6.14% coming out of the quarter. David Alan Dykstra: We think we are fairly neutral on the margin now even if rates go up or down one or two times. You will notice in the deck we added three new swaps during the quarter, with swap rates in the mid-3% range up into the 3.60s—very close to one-month SOFR. We continue to replace swaps out into the future to manage the margin to stay neutral in the 3.50s range, which we think is prudent. Loans are coming on in the low 6% range and deposits will be relatively flat, so we think we hold yields and rates and keep the margin relatively flat in the 3.50s going forward. Nathan James Race: And just to clarify, is incremental deposit growth neutral to your all-in interest-bearing deposit costs? David Alan Dykstra: I would think loan rates and deposit rates will be relatively consistent next quarter barring some move by the Fed and market rates. Nathan James Race: Understood. Appreciate the color. Congrats on another great quarter. Operator: Thank you. Our next question comes from the line of Analyst from TD Cowen. Please go ahead. Analyst: Not only are your period-end loans almost $1.2 billion above your average for the quarter, but your period-end noninterest-bearing deposits are also $1.1 billion above the average. I would assume a lot of that is you taking market share with your service as a differentiator. Should we expect any adjustments in the second quarter, or is that a good run rate heading into Q2? Timothy S. Crane: A couple of things. You are correct—we continue to win business in the market and grow our deposit base. Quarter-end is a little bit lumpy with respect to noninterest-bearing deposits, and the better way to look at that is average noninterest-bearing deposits over the period. It will continue to move around a little bit, but we had a very nice quarter-end and continue to build the deposit franchise. Analyst: Thank you. With NIM in the 3.5% handle for the rest of 2026, NII in Q2 should benefit a lot from strong period-end balances. Double-digit NII growth in 2026 does not seem unrealistic. Is there anything I am missing? Would you still look for mid-single-digit expense growth if that were the case? How should we think about the level of POL you want to achieve for the year? David Alan Dykstra: If we have stronger loan growth, we do not expect a significant increase in expenses. Our infrastructure can handle that. Q2 will be a very strong quarter because of the seasonality of premium finance loans—generally plus or minus $1 billion in Q2 just from premium finance. We expect a very strong Q2, which should be above our range. Looking out to the third and fourth quarters, given the volatile interest rate environment, we still stay within mid- to high-single-digit year expectations for the year. It is possible the economy keeps plugging along and we do better than expected, but we have consistently thought the pipelines and business plan produce at least mid- to high-single-digit loan growth, likely the higher end of that range given results so far. Operator: Our next question comes from the line of David John Chiaverini of Jefferies. Please go ahead, David. David John Chiaverini: Thanks. I wanted to drill into deposit competition. We are hearing mixed messages, with one of the larger banks in the Midwest saying competition is fairly intense. Is this impacting Wintrust Financial Corporation much? Timothy S. Crane: It is still fairly reasonable in Chicago. We have strong market share in three markets: Southeastern Wisconsin, Northern Illinois/Chicago area, and Grand Rapids. Pricing is rational—promotional CDs around 4%, promotional money market in the low 3% range. We are not seeing anything atypical at this point, though we appreciate that some other Midwest markets may be a little frothy. It feels okay to us. David John Chiaverini: Thanks. On expenses and positive operating leverage, I think you have spoken previously about approximately 200 basis points for this year. Is that still the expectation or could we do better? Timothy S. Crane: We had a strong first quarter and expect a good second quarter. We will see. We continue to invest to position the bank for growth. The 200 basis points is not out of the question, and we would work to improve on that. Operator: Our next question comes from the line of Analyst from Stephens Inc. Please go ahead. Analyst: Good morning. On credit, I noticed special mention increased about 20% during the quarter. It looks like it stemmed from the commercial portfolio. Is that accurate? If not, could you expand on that increase? Richard B. Murphy: That is accurate; it is in the commercial portfolio. It is hard when you look at those numbers because levels are low, so periodic increases draw attention. We are very active in our loan ratings, and when customers have a bit of a miss in a quarter, we will adjust. There is nothing systemic here—more one-off situations across a couple of customers, not concentrated by industry. We anticipate it will probably hang around this level for the next few quarters. Customers generally are operating with reasonable results, so nothing to read into it. Analyst: Thanks. On fees, operating lease income stepped up. Historically it is not abnormal to see one or two quarters step up and then go back down. On a go-forward basis, should we look at that as more of a $15–$16 million run rate, or is this $19 million the new rate? David Alan Dykstra: It is probably somewhere between $16 million and $19 million. Occasionally, you get gains on sales during the quarter—normal course of business. They happen on a recurring basis, but you cannot always judge the size of them each quarter. Not out of the question it could be $19 million again next quarter, but somewhere in between is a good bet. Operator: Our next question comes from the line of Jeffrey Allen Rulis of D.A. Davidson. Please go ahead, Jeff. Jeffrey Allen Rulis: Good morning. Sticking on fee income, the wealth management side was pretty impressive. At about $42 million, that is strong. What is the outlook from here for this year? Timothy S. Crane: A really nice quarter in a business we like and are growing steadily. There is a seasonal element to the strong growth this quarter that accounts for a little more revenue than we would expect in coming quarters. Overall, good news and momentum. As a better go-forward number, look for something between the fourth quarter and the first quarter. Jeffrey Allen Rulis: Thanks. And checking in on M&A conversations as you target smaller institutions—what is the appetite and level of conversations? Timothy S. Crane: Not much change since we last spoke. Some high-level conversations that I would characterize as exploration. No change to our posture—we are a disciplined and skilled acquirer. We will look at opportunities with good strategic and cultural fit and are well positioned to take advantage if they present themselves. Operator: Our next question comes from the line of Benjamin Tyson Gerlinger of Citi. Please go ahead, Ben. Benjamin Tyson Gerlinger: In your prepared remarks, I think you said “several” branches. Were these in Chicago? And for David, I am assuming that is in the expense guide you provided? Timothy S. Crane: I said “several,” not seven. We have new branch activity in each of our three markets for the second half of the year. In some cases, these are sub-markets we are not in; in other cases, opportunistic builds as populations move. These are nice opportunities that help build out the franchise and deposit base. David Alan Dykstra: And they are included in our expense forecast. Benjamin Tyson Gerlinger: With these new branches, should we expect intentional marketing or over-market rates to spin up deposits faster given branches take roughly three to four years to breakeven? Timothy S. Crane: When we enter new markets, we want to be aggressive and build the size of those branches quickly. I do not think on an overall basis it will change the trajectory of the financials in a way that is easily recognizable, but we will be aggressive in those markets. Operator: Our next question comes from the line of Jared David Shaw of Barclays. Please go ahead, Jared. Jared David Shaw: Listening to the optimism around loan growth and a stable margin, mid- to high-single-digit revenue growth feels conservative. Is that the right way to think about it, with a little conservatism built in on economic uncertainty? Or as we get through Q2 and the premium finance benefits, do Q3 and Q4 tail off a bit? Timothy S. Crane: We have visibility to a very good start to Q2 and the seasonal P&C business. Pipelines look good for the second half. If that continues, we might be on the high end—we are certainly working to be on the high end. But there is uncertainty with some geopolitical issues. Our clients are cautiously optimistic, but beyond six months, visibility gets less clear. Jared David Shaw: On capital, how should we think about capital continuing to grow from here? If there is not a deal, is there a limit to how high you want it to go near to mid-term? Timothy S. Crane: We ended the quarter with CET1 at 10.4%. With substantial growth in the second quarter, that number probably will not move much, and if we do really well, it might move down a little. We would expect to grow CET1 the remainder of the year at mid- to high-single-digit loan growth. Once we cross about 10.5%, and depending on what happens with the proposals, we will evaluate appropriate capital levels and make decisions. Our order remains: organic growth; if we find an appropriate acquisition, we may need capital; and we have an authorization in place for stock buybacks if we ended up with a lot more capital. Operator: Our next question comes from the line of Analyst from Truist. Your line is open. Analyst: If no M&A emerges, with some activity around your markets, are there opportunities you are watching for team hires, de novo market expansion, or opportunistic client acquisitions? Any benefit from M&A happening around you right now? Timothy S. Crane: We always look for talented people to hire; that tends to happen when someone is frustrated with their ability to take care of customers at their institution. We have had some success there, though we typically do not highlight it on these calls. We are excited about de novo expansion; the communities we will enter are attractive and represent good opportunities. On M&A, it happens when it happens—we will continue to talk to institutions that are a cultural and strategic fit. I would characterize the current state as more exploration than serious conversation, though that can change. Analyst: On expenses, to clarify, the mid-single digits is full-year 2026 versus full-year 2025, not off the fourth-quarter annualized base? David Alan Dykstra: Correct—full year 2026 versus full year 2025, mid-single digits. Operator: Our next question comes from the line of Christopher Edward McGratty of KBW. Your line is open, Christopher. Christopher Edward McGratty: Good morning. On capital, rating agencies are one of the constituents to be mindful of as you consider Basel III opportunities. How important is the TCE ratio over the next couple of years? Any thoughts on balancing the ratios? David Alan Dykstra: The rating agencies acknowledge that our capital levels are sufficient given our risk profile. About a third of our portfolio is premium finance, which is low risk, and life finance, which has been zero basis points of loss over the years. From a risk-adjusted perspective, our capital is more than sufficient, and the rating agencies understand that. Our ratings have stayed stable and our capital has been growing. Even if we did a buyback and brought that down a little, we have room. We are comfortable with our capital levels and with how the rating agencies look at it. Christopher Edward McGratty: Within the NII expectations, what is your deposit mix outlook? DDA has grown on an unaveraged basis pretty solidly in the last six months. Any seasonal patterns and expectations? David Alan Dykstra: As Tim said, the better way to look at DDA is averages, because at quarter- and year-ends there are fluctuations. I would suspect the mix will stay relatively the same. In good growth quarters, we tend to add more interest-bearing deposits than noninterest-bearing deposits, but the absolute dollar amount of DDA should stay relatively consistent on an average basis and then grow as we bring more customers in. Beyond that, interest-bearing growth will be a little faster than noninterest-bearing simply to support loan growth. I would not expect big changes in the mix. Operator: I would now like to turn the conference back to Timothy S. Crane for closing remarks. Timothy S. Crane: Thank you. Again, a good start to the year. We feel good about the outlook for 2026, and that is really a tribute to the great team we have at Wintrust Financial Corporation. They are very focused on our strategic priorities. I want to thank them for all they do for the customers and communities in which we operate and, most importantly, our shareholders. Thank you, and hope everybody has a nice day. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Goodfood Q2 2026 Earnings Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, April 21, at 8:00 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation. I would like to turn the meeting over to your host for today's call, Selim Bassoul, Goodfood Chief Executive Officer. Mr. Bassoul, you may proceed. Selim Bassoul: S [Foreign Language] Good morning, everyone. Welcome to our Goodfood earnings call in which we will present our results for the second quarter of fiscal 2026. You can find our press release and other filings on our website and SEDAR+ and all figures on this call are in Canadian unless otherwise noted. With me today are Najib Maalouf, our newly appointed President and Chief Operating Officer; Vanessa Hadida, our Vice President of Finance; and Ross Aouameur, our outgoing Chief Financial Officer. Before we begin, I wanted to highlight two things. First, Najib and I joined Goodfood with a clear mandate: stabilize the business, protect cash and rebuild discipline. That work is underway, and albeit today's results will show the impact of a license suspension, we have made significant strides in advancing our mandate. Also, for fiscal 2026, both Najib and I have made the deliberate decision to forgo our base salaries. This is a voluntary choice. Our employment agreements remain unchanged, but we believe that in this phase of the company's transformation, accountability needs to start at the top. This is not a signal that we expect others to do the same. Our priority is to build a stronger, more resilient company, one that creates long-term opportunities for our teams, delivers for our customers and earn the trust of our shareholders. The second thing I wanted to highlight is that today is the last earnings call our Chief Financial Officer. I want to recognize Ross for his strong leadership and disciplined financial stewardship over the years. He has been instrumental in the transition, and we wish him continued success in his upcoming next chapter. I will now turn it over to Najib to begin our review of the quarter with Slide 3. Najib Maalouf: Thank you, Selim. First, I wish to say that it is a privilege to be serving alongside you one more time. Slide #3 captures the reality of the quarter. We are executing a necessary reset while absorbing short-term disruption. During Q2, operational factors, including a temporary regulatory-related disruption impacted order volumes and created cost inefficiencies, particularly in logistics. These pressures were real that they were also temporary. More importantly, they accelerated our execution. We responded quickly with disciplined cost actions, namely reducing marketing intensity, optimizing head count and tightening our focus on profitable demand. As a result, we continue to see strength in average order value and customer quality. At the same time, the reset is well underway. We are simplifying the operating model, removing complexity, aligning the cost structure to current volumes and focusing the business on core profitability. In parallel, we are sharpening the product offering, improvements in ingredient quality, meaningful increase in portion sizes and faster recipe cook time to 20 minutes or less are designed to delight customers and in turn, better retention and increase wallet share from our most engaged customers. So while Q2 reflects pressure, it also reflects progress. The actions we're taking are deliberate, structural and focus on improving the earnings profile of the business. I'll now turn it to Vanessa to walk through the financials. Vanessa Hadida: Thank you, Najib. As shown on Slide 4, net sales and active customers declined year-over-year reaching $22.5 million and $59,000, respectively. These figures reflect three primary factors: the temporary license disruption during the quarter, lower order frequency, and our intentional pullback in marketing and incentives. The reduction in marketing and coupon intensity is a conscious trade-off. We are prioritizing revenue quality over volume and that is reflected in the continued increase in net sales per active customers year-over-year, reaching $382 higher basket sizes and lower discounting are driving the improved unit economics. This is an important point. While the top line is lower, the underlying revenue base is becoming more efficient and more profitable on a per customer basis. I will now turn to Slide 5 to discuss margins and profitability. Profitability in the quarter was impacted by a combination of higher shipping and labor costs and lower fixed cost absorption due to the reduced volume as a result of a temporary license suspension. As such, gross profit was $7 million for a gross margin of 30.6%. These pressures resulted in margin compression and negative adjusted EBITDA for the quarter to the tune of negative $1 million. That said, we view a significant portion of these results as transitional in nature rather than a structural change. Indeed, when the license suspension occurred, we shipped Ontario orders from our Calgary facility, which is significantly more costly than shipping from our Montreal facility, which we have now resumed. Of course, the current operating environment with heightened fuel cost and food inflation remains a meaningful headwind. We also have already taken action to address these cost drivers, both through operational simplification, tighter cost control and pricing, which we expect to support margin stabilization going forward. Moving now to Slide 6. Cash flow in the quarter reflects the impact of profitability as well as working capital timing with certain payments shifting into Q2. Importantly, capital expenditures remain tightly controlled, and we continue to operate with a disciplined approach to cash management. Our focus is clear: improving cash generation through better margins controlled investments and continued working capital discipline. I will now turn to Slide 7. The key takeaway from this slide is that Q2 reflects a combination of lower scale and temporary cost pressures. At the same time, the results reinforce why our current priorities, cost discipline, margin protection and cash generation are the right ones. We are actively addressing the drivers of performance and the actions underway are designed to improve both profitability and liquidity over time. With that, I will now pass it back to Najib to walk through our outlook. Najib Maalouf: Thank you, Vanessa. Let's now turn to Slide 8. Our path forward is focused and disciplined. First, on the operating model. We're simplifying the business and aligning the cost structure to current demand levels. We're not relying on a market recovery to improve performance. We are designing the model to perform under today's conditions. Second, on the product. We are repositioning the offering around value, quality and convenience. We have introduced a simpler menu that is designed to fit our customers' busy lives. We also increased portion sizes and have sourced better ingredients to ensure the consistent quality of our subscribers' experience. This is already contributing to a stronger basket size and is expected to support retention and lifetime value. Third, on capital and the balance sheet, our priority is consistent cash generation and liquidity preservation. Every dollar of capital is being allocated with discipline with a clear objective of maintaining flexibility. And fourth, on growth, we will remain selective. We see opportunities in adjacent categories such as heat and eat, but we will pursue them in a measured way with a strict focus on returns and cash flow. The common thread across all of these priorities is discipline. We're simplifying the business, improving execution and positioning Goodfood to generate more consistent and sustainable financial performance. I will now turn it back to Selim for closing remarks. Selim Bassoul: Thanks, Najib. This quarter was not about optics. It was about action. We addressed operational issues, reduced complexity and reinforce discipline across the organization. We are running the business with a clear set of priorities: protect margins generate cash and maintain balance sheet flexibility. We have $44 million of convertible debt on the balance sheet with large interest payments that is hindering our transformation and ability to invest in the business. We are focused on strengthening the business while evaluating a range of financial alternatives to address our debt situation and enhance long-term value. We are not depending on external improvements to deliver results. We are focused on what we control, which are execution cost structure and product relevance. This is how we will rebuild performance and create long-term shareholder value. With that, I will now turn it over to the operator for Q&A. Operator: [Operator Instructions] There are no questions at this time. I will now turn the call over to management for closing remarks. Selim Bassoul: Thank you for joining us on this call. We look forward to speaking with you again at our next call. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Welcome to Getinge Q1 Report 2026 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead. Mattias Perjos: Thanks, and welcome, everyone. Thanks for joining the call today. As mentioned in the intro here, it's me and our CFO, Agneta Palmer, with you today. And in today's conference, we'll go through performance and some of the highlights in the first quarter of 2026 before opening up for a Q&A. So let's move directly to Page #2, please. And I'd like to start by looking at the development of some of our strategic KPIs. And as you can see here, it's evident that we continue to clearly track in line with plan to increase the share of sales from recurring revenue and also accelerating the share of sales from higher-margin products like, for example, our ECLS offering, our consumables in Infection Control and our BetaBags within the Sterile Transfer product category. This is all supported, of course, by solid and effective quality processes. And if we look at the specifics here, you can see that sales from recurring revenue continue to make up 2/3 and high-margin products closing in on about 70% right now. When it comes to quality, the number of field actions in relation to sales has decreased significantly, and we see this positive trend sequentially continue also into the beginning of 2026. And these improvements, we always act with -- in line with thinking of responsible leverage and an attractive long-term return on invested capital. We can move to Page #3, please. So if we then look at some of the key takeaways from the first quarter, we managed to beat last year's record quarter and grow top line organically. Net sales grew by 0.8% organically with positive development specifically in Life Science and in Surgical Workflows. And on the order intake front, we saw an organic increase of 3.9%. When it comes to our adjusted gross and EBITA margins, they were down in the quarter, mainly due to the strong headwind from currency and from tariffs. And adjusting for the SEK 226 million in currency and tariff headwinds in the quarter, the EBITA margin was about 50 basis points higher than last year's Q1. So the conclusion from that is that the underlying performance in business -- in our business continues to be strong, and it's developing according to the plans, the long-term plans that we have laid out. We also have a strong cash flow and continue to have a solid financial position. So our financial leverage is at 1.5x and well below the 2.5x EBITDA that we have kind of as an internal threshold. We can then move over to Page #4 and some of the key events during the quarter. And if we start with our product offering and our customers, I think one situation that is, of course, evolving on a daily basis is the situation in Middle East, and we continue to monitor this closely. Our first priority is, of course, to tend to our employees in the region and continue to support our customers. And if you look at the region as such, it makes up about 2% of our sales and where Saudi Arabia is half. And so far, the impact on top line and on cost has been very limited for us. To our Life Science customers, we launched a new steam sterilizer dedicated to larger items for use for labs and for research applications. And when it comes to the sustainability and quality perspective, I'm very happy to see that we got the CE approval for Cardiohelp II in the quarter, and I'll talk more about that on the coming slide here. In addition to this, we have in our implants business received EU MDR certificate for the Intergard Synergy, which is a vascular graft with an antimicrobial coating, to minimize the risk of infections. Furthermore, in the quarter, we released our annual report for 2025, including our sustainability statement and the annual report provides a lot of good information on Getinge. So I encourage you to have a look at this if you haven't done so already. We can then move to Page #5, please. So just wanted to elaborate a moment on the positive news about the CE approval for Cardiohelp II. And just to remind everybody, this is a market segment where we are already the global market leader within ECLS therapy, thanks to our strong existing portfolio. With the launch of Cardiohelp II now, we become even more relevant for our customers. And some of the systems' key features are that it's even more lightweight and transportable, meaning that it can be used for both in-hospital and intra-hospital use. It also has an attachable gas blender as an option, which is something that is highly appreciated by our customers. And from an interface standpoint, we have an interface now that is even easier for users to operate, and it includes also several smart monitoring functionalities for better decision support for our customers. We have initiated a limited market release now in the beginning of the second quarter to a handful of customers and very happy to see how positive the reception from our customers have been for this important product. The plan now is to do a full CE market release at the beginning of the third quarter. And when it comes to the important U.S. market, the plan is still to make the submission of the Cardiohelp II system, including our HLS Advanced consumables in the second half of this year. We can then move to Page #6 and talk about the top line for a moment. So overall, we had a solid top line performance in Life Science and in Surgical Workflows. And when it comes to order intake for the group, we grew 3.9% organically. The order intake for Acute Care Therapies decreased mainly due to the temporarily high comparative figures in ventilation, where one competitor last year drastically exited the market. So we're very successful in capturing some of that market share. At the same time, we saw really good growth when it comes to ECLS consumables across the board. And this is, as you know, one of our key categories. In Life Science, the organic order intake increased in the quarter, for example, because of an anticipated improvement from low levels that we've seen in bioprocessing for quite some time. And this is something that [indiscernible] and it's good to see some of the momentum here. [ Surgical Workflows ] grew double digit in the quarter, mainly on the back of the strong development across all our product areas, which is also encouraging to see. Net sales there, we had growth of 0.8% organically for Acute Care Therapies. Organic net sales decreased mainly on the back of last year's consolidation in the ventilation market, that I just mentioned. In Life Science, they had a really strong quarter in terms of deliveries, and they grew organic net sales in all product areas. BetaBags and Sterile Transfer continues to show significant traction and momentum. In Surgical Workflows, the organic net sales increased primarily thanks to growth in Infection Control consumables within service and within our operating table category. With that, we can move over to Page #7, and I hand over to you, Agneta for a moment. Agneta Palmer: Okay. Thank you, Mattias. So overall, the headwind from tariffs and currency continued in the first quarter. Even so, we managed to hold up margins, thanks to continued pricing and productivity. Starting with adjusted gross profit for the group, adjusted gross profit amounted to SEK 3.828 billion in the quarter, heavily impacted by currency and tariffs. Adjusted gross margin was down by 0.7 percentage points in total in spite of healthy contribution from price and mix. If we then look at adjusted EBITA, cleared for currency, adjusted gross profit effect on the EBITA margin was plus 0.3 percentage points, while OpEx adjusted for currency had a negative impact on the margin by about minus 1 percentage points in the quarter. And FX impacted by minus 0.3 percentage points. So all in all, this resulted in an adjusted EBITA of SEK 824 million and a margin of 11.1%. Let's then move to Page 8, please. And here, we can clearly state that we remain in a solid financial position. Free cash flow amounted to SEK 842 million in the quarter. Compared with last year, free cash flow was impacted by improved operating profit and changes in capital. Working capital days continued to be well below 100. We are now at roughly 90 days. On operating return on invested capital, we are at 11.4% on a rolling 12-month basis, which is well above the cost of capital. At the end of Q1, net debt decreased to SEK 9.3 billion. If we adjust for pension liabilities, we are now at SEK 7 billion. This brings us to a leverage of 1.5x adjusted EBITDA, which is well below the 2.5x that we have set as an internal threshold. If we adjust for pension liabilities, leverage is at 1.1x adjusted EBITDA. Cash amounted to approximately SEK 4 billion at the end of the quarter. So all in all, we can conclude that the financial position continues to be strong. Let's now move to Page 9, please, and back to you, Mattias. Mattias Perjos: Okay. Great. Thank you, Agneta. Just a moment then to focus on the impact from tariffs and FX in the quarter. So this was, in total, a drag on adjusted EBITA in Q1 of more than SEK 200 million, so SEK 226 million altogether. Tariffs made up just over SEK 100 million of that. And if we exclude the impact of tariffs and currency, our adjusted EBITA margin in Q1 would have been 12.6%. And there, as you can see, showing then an underlying improvement. As tariffs were first implemented in Q2 of 2025, then we expect the year-on-year comparison to be a little bit cleaner from Q2 and onwards if tariff levels remain. And that's, of course, something we'll continue to update you on. We can then move over to Page #10, please. So I want to talk a little bit more about the long term as well. So zooming out and returning to what we said at the Capital Market update that we had in May of 2024. There, we talked about an adjusted EBITA margin of 16% to 19% by the end of 2028. And I think we're on a steady path of reaching that despite the headwind factors that we have seen, that we were not aware of when we announced this target. The main drivers which will enable this are growth, mix and productivity. From a growth perspective, from regulatory approvals and key strategic product launches such as Cardiohelp II in ECMO that we've talked about here and also launching our low-temp sterilization in the U.S., having the sales restrictions removed for Cardiosave in our Intra-Aortic Balloon Pump business. It's just to mention a few factors here. Specifically, when it comes to Cardiosave, I'm happy to say that we, at the end of last week, got the release for sales in CEE countries in line with the plan for Q2. We also expect that the investment fatigue that we've seen in the pharma industry will improve and some of the decision anxiety that we've seen in the last year will go away here as well. We will also, in addition to this, get our share of the announced U.S. investments and benefit from the recovery in bioprocessing. And of course, we will also continue our diligent and successful work with realizing price increases annually. When it comes to mix, we have been successful in our strategic intent to steer our business towards a continued rotation to high-margin products and consumables. And if possible, we prefer to have products made up of a competent hardware with captive consumables attached to it, similar to what we have in our ECLS offering with Cardiohelp and HLS and in the Sterile Transfer offering with Alpha Ports driving the consumption of BetaBag. Our strong R&D and innovation pipeline is, of course, set to support this. When it comes to productivity, here, we've already done a lot in different parts of the business, and we are still excited that there remain quite a few opportunities across the business as well. One thing to mention, I think, is the heightened extraordinary quality costs connected to the product uplift of Cardiosave and Cardiohelp that is expected now to go down in the second half of 2026 and that we will be on a lower level in 2027 and '28. Furthermore, we will, of course, continue with our production excellence effort, where we also have some very tangible measurable benefits and helping us further optimize our supply chain and remain with an overall tight cost control across the company. So this all supports our assessment that our target for 2028 is still within good reach. Then we can move over to Page 11, please. So for the remainder of 2026, we confirm the financial outlook for 2026. As we all know, there are some geopolitical uncertainties that we need to navigate. But based on the underlying demand and the dialogue that we have with our customers on a daily basis, our expectation remains for an organic net sales growth in the range of 3% to 5%, adjusted for the phaseout of the surgical perfusion product category. Surgical Perfusion is still expected to have some net sales in 2026, but declining from about SEK 250 million last year to SEK 50 million this year. We can then move to Page 13, please. So in terms of summarizing here, the key takeaways from the first quarter. We did achieve organic growth in our top line despite the record quarter last year. Tariffs and FX continue to be a significant headwind, but our underlying performance is improving. Cash flow in the quarter was really strong in the quarter, and our financial position remains solid as well. For 2026, we reiterate our guidance for organic net sales growth of 3% to 5% adjusted for the phaseout of the Surgical Perfusion. And when it comes to our priorities for 2026, you've heard them before, we are focused on addressing the remaining challenges when it comes to quality remediation in Acute Care Therapies. We focus on sustainable productivity improvements and cost consciousness when it comes to navigating the geopolitical uncertainty and also addressing the impact from tariffs. And most importantly, we continue to focus on the work hand-in-hand with our customers, adding value for them and the patients that they serve. With that said, I open up for questions. Operator: [Operator Instructions] The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: A couple of questions. First of all, with regards to the ventilator headwinds you had here in Q1, if I remember correctly, you had pretty good sales development for ventilators also in Q2 last year. So is it fair to assume that the headwind will continue into Q2? That would be my first question. Mattias Perjos: Maybe to some extent, it's not something -- it's not going to be a significant factor, I think, for Q2, but it certainly won't be a big help either. Sten Gustafsson: Okay. Excellent. My second question is regarding Cardiohelp II. And what kind of gross margin should we assume for that product compared to the existing Cardiohelp product? Is it going to be accretive? Or is it fairly similar gross margins on those 2 products? Mattias Perjos: Yes. We don't guide on and disclose gross margin levels on any of our products and Cardiohelp II is no exception. Generally, though, when we work with product development and new launches, we make sure that the products that form the next generation of any therapy or product category have a better gross margin than the generation that they replace, and Cardiohelp II should be no exception to this. Sten Gustafsson: Okay. And one final, if I may. You talk about these lower extraordinary quality costs going forward. Could you please sort of quantify those? I mean we've heard SEK 800 million in the past. And where we are today? How low those will be going forward? Mattias Perjos: Yes. Yes, I think you're right. We said that they peaked at about SEK 800 million in 2024. We saw a small decrease in 2025. We expect another small decrease this year and then a slightly bigger decrease from 2027 onwards. And the end game here is to at least halve those costs. Operator: The next question comes from Erik Cassel from Danske Bank. Erik Cassel: First, I want to get some more color on the composition of the ACT decline. I mean, obviously, you talked about ventilators, but you're also talking about Cardiac Assist, et cetera. And I think last quarter, you said that the demand for Cardiac Assist was quite positive on the hardware side. So I wanted to ask if something has changed on that side. And if you could, if possible, give some more color on how much the ACT Americas part declined by the different parts? Mattias Perjos: Yes. No, thanks for the question. We don't dissect the business that much. What I can say on Cardiac Assist is that we had hoped to be able to resume deliveries in Q1 already of balloon pumps in CEE markets. And that was not the case. We only got the final approval to start this last Friday. So it will be a Q2 event. So that's been a little bit of a drag on sales. And also, it has a direct impact on order intake as well because customers don't order new pumps unless they have received what they're expecting to be delivered. Erik Cassel: Can you say anything on how much the ventilator decline did on that 8.5%? Mattias Perjos: No, we don't disclose subcategory financial parameters, unfortunately. Erik Cassel: But can you say anything if it would have been, say, positive organic growth if it wasn't for ventilators? Mattias Perjos: No, I can't answer that either, unfortunately. Erik Cassel: All right. Fair enough. I got to try. Then on the guidance side, I view it as the wording is a bit softer, perhaps the visibility is worse now and maybe you're even seeing a bit more, say, negative outlook. Can you just talk a bit about what you're seeing for the rest of '26 in terms of the, say, customer behavior and dialogues that you're referring to? Has it become slightly more negative? Or is this just a wording change that I'm dwelling too much on? Mattias Perjos: Yes. No, that was not the intent of the wording change at all. It was really just a way of recognizing that we do operate in a rather volatile environment, and we're mindful of that, but we feel confident reconfirming our guidance here even if the word, semantics, had changed a little bit. Erik Cassel: Okay. Just a last question then. Surgical Workflows, obviously quite strong in terms of order intake, especially for Americas and Digital Health. Is there some specific projects that this relates to that sort of makes it nonrecurring? Or are you seeing a more upbeat environment in the U.S. specifically for Surgical Workflows? Mattias Perjos: It's a bit of both. If you look at DHS, it's always lumpy. I mean they tend to be rather large projects, and we do have that, but there's also a little bit of an underlying better confidence, I think, generally in the market and also, I think in the way we operate in this business as well. We made some tweaks to how we organize ourselves, which hopefully also for the long term has a better, more positive impact. But there's absolutely a bit of -- you cannot call them one-offs because they're not. It's just project business that is a little bit fluctuating by nature. Erik Cassel: Okay. Can I ask one short one? Will you tell us anything on the potential impact of the change in steel content tariffs? Or is that something you're going to not disclose? Agneta Palmer: What we can say there is that it's still under analysis, how it impacts us. It's fairly recent. But the preliminary evaluation is that it's mainly if it hits us. It's components and spare parts, not complete products. And the absolute majority of our exposure is on the complete products. Erik Cassel: So the SEK 500 million for full year still holds, you think? Agneta Palmer: I don't think that we have guided on this, but that sounds like a fair assumption given the current levels, yes. Operator: The next question comes from Filip Wetterqvist from SB1 Markets. Filip Wetterqvist: I have a couple. First one, given recent pricing hikes that we have seen on raw materials such as plastic, steel, aluminum, it seems like you do not see any material effect of this in Q1, and I assume contracts are negotiated a few quarters in advance. But do you anticipate any higher input costs in the coming quarters? Or do you not expect any effect at all from this? Agneta Palmer: Yes. Thank you for that question. If we dissect it a bit into parts. When it comes to freight, which is the more direct near-term impact, we have very limited impact in Q1. But if it's prolonged, yes, there will be some impact in Q2 onwards. When it comes to plastics, et cetera, it's too early to say that we have any effects there. Filip Wetterqvist: Okay. And at the Q4 call, you indicated price increases of around 2% for 2026. Did that materialize here in Q1, meaning the 0.8% organic growth was hampered by lower volumes? Or -- and do you -- are you able to accelerate price increases further there if you see increasing costs here in the coming quarters? Agneta Palmer: Yes. We still stand by that, roughly 2%. It is a gradual rolling during the year. So it's slightly less than that in Q1, but we are progressing well towards that level. Filip Wetterqvist: Okay. But let's say, we see -- so if costs are increasing, you won't be able to translate that onwards to your customers, you still anticipate only a 2% price increase then? Agneta Palmer: This is always an ongoing discussion that we have with the -- all the commercial dynamics and the cost levels that we have. So of course, we will adapt our ways of working if we see that we get higher inflation, but it's not an automatic or sort of something that we can directly pass on. Mattias mentioned it for tariffs and it's similar then for raw material. But we do have very active pricing. Operator: The next question comes from Kristofer Liljeberg from DNB Carnegie. Kristofer Liljeberg-Svensson: I have a few short ones. I hope that's okay. First of all, is it possible to quantify at all the positive effect you expect here from the new ECMO approval in Europe or whether that potential positive effect is more a factor of when and -- yes, when you get the U.S. approval, again? And then could you just clarify a little bit about the Cardiosave status here in Europe and the U.S. filing? And then finally, on tariffs, if it's fair to assume really neutral effect here year-over-year from the second quarter? Mattias Perjos: Yes. I think we can't quantify. But of course, there is a positive effect from the launch of Cardiohelp. I mean this is an important part of our product range. So definitely a net positive, but I can't give you a magnitude of that. When it comes to the Cardiosave status, we got approval to start shipping last Friday. So the first pumps are being delivered in CEE markets this week. And the U.S. filing, there is no change here. We still expect to do that before the half year mark. Agneta Palmer: And then when it comes to tariffs, it's dependent, obviously, on the tariff level, but also on the product mix of imports. But generally speaking, yes, it sounds like a fair assumption to assume that. Operator: [Operator Instructions] The next question comes from David Adlington from JPMorgan. David Adlington: Maybe could you quantify the impact of foreign exchange hedges in Q1, how they roll off through the next 12 months or so? And then secondly, obviously, we're a quarter in now, still no margin guidance. Just wondering if you're willing to give us an idea around how you're seeing margins for the year, whether up, down or sideways? Agneta Palmer: Yes. If we start with FX, we have not changed anything specifically regarding our hedging strategy, and we will not disclose that. But just a reminder, I think we have talked about it on this call before, looking at the natural hedge, around 60% of what we sell in the U.S., we also produce in the U.S. And then the second thing maybe to mention regarding natural hedging and FX exposure is that we work very actively with our payment flows to compensate or offset as much as possible. So those are the 2 things to highlight there, but no quantification of the hedging effects as such. Mattias Perjos: And on the margin guidance, I mean, there's still [Technical Difficulty] said in the presentation, we are confident about the long-term margin guidance of 16% to 19%. David Adlington: Sorry, Mattias, you broke up again. I might have missed the first part of that. Would you mind just repeating the margins for this year? Mattias Perjos: Yes. I just said that we -- there's a lot of uncertainty in the world, as you know. So we are not going to do any margin guidance for 2026. We remain with the top line guidance only, and we remain with the long-term margin guidance of 16% to 19%. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: Yes. I just have a follow-up on ACT. So on ECLS consumables continued to grow despite being up against a rather tough comparison numbers. And I assume there was some flu-related headwinds here given the lower hospitalizations Q1 '26. So I just wonder if there were any one-offs or stocking of consumables that you saw here in the quarter or if it's rather the underlying run rate? Mattias Perjos: You broke up for a second. Can you repeat the question on the ECLS consumables, please? Ludvig Lundgren: Yes. So it seems pretty strong considering the quite tough comparison. So I just wonder if you saw any stocking or one-offs here in the quarter or if it rather reflects the underlying run rate? Mattias Perjos: Yes. No, there were no abnormal events in Q1. I think your analysis of this seems correct. It's a good underlying demand. Ludvig Lundgren: Yes. Okay. And can you just confirm that like the flu-related sales was lower this quarter versus Q1 '25? Mattias Perjos: [indiscernible] confirm that we see the same flu data as you when it comes to hospitalizations. How our customers use the product they buy, whether it's for treating flu or something else, we don't have perfect insight into it. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Mattias Perjos: Okay. Thank you very much. I think I already made the summary before the Q&A. So I just wanted to say thanks, everyone, for joining, and I wish you a good rest of the day. Thank you very much.
Operator: Greetings, and welcome to the Equifax Q1 2026 Earnings Conference Call Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to Trevor Burns, Senior Vice President, Investor Relations. Trevor, please go ahead. Trevor Burns: Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns, with me today are Mark Begor, Chief Executive Officer; and John Gamble, Chief Financial Officer. Today's call is being recorded and an archive of the recording will be available later today in the IR calendar section of the News and Events tab at our Investor Relations website. During the call, we will be making reference to certain materials that can be found in the Presentations section of the News & Events tab at our IR website. These materials are labeled 1Q 2026 earnings conference call. Also, we will be making certain forward-looking statements, including second quarter and full year 2026 guidance to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors that may impact our business are set forth in filings with the SEC, including our 2025 Form 10-K and subsequent filings. During this call, we will be referencing certain non-GAAP financial measures, including adjusted EPS, adjusted EBITDA, adjusted EBITDA margins and cash conversion which are adjusted for certain items that affect the comparability of our underlying operational performance. All references to EPS, EBITDA, EBITDA margins and cash conversion are references to non-GAAP measures. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the Financial Results section of the Financial Info tab at our IR website. Now I'd like to turn it over to Mark. Mark Begor: Thanks, Trevor. Turning to Slide 4. Equifax delivered very strong first quarter results with reported revenue of $1.649 billion, up 14%, which was $37 million above the midpoint of our February guidance. On an organic constant currency basis, revenue growth of 13%, which was over 200 basis points above the midpoint of our February framework. Ex FICO, revenue growth was up about 10% and at the top end of our 7% to 10% long-term growth framework. The revenue outperformance was principally in U.S. mortgage, which was up 38% and better than our February guide from stronger mortgage activity in the middle of the quarter before rates increased due to the Iran conflict. USIS Mortgage also benefited from stronger revenue growth related to its new wins in pre-approval products driven by our TWN Indicator solution. These mortgage customer wins are a good proof point that our differentiated TWN Indicator solutions are resonating with mortgage customers. We also expect customer share gains this year in card, auto and P loan as we drive TWN indicator deployment more broadly. As a reminder, we are offering the TWN indicator as well as our cell phone utility and Pay TV attributes at no cost in mortgage to drive share gains. Organic diversified markets constant revenue dollar growth grew almost 6% in the quarter, consistent with our guidance. This was principally driven by strong broad-based execution in Workforce Solutions. Importantly, first quarter EBITDA of $477 million was up 13% with an EBITDA margin, excluding FICO of 31.2%, up a strong 80 basis points and a very strong 110 basis points above the midpoint of our February framework. The 80 basis point expansion versus last year in EBITDA margin was both above our 75 basis point target for the year and 30 basis points above our long-term 50 basis point framework. The strong EBITDA margins were driven by strong operating leverage, mortgage flow-through and AI-driven cost productivity. Equifax reported EBITDA margins were 29% in the quarter. EPS at $1.86 per share was also up a very strong 22% and $0.18 above the midpoint of our February guide. As a reminder, first quarter EBITDA margins and EPS are lower than the remainder of the year, primarily due to a large percentage of our employee equity plan expenses being recognized in the quarter. We returned $327 million to shareholders in the quarter, including repurchasing 1.3 million shares or about 1% of shares outstanding for 260 million to take advantage of a weaker Equifax stock price. And last month, we increased our quarterly dividend by 12% to $0.56 per share. Equifax paid $67 million of dividends in the quarter. We continue to expect strong free cash flow of over $1 billion in 2026 with a cash conversion over 100%, which will deliver capacity of approximately $1.5 billion for bolt-on M&A and return of cash to shareholders while maintaining strong leverage levels. The team also continued to execute very well against our EFX2028 strategic priorities in the quarter by leveraging EFX.AI-based solutions built on our cloud-native infrastructure to drive innovation, new products and growth. In the first quarter, our Vitality Index of 17% was at record levels and reflects the focused execution of our teams in driving customer-focused growth through accelerated innovation based on advanced EFX.AI, leveraging our proprietary data assets. As a reminder, we added over 40 EFX.AI-based patents in 2025 and 10 more AI-based patents in the first quarter for a total of 400 pending or granted AI-based patents as we continue to invest in differentiated explainable AI capabilities at Equifax. In the middle of the first quarter, we saw strength in diversified markets, U.S. credit and mortgage activity as overall economic activity remained robust, inflation expectations moderated in interest rates decline. In March, the Iran conflict drove market uncertainty and higher interest rates, and we saw a weaker overall U.S. transactional activity from higher interest rates impacting mortgage and, to a lesser degree, auto and banking. Broadly, the U.S. consumers is resilient even in these uncertain times. We've seen mortgage activity decline in the last 6 weeks from elevated levels in February from the higher interest rates and we expect these lower levels of inquiries to continue until the Iran conflict is resolved and interest rates moderate. Current mortgage run rates are slightly below the levels reflected in the 2026 framework we shared in February. Despite our very strong first quarter results and given the significant uncertainty related to the current Iran conflict, we felt it was prudent to maintain our 2026 guidance we put in place in February until there's more clarity on the direction of the economy and importantly, inflation and interest rates. Absent the uncertainty in economic conditions related to the Iran conflict, we would have raised our full year guidance based on our strong first quarter results. We are maintaining our 2026 guidance for mortgage revenue growth of over 20%, consistent with the framework we provided in February, as a stronger-than-expected first quarter mortgage revenue growth is offset by our expectation of current trends of slightly slower growth over the remainder of the year versus our February guide. For the full year, we continue to expect our diversified markets revenue to be up high single digits, consistent with the guidance we provided in February. We expect strong execution from EFX.AI-driven new products and customer share gains to allow us to deliver at the levels consistent with our February framework. We also expect to deliver strong full year margin expansion, excluding FICO of 75 basis points from operating leverage of strong top line growth, higher margin new products and AI-driven productivity. The 75 basis points is 25 basis points above our 50 basis point long-term margin framework. Turning to Slide 5. Workforce Solutions revenue was up over 10% and better than our expectations. Verifier revenue was up a strong 14% with diversified markets revenue growth of 14%, which is a great start to the year. Within diversified markets, government had a very strong quarter, building off their fourth quarter performance with revenue up mid-double digits from continued strong state-level penetration. We expect government revenue in the second quarter to be about flat sequentially against a very tough comp from the SSA contract win last year and timing of state contract activations. We continue to see strong momentum in government from OB3 and the big $5 billion TAM that they operate in. Talent Solutions revenue was up almost 10% in the quarter. This is the second consecutive quarter of high single-digit revenue growth in a challenging white collar hiring market. In February, we discussed weaker hiring volumes in January that have begun to improve later in the quarter. Despite the overall weaker hiring macro in the first quarter, Talent Solutions continued to outperform their underlying markets, driven by client penetration, higher hit rates from record additions, pricing and product penetration, including data incarceration and education solutions. The team is doing a great job delivering new solutions to the market, enabling employers to make the right hires with speed and confidence. EWS mortgage revenue was up a strong 14% in the quarter from better-than-expected volumes, new products, including TWN Income qualified for mortgage, record growth and pricing. Consumer lending continues to perform very well with revenue up strong mid-double digits from double-digit revenue growth in P loans and auto. This is the seventh consecutive quarter of double-digit revenue growth in these verticals. Consumer lending is increasingly becoming a larger portion of Verifier revenue. Workforce Solutions EBITDA margins of 52.3% were very strong and up 200 basis points versus last year from operating leverage from higher revenue growth and AI-driven productivity, while continuing to invest in new products, government and record additions. TWN record additions continue to be very strong again in the first quarter with 211 million active records, up 11% and 120 million total current records, up 9%, which represents 105 million unique SSNs. The record growth drives higher hit rates and revenue growth and outperformance against underlying markets across our EWS Verifier verticals. In addition to payroll provider partnerships, EWS continues to expand relationships outside of the traditional payroll processing space, including HR software companies to obtain additional sources of income and employment data. We have a long runway for record growth against 250 million income-producing Americans. Turning to Slide 6. We remain energized about the mid- and long-term growth opportunities for EWS government at both the federal and the state level in meeting new federal requirements regarding accuracy of income validation in Medicaid and SNAP as well as work, education and community engagement requirements and Medicaid benefits. We are seeing strong interest with our pipelines for new and existing expanded government services up over 2x versus last year. As is typical in government, we are seeing some timing issues in new deal closures and activations as states-managed technology implementations and challenging budget frameworks. We continue to expect to see the benefit of the new OB3 opportunities later in '26 and in '27 and beyond. As state agencies implement required validations of expanded work requirements and increased redeterminations for certain Medicaid populations and take actions to reduce SNAP error rates, Equifax is serving as a key adviser leveraging our differentiated income and employment data to drive speed, accuracy and productivity. Our new products such as continuous evaluation for SNAP built using EFX.AI that we launched in the first quarter have already delivered strong results for a few states by identifying errors within their beneficiary population. We also see expanding opportunities with multiple federal agencies in support of their focus on reducing improper payments. Given our strong value proposition from TWN on speed of social service delivery, case worker productivity and accuracy of income verifications, we are uniquely positioned with our differentiated TWN data assets and new solutions to help state agencies increase efficiency and strengthen program integrity, particularly with SNAP and CMS. EWS has significant opportunities for long-term revenue growth supporting government programs and their big $5 billion TAM. Turning to Slide 7. Before discussing USIS results, I'd like to welcome David Smith, our new USIS President, to the team. David's broad consumer finance experience, proven executive leadership, customer focus, innovation capabilities and regulatory depth will be a big asset for USIS as they drive innovation and revenue growth for their customers. It's great to have David on the Equifax team. In the first quarter, USIS revenue was up a very strong 21% and 8% excluding FICO, driven by significant mortgage outperformance. The 8% growth is strong and at the high end of our 6% to 8% long-term framework for USIS. USIS mortgage revenue was up 60% and up a strong 24% excluding FICO and better than our expectations. USIS saw meaningful share gains in mortgage pre-approval, soft pull products with our new TWN Indicator, contributing to mortgage revenue outperformance in the quarter. And as mentioned previously, USIS saw increased mortgage activity in the middle of the quarter before rate increases from the Iran conflict reduced activity over the past 6 weeks. USIS diversified markets revenue grew 3% in the quarter and were slightly below our expectations with B2B up 2% and B2C up a strong 9%. While B2B delivered low single-digit growth rates, core online auto and FI transaction revenue delivered solid mid-single-digit growth. Off-line batch was about flat, principally related to a tough comp due to the strength in offline batch jobs last year. We did not see changes in customer marketing or risk management behavior in the quarter. And we expect USIS diversified markets revenue growth to be up mid-single digits in the second quarter. USIS EBITDA margins were 30.3% in the quarter, excluding FICO, USIS EBITDA margins were 37.9% and down slightly compared to last year. Absent some onetime costs incurred in the quarter, margins would have grown at levels consistent with our expectations. We continue to expect USIS EBITDA margins ex FICO to be almost 40% in the year up over 75 basis points versus 2025. Turning to Slide 8. As a reminder, we make no margin on the sale of FICO scores. FICO Mortgage Scores revenue is about 50% of the USIS mortgage revenue and 6% of total Equifax revenue, delivering zero margin. To be conservative, our 2026 framework continues to assume Equifax will calculate and sell only FICO scores this year, and there will be no vintage conversion in 2026. However, we are seeing strong momentum from mortgage originators on using Vantage. We expect conversions to VantageScore to accelerate once FHFA activates VantageScore and indications are that we're getting closer to FHFA formally activating VantageScore for Agency mortgage originations. A few weeks ago, we lowered our Vantage mortgage pricing from $4.50 to $1 to further incent conversion by the industry. We believe this pricing change will further accelerate mortgage originator conversions to Vantage, given the substantial $1 billion of annual savings opportunity for originators and consumers by using Vantage. The FHFA's decision last July to allow mortgage score choice between Vantage and FICO is a win for consumers and for the industry. We currently have over 240 mortgage originators ingesting our free VantageScore with a paid FICO Score offering, and we have over 50 principally non-GSE mortgage lenders using Vantage for their mortgage originations. For perspective and to provide data for your analysis, we have included a chart in the appendix of our earnings deck that provides details on the annual $35 million margin upside from full conversion of VantageScore at current mortgage run rates. As we move through 2026 and there is more clarity on Vantage conversion timing or the FICO direct license program, we will update our guidance to reflect this shift and the opportunity for mortgage industry, consumers and Equifax. Turning to Slide 9. International revenue was up 4% in constant currency and consistent with our expectations of mid-single-digit growth. International saw strong high single-digit revenue growth in Canada and ANZ in LatAm and the U.K. and Spain CRE businesses delivering mid-single-digit revenue growth in the quarter. International EBITDA margins were 25% in the quarter, up a very strong 80 basis points versus last year. Turning to Slide 10. As we discussed in February, there's a strong AI moat around Equifax' unique and proprietary data. 90% of Equifax revenue is generated from proprietary data sources, including our income and employment exchanges in the U.S. U.K., Canada, Australia, our U.S. and international consumer and commercial credit exchanges and our alternative data sets, including our NCTUE, telco and utility exchange in the U.S. This proprietary data has contributed to Equifax and its uses managed by Equifax and is subject to significant regulatory and privacy controls. To be clear, the data is not available on the web and only Equifax can access this data. Equifax' scale and proprietary data along with our cloud-native global technology platforms that include implementation of leading AI and ML capabilities is at the center of our momentum on new product innovation that has delivered accelerating NPIs and driven our NPI Vitality Index to almost 14% over the past 3 years. The application of advanced EFX.AI-based and traditional IT-based analytical techniques allows us and our customers to rapidly develop new solutions that are built off our only Equifax proprietary data. Turning to Slide 11. Our cloud-native technology and EFX.AI capabilities have accelerated our innovation cycle over the past 5 years since we moved to the cloud. Last year, over 90% of our products were built on our new global cloud-based platforms. With more efficient cloud-native technology, leveraging global platforms and EFX.AI, we have quadrupled the number of products in our innovation funnel and reduced product development life cycles by half resulting in a record level of new products launched in 2025, which is up 2x over historic levels. 100% of our new models and scores in 2025 were built using EfX.AI. We're building more complex products generating higher performance for our customers with about 50% of our new products now powered by multiple EFX data assets. And last, we're seeing higher performing products with year 3 NPI revenue up about 70% in '25 over historical levels. We are just getting started leveraging the power of our proprietary data, the new Equifax cloud and EFX.AI to deliver higher-performing products, models and scores to help our customers grow and deliver higher growth and free cash flow to Equifax. Recently, we launched Ignite AI adviser for auto, an AI platform that provides lenders with instant plain English analytics, benchmarking and automated insights alongside conversational agents for deeper exploration by our customers. We expect to launch similar solutions in cards and personal loan portfolios this year while integrating advanced synthetic and credit abuse fraud detection. As EFX.AI advances, we'll leverage our new global cloud infrastructure, combined with our [ agentic ] AI and Google Vertex AI capabilities and proprietary data to deliver higher-performing analytical solutions at an accelerating pace, positioning these advanced analytical solutions for more customers. Equifax is on offense with AI. Turning to Slide 12. As I previously mentioned, USIS is gaining traction with their TWN indicator solutions in mortgage that supported our strong mortgage revenue growth in the quarter. In April, we were energized to launch The Work Number Record Indicator or TWN indicator for auto lenders and personal loan originators, which are additive to our suite of TWN indicator solutions for mortgage, auto dealers and card. These solutions deliver income and employment insights from the Work Number alongside the Equifax consumer credit report at the prequal or marketing stage of the auto or personal loan application process. The TWN indicator returns a response indicating whether a verification of income or employment is available for an applicant from the EWS Work Number. This immediate visibility gives lenders the ability to instantly segment their workflows, fast-tracking appropriate borrowers through an automated paperless path while proactively identifying those who may require manual documentation. By reducing guess work from the start of the application process, lenders can offer appropriate loans while borrowers can benefit from a faster approval process. We expect continued share gains from our TWN indicator suite as we move through 2026. And as a reminder, Equifax is delivering TWN income and employment attributes at no cost to our customers to drive credit file share gains in TWN VOI and VOE growth in the future. Now I'd like to turn it over to John to provide our second quarter and full year framework. John Gamble: Thanks, Mark. Slide 13 provides the specifics of our 2026 full year guidance. As Mark indicated, we are holding our full year 2026 revenue guidance on a constant currency basis to be unchanged from our February guidance. Even with our strong first quarter performance, there continues to be a heightened level of economic uncertainty as well as uncertainty in the direction of interest rates and therefore, mortgage volumes. We increased our guidance to reflect the impact of FX changes since February, increasing the midpoint of our reported revenue guidance by $25 million to $6.745 billion and adjusted EPS by $0.04 per share to $8.54 per share. FX is about 90 basis points favorable to revenue growth for the year. Diversified markets revenue growth at the midpoint is expected to be up high single digits and U.S. mortgage revenue to be up over 20% with mortgage market originations down low single digits. For your perspective, as you determine your view of the 2026 U.S. mortgage market based on a review of Equifax data on mortgage home purchase issuances since early 2022, we estimate that there are over 15 million mortgages that were issued with an interest rate over 5%, including about $13.5 million with rates over 6% and over $9.5 million with rates over 6.5%. This provides a perspective on the pool of mortgages potentially available to refinance as mortgage rates change. Expectations for EWS overall performance in 2026 are unchanged from the levels we discussed in February, with EWS expected to deliver revenue growth of high single digits and EBITDA margins at 51.2% to 51.7%, about flat at the midpoint with 2025. We continue to expect Verification Services revenue to be up high single digits to low double digits. In Employer Services, revenue is now expected to decline slightly in 2026 as work opportunity tax credit legislation has not been extended by the federal government. Historically, when the renewal occurs, it has been retroactive, and we would expect to recover the revenue. USIS and International business unit revenue growth and EBITDA margin guidance expectations are unchanged from February. The slide also includes additional detail on revenue growth rates and EBITDA margins, excluding FICO mortgage score royalty pass-through revenue and expected BU revenue and EBITDA margins. We expect to deliver growth of 7% to 9%, excluding the impact of FICO mortgage royalties in 2026 within our long-term financial framework and we expect to grow EBITDA margins, excluding the impact of FICO mortgage royalties by a strong 75 basis points, which is 25 basis points above our long-term framework. In 2026, we expect to deliver over $1 billion of free cash flow and a cash flow conversion of at least 100%. As we discussed in February, with EBITDA increasing to about $2.1 billion at the midpoint, we are also generating an additional $400 million in debt capacity at our current debt leverage. This creates $1.5 billion in capital available in 2026 for M&A and return of cash to shareholders. We continue to look for attractive bolt-on M&A to strengthen Workforce Solutions, our differentiated proprietary data assets as well as international platforms and we have substantial capacity for share repurchases, continuing from the $260 million we repurchased in the first quarter. Slide 14 provides the details of our 2Q '26 guidance. In 2Q '26, we expect total Equifax revenue to be between $1.680 billion and $1.710 billion, up 10.3% on a reported basis year-to-year at the midpoint. Constant dollar revenue growth at the midpoint is up 9.4%. Excluding the impact of FICO mortgage scores, 2Q '26 reported revenue is expected to be up about 6.5% at the midpoint. Diversified markets revenue is expected to be up mid-single digits on a constant currency basis and down sequentially from first quarter given the more difficult EWS government comparison that Mark discussed. U.S. mortgage revenue is expected to be up over 20% and high single digits, excluding FICO royalties. EPS in 2Q '26 is expected to be $2.15 to $2.25 per share, up about 10% versus 2Q '25 at the midpoint. Equifax 2Q '26 EBITDA dollars are expected to be $537 million to $554 million, up just over 9% at the midpoint. EBITDA margins are expected to be [ about ] 32.2% at the midpoint of our guidance. And excluding the impact of FICO mortgage royalties, EBITDA margins in 2Q '26 would be 34.3% to 34.7%, up over 80 basis points at the midpoint from 2Q '25 on the same basis. We believe that our full year and 2Q '26 guidance are centered at the midpoint of both our revenue and EPS guidance ranges. In the supplemental information to this presentation, which will be shared after this call, we have added a slide that provides a 5-year view of U.S. mortgage originations by quarter. The data is determined based on submissions to Equifax' U.S. consumer credit file. Going forward, we will update this slide to provide originations data 90 days in arrears. So today, we are providing data through December 2025. As full contributor mortgage origination data can take up to 150 days, we will update this slide each quarter based on any updated data we receive. As we did in February, going forward, our guidance will include our expectations for U.S. mortgage originations for the current calendar year. As a reminder, this mortgage detail and more analytical detail based on the Equifax U.S. credit files are published monthly in our credit trends reports and can be found on our website under business trends and insights. Historically, Equifax has provided USIS hard mortgage credit inquiries as a measure of U.S. mortgage market activity. Given changes that have occurred over the last several years and how mortgage originators use hard and soft mortgage inquiries, during the loan origination process, hard inquiry volumes have become less correlated to changes in the U.S. mortgage market originations. As such, we will stop disclosing USIS mortgage hard credit inquiries beginning in 2027. Now I'd like to turn it back over to Mark. Mark Begor: Thanks, John. Wrapping up on Slide 15, Equifax is off to a strong start in 2026, executing very well against our EFX2028 strategic priorities in a challenging economic environment. The new Equifax is leveraging the Equifax cloud EFX.AI and proprietary data assets to accelerate innovation and help our customers grow. With the EFX cloud transformation substantially complete, we are focused on leveraging the new cloud capabilities and focusing our team on EFX.AI and NPI initiatives to deliver innovation to our customers, resulting in record levels 17% Vitality Index in the quarter and driving operational efficiencies inside of Equifax. We are using our single data fabric, EFX.AI and Ignite, our analytics platform to develop new credit solutions powered by TWN indicators in verticals like mortgage, auto, card and P loan that only Equifax could provide, which is leading to share gains and incremental growth. Our first quarter financial results are a strong proof point on the broad-based Equifax operating model, including the strong 80 basis point of EBITDA margin expansion in the quarter. Given our strong free cash flow generation with cash conversion over 100% in 2026, we're also delivering on our commitment to return substantial excess free cash flow to our shareholders. In the first quarter, we returned $327 million to shareholders. And in 2026, we expect to have $1.5 billion available to invest in both bolt-on M&A and return cash to shareholders through share repurchases and dividends. I'm energized about our strong start to 2026, but even more energized about the future of the new Equifax. And with that, operator, let me open it up for questions. Operator: [Operator Instructions] Our first question today is coming from Jeff Meuler from Baird. Jeffrey Meuler: How are you thinking about the timing of the revenue from the expanded government opportunity? I get the tough Q2 comp, but Q1 was really good. So to what extent did the expanded opportunity drive that strength? And then just help us understand what you're trying to signal when you're talking about timing factors related to system integration and budget challenges. Mark Begor: Yes, Jeff. We remain very bullish about our government vertical, given the big TAM and also OB3, we've talked about that a bunch. We've been clear since really last July when OB3 was passed that we expect the substantial portion of that to be later in the year, but really principally in 2027, when that takes effect, whether it's the Medicaid or the SNAP benefits or the more frequent 6-month redeterminations. We said in our prepared comments that our pipelines for government are very robust, up 2x over where they were a year ago. So we feel good about the pipelines. But government can be bumpy, both on when deals not only close and sign, but also when they activate. And then there's always budget pressures at the government level. And as you point out, we had a big win with SSA a year ago in April. So that's a comp that's challenging in the second quarter, and we just wanted to highlight that. Jeffrey Meuler: Okay. And then for USIS diversified markets, what dragged it down in Q1? Because I think the online growth was slower overall than card and auto was. So what dragged it down in Q1? And then maybe it's because of whatever that factor is, but what drives the acceleration in Q2 because it sounded like there was also a little bit of softening ex mortgage related to rates and macro volatility later in the quarter? Mark Begor: Yes. I'll jump in, and John can also chime in also. First, on the -- what happened in the first quarter is we had some larger batch volumes, which can be choppy on when they land during the year and one quarter to another quarter last year versus this year. So I think that's the principal impact on the first quarter. As we look forward, we've got a lot of new products that we're rolling out. I think we talked a bunch on our prepared comments around the TWN indicator that we have in market. We just launched it for auto, lenders and also for card, and we've seen good progress there. We expect that to help as we go through the year. Anything else you'd add, John? John Gamble: Not just what we have in our comments, right? We saw weakening as we went into the March period, and that affected not only online but to a degree as we indicated [ by batch ], right, and it was in auto, it was to a degree in FI and across some other verticals as well. So I think the general economic situation that we ran into in March just resulted in a little slower volumes, not just in online, but as we all know, oftentimes [ batch ] is repetitive, right? So some of the batch jobs that occur very frequently just slowed. Operator: Our next question today is coming from Andrew Steinerman from JPMorgan. Andrew Steinerman: I wanted to ask about EWS mortgage revenue outperformance. What did you see in the first quarter? And what are you assuming in the guide in terms of EWS mortgage revenue outperformance? Mark Begor: Mortgage had a strong first quarter at EWS. I think we talked about some new products that we've rolled out that we're getting some traction on. Anything else you'd add on that, John, for the first quarter? John Gamble: Yes. I think we consistently said we expect to see high single-digit type of outperformance relative to transaction volumes, and we saw a very good performance in the first quarter, and that continues to be our expectation going forward. Operator: Your next question today is coming from Toni Kaplan from Morgan Stanley. Toni Kaplan: I wanted to go back to CMS and basically, when you think about competition, we saw an article a couple of months ago about one of your private company competitors who uses connectivity for verification and winning a contract on the Medicaid and SNAP eligibility side. So I was just hoping you could frame for us how you see your product versus maybe a cheaper product like because of the state budgets, always seeming to be challenged. Like does that lead to a cheaper solution gaining traction? or -- and then also the friction point you always mentioned, does that resonate as much in this market as in the lending market? Just wanted to understand the sort of go-to-market strategy and positioning between your products, which is maybe more premium and very good accuracy versus maybe a cheaper connectivity product. Mark Begor: Yes. When you say cheaper connectivity, I think you're referring to consumer consent and data. And there's clearly a place for that. As you know, we rolled out last summer, our own solution called Complete income that we've seen traction on. And with this demographic, there's a lot of W-2 income in here, but there's also a lot of gig income, which we have less of in our database. So our large coverage is still a big asset for us, having over 150 million current records is a big asset in our data set that we can deliver instantly. When you go down the consumer consented path, it adds friction to the process, both for the case worker and for the recipient. They have to do things to participate in it. Where we've seen why we invested in it and we launched our solution that's integrated between hitting our TWN database first and then water falling to our own consumer consented solution. that integrated solution, we think is a superior one, delivers that same benefit. And what the states we're after is more coverage. It's really hard to get that income verification. And that consumer consent, it really covers a lot of the records that we don't have, and that's why we've invested in the solution, and we've already landed a handful of states that are now using that solution in the marketplace. Toni Kaplan: Yes. Great. And wanted to ask just on VantageScore. I guess, what's taking so long with the grid? And I guess, when -- how is the reception to your lowering the price of the score? And does that sort of lead to FHFA maybe to sort of be less concerned about pricing in the industry? Mark Begor: Yes. That's a hard question. These kind of changes take time. As you know, FICO was used for 30 years, it's the only score in mortgage. And last July, Director Pulte introduced score competition. It takes a lot of technical time. Our view is that the integrators, meaning the software systems are ready for Vantage. They've built that out over the last number of months. Our customers are ready. We talked about 250 customers ingesting the free VantageScore. We felt that there would be an advantage for Equifax and our competitors did the same thing by lowering the price to $1 versus $450 to create a real price advantage for customers to really incent them in the industry to really move forward with Vantage. And the feedback has been very positive. And I think as you've seen in various publications. If you use that $1 versus the $10 FICO score, that's $1 billion worth of run rate annual cost savings for the industry. That's a big incentive to change. So all indications are we're getting closer. We had the same indications last time we talked in February, but we're certainly closer now that we're in April. And the industry is clearly ready for it. They want to take advantage of it. So we expect it to move forward. But as you know, in our guidance, we laid out that we don't know when that timing is. So we really can't forecast Vantage conversion. So we assume that FICO stays there through the year. But just to be clear, and I know you know this, Toni, that it doesn't impact our P&L if FICO stays there long term. There's an advantage to our P&L with the margin we make on the VantageScore, if there is Vantage conversion. So we think Equifax is well positioned because, as you know, you can't calculate a credit score without our credit file, and that's the data that's used there. So we think we're well positioned, whether it is FICO or Vantage, but there's definitely a lot of energy and enthusiasm about moving to Vantage once it gets activated by the agencies. Operator: Next question today is coming from Manav Patnaik from Barclays. Manav Patnaik: I think we all saw the mortgage data kind of taper off in March. But Mark, I think you mentioned there was some impact to a lesser degree in auto and banking. I was hoping you could just elaborate on that just to appreciate the sensitivities and how you think that could be impacted? Mark Begor: Yes. It was really -- I mean not more in auto. We saw a little bit in banking, but it's probably harder to find in the rounds. Auto is a big ticket transaction. When rates went up a little bit. We saw some tail off. It's typically a very -- a larger auto financing market around tax season and there was some dampening of that. Part of it's auto prices, for sure, have increased, and then you add to it, auto rates have increased, but it was still a positive market for us, but we just thought we'd highlight that. Anything you'd add, John? John Gamble: No, I think you covered it. Yes. And we saw it run through March, and I think it's kind of continued into April. Manav Patnaik: Okay. Got it. And I think your point on reemphasizing the proprietary data, that's well understood. You also mentioned using Ignite and some of your other analytical tools. I was just wondering how connected or packaged is those Ignite and analytic tools to the data? Just trying to appreciate if you -- how you think of the potential disruption risk to the software side of things, which is the big market talk right now? Mark Begor: Yes. As you know, the so-called software is a small part of our business. It's one we certainly invest in, particularly for our -- broadly our mid-market customers that don't have larger tech platforms that they can use to ingest our data. But we sell data. We sell scores, we sell models, we sell products. That's the vast, vast majority of our revenue. We're very, very small in the revenue from software sales. And we really have our investments in Ignite and interconnect really to facilitate the sales of our data. We don't really view it as a way that we deliver our data to market. John Gamble: Yes. Ignite AI Advisor is to allow smaller customers to ingest more of our data by seeing the value in the scores and the lift they get by using not just credit data but also alternative data and other data sources. So that's what it's intended to do. We are very excited about the fact that it's going to drive more data sales, but it isn't a licensing play. That isn't what we do. Yes. Operator: Next question today is coming from Shlomo Rosenbaum from Stifel. Shlomo Rosenbaum: Mark, can you talk a little bit more about The Work Number indicator? And is there some way to quantify some of the market share gains? It really looks like a unique position that you guys can kind of wedge in there and gain some more share. So I'm wondering if there's some way to quantify it. Since you've rolled it out, where have you seen the share shift? You noted one large client last call, I think, in the mortgage space, but -- if you can talk about what's happened since then? And then has there been any reaction with any of the unique data from the other bureaus that they've been putting in for free aside their own credit reports? And then I have a follow-up. Mark Begor: Yes, sure. We think, obviously, we have a unique asset in the TWN data set. By adding the TWN indicator, we think it benefits both our credit file, but also benefits pull-through of our TWN data in underwriting process because the originator now knows that we have a record. So it's a benefit really on both sides. And we've seen really positive response. As you know, it's still early days. We really only launched this in the second half of last year and initially in mortgage. And as we talked in February and again today, that's where we're seeing the most interest. And when you think about it, if you're a mortgage lender and then as you know, we're rolling it out in auto, cards and P loans, if you're underwriting a consumer, you typically, for 20, 30 years, have done that off the credit file, the credit score and credit data, but you are really invisible in that marketing process, the early stage in your funnel when you bring a consumer into your application process or pre-application process about whether they're working or not or what their income is. And number one, it's kind of binary if you're not employed, but you're applying that generally is going to be more challenging with credit. But if you're working and then dependent upon your income levels and your ability to pay, it allows the lender to give that consumer a larger loan at a lower interest rate and really drive approval rates. And it really is getting the consumer into the right products. So it's very unique solution that we have and one that we're super energized about. I think you can see in our mortgage results for the first quarter, versus the underlying market, you can do the math. There's clearly some lift in there that we're seeing with share benefits in the prequal and we attribute that to one of the factors, for sure, is the fact that we're offering the TWN indicator there at no charge. I think I talked about on the February call that some of the early customers that are using that were seeing not only that they're using more of our credit file because it has that attribute with it, it's very valuable in that mortgage funnel. But we're also seeing a lift in some of the TWN poles because they know we have a record and they're able to access that record later in the process when they're doing the VOE and VOI full verification versus the thinner set that we have in the TWN indicator. So we're very energized about it. And then the feedback we're getting from the other financial services verticals is very positive. Obviously, getting that kind of rich data for free is very valuable and a differentiator for us. And then beyond just the TWN indicator, I think you know that we're also working to offer in the mortgage space, our cellphone utility attributes in the mortgage file. That's another very unique Equifax data set, one that only we have. It's got real scale. It covers most Americans so it's got a lot of data in there, and we're adding those attributes to the mortgage file really same basis at no charge, but to differentiate our mortgage credit file for share gains. So we're energized, but kind of -- I think the encapsulated it's early days, meaning we're still in the -- we just launched literally this week, some of the solutions in card and auto lenders. So we're getting in that marketplace, but the response is very positive. John Gamble: In the first quarter, a very meaningful part of that 24 points, excluding FICO was share gains, right, so it was a significant contributor. Shlomo Rosenbaum: And then just as a follow-up, can you talk about where you are in terms of completing the cloud platform in the international markets? Mark Begor: Yes. We finished the year a few months ago, 2025 at about 90% of our revenue in the new cloud. That's substantially all of the United States. As you know, that was our strategy. And what we have left to finish is Australia, a couple of Latin American countries and a few other in India, so a few other pieces. And most of that will be complete this year. It's really a game changer for us to have the cloud behind us. As I talked in my prepared comments, having that cloud capabilities, our scaled differentiated data, we're really purpose-built now with the investments we've made to really activate our AI initiatives and our multidata solution initiatives to really differentiate Equifax in the marketplace. And you're seeing that in our vitality index, the 17% Vitality in the quarter in the large pipeline we have of new products that we're planning to roll out, like we just talked about TWN indicator in really every financial services vertical, that's really exciting and stuff we couldn't do before the cloud. So it's really energizing time for us, having the cloud at this stage and substantially behind us, particularly in our large and most profitable and EBITDA generating market in the United States, it's an exciting time. Operator: Our next question today is coming from Kyle Peterson from Needham & Company. Kyle Peterson: Great. Just one for me. I wanted to touch on talent. Great to see you guys performing. It's been a pretty tough hiring market. But I wanted to see if you guys could unpack a little bit what kind of the bigger drivers are? Obviously, it seems like records is helping a lot with hit rates and stuff, but maybe between like whether it's record price, bigger package density like longer background screening. Just any more detail or color there would be really helpful for us. Mark Begor: Yes, I think you've hit on it. Clearly, records are real positive. And as you know, we had strong record growth again in the quarter which is super attractive for all of our Workforce Solutions verticals. Chad and the team are doing a great job on continuing to expand our data set. We have price in their prices. One of the elements we took price up [ 11 ], so that's definitely benefiting all of our verticals in Equifax and AWS, including talent. We've got a bunch of new products that the team is rolling out. So really a lot of innovation coming there. And remember, not only are we selling -- helping the background screeners by delivering that work history from our data set because we get the job title with every payroll record and we have that digital resume but increasingly, we're delivering education data incarceration data and other data elements to the background screeners and then in different formats. We're getting more sophisticated in delivering on our customers really requirements around the different job categories and what data is required in a white collar, in your world, financial services job, there's a lot of more history job history and education history than there is in a blue-collar job. So we've rolled out some more blue collar, which think about it as a last job worked kind of solution versus the last 5 years of employment. So just being more deliberate around having a suite of products to help our background screening customers. Operator: Your next question today is coming from Jason Haas from Wells Fargo. Jason Haas: I'm curious, why did our government verification business declined quarter-over-quarter. I think historically, you typically see like that revenue go up from 4Q to 1Q. And then I also had a question just on 2Q. Why is that flat year-over-year just because historically, that typically increases also from 1Q to 2Q? Mark Begor: Yes. So it went up in 1Q. We shared that earlier. So we had a very strong quarter, and we're very pleased with the momentum, not only in the quarter, but in particular, more the long-term pipeline, which we shared was up kind of 2x year-over-year. Second quarter, as we talked about in our prepared comments and one of the earlier questions, is we got a tough comp because we had a large win last year with SSA that we're comping that activated in April of last year. So that's a tougher comp, which is really driving the performance in the second quarter. John Gamble: Yes. And seasonally, we're expecting to see revenue up in the second quarter versus the first, which is not unusual, right? [indiscernible] I don't think there's really anything unusual in the trends that we saw this year. Jason Haas: Okay. So that SSA contract, was that like a onetime benefit? I thought that, that's launched in 2Q, but then that becomes an ongoing benefit. Mark Begor: It does, but it's -- we're comping against it because it was a new contract in 2Q. And as you point out, it does go on in the future beyond 2026. But the comp is one that is -- one we have to overcome, and it was a big contract. Jason Haas: Okay. That's fair. And then just on the margins were really strong for EWS. The guidance now implies it looks like they're going to be down in the rest of the year. So yes, what drove the [ beat ]? And why does that not continue going forward? Mark Begor: Yes. And I hope you saw that Equifax margins were also quite strong in the quarter. And as you know, we've got a guide for 75 basis points of margin expansion for the year, which is well above our 50 basis point long-term framework. So we feel really good about the operating leverage for EWS in particular, they had a very strong first quarter and then that operating leverage flow through. And that's why we're still investing heavily in EWS. We're -- it's our fastest-growing business over the long term, and we're continuing to invest in the government vertical. We're investing -- Chad is investing in a bunch of new products, and we're also investing in capabilities and record additions. So it's one that we're continuing to invest in the business, and you just had the strong operating leverage flow through. Operator: The next question is coming from Ashish Sabadra from RBC Capital Markets. Ashish Sabadra: The CMS recently launched Emmy, an income verification tool. How is this expected to change any competitive landscape for the Government Verification Services? Mark Begor: Yes. I think it's still early days on that solution. It's one that we think we can be complementary with. As you know, our scale data set provides an instant verification. It has large coverage. It provides a lot of productivity for the case workers at the state level. We think that's -- their solution looks a lot like our complete income. Obviously, it's not integrated in there to go after either records we don't have or to go after some of the gig income that we may not have in our data set. But we think it's -- our data set is just so much more comprehensive and instantly available. We think there's still a large position for us to continue to grow with CMS. And then you add to it some of the new requirements with OB3 on work requirements, education requirements or volunteering requirements. We're rolling out a solution that will really deliver those capabilities, but it's going to be integrated with our core TWN dataset income offering that we think will be quite beneficial for the Medicaid, Medicare verifications. John Gamble: And it would just be another distribution channel for us. Obviously, we'll make sure our customers can get to our data in the way they want to. Mark Begor: Yes. Ashish Sabadra: That's very helpful color. And if I can ask a question around agentic AI, one of the concerns that we've heard is agentic AI could potentially displace manual verification. And just given that manual verification is one of the key competition in your verification business, how does -- one of the questions that we get is how does the technology shift, if any, Equifax, again, positioning in the verification business? Mark Begor: Yes. We think it's pretty hard because, as you know, that's all proprietary data. You're talking about income and employment data is proprietary in our data set, and it's all permissioned by permissible purpose because of the Fair Credit Reporting Act solution. And then the contributors, we have almost 5 million companies now contributing data to us every pay period, it's proprietary in their data set or with their payroll process or HR software company. So it has to be consumer permission. There's a lot of friction with that. I don't -- we don't see how AI can really facilitate that consumer permissioning to access that data because the data is not available anywhere in the worldwide web. It's all in proprietary house environments, including Workforce Solutions at Equifax. So we just don't see that as a threat, which is really part of that AI data moat that we highlighted in one of the charts in our deck this morning, and we did it again in February that the work number as well as our credit data and our other data sets really are quite unique because AI can't access them. Only Equifax AI can access them or when we deliver it to our customers on a permission basis, they can access it, but it's just not available on the worldwide web. Operator: The next question today is coming from Faiza Alwy from Deutsche Bank. Faiza Alwy: First, I just wanted to clarify on the government business. I think you said earlier in the call that you expect sort of second quarter revenue to be flat versus first quarter. And then I think you just said in response to a question that you expected to be up. So maybe if you could just sort of... Mark Begor: No. I did not say that. My intention was to say it was -- we had a strong first quarter, which we were pleased with. We also talked about our pipelines, which when we think about pipeline, you'd think about later in the year in 2027, that's generally how the kind of deal cycle is in government. It's longer term. But we did say that we expect the second quarter to be flattish because of the tough comp versus last year. Faiza Alwy: Got it. And then just to put a finer point on the year. I think previously, we are expecting that you can grow sort of in line with your long-term growth rate for EWS this year, which is up 13% to 15%. Do you think that we sort of do that this year? Or is that more -- are you expecting more of that benefit in 2027? Mark Begor: Go ahead, John? John Gamble: To be clear, we had only provided guidance for EWS and Verification Services in total, right? And EWS and the Verification Services guidance were not. They were below the long-term framework. We think they were very good and nice growth from 2025, right, but no, they weren't at the long-term framework yet, right, part of it due to mortgage, part of it due to other factors like weaker hiring market. So I think what Mark covered in his remarks and already is that our expectation is we're going to continue to see improved performance in government as we move through this year, but that the major opportunities that we have regarding the new programs that were passed by the government, et cetera, that Mark covered in detail, we expect that really to start benefiting us in 2027. Faiza Alwy: Understood. Makes sense. And then I just wanted to ask, have you seen any impact on mortgage volumes from the trigger lead legislation? I think, John, you'd previously said that it might -- you might shift more towards hard inquiries. So just curious if there's been any impact on overall volumes or any kind of shift that we should watch out? John Gamble: Not yet. Now admittedly, it's very new in the quarter, right? So not yet. And I think our guidance doesn't assume much in the second quarter will occur either. Operator: Our next question today is coming from Kevin McVeigh from UBS. Kevin McVeigh: Great. I guess obviously, the big focus on mortgage, but I wonder if you had any thoughts as to how the VantageScore could impact auto, consumer and some of the other areas from a kind of share perspective? And then just from a regulatory perspective as well? Mark Begor: Yes, I think it's a great question. As you know, there's already a large penetration in non-mortgage or diversified markets. You've got large lenders that have been using Vantage for many years. Number one, because of the performance of the score is more predictive because it includes more data than the current Vantage Classic score. Vantage 10T will close some of that gap. But it has a performance element. And then there's just a cost element. It's a less expensive score. We charge much less than FICO does over there. I think the other element that we think about is that if you're a multi -- if you're not a [ monoline ] and your financial institution that's doing mortgage, auto, card, p loan, you're doing multiple products, you're likely going to be incented to move your mortgage volume over because of that significant cost savings and the fact that with an agency mortgage, if it's approved, they're going to take that loan and take it into the pools that they've purchased from the mortgage originators but if you're using Vantage in mortgage, you're likely going to use the Vantage when you rescue your portfolio. And we see the same opportunities over the medium and long term to drive more Vantage adoption in the diversified markets or non-mortgage spaces. And there already is a lot of adoption there. There's, as I said, large lenders that are entirely vantage outside of mortgage because as you know, there's never -- there's no regulatory requirement in non-mortgage, there only was in the mortgage space by the agencies that require the FICO score up until last July for 25-plus years. So we see it as an opportunity for sure. Kevin McVeigh: That's helpful. And then just from a pricing perspective, I know you adjusted the VantageScore pricing for mortgage, any thoughts around auto? Mark Begor: Same. Yes. We're going to offer the VantageScore. We're already in the market doing that at a discount to FICO. Again, we sell the credit file plus the score when we sell the FICO score in mortgage or auto or any other market, we don't make any margin on that score sale. When we sell Vantage, we make some margin on it. So we're obviously incented to deliver that to our customers, and we see that as an opportunity going forward. Obviously, much smaller given the significant $10 price in mortgage versus it's much less the FICO score in auto, cards and P loans, but there's still a performance and a margin opportunity for our customers. So we're certainly going to take advantage of that. And I think as you know, last summer, we rolled out the free VantageScore with every paid FICO score, not only in mortgage but also in diversified markets or non-mortgage. So we've got lenders that are taking -- that are using FICO, that are taking Vantage to make sure they understand it and understand the performance and evaluate it. So as I said a couple of times, we see that as an opportunity going forward. Operator: Our next question is coming from Curtis Nagle from Bank of America. Curtis Nagle: Terrific. So maybe just sticking on the subject of Vantage, how soon you could provide a little more detail and I think you said 50 mortgage lenders are currently in production with Vantage. I guess just to confirm, so I think these are non-GSE mortgages? Are they being underwritten? Are they being held on the books? Securitized? Any sense of kind of the nationals? Just trying to get a size of sort of where things sit before we get kind of full acceptance with GSEs. Mark Begor: Yes. These are admittedly smaller lenders, but they are lenders that a year ago were not using Vantage in the mortgage space. They're non-GSE, as you point out, they're some of the other federal agencies that don't fall under FHFA as well as other lenders. And it's just reassuring to us to see that they're taking these loans, in many cases, balance sheeting them, but see the power and the performance of the VantageScore and obviously, the cost opportunity of buying it at a lower price than what FICO is currently charging. And we see that as another indicator that the industry is going to be ready. I think a more powerful one is the 240 GSE lenders. Many of them also have some element of balance sheet for the non-agency loans or securitizations on their own, but the fact that they're taking the VantageScore, ingesting it in their system, and obviously, we talk to them all the time. There's a lot of interest around using Vantage once it gets activated by the agencies. John Gamble: And for lenders that are non-GSE and are exclusively non-GSE, we think the share of Vantage is very high, right? So where the opportunity exists the movement has occurred. The volumes are very low, but the share is very high. Curtis Nagle: Okay. Understood. And then maybe just a quick one just on -- I think, at least at a high level, you pointed out some cost productivity from AI. Maybe just a little more detail. Is that some, I guess, output of higher throughput? Is it raw expense takeouts, some combination of the two? Something else? Just any more detail there would be helpful. Mark Begor: Yes. So maybe I'll be a little broader on it. Obviously, we were pleased with our margin expansion ex FICO in the quarter, and we're also pleased and I hope you are too with our guide for the year to be up 75 basis points. You think about that as being -- the first big piece there is operating leverage, having our strong revenue growth that is at the kind of higher end of our long-term framework delivers that incremental margin. So that's a positive. We also have in the quarter, which was substantially higher than our guide in the first quarter, you had that mortgage lift that we had kind of in the middle of the month before rates went up, that kind of pass through and went through to the bottom line. I think that is indicative of when mortgage markets recover, we've been very clear with you that margin is going to drop through and you certainly saw it drop through in the first quarter. And then last, as you point out, we're really getting some traction, and I would characterize it as still early days, meaning the runway we have around deploying AI across our operations inside of Equifax. We call it AI for EFX operations, think about call centers and our paper processing centers is kind of the first frontier there. We're making a bunch of progress of using agents to start taking calls from consumers using agents in AI to process hundreds of thousands of paper documents we get every month from consumers here in the United States and around the world. There's a lot of productivity there. And then we see productivity opportunities going forward in technology where we have a large workforce. We're seeing real momentum around using some of the AI tools to do coding which we're very energized about is the opportunity of that going forward. And then broadly, in our kind of support teams, whether it's finance, HR, legal, all of the support teams are deploying AI to increase their efficiencies. So I would expect kind of AI-driven productivity to be a multiyear lever for Equifax going forward. And I think it is going to be for all companies. We all read about it, but it's really real. And the acceleration tools. We're using things today that we weren't using 6, 9, 12 months ago inside of Equifax to drive our speed, efficiencies and accuracy. So it's really exciting. So I think those 3 together are really what's driving our above long-term framework margin expansion for the year, and we're very pleased with that kind of operating leverage. And then obviously, it generates incremental free cash flow that we can return to shareholders or use for bolt-on M&A. Operator: Our next question today is coming from Surinder Thind from Jefferies. Surinder Thind: John, can you maybe talk about just the hard inquiries versus the overall mortgage originations? Thinking about it from a lender behavior perspective, just any changes that you're seeing in hard versus soft and what the implications this is from a revenue perspective here, is just more usage of soft equals less revenue? Or how should we think about the pending changes here [ around the party ]? John Gamble: I think what we've seen over the past several years, right, is a significant acceleration in the use of soft early in the mortgage process to give lenders a better view in terms of who they're working with, who are submitting the applications or who are they marketing to, right? So I think it's both -- there has been some shift of activity from hard to soft, that's certainly true. But there's also been an expansion of opportunity as lenders utilize these lower-cost soft pulls in order to get a better view of how they want to sell and market in the business. So overall, what we think has happened is you're just -- you have seen more activity over the time period if you combine hard and soft together, right? Also, we think what has happened is that hard inquiries, therefore, have become less indicative of just the trend that's occurring in originations, as we mentioned in the prepared remarks, right? So that's why we're going to start sharing with you the origination data that we have from the credit file. Yes, it's a little bit in arrears, but we think it's very valuable information that we can share. And we'll continue to guide as we go forward based on our expectation on annual origination volume for the industry so we can get a perspective on what our expectation is for the year. Surinder Thind: Got it. And just to clarify, is the idea here that we're going to continue to see the mix shift changes? Or are we kind of approaching some point of stabilization? John Gamble: I think we're going to continue to see changes in the mortgage industry based on the new products we launch, right? So -- and we're continuing to see that occur. So for example, we're very excited about the growth that we're seeing in our soft pulls based on TWN indicator and the other data we're providing, right? So we're continuing to offer richer products on the front end, which drive more volume. Exactly how the market shifts as we go forward. I think we're going to see it together. But at this point in time, what we're seeing is we're seeing ourselves drive more growth in soft as we believe we're taking share by offering more value on the front end. Surinder Thind: Got it. And then as a follow-up, on the whole VantageScore-FHFA debate, I mean when we think about -- like do lenders actually care about the performance of the credit scoring model as the current the market system works, meaning that I feel like the debate has been in VS4 versus classic FICO, but I also think there's 10T in the mix. And the preliminary data suggests that there may be differences in performance model and which would be perhaps another consideration in addition to price here, like how do we think about that? Mark Begor: Yes, I think that it's a great question. I think broadly, lenders will use scores that are approved by the agencies. You have to. So I think you got to start with that. And remember that the lenders are broadly originating the loan and then selling it to the government. So they want to follow the specifications that they have. But I would make sure that we both think about and we do too, is that in that mortgage prequal and application process, if you've got a mortgage score or data that's going to allow you to either approve more customers or put the customers, the consumer, the future homeowner in the right loan because there's more data. In the case of Vantage 4.0, there's just more data used in that score. So it should allow for a more accurate picture on that consumer. And then we believe allow them to originate more, which is a good thing and put them in the right loans because what you don't want to do is have someone going through the application process, and then they get disappointed because either they have to have a higher down payment or the interest rate is higher than they think because of not having as much data information. But -- so I think both are true. And from our perspective, I think it's broadly recognized, although some maybe would disagree with this, but Vantage 4.0 is a score that has more data in it than FICO Classic. I think 10T closes that gap once it's rolled out than Vantage 4.0. But what's approved by the agencies is what the originators are going to use, and that's what's important. And I think we're all -- I don't think there's a debate. I think we're all just waiting for when will the agencies be ready to accept the VantageScore, and we just think we're getting closer to that stage. And again, from an Equifax perspective, we're advantaged either way. Our guide for 2026 assumes no Vantage conversion. We've laid out for you what the upside is, if there is Vantage conversion, it's only upside. And there's really not a downside to Equifax because both of these scores are calculated using our credit data. and you can't calculate the score without the credit data. So it's -- we think we're well positioned going forward, and we're trying to be responsive to our customers by offering the VantageScore that delivers performance and certainly significant economic value with $1 versus $10. Operator: The next question is coming from Andrew Nicholas from William Blair. Andrew Nicholas: Just one question for me on maybe the AI front. You talked about operating efficiency from AI, product funnels, development life cycles, patent generation, all the benefits you're seeing in the way that you use the technology. Could you speak more to how clients are interacting with you and the data differently, if at all? Are you seeing any changes in usage patterns or evolution in how often clients are interacting or [ why did they ] interact with your data? Any insights there would be great. Mark Begor: Yes. So I think there's long been a macro and it's still -- we're still in that macro about our customers want more data. They want more alternative data. They want more differentiated data and that's one that's a macro that's still, in my opinion, in early innings, meaning there are large lenders that only use the credit file today and aren't using alternative data. And they know that they're going to get a lift with alternative data. What AI is allowing us to do, and again, Equifax has more alternative data than our competitors, which we think is an advantage for Equifax in an AI world, because it allows you to really ingest that differentiated and additional data that's going to drive a more predictive or higher-performing solution for either underwriting or identity or whatever the process is. So we're super energized around, number one, having the cloud substantially complete. We put all our data in a single data fabric. We've got large-scale differentiated data that's proprietary. We have an AI moat around it. And now we're really investing in delivering that data to our customers, either the individual data sets or for lots of customers, scores and models that incorporate more data in it. I mean you can't do that without the explainable AI that as you point out, we've been investing in from a technology standpoint and with our patents, around the ability to deliver that explainable AI that our customers require for their regulators and for their own internal processes and the Fair Credit Reporting Act requires. So really, both of those become another area that is an important differentiator in our space and for Equifax to make sure we're delivering solutions that have that higher performance. And AI is -- we're really seeing a lot of momentum there. I think we pointed out that 100% of our scores last year were using our AI capabilities, and that means higher performance. Our products now are increasingly using AI and we talked about some of our platforms that are having conversational AI, so our customers can use them more readily inside of their operations. So it's still very much early innings between the ability to deliver more differentiated data to our customers and then the ability to do that with AI. Operator: The next question is coming from Scott Wurtzel from Wolfe Research. Scott Wurtzel: Just one for me. We've been getting a lot more questions around just whole kind of tri-merge to bi-merge dynamic and the potential of that move taking place, I guess, given some of the rhetoric we've heard from industry participants. So just kind of wondering what -- if there's anything you guys have heard from whether it's your conversation with regulators or other industry participants just around that whole dynamic and the potential for that... Mark Begor: Yes. Our conversations are quite broad that it's well understood that there's large enough differences between the 3 credit files, that a tri-merge provides performance, meaning it includes more people, provides a more complete picture. If you think about it, most consumers have multiple bank accounts, not every bank will contribute to all 3 credit bureaus. And we've shared stats before. There's 10 million roughly consumers, they're only on one credit bureau. So if you're pulling one or two, you're never going to approve or even see that. And then if you ever look at your credit score between the 3 credit bureaus, it's going to be different by 30, 40, 50 points. And that's because not every bank contributes to all. So our view is that there's a broad understanding that the Tri-Merge delivers both access to credit, meaning having a more complete picture on the consumers, and it also delivers the same in safety and soundness, meaning you're seeing every trade line that a consumer has, both the good and the bad trade lines. So you've got a complete picture. So we think that there's broad support on the Hill with the regulators and with our customers about the power of tri-merge and I think I've shared before on other calls. If you look at the more sophisticated, in my opinion, lenders outside of mortgage, think about cards or others there's many that pull a tri-merge because they get a more complete picture about the consumer for approvals, meaning they can improve more. And they see all the trade lines, so they make sure that they're managing their losses, and they're not missing a trade line that might be a negative trade line in one of the bureaus if they're only pulling a [ 1 or 2B ]. So we think there's a lot of support for it. Operator: The next question is coming from Ryan Griffin from BMO Capital Markets. Ryan Griffin: I was just wondering what percentage of your volumes are soft versus hard pull? And I was wondering where you see that mix evolving over time with some of the new products benefiting in prequal? John Gamble: Yes. So we don't specifically disclose soft versus hard and I think what we've indicated is over the last several years, what we've seen is soft pulls obviously grown meaningfully as a percentage of total pulls. Mark Begor: And I would point you to our revenue is quite strong in hard and soft pulls, which we were very pleased with. Ryan Griffin: Appreciate it. And then just on the lenders onboarded thus far, testing the VantageScore. I was wondering if you could give any information on that group in terms of the customer size or type of lending institution, whether it's banks or independent mortgage brokers? Mark Begor: All of the above. 240 is a lot and includes smaller ones, but a lot of the big ones. So it's broadly, our customers understand how Vantage operates. They understand that it's a performing score. They understand that Fannie and Freddie are going to activate it. It's just a matter of time. It feels like we're getting closer. And then they also understand the cost advantage, which is significant to them. And remember, 1 in 8, 1 in 9, 1 in 7 loans close, the others don't. And that's breakage for the mortgage lenders and at $1 of breakage versus $10 times 3, it's a significant cost savings. As you know, it's been quantified for the industry. It's over $1 billion of cost saves by moving to Vantage. So that gets the attention of the lenders. Operator: Our next question is coming from Kelsey Zhu from Autonomous Research. Kelsey Zhu: Could you maybe talk a little bit more about your expectation around VantageScore market share gains and future pricing policy and the mortgage vertical over the medium term? Mark Begor: Yes. It's hard to put numbers on it and I don't know how far medium term is, but let's say, over the next couple of years, in my opinion -- I think in our opinion, once Vantage is activated by the agencies, there will be adoption and that will be positive for Equifax. It's not in our guide. So that will be incremental margin. Our revenue will go down because we're selling a $1 score versus a $10 score, but our margins will go up because we're going to make a buck instead of making zero and over the medium term, I think there's going to be substantial conversion. Why would a lender if the agencies are approving Vantage, why would they pay $10 versus $1. It's one that's kind of common sense. As far as pricing, we're going to be certainly intended to be very competitive. I think the dollar reflects that versus the current FICO pricing. I don't think any of us know what FICO is intending to do in January of 2027, which is not that far away, whether their price is going to go up, down or sideways, but we're going to be very competitive going forward. And we don't need a lot of price to deliver our long-term framework. That's not how we operate. We're multifaceted in our ability to grow our business. Price is one element. But more important for us is share gains, new product rollouts. In the case of Workforce Solutions, record additions, new verticals that we're penetrating. We've got multiple levers for growth. And in the case of Vantage, it's really going to be a margin opportunity for us to grow our margins going forward. Kelsey Zhu: Got it. Second question, I was wondering if you can talk a little bit more about your outlook for volume growth across card, auto, personal loans for the rest of the year? John Gamble: So I think we gave guidance for our diversified markets for the second quarter. We gave some perspective on the full year, and I think that's kind of consistent... Mark Begor: There's really not a lot of change. Yes. John Gamble: But not a lot of change, right? It's pretty consistent across the rest of the year. Yes. Mark Begor: The consumer is still broadly resilient. Delinquencies are still managed well. Our customers are strong, meaning the financial institutions. I think one variable is how long does this conflict go on in the Middle East? And what is the impact on oil prices? What's the impact on inflation? What's the impact on consumer spending and does that impact financial services? That's hard to handicap how long this is going to go. I think we all hope it gets resolved fairly quickly, and the market seem to reflect that kind of bias. And I think you heard last week and to a lesser degree, this week from the large banks reporting that they're having good originations and managing their delinquencies broadly quite well. So I think that's a good outlook for us in FI when you look through the rest of the year. Operator: Our next question is coming from Craig Huber from Huber Research Partners. Craig Huber: I think a few people could probably blame you guys for not raising your guidance after the very strong first quarter, just given the macro issues out there. But my very specific question is in the month of March with this war starting, this Iran war starting at the end of February, is there any areas in your business that you saw material movement down in the revenue growth rates given this Iran war that you can attribute to? Mark Begor: Mortgage. Craig Huber: Anywhere else though that you can talk about? Mark Begor: It was meaningfully mortgage for sure meaning mortgage, we saw an uptick kind of in the middle of the quarter as rates came down before the Middle East conflict started. And then we saw I think a combination of rate increases and probably consumer psyche about something like that happening in the Middle East, things -- mortgage slow [Audio Gap] And then we talked about -- we saw a little bit in auto, slowdown from probably higher rates. There's also the higher prices of cars from the flow-through of tariffs and other impacts. But we shared earlier that where mortgage is kind of running over the last 4, 5, 6 weeks is kind of back down in line with our February guidance for the year. So that's why we -- it's slightly below that actually, but that's why we held the year. And we're hopeful that if the conflict gets resolved and inflation comes down from the oil impact that there will be some rate reduction. And John pointed out, and I hope you saw that the significant, I would call it, pipeline mortgages at these higher rates that continues to build because mortgage hasn't stopped, but you've got a large pipeline or portfolio consumers that have mortgages at these higher rates of 5, 5.5 and over 6 that will be ready for a refi as soon as rates tick down 25 basis points, 30 basis points, 50 basis points, that creates an opportunity for a refi that's going to be good news for us when that happens. And again, we saw a small piece of that in the middle of the quarter. Craig Huber: And then my follow-up question, if I could. On the securitization market for mortgages, how important is that market there? Any feedback there, et cetera, for getting VantageScore up and rolling and moving along here with market share gains on mortgages? Mark Begor: We don't see it as a real event because there's a lot of securitization that's done in the non-mortgage space. In auto and cards, there's large lenders that are exclusively Vantage that have been securitizing auto portfolios and card portfolios for years, 5 years, 6 years, 7 years. So it's well understood. We don't think it has an impact. It's really more getting the agencies to get their technology and their pricing tables set up to take in that VantageScore. And the indications we're getting is that they're getting close to being ready for that. Operator: The next question is coming from Zachary [indiscernible] from FT Partners. Unknown Analyst: This is [ Zach ] [indiscernible] on for Zachary [indiscernible]. Just a couple of questions on employer. Since the macro is causing some deceleration there. Can you just talk about the underlying trends you're seeing? Is it just the tax credit legislation? Are there other factors maybe between blue-collar versus white-collar, maybe geographically? Jeffrey Meuler: The employer, the big impact is the Work Opportunity Tax Credit, or WOTC, not being -- expiring and not being approved. I think we're -- we and lots of others are lobbying to get that through Congress. There's, I think, broad support to do it because it promotes the employment of certain individuals that really benefit from that. Just as a reminder, we're continuing to process the WOTC applications, even though they're not being accepted for the tax credit [ same ] meaning that we're building a pipeline when it does get activated. And it's hard to handicap when that's going to happen. But that's a meaningful impact in that vertical and employer because it's a larger business for them that we're not able to generate any revenue today, but we're building a pipeline once it does get activated to submit those WOTC applications for approval. Operator: Our next question today is coming from Owen [indiscernible]. Unknown Analyst: I just have a quick clarification on that $35 million margin upside from VantageScore conversion. Could you please talk about the assumptions behind how can we get to this [ map ] by $35 million and the margin profile of VantageScore at $1 per score? Mark Begor: Yes. The margin profile on a dollar is 100% margin. Think about it that way. It's zero with our FICO score. And it's really just taking that dollar current mortgage activity. And the $35 million assumes full adoption at today's run rate of mortgage transactions. Obviously, if the mortgage market improves, that becomes a bigger number. Would you have anything, John? John Gamble: No. It's just based on -- its adoption at our 2026 guidance for the mortgage margin, right? It's just consistent with our guidance. If there was no FICO and 100% Vantage, that's how you get to the $35 million. Mark Begor: And again, just to reclarify, our guide for the year assumes 100% FICO delivery and no Vantage conversion. So this is an upside for us. And again, if there is FICO to Vantage conversion, our revenue would come down, but our margins would go up by that run rate of $35 million. Unknown Analyst: Got it. So that conversion is 100% conversion from zero to... Operator: The next question is coming from Simon [indiscernible] from [ Wolf Child & Company Redburn ] Unknown Analyst: Just wanted to change subject a little bit. And just going back to the discussion you had on consumer permissioning within the verification business. I note that the current friction we have with consumer [indiscernible] are I think that the consumer just has to put in their own -- offer their login details and passwords. And obviously, that creates a huge amount of friction in the whole process. Is there a world in which the requirement actually input passwords and log-in details goes away where just actually giving permission allows access to that data via those providers. I'm just curious about your thoughts around that kind of the legal pathway to that kind of environment. Mark Begor: Yes. It's hard to see that happening. I don't know where they would -- I think you're going down the path of like an AI agent somehow would have to get access to that user ID and password from that individual consumer because they're all individualized by every individual for every account they have and everyone's got lots of accounts. So it's hard to see that happening. What we see in consumer friction, and we participate in it, is that there's a lot of friction with it. And our customers typically don't want to use it because in an application process, too many consumers drop out when they're asked to do more, meaning they want a friction-free, very smooth process, which means instant decisioning and you can't do instant decisioning with consumer permission. So there's a place for it. And that's why we've rolled out our complete income solution for government, and we've had some wins in the government space that where that consumer is willing to invest the time, I think that's where you really get to. And as far as the AI element, it's hard to see. Unknown Analyst: Okay. That's helpful. And just one quick follow-up. Really from a sort of technical perspective here, when you talk about your ex FICO revenue growth, how are your reseller revenues treated [indiscernible]? Are you stripping the FICA revenues out [indiscernible] group as well... Mark Begor: All the way through. Unknown Analyst: All the way through? So that includes the FICO revenues from the [ resold ] FICOs from the other bureaus within that? Mark Begor: We have a tri-merge business. This really assumes the Equifax piece. John Gamble: So what we assume is just any revenue that we paid to FICO or any revenue that would be paid to FICO by Experian and TransUnion has effectively passed through to us by the price that they charge us, right? So this is to try to cover as best we can all of the FICO score revenue that we are paying either directly or indirect. Operator: Our final question today is coming from Arthur Truslove from Citi. Mark Begor: Sorry, Arthur, can you get closer to the phone? We can't hear you. Arthur Truslove: Sorry about that. So for me, you obviously mentioned earlier that AI is contributing to your margin development, and that's very positive. Obviously, your sort of midterm margin guide has always been 50 bps since I've been involved covering the stock. I guess my question would be, like in what sort of set of circumstances could you see that midterm margin guide being bumped up to 75 or 100 basis points? So I just wondered what might bring that about? Mark Begor: Yes. It's a fair question. We're obviously pleased with our guide for the year and super pleased with our performance in the quarter. And as you know, the margin expansion really has two big levers. One is the core operating leverage from the business and the strong top line growth with the operating leverage you get from that generates some of that margin lift, which is directionally that 50 basis points with our long-term framework for revenue growth. And if we're able to grow revenue faster, that's going to be attractive for us as far as operating leverage. On the AI side, it's kind of early days. We're only months into this as far as deploying it. And I think as we get further into it, we see some of the further benefits in operations, which think about that as our call centers and operation centers, which are quite substantial. As I mentioned earlier, as we start getting into the technology side and our ability to use to really accelerate our coding capabilities, which we're seeing some early progress there. I think as that unfolds and then across the rest of the organization, we see some of the benefits, we'll certainly, at the right time, take a look at our long-term margin goal. Today, we feel very comfortable with the 50 bps. We're very pleased with our outperformance guide for 2026 and at 75 bps, and then we'll certainly look at it in the future as we get further into the AI journey. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Trevor for any further closing comments. Trevor Burns: Thanks for everybody's time today. If you have any follow-up questions, please reach out to Molly and I. Thank you, and have a good day. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good morning and welcome to Peoples Bancorp Inc. Conference Call. My name is Chuck and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter ended 03/31/2026. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then 1 on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, please press star then 2. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections and other forward-looking statements regarding Peoples Bancorp Inc.’s future financial performance and future events. These statements are based on management's current expectations. The statements in this call which are not historical fact are forward-looking statements and involve a number of risks and uncertainties, detailed in the Peoples Bancorp Inc. Securities and Exchange Commission filings. Management believes that the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples Bancorp Inc.’s business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples Bancorp Inc. disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples Bancorp Inc.’s first quarter 2026 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles, or GAAP, financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 15 to 20 minutes of prepared commentary, followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available at peoplesbank.com in the Investor Relations section for one year. Participants in this call today are Mr. Tyler Wilcox, President and Chief Executive Officer, along with Ms. Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Tyler Wilcox, you may begin the conference. Tyler Wilcox: Thank you, Chuck. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we announced that we entered into an agreement to merge with Citizens National Corporation. Citizens has approximately $700 million in assets and operates 12 branches in eight counties in Kentucky. We expect to close the merger in 2026. We are excited about this partnership which expands our presence in Kentucky markets that both overlap and complement our existing footprint. Citizens is a deposit-rich franchise that shares a similar philosophy in serving the needs of clients and communities. We look forward to welcoming their shareholders, employees, and clients to become part of the Peoples Bancorp Inc. team. We believe this merger will improve shareholder value and benefit associates of both Citizens and Peoples Bancorp Inc. while offering clients of Citizens more diversified products. I will go into more details on the planned merger later in the call, and you can refer to our accompanying slides for additional details. Now I would like to highlight our results issued this morning. We reported diluted earnings per share of $0.81 for the first quarter. Our results included several improvements compared to the linked quarter. For the first quarter, our net interest margin expanded 4 basis points driven by lower deposit costs. We had a $400 thousand increase in fee-based income. We had loan growth of $13 million when we had originally anticipated loan growth to be flat due to expected paydowns during the first quarter. Our nonperforming loans and delinquency levels improved, while we also experienced reductions in our criticized and classified loan balances. Our noninterest-bearing deposits grew over $41 million, or 3%. Our loan-to-deposit ratio improved to 88.5%. Our tangible equity to tangible assets ratio increased 12 basis points to 8.91%. Our book value per share grew 1% on an annualized basis compared to year-end, while our tangible book value per share improved 3% on an annualized basis. All of our regulatory capital ratios improved, and our diluted EPS of $0.81 exceeded consensus analyst estimates of $0.80. As we have noted previously, we typically have annual first quarter one-time expenses that occur which include stock-based compensation expense related to the annual forfeiture rate true-up on stock vested during the first quarter along with upfront expense on stock grants to retirement-eligible employees, which combined for a total of $764 thousand, negatively impacting diluted EPS by $0.02 per share, and employer health savings account contributions of $689 thousand, which reduced diluted EPS by $0.02 per share. For the first quarter, our provision for credit losses totaled $9.7 million, increasing our allowance for credit losses as a percent of total loans to 1.16% from 1.12% at year-end. Our provision for credit losses for the quarter was driven by a deterioration in macroeconomic conditions used within our models and is not indicative of issues we are seeing within our portfolio. However, we are cautious and disciplined within our underwriting and portfolio management as we assess the impact of the Iran conflict on oil prices and inflationary pressure on prospects and clients. Our annualized quarterly net charge-off rate improved to 40 basis points compared to 44 basis points for the linked quarter. Our small-ticket lease charge-offs totaled $3.8 million for the first quarter and contributed 23 basis points of our annualized quarterly net charge-off rate. While we experienced a reduction in our net charge-offs for the first quarter from a dollar perspective, we do anticipate our second quarter net charge-offs to be consistent with recent quarters. We continue to project that net charge-offs will come down in 2026 compared to recent quarterly levels. We continue to reduce the size of our high balance accounts in our small-ticket leasing business, which totaled around $9 million at March 31, down from nearly $13 million at year-end. For more information on our small-ticket leasing business-related net charge-offs, please refer to our accompanying slides. Our nonperforming loans declined over $3 million compared to the linked quarter, mostly due to reductions in several categories of loans 90-plus days past due and accruing. We also had improvements in our criticized loans, which were down $12 million compared to the linked quarter-end, and our classified loans were down $5 million. At March 31, our criticized loan balance as a percent of total loans improved to 3.31%, while our classified loans as a percent of total loans declined to 2.1%. Our delinquency levels improved, and at March 31, 98.9% of our loan portfolio was considered current compared to 98.6% at year-end. Moving on to loan balances, we generated loan growth of $13 million. We had significant commercial and industrial loan growth of over $111 million, which was partially offset by reductions in construction and commercial real estate loans of about $55 million combined. We also had declines in premium finance and leases of $24 million and $15 million, respectively. We experienced some of the payoffs we had anticipated for the first quarter; however, some of those migrated to the second quarter. I will now turn the call over to Katie Bailey for a discussion of our financial performance. Katie Bailey: Thanks, Tyler. Our net interest income declined $629 thousand compared to the linked quarter, while our net interest margin expanded 4 basis points. Most of the reduction in net interest income was driven by declines in accretion income, which totaled $1.3 million compared to $1.8 million for the fourth quarter, contributing 6 basis points and 8 basis points, respectively. We had two fewer days in the first quarter than in the fourth quarter, which also contributed to the decline in net interest income. The improvement in our net interest margin was partially driven by a 12 basis point reduction in our core deposit costs, which exclude brokered CDs. We also had a decrease in our brokered CD position, which helped to increase our net interest margin. From a total balance sheet perspective, we have worked to minimize our interest rate risk exposure and are in a relatively neutral interest rate risk position. As it relates to our fee-based income, we had growth of $400 thousand compared to the linked quarter. We recognized $1.2 million related to our annual performance-based insurance commissions, which we typically receive in the first quarter of each year. This income was partially offset by lower electronic banking income and deposit account service charges, which are seasonally higher in the fourth quarter of each year. Our noninterest expenses were up $341 thousand compared to the linked quarter. As Tyler mentioned, we typically recognize additional employee-related expense during the first quarter of each year, which drove the increase compared to the fourth quarter. If you exclude our additional one-time expenses from the first quarter, our noninterest expense is actually down compared to the fourth quarter. Our reported efficiency ratio was 58.6% for the first quarter and 57.8% for the linked quarter. The increase in our ratio was driven by the one-time expenses from the first quarter, coupled with lower accretion income. Looking at our balance sheet at quarter-end, our loan-to-deposit ratio improved to 88.5% compared to 88.8% at year-end as our influx of deposits outpaced our loan growth for the first quarter. Our investment portfolio as a percent of total assets declined slightly to 20.3% at March 31, compared to 20.5% at year-end. Our core deposit balances, which exclude brokered CDs, increased $192 million compared to the linked quarter-end. This improvement was due to $102 million of governmental deposit growth coupled with an increase of $41 million in noninterest-bearing deposits. This growth was partially offset by $154 million of declines in our brokered CDs as we reduced our position, opting for lower short-term borrowing rates as a funding source. As a note, our governmental deposits are seasonally higher in the first quarter of each year, so we anticipate seeing some of that money flow out in the second quarter. Our demand deposits as a percent of total deposits were flat at 35% for both quarter-end and year-end. Our noninterest-bearing deposits to total deposits grew to 21% at March 31, compared to 20% at year-end. Moving on to our capital position. All of our regulatory capital ratios improved compared to the linked quarter-end. Our tangible equity to tangible assets ratio improved 12 basis points to 8.9% at quarter-end compared to 8.8% at year-end. Our book value per share grew to $33.85, while our tangible book value per share improved to $22.95, or 3% annualized. We increased our quarterly dividend rate for the eleventh consecutive year to $0.42 per share. This results in an annualized dividend yield of 4.84%. Finally, I will turn the call over to Tyler for his closing comments. Tyler Wilcox: Thank you, Katie. Looking to our results for the full year of 2026, we expect the following, which excludes the impact of noncore expenses and the proposed merger. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 44.2% for the full year of 2026, which includes one 25 basis point rate cut. Each incremental 25 basis point reduction in rates from the Federal Reserve is expected to result in a 3 to 4 basis point decline in our net interest margin for the full year, while similar increases have a 3 to 4 basis point improvement in our net interest margin. We believe our quarterly fee-based income will range between $28 million and $30 million. We expect quarterly total noninterest expense to be between $73 million and $75 million for the remaining quarterly periods of 2026. We believe our loan growth will come in towards the low end of our guided range of 3% to 5% due to the movement of paydowns from late 2025 to 2026, coupled with the macro environment changes that occurred in the first quarter. We anticipate a slight reduction in our net charge-offs for 2026 compared to 2025, which we expect to positively impact provision for credit losses, excluding any changes in the economic forecast. As far as our proposed merger, we find the Citizens merger attractive for many reasons. While we have talked more frequently about large deals to cross 10 billion, we have consistently sought opportunities for depth and efficiency in our existing market. This opportunity with Citizens meets all of those other criteria while retaining the strategic flexibility to organically stay under 10 billion as well as pursue additional merger and acquisition opportunities. Citizens has high-quality, low-cost deposits, and an attractively low loan-to-deposit ratio. This merger will give us increased efficiency in markets where we already have a meaningful presence. Our diversified products and services will allow us to expand offerings to the Citizens client to engage them in a more robust overall financial experience, while giving our existing clients more access to convenient locations. We look forward to welcoming the Citizens associates into our organization and allowing them to continue to deliver high-quality service to their clients while giving their clients the opportunity to work with our other lines of business in fulfilling their needs. This transaction is valued at approximately $77 million, with shareholders of Citizens receiving 2.1 shares of Peoples Bancorp Inc. stock and $8 in cash for each share of Citizens stock. The merger is priced attractively for our shareholders with an expected tangible book value earn-back period of less than one year. As far as assumptions, we anticipate realizing 40% cost savings associated with this transaction, which should improve our combined efficiency ratio. We expect the transaction to be accretive to our 2027 EPS by $0.20. We also anticipate that our regulatory capital ratios will improve at the close of the merger based on pro forma results. We have included additional details regarding the proposed merger within our accompanying slides. The Citizens merger transaction is subject to the satisfaction of customary closing conditions, including regulatory and shareholder approvals. Last quarter, we provided clarity as to our anticipated crossing of 10 billion in assets. We said that absent actions taken, we would cross that mark in 2027. This remains the case, and we also continue to retain some flexibility to remain under 10 billion for a period of time using the levers we described last quarter, including flexibility in our investment portfolio, beyond proposed actions taken related to the merger. Going forward, we will continue to consider all viable paths. These include a larger bank acquisition in the 2 to 5 billion asset range as our primary priority. We additionally see a path where we do more small deals given the larger number of available partners at that level and the potential for efficiencies as seen in our recently announced deal. Additionally, we believe the current regulatory environment is generally favorable to bank mergers and acquisitions, giving opportunities for multiple deals which our team is capable of pursuing and executing. Finally, we will weigh the trade-offs of crossing 10 billion organically in the future and the negative impact of the Durbin Amendment. Ultimately, we acknowledge some uncertainty is inherent in our share price and has been noted by us, our analysts, and our shareholders. Crossing 10 billion in any of these described manners could serve to provide strategic clarity. We continue to strive to increase shareholder value by producing stable and reliable financial results, being mindful with our strategic and organic growth, while giving our clients a robust financial offering. We will always work to make decisions that are in the best interest of our shareholders, associates, and clients. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you. Operator: Thank you. We will now open the call for questions. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question for today will come from Jeff Rulis with D.A. Davidson. Please go ahead. Ryan Payne: Good morning. This is Ryan Payne on for Jeff Rulis. We could start with how the deal came to be and overall your relationship with the bank. Tyler Wilcox: Yeah. Thanks. Appreciate the question. So in 2018, we did the First Commonwealth acquisition, which was headquartered very close in proximity geographically. That represented our first of multiple expansions into Kentucky. And even at that time, we looked around those markets, saw the attractive cost of deposits, saw the kind of like-minded associates and communities where we can make a difference, and, frankly, have had an interest in this franchise ever since then. So we have been watching and waiting for some number of years. They have been a good performing bank and have been committed to independence, and given their recent decision to proceed with exploring a sale, we found that I think we were great partners for each other. And it came together nicely because of that fit, because of that overlap, and because of that long-term interest that we had. Ryan Payne: Great. Appreciate the NIM guide for the full year. But looking ahead with the transaction, where could we see the margin shaking out post the planned security sales and borrowing paydowns? Katie Bailey: Yeah. I mean, I think there is obviously upward trajectory to that number. I think 2026 is going to be impacted, but not until the later part of the year. So I think when we look at 2027 on a more full-year basis, I think there is a 15 to 20 basis point opportunity over our standalone guide on the margin side. Ryan Payne: Got it. Last one for me. So with the 40% cost savings, what is built into that number? Is that more so back office and systems? And do you have estimates on timing of those cost saves? Tyler Wilcox: Yeah. I will address the timing first. We expect about 50% of that cost savings to be effectuated within 2026 and the remainder within the beginning of 2027. As to the mix of that, it is a combination of everything. There are contracts, there are duplicate locations, there is staffing, and so forth. So it is the usual mix of efficiencies gained from the two organizations combining. Ryan Payne: Got it. Thanks, guys. Tyler Wilcox: Thank you. Operator: The next question will come from Tim Switzer with KBW. Please go ahead. Tim Switzer: Hey, good morning. Thanks for taking my question. Hey, congrats on the deal. One quick one, and sorry if you already said this, but any more color you can provide on the timing of the deal close? Are we thinking end of Q3, beginning of Q4? Trying to get a better idea for the model. Tyler Wilcox: Probably right near the ending of Q3 slash beginning of Q4 for closing. We expect conversion in the second quarter sometime of next year. Tim Switzer: Got it. Okay. And does the Citizens acquisition preclude you at all from announcing another merger before closing? Or do you think you still have the capability to do that if the right opportunity arises? Tyler Wilcox: Yeah. If given the right opportunity, we are ready, willing, and able and, you know, obviously continue long-term in many conversations. So should any of those come to fruition, we would be ready to announce that and execute on it. So this does not put us on the sidelines in any way, shape, or form. Tim Switzer: Okay. That is great to hear. And my guess would be no, just given the size, but does this acquisition alter your view on the type of bank you would like to acquire, the size of bank, your strategy or approach to that as you cross 10 billion? Tyler Wilcox: You know, it does not. I think, like I said in the prepared remarks, although we have talked probably more frequently about our number one choice being a single large acquisition, we have left open that possibility, especially in the last year given the regulatory favorability to time to close and those types of things that we have seen in other transactions. So we see that and notice it, and then if we find something that is very attractive in the 1 billion range, maybe a little bit more, maybe a little bit less, that has a lot of the metrics that are attractive for our shareholders like this one is, we would absolutely pursue that and then be on the train to continue that over time and continue to be open in that scenario to larger or smaller deals going forward. Tim Switzer: Gotcha. Very helpful. Thank you, Tyler. Tyler Wilcox: Thank you. Operator: The next question will come from Brendan Nosal with Hovde. Please go ahead. Brendan Nosal: Hey. Good morning, folks. Hope you are doing well. If I look at slide 22, just the actions that you plan around the 10 billion threshold, are those contemplated in the deal accretion of 5.6%? Or would that be further accretive just given where securities roll off versus where the borrowing costs are? Katie Bailey: The transaction, the selling of the securities, is in the metrics that we noted related to the deal. But any further action outside of selling part of their securities portfolio and part of ours is not contemplated in the deal. Brendan Nosal: Sorry. Say that again, Katie. What is included in the deal accretion you provided and what is not? Katie Bailey: Included is the selling of about 303.1 billion of our securities and their securities portfolio. So the 560 million noted on slide 22 is contemplated, or is included, in the deal math that we articulated. Brendan Nosal: Okay. Thank you. That is helpful. Maybe turning to expenses. Even with the seasonally higher items that tend to hit in the first quarter, I thought expenses were really well contained, but it looks like you did increase the expected run rate the final three quarters of the year. Is this just a timing difference for when you realize certain things? Or is there maybe something else worth pointing out? Katie Bailey: The one thing I would point out is it is mostly impacted by operating lease expense, which has corresponding revenue associated with it from our Vantage leasing operations. And so it is positive to pretax earnings, but it does increase the expense base, and that is what is driving that increase in the guide. And there is revenue on the other side, like I said, but that revenue side stayed within our previous guide. Brendan Nosal: Got it. Okay. And let me sneak one more in here. Just on the loan mark for Citizens, I mean, 4% loan mark feels somewhat heavy for the current credit environment. Was there anything particular that drove the mark to that level, whether it is a specific portfolio or something you saw in the diligence process that might not be super obvious to those of us on the outside? Tyler Wilcox: Yeah. I would agree with you that especially their reported metrics, which we found to be validated, had very, very few charge-offs. I would say, one, it is a very small denominator, so one or two loans can significantly move that a little bit. As we did our analysis, they had one or two very small emerging situations that we wanted to take a cautious approach to and ensure that we are fully reserved for. So there is no systematic issue. We are very satisfied with the credit. But that one or two relationships of reasonable size for them is what drove that mark. Brendan Nosal: Okay. That is helpful color, Tyler. Thanks for taking the questions. Tyler Wilcox: Yeah. Thank you. Operator: The next question will come from Adam Kroll with Piper Sandler. Please go ahead. Adam Kroll: Hi. I am on for Nathan Race. Good morning, and thanks for taking my questions. Maybe a question for Katie. You had some really nice reductions in funding costs during the quarter. Are you still seeing opportunities to reduce deposit costs even with the Fed on hold? Katie Bailey: Yeah. We continually evaluate. I think we meet at least twice a month, and more regularly offline, to evaluate pricing and compare our pricing competitively as well as the balances that we are seeing in our portfolio. So we have continued to remain strategic and opportunistic as it relates to deposit costs, and most notably, the retail CD product. Adam Kroll: Got it. Maybe switching to the loan growth guide for the year, just given some of the commentary in the deck on the macro environment changes, I was just wondering if you could provide some color if you are seeing that come through in the pipeline or hearing some of your borrowers pausing on projects. Is it more just being conservative? Tyler Wilcox: I will start by saying it is generally more being conservative. And when we look at the pressures on our net loan growth, it is really about the payoff activity. For context, we expect a little over $400 million in payoffs for the full year, and the vast majority, about $380 million of that, we expect in the first half, just to give you an idea of where we are coming from there. So our commentary about the macro environment: we still continue to see really robust, as shows in our results, C&I loan demand. Maybe tinge down in the CRE project funding and sourcing, but still experienced growth there. And then, finally, I would say maybe on the consumer side, we are seeing a little bit more slowdown, particularly in our indirect and residential, as interest rates remain high and affordability—for example, in the auto industry, I think we have all seen the headlines around the average auto price hitting $50 thousand. And so I think rising fuel costs and some of those things are impacting the consumer demand a little bit more than the commercial demand. Adam Kroll: Got it. Really appreciate the color, Tyler. Maybe just last one on credit. On the North Star portfolio specifically, I was wondering if you had the charge-off contribution specifically from the high balance accounts during the quarter? Tyler Wilcox: The high balance accounts as a percentage of the charge-offs—this quarter they were about $1.15 million of the $3.8 million of the charge-offs within that business, so about 30%. Adam Kroll: Okay. Got it. Thanks for taking my questions. Tyler Wilcox: Thank you. Operator: The next question will come from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, Tyler. Good morning, Katie. I am going to dig a little bit more into the size of the deal. I know you made comments in the prepared remarks and then answered a question on it. But you have obviously been looking for a deal for a while, and then this one comes along and it is significantly smaller, I think, than what we were potentially looking for, which I do not think is a bad thing. Is it fair to say—and you said it—but is it fair to say that the 2 to 5 billion deal that checks all the boxes is much harder to find maybe than you were anticipating, and the more likely path, or at least the easier-to-see path over the next few years, is you do a number of these smaller deals to find your way over 10 billion? Tyler Wilcox: Yeah. I mean, just playing the odds, Danny. One, I would say the old saying, the neighbor's farm only goes on sale once a generation. Right? And so this is a deal that, because it became available now, we felt like we had to be opportunistic and seize on it. But if you are just playing the numbers, there are literally hundreds of banks that fit within the kind of billion-dollar range, and there is a much smaller number in the larger range. So strategically and execution-wise, it is, for all the reasons we have said all along, much more preferable to grab that 3 or 4 billion bank. But there are just fewer. I would say I am still as optimistic as I have been because we continue to have conversations with banks that are in that space. Whether those materialize in two quarters or two years, I cannot say right now, but I am optimistic enough to continue to talk publicly here about that being something that we see as a viable path. But given the numbers and given the favorable regulatory environment and given our ability to execute on that, I would not say it is more likely that we will do a smaller deal, but it maybe is as likely. And we are ready, willing, and able because, again, those who have followed us for a while like you have remember the four deals in four quarters—we are not announcing that, to be very clear—but our team is capable of that. And so we see it as a viable path. Daniel Tamayo: That is great. Thanks, Tyler. Anything else in the loan book or business-wise that you think you are interested in getting out of or selling from their balance sheet? Tyler Wilcox: No. They have a very—you know, their balance sheet and their loan portfolio are very much in line with what you look at First Commonwealth Bank, you look at Premier. Although I would say it is maybe higher quality than some that we have looked at in the past. So there is nothing that we are going to wholesale walk away from. We will work with those clients, and we are looking forward to that. It is in, again, communities we know. There are many loans that we had at some point that they picked up and vice versa. So that is the good of being in markets that we are highly familiar with. Daniel Tamayo: Okay. So the way to think about the net add from a balance sheet perspective is kind of their balance sheet that they are bringing on minus the 560 million securities—meaning that is kind of the way to think about it before any growth, obviously, and maybe some runoff. But that is a fair place to start? Tyler Wilcox: Yeah. That is fair. I think their loan portfolio is about $350 million, you know, CRE and one-to-four family. And it is just very community bank. No surprises. Some c-stores, some hotels, all things we are familiar with. Daniel Tamayo: And, sorry, some cleanup items here. Katie, the 15 to 20 basis points of NIM expansion that you talked about, how much of that is accretion, do you think? Katie Bailey: A couple basis points. It is not a significant contributor to the margin impact. I think the more significant margin benefit is coming from the reduction of low-yielding securities and the paydown of higher-cost overnight wholesale funding. Daniel Tamayo: Got it. Okay. I do not want to take everybody's questions. I am not sure if I am the last one or not. If I am not, let me know, and I will jump off. Otherwise, thanks. Tyler Wilcox: Thank you. Operator: The next question will come from Analyst with Stephens Inc. Please go ahead. Analyst: Hey. Good morning. Maybe just to start, what is the current Durbin-related revenue risk upon crossing 10 billion? Tyler Wilcox: It is about $10 million pretax before this deal. Analyst: Okay. And is there any incremental expenses, or you have kind of already checked off that box? Tyler Wilcox: No. We have our expenses baked in. We are ready to cross, and there will not be a negative dividend to that on expenses for us. Analyst: Okay. And, Katie, I think you had mentioned just kind of the remixing or the repricing of securities. Could you give us some sense for expected cash flows the rest of the year in the securities book and kind of the roll-on, roll-off dynamics within that? Katie Bailey: On a standalone basis for our portfolio, it still remains in that $15 million to $20 million a month of cash flow that we receive. Analyst: Do you know what the yield is on those cash flows? Katie Bailey: I would guess somewhere in the range of 3.50%. Analyst: And you are putting it back on at 100 to 150 bps better? Katie Bailey: Sometimes. It just depends where we are with loan growth and where we are on the funding side. But yes, if we are reinvesting it, I think your number is correct, maybe upwards up to 5% depending where we are in the cycle of the market. Analyst: Do you have—think you had said it is just a couple of bps from accretion from the deal. Is that right out of the gate? Katie Bailey: Correct. Analyst: Alright. That is all I had. Thanks for taking my questions. Tyler Wilcox: Thank you. Operator: The next question is a follow-up from Adam Kroll with Piper Sandler. Please go ahead. Adam Kroll: Hi. Just a follow-up for me, maybe for Katie. I would be curious: what are new loans coming on the portfolio at, and more broadly, what are you seeing from a competition perspective, and maybe just remind us what you have in terms of fixed-rate loans repricing over the next year or so? Katie Bailey: Sure. So the rate that is coming on, as you might imagine, varies meaningfully across all the portfolios that we have on the lending side. I would say it is somewhere between 7% and 7.25%. And then as far as fixed versus variable, it is about 50/50. I think we are slightly—maybe 55% variable and 45% fixed as we sit here today. And I cannot remember if there was another component to your question. If so, please feel free to re-ask. Adam Kroll: Just in terms of fixed-rate loans maybe repricing higher over the next twelve months or so that could be kind of a tailwind to yields? Katie Bailey: Yes. I think that is correct. And the other thing I have highlighted the last few quarters is the production in our [inaudible] from a rate perspective on new origination. Tyler Wilcox: We expect that ramp up to—as we have talked about, new management there—towards the end of this year, beginning of next year is when you will see that begin to make an impact. Adam Kroll: Got it. Really appreciate the color there. Tyler Wilcox: Thank you. Operator: The next question is a follow-up from Brendan Nosal with Hovde. Please go ahead. Brendan Nosal: Hey, guys. Just not to beat a dead horse on the merger assumptions, but, Katie, you said the security sales were contemplated in the 0.6% EPS accretion. Does that also include the impact of the borrowing reduction? Katie Bailey: Yes. The whole balance sheet trade right there is included. Brendan Nosal: Okay. Perfect. And then one other for me, just on North Star. I get the work you have done on the high balance stuff. But given that two-thirds of the charge-offs from North Star are coming from outside of that particular sleeve, is there anything else you need to contemplate to get the loss content in that book where you need to, or is the high balance activity sufficient in your view? Tyler Wilcox: No, there is action taken. We talk about the high balance quite a bit because it is a quantifiable portfolio that we have not originated for well over a year now, and we want to make clear that that is not going to be a recurring issue. As to the rest of it, one, the denominator has continued to shrink, and that is, as Katie just acknowledged, by design. And so the charge-off rate is a bit higher than we would like, but historically we would like to get back to that 4% to 6% charge-off rate. So as we turn that portfolio around to growth and originate what we will be seeing that is non–high balance and that is of the quality that will deliver that 4% to 6% charge-off ratio, we feel good about where the credit target is. I think we are right over the target that we want to be at, and it is just going to take a while for that rate to normalize as the portfolio begins to grow again. Some of that is non–high balance but is related to the 2022–2023 vintages. But with what we have been putting on the books and in this new credit regime over the last year, we have a high degree of confidence that we have it under control, and it is a viable business that we are pretty excited about for the reasons that Katie articulated in the future. Brendan Nosal: Okay. Fantastic. Thank you for taking the follow-ups. Tyler Wilcox: Thank you. Operator: The next question will come from Daniel Cardenas with Brean Capital. Please go ahead. Daniel Cardenas: Good morning, guys. Congrats on the deal. Just absent the transaction, maybe if you could—and I apologize if I missed this; I have been jumping around here—give us some color on competitive factors on the deposit side. Are those beginning to pick up in your footprint, or are they still manageable at the moment? Tyler Wilcox: Yeah. I would say it is manageable. Katie talked a little bit about our regular pricing committee where we do evaluation of our extensive geography. There are always some outlier players, often smaller banks or credit unions. But we are able to maintain where we want to be from a macro perspective. We do not—as we shared last quarter—we do not chase stupid. It is a technical banking term, but we really value our margins. So we do not price to the lowest common denominator, and we are competing largely against rational actors in the community bank and larger regional space. Daniel Cardenas: Perfect. All my other questions have been asked and answered. Thank you. Tyler Wilcox: Thank you. Operator: The next question is a follow-up from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thanks, guys. Super quick one. The Durbin hit of $10 million I think you said was before the deal. I imagine it is really small, but do you have a sense for what Citizens would add to that? Tyler Wilcox: It is about $1 million, Danny. Daniel Tamayo: Great. Okay. Thanks. That is all I had. Tyler Wilcox: Yep. Thank you. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Mr. Tyler Wilcox for any closing remarks. Tyler Wilcox: Yes. I want to thank everybody for joining our call this morning. Please remember that our earnings release and a webcast of this call, and our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Steel Dynamics, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, 04/21/2026, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead. David Lipschitz: Thank you. Good morning, and welcome to the Steel Dynamics, Inc. First Quarter 2026 Earnings Conference Call. As a reminder, today's call is being recorded and will be available on our website for replay later today. Leading today's call are Mark D. Millett, Chairman and Chief Executive Officer; Theresa E. Wagler, Executive Vice President and Chief Financial Officer; and Barry T. Schneider, President and Chief Operating Officer. Other members of our senior leadership team are joining us on the call individually. Some of today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate, or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to integrating or starting up new assets, the aluminum industry, the use of estimates and assumptions in connection with anticipated project returns in our steel, metals recycling, fabrication, and aluminum businesses, as well as to general business and economic conditions. Examples of these are described in a related press release as well as in our annually filed SEC Form 10-Ks under the headings Forward-Looking Statements and Risk Factors, found at sec.gov, and applicable in any later SEC Form 10-Q. You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics, Inc. reports first quarter 2026 results. I will now turn the call over to Mark. Thank you, everyone, and good morning. Mark D. Millett: Thanks for sharing your time this morning for our first quarter 2026 earnings call. As reported, our teams achieved a very strong first quarter financial and operational performance. Several highlights for the quarter included record quarterly steel shipments of 3.6 million tons. We saw significant progress within our aluminum operations. It really is exciting to see our vision coming to life there. We had adjusted EBITDA of $700 million. And, again, most importantly, our teams continue to keep safety top of mind. We have an amazing group of people that achieves best-in-class performance each and every day. I am incredibly proud of them and the whole team. Our world-class safety culture continues to evolve, and our team's dedication to our controlled safety philosophy is extraordinary. At some 135 Steel Dynamics, Inc. locations, 94% operated in the first quarter without one lost-time injury. I am continually inspired by the commitment they have for one another, consider themselves family, and challenge the status quo each day. But, as always, we will never be dissatisfied until we achieve a zero-incident environment. Before I continue, I would like to shift to Theresa and Barry for their commentary. Theresa? Theresa E. Wagler: Thanks, Mark. Good morning, everyone, and thank you for joining us this morning. For the first quarter 2026, our net income was $403 million, or $2.78 per diluted share, with adjusted EBITDA of $700 million. First quarter 2026 revenues were $5.2 billion and operating income was $538 million, higher than sequential fourth quarter results driven by higher realized steel pricing and record steel volumes. Our steel operations generated operating income of $557 million in the first quarter, a 73% sequential increase as average selling prices per ton increased $86. From an index perspective, average HRC pricing increased from an average of $850 per ton in the fourth quarter to $975 per ton in the first quarter. Today it is over $1,000. Barry will talk more about the market in a moment. Value-added spreads to HRC have also improved. As the largest coater in North America, this will especially be helpful to our forward performance. As a quick reminder, approximately 75% to 80% of our flat rolled steel business is linked to lagging priced contracts, in aggregate generally lagging two months. So the most recent flat rolled steel price increases will positively impact our second quarter results. Additionally, demand and related pricing for our long product steel is strong, with pricing also continuing to improve. From a metals recycling perspective, first quarter 2026 operating income was $47 million, or 155% higher than sequential earnings, based on higher pricing for both ferrous and nonferrous scrap. Shipments were modestly lower in the first quarter due to inclement weather several weeks in January and February. Scrap flows are strong again with expectations for seasonally increased shipments in the second and third quarters, in addition to increases related to further support of our aluminum operations. Our steel fabrication team achieved first quarter operating income of $90 million, aligned with fourth quarter results, as a benefit from higher shipments was offset by the increase in steel input prices. Our fabrication business generally maintains between 10 to 12 weeks of steel inventory, which can tighten margins in a rising steel price environment. Our steel joist and deck demand remains solid, evidenced by very strong order activity with March representing the current high point. We were with the aluminum management team last week, and things are going incredibly well. That said, a quick reminder that we are still constructing and commissioning while we are in operational startup. Mark will provide specifics in a moment. As for the related first quarter financial impact, earnings for aluminum were lower than we originally expected, with an operating loss of $65 million. Operating costs were significantly higher in January as the team experienced normal startup issues necessitating a temporary pause in operations and a write-down of some inventory. Things were resolved quickly and are operating smoothly now with increasing volumes already being realized. We generated cash flow from operations of $148 million in the first quarter. Cash was reduced by $120 million related to our annual company-wide retirement profit-sharing funding and an additional $150 million related to working capital growth specifically associated with our new aluminum investment. We also experienced significant working capital growth related to increased pricing across our businesses, increasing both customer accounts and inventory values. Our cash generation is consistently strong based on our differentiated circular business model and highly variable low-cost structure. At the end of the quarter, we had liquidity of $2 billion, comprised of cash and investments of $800 million and our fully available unsecured revolver of $1.2 billion. During the first quarter, we invested $138 million in capital investments. We believe total investments for the entirety of 2026 will be in the range of $600 million. In the first quarter, we increased our cash dividend and repurchased $115 million of our common stock, with $687 million remaining authorized at March. These actions reflect the strength of our capital foundation and consistently strong cash flow generation, and our continued confidence in our future. Our capital allocation strategy prioritizes high-return growth, with shareholder distributions comprised of a base positive dividend that is complemented with a variable share repurchase program, while we remain dedicated to maintaining our investment-grade credit designation. Our free cash flow profile has fundamentally changed over the last number of years, from an annual average of $540 million from 2011 to 2015, to $2.4 billion for the most recent five-year period. If you exclude our growth investments related to our Texas steel mill and our new aluminum investment, the average is $3.2 billion per year. And there is more coming. We have invested over $5 billion in three primary organic growth investments, including our Texas mill, our value-added flat roll coating lines, and our aluminum platform. These projects have an estimated through-cycle annual EBITDA of approximately $1.4 billion. We placed ourselves in a position of strength to have a sustainable capital foundation that provides the opportunity for meaningful strategic growth and strong shareholder returns while maintaining our investment-grade metrics. I also want to give a shout-out to our Biocarbon team. Last week, instead of a ribbon-cutting ceremony, we had a log-cutting ceremony, which I think probably has not been done anywhere else in the world. Kudos to that team—it is doing very well as well. Barry? Barry T. Schneider: Thank you, Theresa. Our steel fabrication operations performed well in 2026, delivering strong earnings. Steel joist and deck order backlog was solid at quarter-end, with December through March representing some of the strongest order entry we have seen in the past 18 months. This backlog extends into 2026. We continue to have high expectations for the business this year due to positive customer sentiment, quoting activity, continued manufacturing onshoring, and public funding for infrastructure and other fixed asset investment programs. The uplift from this macro environment could be considerable. Our steel fabrication platform provides meaningful volume support for our steel mills, particularly critical in softer demand environments, allowing us to operate at higher through-cycle utilization rates than our peers. This also helps mitigate the financial risks associated with lower steel prices. Metals recycling operations also performed well in the quarter as scrap prices increased during the quarter, more than doubling operating income—congratulations to the team. They had some tough weather earlier in the year. The North American geographic footprint of our metals recycling platform provides strategic competitive advantage for both our steel mills and our scrap-generating customers. In particular, our Mexican operations strengthen the raw material positions of our Columbus and Sinton facilities. They also provide strategic support for aluminum scrap procurement for our flat rolled aluminum investments. Our metals recycling team is partnering even more closely with our steel and aluminum teams to expand scrap separation capabilities through enhanced processes and technology. This will help mitigate potential prime scrap challenges over time and provide a meaningful advantage in increasing recycled content in our aluminum flat roll products, while expanding our earnings capabilities. The steel team delivered a solid quarter with record shipments of 3.6 million tons. During 2026, the domestic steel industry operated at an estimated production utilization rate of 77%, while our steel mills operated at 89%. We consistently achieve higher utilization due to our value-added product diversification, differentiated customer supply chain solutions, and the support of our internal manufacturing businesses. This higher through-cycle utilization is a key competitive advantage supporting our strong and growing cash generation and best-in-class financial metrics. Regarding the flat rolled steel markets, conditions continue to improve, supported by strong demand and lower imports. Lead times remain elevated and customers remain optimistic about the outlook. Specifically, in flat rolled steel, we see improving value-added spreads returning with the impact of the core trade cases that we won in 2025. Long product steel markets continue to be strong in 2026, and we expect another solid year as demand and pricing remain favorable, particularly in structural steel and railroad rail, with our Columbia City and Roanoke mills both achieving record months in production. SBQ markets are also improving across various sectors with increasing manufacturing and energy product support. Regarding the steel market environment, North American automotive production estimates for 2026 are expected to be similar to 2025. Our specific automotive customer base has not only remained stable, but has provided opportunities for growth. We have become a supplier of choice for many U.S.-based European and Asian automotive producers due in part to our lower carbon content capabilities. Nonresidential construction remains strong, led by data centers and an increase in multifamily home building. Our platforms continue to benefit from ongoing onshoring activity and domestic manufacturing projects. In the energy sector, oil and gas activity has been strong, with the pipe mills already booked well into the summer, and solar continuing to remain strong in our order books. Overall, we remain optimistic concerning demand for our diversified value-added steel products in the coming year. And with that, I will return it to Mark. Mark D. Millett: Alright. Theresa, thank you. As you can see, it has been an incredibly good quarter, with great performance by everyone—something to celebrate for sure. We are also celebrating Barry's birthday today, and it is rarely that we get donuts anymore in the office, but today was a special day, so we are celebrating that too. Sustaining positive results does not just happen. It is the result of the strategies implemented and executed by the teams over time. We have continually invested strategically to provide scale of business, product and market diversification, unique customer supply chains, and we have been linking operating platforms to optimize market opportunities throughout economic cycles. When combined with our performance-driven incentive culture, we consistently achieve at the highest levels compared to our peers. Our foundational focus on market and product diversification into high-margin, value-added products drives higher through-cycle utilization and superior financial metrics. We optimize cash generation, allowing for a consistent and balanced cash allocation strategy that has consistently delivered strong shareholder returns. Our disciplined investment approach continues to support a strong, growing, through-cycle cash generation profile, while maintaining one of the highest ROIC metrics among our industrial peers. At the moment, our largest current investment is in the aluminum flat rolled products arena. When touring the facilities there, the excitement of the aluminum team is palpable as you watch them perform, now transitioning from construction and commissioning to production and serving customers with high-quality products. They are also constructively navigating a roiling aluminum market, manifested by the tragic impacts of the Iranian war and domestic supply chain challenges. But beyond these hopefully near-term constraints, we are also experiencing a unique and very favorable long-term market environment. There is a significant and fundamental domestic supply deficit of over 1.4 million tons of aluminum sheet, and this deficit is forecast to grow with additional demand in the coming years. In 2024 and 2025, that deficit was supplied through high-cost imports, which are now even higher as tariffs increased from 10% in 2024 to the current 50% level. This investment is in clear alignment with Steel Dynamics, Inc.’s core competencies. Our construction capabilities have once again been proven. Both Columbus and our cathouse in Saint Louis Portoci are state-of-the-art facilities, brought on in record time compared to other facilities and at a very reasonable cost, on budget, or near to budget. We are using Steel Dynamics, Inc.’s deep operational know-how in combination with the technical expertise of aluminum industry experts, and our proven incentive-driven performance culture will drive higher efficiency and lower-cost operations compared to our competitors. We also believe we have an advantaged commercial position. Two-thirds of our existing carbon flat rolled steel customers also consume and process aluminum flat rolled sheets. Our growth in the automotive sector will complement our existing steel position and provide customer material optionality. The beverage can market provides countercyclical market diversification and a more stable earnings profile within the aluminum space, further enhancing the consistency of our through-cycle cash generation. Our raw material platform will also facilitate high recycled content. We are the largest North American metals recycler, which includes aluminum, and we have successfully developed new separation technologies allowing us to have more access to usable aluminum scrap at a lower cost. Production to date, even at its early stages, is already confirming our expected earnings differentiation. When markets normalize, we are confident the through-cycle EBITDA expectation for normalized markets remains at $650 million to $700 million, plus a further $40 million to $50 million for our recycling platform. As we have spoken in the past, the four key areas of advantage result from labor efficiency, higher recycled content, high yield, and optimized logistics, all driven by our performance-based operating culture utilizing state-of-the-art equipment. This strategic investment is a cost-effective and high-return growth opportunity providing Steel Dynamics, Inc. with additional countercyclical diversification while further stabilizing and growing our cash generation capabilities. We have seen that the customer base is hungry for a new market entrant—one that is known to be innovative, customer-focused, and responsive. We view business relationships as long term, founded on trust with a continuous goal of creating mutual value—not simply financial value—by providing new supply chain solutions and new products with preferred quality and service. Many customers have already experienced this through the actions we have taken to help solve some of the recent supply chain challenges. It has been fortuitous for us, allowing us to help the market while accelerating material qualification. All startups have their challenges, and I would like to thank our customers for their patience as we fine-tune our operations and continue our ramp-up. Today, we have received certifications from multiple customers for industrial and can sheet finished products, as well as certification for automotive aluminum hot band. What is incredible to me is that even finished automotive products are currently in the qualification process with several automotive customers, and we believe we can receive approvals in the coming weeks. This accelerated certification should allow us to shift our product mix to a higher-margin mix this year, reaching the planned optimized mix of 45% can sheet, 35% automotive, and 20% industrial sometime in 2027. The hot side is fully operational now and has demonstrated the ability to run at full rated capacity. The last of four preheat furnaces will be in service at the end of the second quarter, and we have successfully rolled 3000, 5000, and 6000 alloys. Two of our three cold mills are now ramping operations and producing prime product. The third cold mill is expected to begin producing in the third quarter. The cold reversing mill in particular is successfully producing shippable 3003, 5052, and 3104 product. The first of two automotive continuous anneal and solution heat treat lines (CASH lines) is now operational and producing material for qualification for automotive customers. The team has brought that particular line on in absolute record speed; it truly is testimony to the team we have there, and we believe we should receive qualification from several customers in the coming weeks. The second CASH line is expected to begin commissioning in the third quarter. The team is incredibly excited with the earlier-than-anticipated product certifications, and again it is testament to the incredible talent we have embedded throughout the facility. There is great energy and great momentum. We are extremely excited by the physical production and quality capability of the mill today, especially this early in the startup. We are focused on achieving operational and quality consistency. We continue to believe we will be exiting 2026 at a monthly rate of 90% capacity. As we continue to be impassioned by our current and future growth plans, they will continue to drive the high-return growth momentum we have consistently demonstrated over the years. The earnings growth of our most recent projects is compelling. The capital funding for Sinton, the four value-add lines, and Aluminum Dynamics is basically complete for the projected future through-cycle EBITDA contribution at $1.4 billion a year. I am excited as our teams, customers, and investors recognize the power and consistency of our strong cash generation combined with our disciplined, high-return capital allocation strategy. It is our belief that the steel industry has undergone a paradigm shift in recent years. Supported by a pervasive sense of mercantilism, appropriate trade mechanisms will provide a level playing field. Fixed asset investment will continue to grow, which directly correlates with increased metal products demand. Reshoring of manufacturing continues to increase and, along with AI and cloud computing, will support nonresidential construction—further strengthening what is an already robust long products market. Decarbonization itself will materially steepen the global cost curve, providing Steel Dynamics, Inc. with a huge competitive advantage to gain market share and increase metal spreads. Our diversified value-added product capabilities provide us with a very unique advantage to leverage this evolving business environment and amplify our relative earnings capability. In closing, I never tire of saying that our people are our foundation. Thank you to them for their passion and dedication. We are committed to them, and I remind those listening today that safety for yourselves, your families, and each other is the highest priority. We would be remiss not to thank our loyal customers, many of whom have supported us since our inception. These partnerships are based on trust—on doing what we say we will do—and creating new solutions to enhance the value proposition. Our new aluminum partners are experiencing the same. Also, to our suppliers and service providers, who we value and trust and work with each and every day—thank you. We look forward to creating new opportunities for all of us today and in the years ahead. Thank you, and we will take questions now. Operator: Thank you. We will now open the call for questions. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you pressed star 1 earlier during today's call, please press star 1 again to ensure our equipment has captured your signal. Also, we ask that you please limit yourself to one question to facilitate time for everyone. Any additional questions can be addressed upon reentering the queue. Please hold a moment while we poll for questions. The first question this morning is coming from Albert Bellini from Jefferies. Albert, your line is live. Please go ahead. Albert Bellini: Hi. Good morning, all. Thank you for taking my question. So on aluminum, obviously a lot of external moving parts impacting fundamentals here. One, maybe if you could just talk through some of the impacts you expect to see on the business going forward from the recent change in tariff policy? And then I believe last quarter you briefly touched on mark-to-market margins being higher than what was used in calculating the guided through-cycle EBITDA number for the business. Since that point, we have had some significant global supply impact. Could you provide any further color in terms of how much potential upside to those numbers you see at spot prices or margins? Thank you. Mark D. Millett: I am not so sure our crystal ball is any clearer than yours for the future. Obviously, the market today is absolutely phenomenal from the standpoint of entering a new facility, so qualifying products quicker has been very fortuitous. Margins today are very strong, which is helping a startup ramp. From the performance today—looking at yields, efficiencies, etc.—we are more than confident in the $650 million to $700 million of EBITDA per year, and we do not see downside in the future. Theresa E. Wagler: You are spot on. The spreads that we used from a profitability standpoint—just market-related for each of the product sets—are significantly lower than the spreads available today. Right now, we would like to continue to have the teams perform incredibly well, but there is a significant difference and a significant benefit that would inure to us in today’s spread environment that we think does have more of a structural shift. In the coming months, we would like to discuss what we think through-cycle is. Just like the steel industry went through a structural change and what that might look like, the aluminum industry as well. So I would just say more to come on that. Operator: Thank you. Your next question is coming from Carlos De Alba from Morgan Stanley. Carlos, your line is live. Please go ahead. Carlos De Alba: Thank you very much. Just staying with the aluminum business—congrats on the ramp-up. I wanted to get a little more color on the issues that you faced in the past quarter and related to the inventory write-off you had. Was that due to quality issues, or maybe just more color in general on what happened in the business? And what makes you feel comfortable that you have put those behind and will continue to ramp volumes? Thank you. Mark D. Millett: Thank you, Carlos. Essentially it was principally limited to January and leaked a little into February. You are right; it was a quality issue. It was a stain on the product. We should have caught it, should have seen it, but it has been resolved. Theresa E. Wagler: It was not an equipment issue, Carlos. It was a process issue. Carlos De Alba: Got it. If I may add, any views on how you might ramp up the volumes? Clearly, as you mentioned, current prices are significantly above what everyone expected, so the more you can produce and sell, the better. Any color on that would be great. Thank you. Mark D. Millett: As a ramp—in Q4 we were around 14,000 tons of shipments, give or take. Q1 was around 22,000. Barring any unexpected disruptions, we think we should be around 60,000 to 70,000 tons in the second quarter. The cold reversing mill was running pretty well in the first quarter, and we have the full addition of the first tandem mill, which should change things dramatically. Theresa E. Wagler: To reemphasize the quality point, a majority of what we shipped in the first quarter—and will be in the second quarter as well—is can sheet. So it is high-quality material. Operator: Your next question is coming from Timna Tanners from Wells Fargo. Timna, your line is live. Please go ahead. Timna Tanners: Good morning. Wanted to see if you could provide a little more color about your mix. With the coated lines ramping up, how is that progressing? I did not hear the breakout—if you still provide that, it would be helpful. And a second question: given the strong free cash flow outlook and the fall in CapEx, what are you thinking about in terms of uses of cash? Theresa E. Wagler: Good morning, Timna. Apologies for not covering that earlier. First quarter flat rolled shipments: hot band was 1.017 million tons; cold rolled was 151,000 tons; and coated was 1.53 million tons. The four new value-added lines are operating incredibly well and at full capacity right now, and the markets they service were the most impacted by the court cases. So we are enjoying high-quality production, making our customers happier, and ensuring we have the right mix. From a capital allocation perspective, we are focused on consistently doing what we have been doing: growing the business as our priority, complemented by a progressively positive dividend profile and our share repurchase program, which we are still engaging in. We did take a bit of a pause in the first quarter related to working capital growth for the new operations and increased pricing across the business, but you should continue to expect to see the same balanced approach. Operator: Your next question is coming from Martin Engler from Seaport Research Partners. Martin, your line is live. Please go ahead. Martin Engler: Good morning. Had a question on unit conversion costs. Could you qualitatively touch on positives and negatives quarter-on-quarter—what moved higher, what moved lower—and whether energy was a meaningful influence in the quarter? Barry T. Schneider: Martin, we did not see any huge increases. We have seen some increases in things like paint. As for energy, there were small boosts here and there, but not to a level that concerns us. Despite what is happening around the world, we have very good relationships and we are very efficient with our energy. Our teams respond when there are immediate upsets in energy, and we are able to continue running at very high rates of production. Otherwise, it is not a major concern based on what we have seen so far. Theresa E. Wagler: To Barry’s point, there is nothing specific to point out—just remember product mix has a pretty significant impact when viewed from the outside in. Structural or long steel products generally have higher conversion costs, so as they continue to have robust shipments and volumes due to demand, it can look like our conversion costs are a bit higher. Operator: Your next question is coming from Tristan Gresser from BNP Paribas. Tristan, your line is live. Please go ahead. Tristan Gresser: Thank you, and happy birthday, Barry. On pricing—upcycles have historically seen big swings, but this time increases have been gradual, almost weekly. How do you explain that, and does it improve the sustainability of the current rally? How do you view supply and demand for flat rolled, and any risk of imports picking up? Barry T. Schneider: We are seeing more customer confidence. The tariff environment of the last two years has had impacts, but more importantly, customers have learned supply chains matter. Our local, diverse supply chain position allows us to engage with customers on a longer-term frame than a quarter or half year. We have confidence the market is strong and demand-driven. Pricing has been responsive as capacity has ramped up across the industry. Unfairly dumped imports are very disruptive. Subsequent cases have been filed regarding circumvention. All those steel tons at sea have to find a home. With global interruptions right now, we are happy to have Section 232 protections. The executive orders in early April that further defined steel and aluminum products and derivative products are very helpful because they encompass the entire supply chain. We are feeling the results of U.S. businesses picking up and our supply chain excellence taking hold. We are super excited about long products. There are many big projects where engineering and ownership are getting involved early with our long products team. We market long products and fabrication together to establish positions across projects—pharma, EV production, energy—offering solutions. It is a robust market. We hope globally things calm down, and we will keep making our customers happy. Operator: Your next question is coming from Kashyyanik Kashia. Your line is live. Please go ahead. Kashyyanik Kashia: Thank you. Maybe on the pig iron side—prices are moving higher. How much pig iron do you currently import, and any mitigating factors you are taking? Barry T. Schneider: We only use pig iron at our flat rolled mills. Our Butler mill has its own technology for making liquid iron that takes care of about 90% of Butler’s needs, produced from recycled iron oxide products—very sustainable. Columbus and Sinton are the primary users of pig iron. We will use anywhere between 12% to 22%, based on the quality and product requirements. Mitigation really comes through our relationship with Omni, our scrap provider. We have an incredible connection between scrap and steel. Scrap is continually cleaning the shred (what we call Shred 1) so we know exactly what we will get in the melting furnace. We put very clean shredded product and very clean busheling in intentionally when we need it, and use pig iron to supplement. We look at cost and availability every day. We keep good positions, mindful of working capital, and do not binge. Our teams between Omni and scrap and our melt shops do a great job, coordinated by a strong iron team. It is a benefit of our teams being closely connected and empowered to make decisions quickly. Prices go up, but we keep finding better ways to minimize impact. Operator: Your next question is coming from Samuel McKinney from KeyBanc. Samuel, your line is live. Please go ahead. Samuel McKinney: Good morning. After the solid results in structural and rail—you put up the best quarterly shipment number in a couple of years, and demand remains very strong—could you dig deeper into what is driving the uptick in activity and how the 2026 contracts shook out versus last year? Barry T. Schneider: On long products, our incentive-based system drives our people to make better things and more of them. The team has been very efficient in sequencing. Last month, the melt shop in Columbia City cast 200,000 tons, a difficult achievement for a long products mill due to section changes. Operational efficiency helps put the right backlog and inventory in place. Our sales team across long products is working together to ensure Roanoke, Soelia (West Virginia), and Columbia City are equally represented to customers, securing the best positions to make what they need. Optimization is part of our ongoing challenge. Our mills operate with incentives. There has been a shock to the railroad rail system over the last year; we were able to increase some of those products to help alleviate supply-side problems in rail. It continues to be a good part of our offering. Our SBQ mill, with increased sales and relationships in automotive, energy, and forging customers, has also been purchasing from Columbia City. We worked all long products efficiently together. Good decisions made two to three years ago we get to enjoy today. We do not see it slowing down and are engaging projects early to help with spec’ing and laying out the best solution through our fabricating networks. Operator: Your next question is coming from Lawson Winder from Bank of America. Lawson, your line is live. Please go ahead. Lawson Winder: Thank you, operator. Good morning, Mark, Theresa, and Barry—and happy birthday, Barry. You have never passed up an opportunity for growth. Given the opportunity in long products, can you make a compelling case today for a material expansion there? And similarly, now that you are active in aluminum rolling, do you see a case for investment by Steel Dynamics, Inc. into that market as well for new capacity? Mark D. Millett: You know our team—it is incredibly inspiring to see the opportunities and ideas they bring forth. We have a broad pipeline of strategic opportunities—greenfield growth across all the spaces. Aluminum Dynamics for sure has opportunity. The industry reminds us of the steel industry 30-plus years ago—has not consistently earned cost of capital, reinvested, or grown. We would like to take advantage of that. There are product lines where we feel we could invest long term, and there is a massive supply deficit that will continue to grow. We see tremendous opportunity in aluminum. At the same time, we are a steel company, and the steel teams have their own innovative projects. As we see fit, we will invest accordingly. Operator: Your next question is coming from William Chapman Peterson from JPMorgan. Bill, your line is live. Please go ahead. Bennett: Good morning. This is Bennett on for Bill. Thank you for taking my questions. I wanted to ask about steel substitution amid the elevated aluminum price environment. We have heard from companies in both sectors that this may be starting to unfold. Given that Steel Dynamics, Inc. now sits on both sides, are you hearing about this from customers, or seeing evidence to date? Mark D. Millett: The good thing is we have optionality and can take advantage of whatever direction the market may go. We have not seen or heard of any substantial substitution, to be honest. Theresa E. Wagler: Counter to the idea of substitution, there were recent announcements from a major automotive producer adding additional aluminum in auto bodies in the Midwest, increasing demand. That further supports the idea of lack of substitution. Operator: Your next question is coming from Tristan Gresser from BNP Paribas. Tristan, your line is live. Please go ahead. Tristan Gresser: Two quick follow-ups. First, you mentioned in December that the aluminum plant was EBITDA positive—could you share if it was EBITDA positive in March? Second, regarding BlueScope—what is the situation at the moment? Are discussions ongoing? Theresa E. Wagler: Thanks, Tristan. From an aluminum perspective, the plant was not EBITDA positive on a full quarter basis, but it was basically breakeven combined for February and March because we had that pause in January. They are doing an incredible job now, with full expectations for the remainder of the year to be very positive from an EBITDA perspective. Mark, on BlueScope? Mark D. Millett: Obviously, we never talk with great specificity as to what we are doing from a strategic standpoint. Suffice it to say, we have an incredibly strong partnership with Ryan Stokes and the SGH organization. As you know, we presented what we consider a best-and-final joint offer. It was, in our view, full and fair—that was back in February. As you have seen, that offer was summarily rejected, and there has been no constructive engagement by the company since. Operator: Your next question is coming from Timna Tanners from Wells Fargo. Timna, your line is live. Please go ahead. Timna Tanners: Since you addressed BlueScope, I will try another angle. How are you thinking about downstream versus steel growth versus organic projects? In the way past there was talk of a new plate mill—plates are really strong; beams I hear are sold out. Are there other expansion opportunities there, or are you thinking more of a downstream approach? Mark D. Millett: Thank you, Timna. Our strategic philosophy has not changed. We pursue and explore all opportunities. I cannot remember ever saying there might be interest in plate. When Sinton does address sub-plate needs—that is part of the reason the technology was chosen. With Nucor’s entry there, the plate market is well served. Our focus has been and will be downstream—innovative ways to improve and bring value to the supply chain in different products we are not in today. We are not in business just to grow to get bigger. We focus on value-add, differentiating products and supply chains. The team has a myriad of opportunities under exploration. We took a bit of a hiatus given CapEx for Sinton and Aluminum Dynamics. Now that is behind us, we will continue to explore those opportunities. In aluminum, it is phenomenal where we could go. Operator: That concludes our question-and-answer session. I would like to turn the call back over to Mr. Millett for any closing remarks. Mark D. Millett: Thank you. For those still on the call and those that have supported us in the past and today, we will endeavor to spend your money wisely and continue to deliver the best shareholder return in the steel business. Our team—phenomenal job. It is incredible what you do. You inspire me personally. Make sure you are safe and look after each other out there. To our customers and service providers, we cannot do it without you. Thanks for your patience with us—we can be tough at times, but we are doing tough, challenging things, and together we will succeed. Thank you, everybody. Appreciate your support. See you next quarter. Bye. Operator: Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation, and have a great and safe day.
Operator: Good morning, ladies and gentlemen, and welcome to the Alaska Air Group, Inc. 2026 First Quarter Earnings Call. At this time, all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers' remarks, we will conduct a question and answer session for analysts. I would now like to turn the call over to Alaska Air Group, Inc.'s Vice President of Finance, Planning and Investor Relations, Ryan St. John. Ryan St. John: Thank you, operator, and good morning. Thanks for joining us today to discuss our first quarter 2026 earnings results. Yesterday, we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today's call, you'll hear updates from Benito, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. Alaska Air Group, Inc. reported a first quarter GAAP net loss of $193 million. Excluding special items, Alaska Air Group, Inc. reported an adjusted net loss of $192 million. As a reminder, forward-looking statements about future performance may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit cost excluding fuel. As usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Benito. Benito Minicucci: Thanks, Ryan, and good morning, everyone. To start, I want to thank our more than 30,000 employees across Alaska, Hawaiian, and Horizon for their continued focus, professionalism, and commitment to taking care of our guests through another unpredictable start to the year. The operating backdrop shifted rapidly this quarter. Sharply higher fuel prices driven by geopolitical events created uncertainty across global markets and meaningful pressure on the airline industry. At the same time, our network faced more disruption than normal, from once-in-a-generation rainstorms in Hawaii to civil unrest in Puerto Vallarta. Through it all, our teams have demonstrated remarkable resilience. Their response day in and day out remains the foundation of our performance and long-term success. While these events created close-in challenges, we remain convicted and excited about our strategy and the future we are building at Alaska Air Group, Inc. as we continue to unlock the initiatives we laid out under Alaska Accelerate. Throughout our history, we have leaned into periods of disruption to strengthen the company. After the 2001 downturn, we built a transcontinental network. Coming out of the 2008 financial crisis, we established our Hawaii franchise. And most recently, following the COVID pandemic, we acquired Hawaiian Airlines, secured more than 50% market share in Hawaii, and launched long-haul international travel out of Seattle. Each of these moments shaped who we are today. The near-term pressure facing the industry today is real. Fuel costs were more than $100 million higher in the first quarter, and we expect incremental fuel costs of $600 million or more in the second quarter. That represents approximately a $0.70 impact to earnings per share in Q1 and over $3 in Q2. Offsetting some of that pressure is a strong demand backdrop with fare increases holding—Andrew will share more in his comments. Importantly, our position of strength allows us to manage through environments like this while continuing to build long-term earnings power. Today's backdrop reinforces why we designed Alaska Accelerate the way we did: to create a structurally stronger, more diversified, and more resilient airline capable of delivering value across cycles for our owners, employees, and guests. Scale, relevance, and loyalty with an emphasis on premium experiences and international travel remain central to that foundation. And while fuel volatility may dominate near-term headlines, the initiatives most critical to our trajectory remain firmly within our control, and we will continue to execute on them because it is the right strategy. Now turning to the business, we continue to make meaningful progress on Alaska Accelerate, advancing our priorities and not standing still, even in a challenging environment. From an integration standpoint, we've completed preparations for our single passenger service system cutover, our final major guest-facing milestone. Beginning tomorrow, our systems will operate on a single platform, eliminating the friction of a dual environment. This is a significant moment for Alaska Air Group, Inc. We are moving forward with our combined and globally expanding network and award-winning loyalty program and premium offerings across our entire fleet. Along with the PSS cutover, Hawaiian Airlines has officially joined oneworld, expanding benefits for our loyal guests in Hawaii, attracting new oneworld guests onto the Hawaiian brand, and extending our global reach to meet the full range of business and leisure travel needs. Our network continues to grow as we connect our guests to the world. We launch Rome next week and London and Reykjavik later this spring, all tracking toward full flights. I could not be more excited to see the Alaska brand set foot in Europe for the first time in our 94-year history, marking a major milestone in becoming the fourth global carrier in the United States. At the same time, our premium and guest experience continues to improve. Premium retrofits on our 737 fleet are now more than 90% complete, increasing our share of premium seats across the network and driving higher premium revenue. Our entire regional fleet is now retrofitted with free Starlink Wi-Fi and Boeing 737 installations are underway, further enhancing our end-to-end guest experience. Guest satisfaction has already improved 15 points across all Starlink-equipped aircraft and nearly 30 points on regional jets. Another core pillar of Alaska Accelerate—our loyalty platform—continues to gain momentum. We recently agreed to a multiyear extension with enhanced economics and a deeper partnership with Bank of America, supporting continued growth in our loyalty ecosystem and reinforcing loyalty as one of the most powerful earnings drivers in our business. We're also pleased to have reached an agreement with Amazon that eliminates losses under the legacy Hawaiian terms and creates mutual value as the relationship evolves, with still more to do. And finally, despite winter weather and severe rainstorms in Hawaii, we delivered the industry's number one on-time performance in the first quarter along with very high net promoter scores—another indicator that integration friction is in the rearview mirror for Alaska Air Group, Inc. Collectively, these initiatives are reshaping the composition of our revenues and making our business more durable. Today, more than half of our revenues come from outside the main cabin, driven by premium products, loyalty, cargo, and ancillary streams, and we expect that share to keep growing. To close, Alaska Air Group, Inc. is operating from a position of strength. We have a healthy balance sheet, strong liquidity, and a fleet and network that provides flexibility as conditions evolve. I want to reiterate my confidence in our people, our strategy, and our future. We are navigating this environment with discipline, clarity, and purpose. The challenges we are navigating today do not change our longer-term trajectory, our ability to achieve a $10 EPS target, or remain a top margin-producing airline. While the path is rarely linear, the direction is clear, and our conviction in where we are headed has not wavered. Airlines with caring and committed people, strong brands, loyal guests, disciplined cost structures, and financial flexibility are best positioned to emerge stronger, and I firmly believe Alaska Air Group, Inc. fits that profile. I will now turn the call over to Andrew for the financial results. Andrew R. Harrison: Thanks, Benito, and good morning, everyone. Today, I will walk through our first quarter financial performance, our perspective on the near-term demand and revenue environment, and the significant progress we are realizing on the core initiatives that underpin Alaska Accelerate. Total Q1 revenues reached $3.3 billion, up 5% year over year on capacity growth of just 1.7%. Our unit revenues were up 3.5%, in line with our initial expectations for the quarter and building on a strong prior-year comparison. From a demand and revenue perspective, performance in the first quarter was resilient despite the volatile macro backdrop and material demand headwinds uniquely impacting our spring break revenue given our network. Specifically, we experienced significant headwinds in Hawaii and Puerto Vallarta, which together represent approximately 30% of our system capacity. In Hawaii, unprecedented storms—with rainfall reaching as much as 3 thousand percent of normal historical levels during March—disrupted travel plans and drove a spike in cancellations and near-term book-away. In Puerto Vallarta, where Alaska Air Group, Inc. is the largest U.S. carrier, civil unrest leading up to the spring break travel period had a meaningful impact on demand as well. Together, these impacts reduced first quarter unit revenues by nearly one point, with effects continuing into April and May. In response, we have reduced Puerto Vallarta flying by approximately 30% in the second quarter to better align capacity with demand. In Hawaii, we have maintained near-term capacity as the severe weather was transitory. We are busy taking great care of local travelers and welcoming visitors with the Hawaiian experience they know and love, and this past week saw bookings return to last year's level on strong fare increases. Setting aside these regions, we saw broad-based strength across our network. Premium demand continued to outperform the system and was up 8% year over year. With over 90% of our premium fleet retrofits complete, we are on track to sell all 1.3 million incremental premium seats across the network ahead of the peak summer travel season. Encouragingly, first class revenue continues to produce positive unit revenues even as capacity increases 5%. Internationally, the Reliance AI network continues to drive strong results as guests are choosing to fly with us in more ways than ever before. Seattle–Tokyo reached profitability in March, less than a year after its launch, and load factors for both Seattle–Tokyo and Seoul exceeded 90%. We are extending this momentum with the launch of Rome next week followed by London and Reykjavik next month. Early booking trends are tracking in line with expectations, with demand building nicely and premium cabins performing particularly well. Notably, more than 70% of guests booked on our new Rome service are Atmos members, materially higher than the rest of our network. Managed corporate travel was exceptionally strong, up 19% in the first quarter. Our international expansion has meaningfully increased Alaska Air Group, Inc.'s relevance with corporate customers. As a result, we are competing for and in some cases exceeding our fare market share in business travel on these long-haul routes, particularly in the U.S. point of sale. We are also seeing improved domestic corporate relevance as global connectivity strengthens our value proposition for corporate travelers. Managed corporate demand remains robust in Q2 with held revenue over the next 90 days up almost 30%. We are seeing broad-based strength across all industries, in particular manufacturing, financial services, and technology, and are beginning to see traction through greater signups for small and medium businesses in our Atmos for Business platform. Turning to loyalty, growth remains a priority for Alaska Air Group, Inc. Every major initiative we are executing on is driving relevance and growth for our members. These large-scale enablers—such as the Hawaiian acquisition and resulting domestic and international network expansion, the launch of our Atmos Rewards platform, issuance of a premium co-brand card, and free Starlink Wi-Fi onboard for Atmos members—are all designed to accelerate growth across our portfolio and deepen engagement with our most valuable guests. And it is working. In the first quarter, we generated $615 million in cash remuneration from our co-brand cards, up 12% year over year, while active membership in the Atmos program grew by 13% year over year. Importantly, we are seeing particular strength in our Hawaii loyalty metrics, with double-digit year-over-year growth across members, new cardholders, and card spend. Over 70% of the Hawaii adult population is now enrolled in Atmos Rewards, reflecting the strong value proposition of our combined network and loyalty program, with two beloved airline brands and oneworld's expansive global connectivity. Spend from our Hawaii-based cardholders increased 19% year over year and now accounts for nearly 6% of the state's GDP. Our top-rated Atmos Rewards program is clearly resonating, attracting more guests, keeping them within our ecosystem, and reinforcing the strength of our loyalty flywheel. As we look to further accelerate the growth and relevance of our Atmos Rewards program, yesterday, we announced a long-term extension of our multidecade partnership with Bank of America. This newly expanded agreement delivers improved economics, all-new capabilities, and a significant step-up in marketing investment as we move to a single issuer of Atmos-branded co-brand products. Through 2030, the agreement secures an additional $1 billion of total cash remuneration while offering what we believe will be a step change in portfolio growth. These economics are incremental to what we shared as part of the Alaska Accelerate vision and go meaningfully beyond the $150 million of loyalty profit we targeted by 2027. We are grateful to the team at Bank of America for their longstanding and continued partnership. Turning to our outlook, we ended the year with one of the most prudent growth plans in the industry. The vast majority of our 2026 growth is concentrated in long-haul flying out of Seattle as we continue to build our new global hub and generate new revenue streams. At the same time, in response to the current fuel environment, we proactively trimmed nearly a point of capacity in May and June, including reductions in Mexico and select late-night departures in high-frequency markets. We now expect second quarter capacity to be up approximately 1% year over year—again among the lowest growth rates in the industry—comprised entirely of our long-haul international service out of Seattle. While our North America capacity is down slightly year over year, the overwhelming majority of our capacity remains deployed in core hubs where we have scale, relevance, and strong loyalty. As conditions evolve, we will continue to prioritize margins, consistent with the disciplined actions we took last year, when we were the first large airline to reduce capacity in response to a challenging macro environment. Demand has shown resilience in the face of higher fares. Incoming yields for continental U.S. markets have sustained an increase of 20%+ year over year in recent weeks, pushing held unit revenues in these regions to up double digits for the back half of the quarter. Given that we still have 35% of revenue to book in the quarter, and provided this demand continues, we would expect to see the system achieve high single-digit unit revenue gains with a path to 10% in Q2, despite an overall two-point drag from Hawaii-specific impacts in the quarter. To wrap up, while the near-term environment remains volatile, we continue to make strong strides on the initiatives that matter most to the long-term value of this business. And importantly, we are not standing still, as evidenced by our new co-brand agreement with Bank of America and the transition to a single passenger service system this week, which will unlock the depth and breadth of our guest products and services seamlessly across our global network. We are executing against Alaska Accelerate, improving the durability and quality of our revenue, maintaining prudent capacity discipline, and investing in areas that strengthen our earnings power over time. I remain confident that the actions we are taking today position Alaska Air Group, Inc. to emerge stronger as conditions evolve. With that, I will pass it over to Shane. Shane R. Tackett: Thanks, Andrew, and good morning, everyone. While we entered 2026 with strong momentum, geopolitical events have quickly disrupted that trajectory, driving an acute run-up in fuel prices that has put pressure on the entire industry. In moments like this, it is important to separate what has changed from what has not. Fuel has moved sharply higher and remains volatile. Demand for air travel has remained both resilient and strong. And we have continued to execute on both our integration and the Alaska Accelerate plan, which is focused on building strength into the business for the long term. While we are once again navigating an unexpected and challenging backdrop, we know that successful airlines will be those with scale, relevance, and loyalty. The Alaska Accelerate plan delivers in each of those areas, and also broadens our commercial model as we expand internationally and in our premium offerings—two areas where demand continues to grow rapidly. As we navigate the near term, we will double down on our core business model: operational excellence, high productivity, and providing award-winning service to our guests, while also delivering on continued investment in the initiatives that will grow our earnings over time. Against that backdrop, our first quarter adjusted loss per share of $1.68 came in better than the midpoint of our revised guidance, reflecting both the resilience of demand and the discipline with which we are managing the business. Absent fuel—which alone accounted for approximately $0.70 of incremental EPS pressure versus our original plan—and the impactful, though transitory, events in Puerto Vallarta and Hawaii that Andrew mentioned, we would have been well above the midpoint of our original guide. Our financial position also remains strong. We have approximately $2.9 billion of total liquidity, including cash on hand and our undrawn line of credit, and $20 billion in unencumbered assets. Net leverage was 3.3x, and our debt-to-capital ratio finished the quarter at 61%. During the quarter, we repaid $340 million of debt and we expect to repay $65 million in the second quarter. Given the dislocation in our share price in March and April, our share repurchases accelerated, bringing our year-to-date total to $250 million, which should more than offset dilution this year. We have $180 million remaining under our $1 billion authorization, but we will pause further repurchases to evaluate the outlook for the remainder of the year. Turning to first quarter results and the second quarter outlook, first quarter unit costs were up 6.3% year over year, in line with our expectations, as we lapped the final quarter of our new flight attendant CBA and experienced some pressure from winter weather and storms in Hawaii. Unit cost for the second quarter, given a close-in reduction of one point of capacity, will be modestly higher than our first quarter result. There are three areas driving this that are transitory in nature. These include the crew training costs for ramp-in of our 787 international flying, a headwind year over year given gains on the sale of our 737-900 fleet last year, and a planned employee recognition expense tied to achieving a single PSS system—the last major customer-facing milestone of the integration. There were several positive trends in our core costs in the first quarter as well, including strong improvements in both aircraft utilization and in productivity across our operation, which were achieved while moving back into the position of the industry's best operation. We also had strong performance in our maintenance division and positive trends in selling-related expenses, where we will continue to realize incremental synergies as we drive revenue growth. Our first quarter fuel price averaged just $2.98 per gallon, reflecting the initial increase in fuel cost that began in late February. We have seen refining margins more than double, and in Singapore, refining margins spiked more than 400% during the quarter. As a result, fuel sourced from Singapore—which historically has been consistently the lowest-cost portion of our supply—became the most expensive, impacting roughly 20% of our total consumption. Given how dynamic the current fuel price and demand backdrop are, we are suspending our full-year guide until conditions stabilize and we have better line of sight to earnings beyond the current quarter. For the second quarter, the range of potential financial outcomes remains wide and difficult to predict. In just the past seven days, fuel prices have moved to as high as $5.15 per gallon and as low as $4.45. Given this, we are providing more detailed information on closed-end unit revenues and unit costs than last quarter, where we focused our guide on an EPS range and capacity only. In the future, we plan to revert to EPS-focused guides as the long-term health and earnings capability of our business remains our top financial priority. For the second quarter, we expect unit cost to be about 1.5 points above our first quarter result given we have reduced one point of capacity close in. Unit costs will inflect down in Q3 and Q4 to low single digits. Assuming continued strength in demand—where the balance of bookings that come during the quarter are at currently observed yields—we expect a path to unit revenues of 10%. And for fuel, in April, we will pay approximately $4.75 all-in, and given the current forward curve, we would put the quarter average at $4.50 per gallon. As of today, we are recovering approximately one-third of incremental fuel. We are also assuming a 32% tax rate, though this could change meaningfully depending on both in-quarter performance and also our full-year outlook as we exit the quarter. Any tax accrual changes are not expected to have cash flow impacts, as we expect to not be exposed to cash taxes in the near term. These assumptions result in an EPS estimate of a loss of approximately $1 per share. It is important to step back from the immediate challenges of fuel price, as fuel alone is driving the change in our expected immediate financial performance, and we believe that will normalize over time. Fuel price assumptions are adding $600 million of expense versus expectation for the second quarter, which is a $3.60 impact to EPS alone. The underlying business model is strong, and we see it getting stronger with all of the work we are doing on the commercial side of the business. Absent the fuel price spike, we would have expected to be guiding to a solidly profitable quarter. And absent the transitory Hawaii headwind to RASK, we believe our unit revenue trends are as strong as others who have reported. While this is not how we envisioned starting the year, the underlying demand environment gives us confidence, and the work ahead of us is clear. We are now on the eve of our single passenger service system cutover—a peak integration milestone that, once complete, puts much of the integration friction firmly in the rearview mirror. That unlocks a simpler, faster-moving airline and allows us to fully turn our energy toward the opportunities in front of us. We remain fully committed to deepening the structural advantages that drive long-term success in this industry: scale, relevance, and loyalty. Over time, we expect our revenue profile to increasingly reflect that shift, with a growing share of premium, loyalty, and ancillary streams that provide greater earnings durability across cycles. We are building the right business model, making real progress on the areas within our control, and do not anticipate slowing down in that pursuit. With that, let's go to your questions. Operator: At this time, I would like to invite analysts who would like to ask a question to please press star, then the number 1 on your telephone keypad. Our first question today will come from Jamie Nathaniel Baker with JPMorgan. Jamie Nathaniel Baker: Hey, good morning. Good morning, everybody. So when thinking about the RASM commentary that you just gave—so let's just stick with that 10% round number. Obviously, year on year, there are a lot of initiatives that are impacting that, plus some headwinds in Hawaii, which you laid out. I guess the question is, if we looked at same-store RASM in the second quarter, what do you think that number would look like relative to the 10% path that you've cited? Andrew R. Harrison: Sorry, Jamie, if I am quite understanding your question—when you say same store, is year over year, which is sort of what we gave you; capacity, I think, was marginally consistent year over year. I am just trying to understand specifically—are you asking about synergies and initiatives impact? Well— Jamie Nathaniel Baker: Yeah. So basically, it is what that 10% RASM number would look like without the synergies and the initiatives, just to get down to sort of the core. So that is the question. What would the core RASM be without the synergies and initiatives that you have cited? It is a RASM question, not capacity. Andrew R. Harrison: Sure. It is probably, you know, a couple of points. But again, some of these things like loyalty are just embedded in the core of our revenue now. But I would say a couple of points, just to give you an answer on that. Jamie Nathaniel Baker: Okay. And then second, it is a quick question. On the PSS cutover, I know you were drawing down reservations on the outgoing system. Is the number of PNRs that you have to port over, I guess by hand, consistent with what your expectations were? Andrew R. Harrison: Yeah. Actually, it was a very small number, I think 10,000—give or take on that. But essentially, we drained down the vast majority of the system. And at 6:30 a.m. Eastern Time this morning, our Incheon–Seattle, our Haneda–Honolulu, and now our JFK–Honolulu check-ins have already started, and passengers are already booking in, and things are going fantastically. Jamie Nathaniel Baker: Excellent. Thank you for the color. Appreciate it. Benito Minicucci: Thanks, Jamie. Operator: And our next question will come from Conor T. Cunningham with Melius Research. Hi, everyone. Thank you. Conor T. Cunningham: Shane, maybe I could jump to you. I was hoping you could unpack the puts and takes on the second-half cost trajectory. I realize you called out a fair bit of near-term headwinds. I am just trying to understand how those potentially roll off, and then maybe just directionally how you see each quarter. The only reason why I bring that up is that comps are all over the place. So any help there would be good. Thank you. Shane R. Tackett: Yeah, hey, Conor. Thanks, appreciate the question. Happy to unpack this a little bit. I just want to reiterate—and we said much of this in the script—but just to frame: in the second quarter, we are a bit up from the first quarter. I think there are three to four points in the second quarter that are not really structural to the business. We cut one point of capacity close in. That is always tough to remove the costs when we do that, though it was totally the right thing to do. We have got a point of buildup of crew for our 787 Seattle international flying. That is going to normalize in the business as we begin this flying in earnest out of Seattle, which starts here in a couple of weeks into Rome and then throughout the summer. We do have some planned recognition for employees, given all they have been through over the past year and a half or so with integration. And we are lapping some asset sales from last year. So structurally, the core business is not at closer to the 8%, but probably more like 4% to 5% on a really low growth rate. In the second half, what you are going to start to see—I do think a lot of this is enabled by getting through this last PSS integration milestone—we really are at peak friction over the last couple of quarters with integration, and now we can go to peak focus on optimizing the airline. Unit wages will exit the year at a rate that is equivalent to or lower than our Q4 2025 results. So we are starting to see productivity really tick up; there is more to come. We have got a lot of fleets; we have got a lot of opportunity over time to continue to right-size the network, the banking in our airports, and ultimately rationalize the fleets over the next several years and accrue some more productivity gains through those efforts. Our third-party costs for the operation—where we use partners to manage ramp and manage airports—are down on a unit basis, and will continue to reduce on a unit basis through the second half of the year. We are absorbing all of the core inflation in those contracts through just getting more productive with those partners. Aircraft maintenance per block hour—you will see continue to perform well throughout the second half. Aircraft maintenance is always a little bit spiky; it will go up and down quarter over quarter with volumes, but we expect 2026 in total to be less on a per block hour basis than it was last year. We mentioned in the script we have structurally lower cost of revenue through selling expenses and, even though selling expenses likely rise with much higher revenues and fares, on a unit basis they are lower cost than they were pre-integration. Those are a few of the areas. The places where we have challenges that are more structural, we have talked about—there is nothing new. Airport costs: we have generational investments in the West Coast, very similar to the rest of the industry. Those are still normalizing into the cost base and will be for the next couple of years. And then we have these buildup costs that are really related to transforming the airline into an international player in Seattle. Obviously, I mentioned crew, and then we have some guest-facing costs as well. The last thing that we have in front of us is joint CBAs. We need to bring the Hawaiian employees up to Alaska rates. There is no real timing on that; I think the backdrop makes some of those discussions probably spread out a little bit. But the last thing I would say—nothing that we see in the cost side of the business is a surprise to us. And we actually see most of the areas that we are really focused on performing better, and over time really starting to gain traction. I think you will see that in the third and fourth quarter of the year, and we will have a lot to say about it when we get to those earnings calls. Conor T. Cunningham: That was a very detailed answer, thanks. And then, Benito, conviction level on the $10 figure still sounds really high. It sounds more like it is floating now rather than a 2027 number, and you can correct me if I am wrong there. But in an unpredictable environment over the past 15 to 16 months, what is working that gives you so much conviction there? It seems like international is better, loyalty is a lot better, but there are obviously a lot more headwinds associated on the cost side that are out there in the world. What gives you more conviction on this $10 figure long term? Thank you. Benito Minicucci: No, Conor, it is a great question—thanks for asking it. Look, from where I sit, absent fuel, our company is firing on all cylinders. When I look at Alaska Accelerate—when I look at each and every initiative that we laid out there—this company is executing. You look at PSS; this is a major, major milestone. We are executing it. It is going to be a flawless execution, and I feel really good. One of the things—and I am surprised we have not got the question yet—even with 2027, a couple of things: one, this new Bank of America deal—again, I am not sure if you caught it in Andrew's script—it is $1 billion of incremental cash over the next five years, which in 2027 will add a point of margin. We reworked the Amazon deal from losses to not having losses, and we have a little more work to do there as well. And then overall, I think if you believe that fuel prices will moderate—I am not saying it is going to go back to what it was pre-crisis—but if they moderate and some of these fare increases are sticking, we are getting an average of, give or take, $25 on an average fare depending on the market. I believe we have a strong chance of coming out of 2027 and hitting that $10 EPS. Now I cannot tell you from where I sit today because the world is unstable. But as we get into the third and fourth quarter, we will have some pretty good line of sight to tell you where we will be. But I will tell you, if it is not 2027, it is coming. I have never been more convicted. Things are working. Our strategy is working. We are executing, and I feel really good about it. Conor T. Cunningham: Appreciate it. Thank you. Operator: We will move next to Andrew George Didora with BofA Global Research. Andrew George Didora: Hi, good morning, everyone. Maybe moving to demand a little bit. One of the bigger questions we get from investors is around demand elasticity. Based on your prepared remarks, it does not seem like there is much evidence of that at all. But first, are there any particular markets where you might be seeing some pushback on this higher price—obviously outside of, say, Hawaii or Puerto Vallarta? And second, if not, how do you generally think about demand elasticity in this environment? Are you thinking about positioning your network differently than what is planned today in order to get ready for that? Andrew R. Harrison: Hey, thanks, Andrew. I will just say on a personal note that of course there is elasticity in demand in my personal view. In fact, we have seen it here personally. We have had all these fare increases that have been great, and then our RM folks had to go in and manage some of the buckets down, and we found a really good sweet spot. So there is absolutely elasticity. But I think in the current environment it is well able to absorb the double-digit increases in the fare environment. People want to fly. The airplanes are full. So I think that is all good stuff. As it relates to the network, we are only really growing two to three areas. We are growing San Diego at around 20%. We are growing Portland in the high teens. And we are growing an international gateway. Those are all areas of opportunity and strength—loyalty, revenue, seat share—so we feel really good. And as I shared in my prepared remarks, the reality is that the only real absolute growth domestically—because the Portland and San Diego was moving seats around—is really international. We are just very excited, and we are seeing loyalty, fares, front cabin strength. We have a long way to go to get really proficient here, so it is really good. As we sit here today, as long as demand holds up, we feel really good about our network shape. And, Andrew, it is Benito—the other thing I will add to what Andrew said: we have a fantastic fleet now. What is different between before Hawaiian and post-Hawaiian is we have a much more diverse fleet that we can be more creative in exploring new markets where we see higher revenue potential. We have got 30 widebodies now, and that is a lot of dry powder for us to do some pretty novel things. There is a lot that we can and are going to do to make sure that we get the most revenue coming into this company. Andrew George Didora: Thank you for all of that. And then just my second question: obviously, industry consolidation has been in the headlines recently. You have been one of the very few acquirers over the last decade or so in the space. Do you think further consolidation is something Alaska Air Group, Inc. would want to continue? Benito Minicucci: Look, I think consolidation can only happen—having had the experience doing it—it has got a big hurdle, Andrew. It has got to be pro-consumer and pro-competitive. Those are the two hurdles that you have to get over with the DOJ, with the DOT, and a lot of other stakeholders. We know how hard it is to get past those two big hurdles. We have the experience. We know how to do it. But I am super excited about our organic growth plan. I am focused on a $10 EPS, and that is where we think a lot of value is going to come with our plan. Now look, our plan is always to look at what is good for our company and the stakeholders—the people who care about Alaska Air Group, Inc. What do our employees, customers, and our communities, as well as our shareholders, look for from Alaska Air Group, Inc.? And we will always make the right choice given that. Andrew R. Harrison: Thank you, Benito. Benito Minicucci: Thanks, Andrew. Operator: We will move next to Savanthi Syth with Raymond James. Savanthi Syth: Hey, good afternoon. Just curious—you mentioned long-haul operations and how Seattle is progressing. I was curious how the Hawaiian long-haul operation is progressing. Andrew R. Harrison: Hi, Savi. As you may recall, we made some adjustments to Hawaii. We discontinued Fukuoka. We discontinued Narita and moved that to Seattle. So on a year-over-year basis, it is improving. We are mostly left with Japan and Australia, and we continue to move unit revenue forward there. The other thing I should add is now the Hawaii long haul will welcome oneworld into the fold, which will give all these elite guests—whether it is Qantas or Japan Airlines—fantastic benefits. Savanthi Syth: Appreciate that update. And can I ask—you mentioned in the opening remarks improvements to the Amazon contract. Wondering if you could give an update on cargo in general. Benito Minicucci: Yeah, thanks, Savi. Maybe I will hit Amazon very quickly, and I do not know if Jason wants to say cargo in general, because I think it was a bright spot here for us in the first quarter. We have really enjoyed getting to work more closely with the folks at Amazon. We know them because they are neighbors of ours. We have folks who used to work at Alaska over there. So we have worked on deepening the partnership, and I think it is going well. The partnership is getting better. It is getting healthier. We are continuing to talk about how we can deepen it further in a way that is mutually beneficial. We had a nice update to the agreement that is in force today that helps us on the economic side, and we are hopeful that we can expand that through more partnership over time. Maybe just very quickly, Jason, because we are going to try to move to— Jason Matthew Berry: Hi, Savi. Just on the high level on the cargo piece, at the start of the year, we did get to our own single cargo system, which really allowed us to unlock that connectivity that we have been talking about, and we are really beginning to start to harvest from that. Savanthi Syth: Appreciate that. Thank you. Benito Minicucci: Thanks, Savi. Operator: Our next question will come from Scott H. Group with Wolfe Research. Scott H. Group: Hey, thanks. So historically, whenever we see fuel go up, RASM goes up a lot—we are seeing that right now. And then when fuel goes back down, usually RASM goes back down with it. Do you think it is different this time? Shane R. Tackett: I will take a shot at answering that, Scott. We believe there are a lot of reasons that it could be different this time. Fifteen years ago, we had different reasons—but a similar spike in fuel, a tough economy, structural changes in the industry—and then fares that were modestly higher coming out of it and actually did great from an earnings profile perspective for several years. The rapidity with which some of the fares have gone up and the stability with which bookings have held over the last several weeks suggest—like Andrew said—people really want to travel. When they have discretionary income, one of the priorities that they have, it would appear, is to go out and experience the world. Some of these fare increases—$10, $15, $20—on the total cost of a vacation is pretty modest. That is on the consumer side. It is really important that people on our airplanes feel like they have a lot of value for the fare that they are paying, and we are focused on investing in all of the experiences that we have throughout the entire aircraft, on the ground, and also digitally. We are conscientious about the incremental price being paid, and we need to deliver good value for that. On the other side, the industry structurally has to get healthier. You have got multiple airlines near failure before $4–$4.50 fuel, and that just does not work structurally long term. So I think there are a lot of factors that suggest this could be stickier, but we do not know. It is really dependent on how the economy unfolds over the next several quarters. Scott H. Group: And then just one quick follow-up. I think, Andrew, in an earlier question, you were sort of implying that of the 10 points of RASM, a couple of points is more company-specific or synergy—whatever you want to call it. Do you think that couple of points continues at that pace? Can it accelerate from here with the credit card deal? Does it naturally at some point start to slow? How do you think about that two points going forward? Andrew R. Harrison: Yeah, I think—I am just looking at my CFO and CEO here—that it is an imperative that it will continue. Jokes aside, we have dynamic pricing about to hit. We have got O&D coming. As I shared, the economics of the bank relationship—that $1 billion over the original term, which is going to happen—does not include actual incremental growth from our historic growth rates, which had started to flatten out. So overall, we absolutely still have the view that we can close the RASM gap to the industry and that we will continue our unique momentum on the revenue side. Shane R. Tackett: And, Scott, I would just remind: a lot of the initiatives’ value are to come. We are just completing the 800 remodels. We have not begun selling the full fleet of those. We have other things that we need to do in the widebodies, which are beyond 2027, but will be further initiatives that we control that are not really subject to the rest of the industry. So there are a lot of initiatives still to come for us to keep driving something like two points into the P&L for a while yet. Scott H. Group: Thank you, guys. Benito Minicucci: Thanks, Scott. Operator: Next question comes from Thomas John Fitzgerald with TD Cowen. Thomas John Fitzgerald: Hi, thanks very much for the time. Maybe just sticking with the bank deal again—you talked about it being a step change in portfolio growth. Can you elaborate on that a little more? And then put a finer point on the cadence and any benefit this year, and then in between the point of margin in 2027 and as you get to that $1 billion by 2030? Andrew R. Harrison: Yes, thanks, Tom. Maybe Shane will get the second part of that. Just to be clear, because it is a really important thing that is going on here, what is happening is that with our partner, Bank of America, this refreshed agreement—with many different elements in it that have changed—is going to help us realize the benefits of: number one, the acquisition of Hawaiian; number two, the launch of Atmos Rewards; and number three, the expansion of a long-haul network out of Seattle. We are already starting to see that, and of course the marketing investment—there is a big step change there. At the end of the day, the changes in Alaska Air Group, Inc.'s business and fundamentals, and the changes in the agreement, are going to create for us a much longer-term, wider pathway for growth in loyalty and especially in credit card, which, as you know, are very important to our economics. Shane R. Tackett: Quickly on the margin, it is roughly a half point of margin this year and a full point of margin next year. That is before what Andrew was just alluding to, which is portfolio growth that could be stronger than we are seeing today. That is our expectation, but we are not putting any of that into a forecast or guide at this point. Thomas John Fitzgerald: Okay, that is really helpful. Appreciate that, guys. And then thinking about some of the network initiatives—the growth in San Diego, the rebanking of Portland—would you mind maybe just running through your hubs, by RASM or profitability, and rank-ordering them? Where are you seeing the best performance and maybe room for improvement? Thanks again for the time. Andrew R. Harrison: Thanks, Tom. Those are questions we do not really answer, but obviously Seattle is our largest hub and Honolulu is our second largest. If you look at what we are doing, those are 40%, 50%, nearly 65%+ of our total capacity. We have got two large accelerants in both of those—Seattle with rebanking and global long haul, and in Honolulu and Hawaii in general with the integration and all the good things that come from that. We continue to feel really good about the improvement in the economics there. In places like Portland and San Diego, we believe our product, our customer service, and what we are offering will continue to be very valuable. Operator: Thanks, Tom. Our next question will come from Atul Maheswari with UBS Securities. Atul Maheswari: Good morning. Thanks a lot for taking my question. I had a question on costs. Is the back-half low single-digit CASM ex-fuel a good run rate for us to use for 2027 as well now that the PSS integration is behind us? Or are there any puts and takes specifically as it relates to 2027 on the cost side that we need to be aware of? Shane R. Tackett: Thanks, Atul. A couple of things. Our long-term view on growth is around 3% to 4%. We have not grown at those target rates for a couple of years. We think the core cost inflation in the business is 4% to 5%. So we need to ultimately get into the 3% to 4% range to have an opportunity to fully offset the core inflation. But there should be opportunities to go get at least a point of better unit cost performance through optimization of the business and through productivity. That is our thinking structurally about the business over the next year or two. We do have, as I mentioned before, joint CBA deals that are in front of us. It is hard to say if those will be in cycle or out of cycle with the rest of the industry as those other deals come up on other properties. But that would be the one outstanding area that we are going to have to ultimately get deals with our employees on and absorb those into the P&L. I do not think they are super material, but they are the one outstanding item that is nonstandard. Atul Maheswari: Got it, that is helpful. And then as my second question, I was reading some energy reports that global refining capacity is basically down 6% to 8% since the war started. How long can this disruption persist, in your view, before it causes real jet fuel availability problems in markets like Singapore where you source from? What are you seeing in that market right now, and how are you preparing the business should supply actually become an issue there? Shane R. Tackett: Thanks, Atul. I am going to answer as much as I can. We obviously are not the absolute expert on global oil supplies or refineries. We do understand our markets really well and our supply chain really well. We do not foresee any disruption anytime in the foreseeable future across our network. We are not sole-sourced out of Asia or Singapore into any of our markets, and if we need to supply Hawaii—just as an example—from the domestic market, that is totally within our ability to do so. Our hope is long term it normalizes, Singapore refineries come back on strong, and those costs return to where they were pre-conflict, as it was a really nice lower-cost source of fuel for us into the network. We would like to enjoy that structurally over time. We have also talked about this a bit—we need to work on the West Coast Jet-A supply issue long term. There is increasing desire to fly and demand for Jet-A, and we do not have the pipeline infrastructure or refinery infrastructure that the Gulf Coast or the East Coast has. That will take time, but it is something that we are focused on, and I think other airlines are starting to focus on along with us. Atul Maheswari: Thank you, and good luck with the rest of the year. Benito Minicucci: Thank you, Atul. Operator: We will move next to Catherine Maureen O'Brien with Goldman Sachs. Catherine Maureen O'Brien: Hey, good morning, everyone. Thanks for the time. Maybe just on some of the route network changes—you noted that the Seattle-to-Tokyo route has already reached profitability, and load factors are really strong. Can you speak to the profit swing from moving those aircraft from more leisure-focused Japan point-of-sale flights to more mixed travel purpose U.S. point-of-sale? How big of a bottom-line impact was that in 1Q, or any way to think about what that swing could look like, and how that is ramping versus your expectations back when you announced the transaction? Thanks. Andrew R. Harrison: Yeah, thanks, Katie. High level, what I will tell you is—and we track this as part of our synergies—the movement from Honolulu–Narita to Seattle–Narita has driven a meaningful increase in the profitability of that route. Of course, it accrues significantly to our loyalty base and corporate base. We are already seeing numbers there. It has really helped us, from a network perspective, invest and continue to grow Seattle. So I think that has been a very good move. Shane R. Tackett: Katie, I do not think we have priced the losses that were associated with the aircraft we were using for these markets, but they were in the tens of millions. So it is a meaningful change to the underlying economics of the company. Catherine Maureen O'Brien: That is great. Maybe just a follow-up on the corporate angle here. On the 19% managed corporate revenue growth, is it possible for you to break out what the domestic growth was versus the total? I am just trying to get a sense of how meaningful layering in that international connectivity is. And do you have enough international flying to maybe try to go after additional share in an extra round of corporate negotiation? Andrew R. Harrison: Yeah, thanks, Katie. To put this in perspective, the vast majority of all of our managed corporate travelers is obviously still North American domestic, and we will probably give a little bit more visibility over time. What I can tell you—obviously London is going to be huge—but we are already seeing, as a percent of our managed corporates, that it is a very low percentage, but it is already moving up and revenue is multiple points ahead of the actual passenger share as well. More to come—we are in very early innings here. As we get these all launched, and single passenger service system and loyalty and all the rest of it, we will have a lot more exciting things to share, but it is headed in the right direction. Catherine Maureen O'Brien: Great, thanks for the time. Operator: Our next question will come from Brandon Oglenski with Barclays. Brandon Oglenski: Hey, good morning, and thanks for taking my question. Benito, I appreciate the confidence in hitting $10 at some point here. But at the same time—it is different issues—but it is the second year that we are talking about fuel prices and specifically West Coast challenges. I think maybe Shane hit it there that longer term there could be an issue here. How are you positioning your business, from a commercial perspective, to potentially deal with a higher differential on the West Coast? Benito Minicucci: Brandon, it is a great question. If you would have asked me three years ago with the standalone Alaska, it would have been a lot more difficult. But now, we have flying to different geographies and we have the airplanes to access any part of the world today. What gives me confidence is: every year, there is something happening in the world where you have to pivot and move the business somewhere else, and I think we are becoming good at it. We are getting through this acquisition. This acquisition is making us a more resilient, bigger, stronger airline, and we will have—from what I believe are strong hubs that we operate from—relevance and loyalty to build on those networks. I am confident. I cannot predict the future, but I can predict the way we are executing. I know what we have: we have a phenomenal group of employees who are excited, we have great assets, we have a great balance sheet, and we have a track record of delivering and executing. That is what gives me confidence. I am not going to predict the future, but I am going to bet on Alaska Air Group, Inc. Shane R. Tackett: Brandon, just on the second part of the question on fuel structure—and I alluded to some of it—I think long term, we do think Singapore is going to be a nice, stable source of much lower-cost fuel than Gulf Coast. We were doing 20% of our fuel from there, and we like the idea of moving that up materially, maybe even to 30% or 40% over time. The other thing we are doing is, with some partners, working on building infrastructure here in Seattle to be able to take tanker fuel into Seattle, which would be a game changer for us in terms of the supply chain. I think there is a lot of interest in ultimately getting that work done. These are long-tail investments, though, so it is nice to talk about them, but it is probably a ways away before we structurally resolve this. One last reminder: we have had a $0.10 to $0.15 fuel disadvantage structurally for our entire life out here on the West Coast. This is not new for us, and even with that, we have been able to outperform most of the industry on margins over time. Brandon Oglenski: Appreciate those responses. And just maybe really quick for Andrew, is the new co-brand deal included in your RASM guide for the quarter, or should we expect those benefits to actually ramp later in the year? Thank you. Andrew R. Harrison: The agreement is reflected in the second quarter results as it ramps in and, as Shane mentioned, it is roughly a half point of margin this year ramping to a point of margin on the structural changes, and I think we can do even better than that. Brandon Oglenski: Thanks. Benito Minicucci: Thanks, Brandon. Operator: We will move next to Duane Thomas Pfennigwerth with Evercore ISI. Duane Thomas Pfennigwerth: Hey, thanks. Just on pilot training, can you speak to changes across the two segments? You said you are back to growing Alaska, but overall growth is flattish. Maybe speak to what is growing versus what is shrinking. And what are the drivers of increased pilot training costs? Is this all aircraft that are coming over from Hawaiian? Is attrition a component? And when do you expect that to normalize? Shane R. Tackett: Thanks, Duane. A few questions on pilot training. It is not attrition—attrition is effectively zero absent retirements. We have normal retirement patterns; we are not seeing our folks leave for other airlines. The majority of this in Q1 on a year-over-year basis is really building up the Seattle international flying. We have announced and have opened a pilot base here in Seattle on the 787. That flying takes more pilots per flight than Honolulu to the West Coast—even on a widebody—would have taken. So we have just got to get that ramped up into the base, get the flying started, and then it will normalize on an annualized basis as we take one or two 787s per year over the next few years. On the Alaska side, coming out of the last couple of years, we had room in our productivity within the current number of folks we had on the property for Alaska, and we are back to starting to look forward to taking incremental units throughout the back half of the year—you have got to train early to get ready for summer flying. So we have got some modest incremental costs year over year on the Alaska training side. Duane Thomas Pfennigwerth: Thanks. And then just a quick follow-up on cargo. Can you frame how big of a headwind it was to your recent results? And is the goal to get this to breakeven or something better than that? If the goal is breakeven, then why do it? Thank you. Shane R. Tackett: Thanks, Duane. I will not share the specific economics on the freighters. But no—we are not aiming for breakeven. If we are going to put time into flying aircraft around, we feel like we need to earn a reasonable margin, not a breakeven margin. That is not our philosophy in terms of investment. We will be focused on generating decent returns on this flying. Over the next year or two, we are excited—regardless of the freighter contract—about the opportunities with belly cargo on the widebodies, the opportunities to continue to grow our own freight market share up in the state of Alaska and along the West Coast, and we are anxious to talk more about that over the next year or two. Appreciate the question, Duane. Benito Minicucci: Alright, everybody. Thanks for joining us, and we will talk to you next quarter. Operator: This does conclude today's conference call. Thank you for attending. You may now disconnect. The host has ended this call.
Jessica Smith: Good morning, and welcome to BOQ's financial results presentation for the half year ended 28th of February 2026. My name is Jessica Smith. I am the General Manager, Investor Relations and Corporate Affairs at BOQ. On behalf of the management team, I would like to acknowledge the traditional custodians of the land we are meeting on today, the Gadigal people of the Eora Nation. We pay our respects to elders past and present. I'm joined in the room today by BOQ's Managing Director and Chief Executive Officer, Rod Finch; and our Chief Financial Officer, Racheal Kellaway, who will present the results. We are also joined by BOQ's executive team. Following the briefing, there will be an opportunity for questions. I will now hand over to Rod. Rodney Finch: Thank you, Jess. Good morning, everyone, and thank you for joining us today. Our first half 2026 results reflect disciplined execution against our strategy and ongoing delivery of the group's transformation. Over the half, with strength and resilience across the bank and work to position BOQ to deliver more sustainable earnings through the cycle. We continue to deliver against the milestones and initiatives we have previously outlined, making further progress, simplifying the group, strengthening our operational foundations, advancing our digitization agenda and reshaping the balance sheet to optimize returns. At the same time, our focus on customers and communities remain central. In an environment that continues to test households and businesses, we provided targeted customer support, invested further in fraud prevention and financial crime capability and maintained a strong and visible presence in our core markets, particularly Queensland. The operating environment remains complex with geopolitical uncertainty weighing on consumer and business sentiment. That said, our approach has not changed. We continue to prioritize resilience and sustainability of earnings while progressing our transformation to improve returns and ensure the bank is well positioned for future growth. From a financial resilience perspective, BOQ remains in a strong position. Capital and liquidity levels are robust, asset quality remains sound and our balance sheet provides the flexibility to support customers, navigate uncertainty and continue investing through the cycle. I'll now turn to performance for the half, beginning with our financial results. For the first half, cash earnings were $176 million, down 4% on the prior comparative period. Underlying profit increased by 2%, reflecting revenue and expense growth associated with the completion of the branch network conversion in March 2025. Loan impairment expense was $20 million compared to $3 million in the prior comparative period, which contributed to the 4% decline in cash earnings. We have maintained a strong capital position, which remains well above our management target range. This provides the group with flexibility to support future growth and capacity to absorb potential economic shocks. Reflecting this position, the Board has declared a fully franked interim dividend of $0.20 per share, representing a 75% payout ratio for the half. Racheal will provide more detail on the financial performance shortly. Turning now to the key drivers of our strategy and the strong execution during the half. The digital platform remains a core enabler of our retail strategy, supporting customer growth, improving customer experience and progressively enhancing the economics of the retail bank. Following the launch of term deposits during the half, the core build is now complete, and our focus is shifting to ongoing enhancements that further extend our proposition. To date, we have migrated more than 300,000 customers with over 70% of active retail customers on the platform. Growth and engagement are particularly strong across younger demographics, which was a key strategic objective of the digital bank. From a funding perspective, the digital bank is supporting lower cost deposit growth. The majority of new personal deposits are now originated digitally, supporting higher transactional balances and stronger customer engagement than our legacy platforms. This is also translating into improved lending outcomes. The platform is scaling mortgages in line with plan, with 75% of group home lending originations processed through the platform in March, supporting lower origination costs. Scale increases and enhancements are delivered through the second half of '26 and into FY '27, we remain confident in achieving an improved time to decision and a 50% reduction in origination costs. Overall, this progress reinforces our confidence that the digital bank is delivering on its role, materially improving customer experience, enabling scalable growth and improving retail banking economics. Our productivity program remains a critical enabler of our strategy, reducing complexity, strengthening operational resilience and reducing our cost to serve. Since FY '23, we delivered tangible productivity benefits through a simpler operating model, exits from noncore activities, technology rationalization, a reduced property footprint and continued simplification of our distribution and processing environment following the branch conversion. Our strategic partnership with Capgemini is delivering efficiency through the business processing arrangement. More broadly, we continue to evolve the use of AI across the business with the establishment of a central AI hub to drive adoption and deployment of use cases, including near-term opportunities in the contact center, commercial lending and technology development. When we set out to deliver the $250 million program, we recognized it was ambitious and that the pathway to delivery was unlikely to be linear. As priorities and initiatives have evolved, we expect the full run rate benefits to be achieved of FY '26. With the decommissioning of ME heritage systems and our Capgemini partnership key drivers of that outcome. Importantly, productivity improvements have been sustainably embedded into the way BOQ operates. We have reduced complexity, improved efficiency and created capacity to absorb cost pressures while continuing to invest in our transformation. We expect that on exit of FY '26, we will have generated simplification benefits equivalent to more than 20% of our cost base compared to when the program commenced in FY '23. This is an important outcome in what has been a complex operating environment and reinforces our focus on embedding sustainable efficiency into the way the bank operates. Looking beyond FY '26, we acknowledge there is more work to do. Continued simplification alongside the increasing use of data, automation and AI provides a pathway to drive further productivity and to support operational leverage over time. The capital partner with Challenger announced earlier this month represents an important evolution in our approach to balance sheet optimization and capital efficiency. Our strategic intent is to deliver sustainable returns through shifting asset and funding mix to optimize risk-adjusted returns and grow capital-light income. The capital partnership supports is providing balance sheet optionality and the opportunity for scalable noninterest income growth without the need for capital or funding. The partnership includes a sale of approximately $3.7 billion of our equipment finance back book alongside the establishment of a forward flow arrangement. This structure supports scalable growth in equipment finance without increasing balance sheet concentration or funding requirements while maintaining customer relationships. Under the whole of loan sale, the assets are fully derecognized from BOQ's balance sheet. Risk funding and ownership transfers to Challenger, enabling BOQ to reduce approximately $3.4 billion of higher cost funding, strengthening shareholder returns and further reinforce capital resilience. The forward flow agreement enables us to continue originating new lending using our existing capabilities while scaling the customer offering without increasing balance sheet intensity or concentration risk. Over time this model generates capital-light income through origination and servicing fees, while Challenger provides funding and absorbs credit risk. For BOQ, this supports returns and the ability to do more with our customers. As announced, our intention is to return capital release from this transaction to shareholders with the objective of optimizing return on equity and EPS over time. We are planning to do so through a combination of a fully franked special dividend and an on-market share buyback subject to regulatory and board approvals and market conditions. We expect the transaction to be completed by the end of May. Turning now to progress on our remedial action plans. Delivery of our remedial action plan meeting our regulatory obligations remains a key focus for our management team. We continue to make strong progress across both programs. At the end of the half, 61% of total activities were complete with both Program rQ and AML First transitioning from implementation into the embed phase. This reflects not only delivery against milestones but also a clear shift towards embedding changes into day-to-day business as usual processes. The program remains well governed and appropriately resourced, and we continue to progress in line with regulatory expectations, further strengthening BOQ's risk governance and control frameworks. Turning now to our Retail Bank. Our priority in retail banking remains clear, to reset the economics of home lending and improve returns by scaling a lower cost-to-serve digitally enabled model. We have made considerable progress in reshaping the Retail Bank, including reducing origination costs through the digital platform, delivering term deposits on the platform, which completes the product suite with all deposit products now available on the digital bank and optimizing distribution following the branch conversion. We've also been deliberate in allowing portfolio runoff where returns were uneconomic while improving funding efficiency at the same time. We are now at a key phase as the digital bank scales. More than $23 billion of home lending sits on the platform with approximately 75% of flows originated digitally. The branch conversion has stabilized on a smaller, more efficient footprint and distribution is now better aligned to evolving customer preferences. Foundationally, operating on a modern, cloud-enabled digital platform is also creating a strong underlying capability for the deployment of AI and automation. This has allowed us to explore introducing AI-driven automation across customer operations, particularly in the contact center with further opportunities to improve customer experience and reduce cost to serve. As noted at our full year results last October, the rate of home lending decline has moderated. While we will continue to prioritize returns over short term volume, we expect home lending to return to growth in FY '27, supported by lower origination cost and improved customer experience. Moving to our Business Bank. We are seeing the benefits of focused execution in targeted higher returning specialist segments. Over the half, commercial lending grew above system by 7%, driven primarily by health care, agribusiness and well-secured commercial property. This reflects deliberate portfolio positioning in a sector where we have deep expertise. Housing contraction within the business division reflects targeted runoff where returns were less attractive. The branch conversion continues to support this strategy, enabling banker deployment into key growth corridors and regional SME markets while maintaining strong customer relationships and attracting experienced bankers aligned to our specialist focus. Banker capacity is being further augmented by AI within commercial lending to free up bankers to spend more time with their customers and grow their portfolios. Overall, the Business Bank remains well positioned to deliver sustainable growth, underpinned by strong relationships, quality bankers and deep industry expertise in our key segments. I'll finish by reinforcing the importance of our purpose and values. As a bank with more than 150 years of Queensland heritage, supporting our customers, communities and people remain central to how we operate and make decisions. Across the half, we continue to invest in regional and SME communities and strengthen partnerships supporting vulnerable Australians. At the same time, we remain focused on our people, strengthening the leadership capability, investing in learning and development, including the launch of an AI Academy and sustaining a strong risk culture that supports discipline execution and long-term performance. Together, this underpins the transformation we are delivering, building a stronger and simpler BOQ for our customers, communities and people. I'll now hand over to Racheal to talk more about the financial results in more detail. Racheal Kellaway: Thank you, Rod, and good morning, everyone. The first half 2026 result reflects a steady and continued delivery of our strategy, including bold choices and the disciplined allocation of capital. We delivered cash earnings of $176 million in the half, down 4% against the prior comparative period and 12% against the second half 2025. When compared with the second half of 2025, total income reduced 4% driven by margin compression, fewer days and lower asset balances. There was an uplift of 4% in noninterest income, and we delivered another period of strong cost management, holding expenses flat. Loan impairment expense increased 11% to $20 million. This was primarily driven by one specific provision within the asset finance portfolio, and at 5 basis points to GLA remains below historical levels. Against the prior comparative period, total income increased 5%, primarily driven by revenue uplift from the branch conversion. Expense growth of 6% included bringing on the cost of operating the branch network and is down 2% excluding these costs. Pleasingly, underlying profit increased 2%. Higher loan impairment expense compares to $3 million in the prior comparative period, which included a write-back in commercial lending. The progress we have made on executing against our strategy, including positive lead indicators of success in the digital bank, growth in our Business Bank and our capital partnership and multiyear proof points on cost discipline leave us well positioned as we enter the second half. As outlined to the market earlier this month, there was a $31 million post-tax impact driven by the equipment finance portfolio being recognized as held for sale. Further changes to number will primarily be driven by market movements in swap rates. The impacts of which will be known at completion. There was a further period of amortization relating to the branch strategy with $8 million incurred this half. This program has been delivered on time and on budget as announced in 2024, adding in a small impact from hedging and fair value changes resulted in statutory net profit after tax for the first half of $136 million. I will now spend some time looking closer at the net interest margin given the number of moving parts. On mortgages, we saw ongoing competition, and we experienced slightly higher-than-expected retention discounting, particularly to support branch customers early in the half. Commercial lending competition was in line with expectations and came with strong growth in our Business Bank. We have seen acquisition spreads stabilize through the half. We saw a 1 basis point benefit from continuing mix shift from higher margin -- towards higher-margin business. Outside of these underlying lending drivers, cash rate movements contributed a 4 basis point headwind, driven materially by the non-repeat of benefits in the second half result as rates reduced. Funding contributed a 3 basis point uplift with equal contribution across term deposit optimization, wholesale pricing and funding mix benefits. Liquidity and other was a negative 1 basis point. This included higher HQLA balances, impacting margin by 2 basis points, replicating portfolio, benefiting margin by 1 basis point. However, this was offset by unhedged exposures where the average cash rate in the half was lower than the prior period and less exposure to basis risk and improved basis cost provided a small benefit. Finally, we had a 2 basis points -- we had 2 basis points of a nonrecurring benefit. This is made up of an adjustment to brokerage GST. And as our fast-growing novated leasing portfolio matured, we have an updated view on the average life of that portfolio. Net interest margin for the period was 1.67%. We exited the half with a stronger second quarter margin than the first. Looking to the second half, we will see the benefit from the February and March cash rate movements. Retention activity is expected to continue to feature as households and businesses look to manage their budgets in a rising rate environment and as inflation persists, continuing the trend on underlying price competition. We expect to see ongoing benefit from reshaping the balance sheet toward business lending. We anticipate increasing funding cost benefits from current favorable term deposit spreads, retail deposit optimization and funding mix benefit. Replicating portfolio will continue to be a positive with higher attractive rate. We will optimize liquidity following the sale of the equipment finance portfolio, while impacts from the sale across lending and funding will be broadly neutral to net margin. The 2 basis point benefit one-off I described in our first half will not reoccur. Despite there being somewhat uncertainty and volatility in our outlook, there are more tailwinds than headwinds for margin as we enter the second half. This half, we delivered another period of strong expense management with costs flat on the prior half against a backdrop of high inflation. We are in the final period of our 2023 simplification program, which since its commencement has almost entirely offset annual inflation and new costs to operate the branch network from conversion. This period, inflation and investment across technology, risk and business banking were offset by productivity benefits, seasonality in employee leave and a modest reduction in group investment spend. Whilst we have seen early success in our business processing partnership, we are experiencing some delays in the transition of our technology outsourcing, which is contributing to the multiyear $250 million productivity target and our 2026 cost guidance. The full $30 million of annualized benefits remains on track for 2027. I do want to take this opportunity to reiterate our commitment to sub-inflation cost growth for the full year 2026 against the prior year. This requires a planned reduction in our cost base into the second half. Our guidance on costs remains unchanged. We have continued to invest in the business at a sustainable level with $77 million invested in the first half. As outlined at the full year result, we are moving to a more sustainable level of investment for our business, following a number of years of high investment, including the integration of ME Bank, investment in the Business Bank, the build and scale of the digital bank and risk and regulatory uplifts. 85% of our software intangible assets are now in use and amortizing following the successful delivery of the digital bank and as we acquire and migrate customers and see more features released. Moving now to portfolio quality, and we remain strongly provisioned at 39 basis points to GLA. Impaired assets reduced on last half to $84 million. This includes a reduction in commercial lending and housing impaired balances and an increase in asset finance. Loan impairment expense increased to $20 million or 5 basis points to GLA, remaining at a low level. Looking at each portfolio in more detail over the half. Home lending remains supported by strong underlying asset prices and a decrease in 90-day arrears. There was a $7 million credit to loan impairment expense, driven by the improvement in arrears and house price increases over the period. Commercial lending 90-day arrears saw a slight increase with 2 single name exposures, contributing to a 5-basis-point increase off a low base. Specific provision equity remained low. Total loan impairment expense on the commercial lending portfolio was $3 million. A modest increase in asset finance arrears was largely driven by seasonality with loan impairment expense of $24 million, impacted by a single name exposure, contributing almost half of the expense. BOQ remains well provisioned for a change in the cycle. We hold $298 million in provisions, which is $68 million above the base scenario. We had a reduction in the total collective provision due to the sale of a noncore credit card portfolio, which occurred in the period. Our weightings remain unchanged in the period. However, we have adjusted downwards the economic assumptions, underpinning the base and downside scenarios. We continue to hold collective provision overlays for unique portfolio factors, including specific industries. If we were to enter a 100% downside scenario, a provision increase of $24 million would be required. Our downside scenario assumes residential house prices declining, negative GDP growth and an unemployment rate of 5.6% this calendar year. Whilst we consider our provisions to be appropriate, with current volatility in the broader economic environment, we are remaining vigilant. In a period of sustained lower home lending growth, as we recycled the balance sheet, there was a reduction in total funding. We continue to focus on deposits as a primary source of funding with runoff in less stable deposits and held deposits as a percentage of total funding at 72%, with a broadly stable deposit-to-loan ratio of 85%. There was targeted runoff in term deposit portfolios of 6%. This was both a strategy around optimization for cost of funds but also as we migrated customers onto our new digital platform. Customer deposits remained broadly flat outside of this. Our average LCR remained strong at 141%. As we near completion of the whole of loan sale, we are prudently managing down our liquidity position. We will then see a temporarily elevated LCR before managing this to normalized levels through the second half. Our optimization plan will take the opportunity on our long-term wholesale maturity through our short-term wholesale portfolio and on retail deposits more broadly. Capital ended the half above our target management range at 11.18%, a 24-basis-point increase was driven by earnings, net of dividends. Business lending growth increased underlying risk-weighted assets. However, this was more than offset by a reduction in deferred acquisition costs, adding 2 basis points. Investment consumed 2 basis points. And lastly, other movements increased CET1 by 13 basis points, including mark-to-market gains in the available-for-sale reserve of 9 basis points, deferred tax assets in excess of deferred tax liabilities benefiting 6 basis points and equipment finance portfolio sale impacts of 3 basis points. Our strong capital position supports our planned capital return following the sale of the equipment finance portfolio and as we enter a period of higher uncertainty. As announced earlier in April, we have entered the partnership -- into a partnership with Challenger on the sale of our equipment finance portfolio and the establishment of a forward flow arrangement. Today, we have provided some further detail on the expected impact on our '26 outlook. These impacts do remain subject to change through to completion date, which is on track to occur ahead of initial expectations by early May. In addition, the ranges provided include assumptions on the key moving parts, including the expected benefit from what loan impairment expense would have been without a sale and movements in swap rates. Lastly, while we won't comment further on the detail of the capital management plan, which is subject to Board and regulatory approvals and market conditions, we intend to complete this in an efficient way to support current shareholders and to provide an enduring benefit to both ROE and EPS. In closing, this period saw our focus on costs and capital management did the positive results for the group. 2026 is a key year of delivery against our 4 strategic pillars, in particular, our digitization initiatives, which, in addition to simplifying our business, enables us to grow customer deposits, supporting our commitment to return to asset growth in 2027. We have shown that we will be bold and disciplined in how we deploy capital. With heightened volatility and uncertainty in our environment and how this may in particular, impact funding, margins and losses, commitment to our transformation is even more critical. We continue to remain sharply focused on improving returns over the long term. I'll now hand over to Rod for closing comments and outlook. Rodney Finch: Thanks, Racheal. The external environment remains highly unpredictable with geopolitical uncertainty continuing to increase risks to the economic and financial outlook. We will continue to support customers through these conditions while maintaining disciplined risk settings and strong balance sheet resilience. We will maintain focus on optimizing our balance sheet settings and growing in specialist segments. Growing at system in business lending remains our target heading into the second half, while home lending contraction is expected to continue easing with a return to growth anticipated in FY '27. On the funding side, potential market volatility and further increases in the cash rate will influence competition for deposits. As Racheal outlined, we anticipate tailwinds to margin in the second half through expected funding benefits. We are targeting sub-inflation cost growth, including the full year impact of branch conversion and higher amortization while continuing to progress productivity and simplification initiatives. Loan impairment expense is expected to remain below long-run average loss rates in the near term, though downside risks are clearly present given the global environment. We expect the capital partnership to complete as planned and remain open to further partnerships. We have not changed our management target for CET1 or dividend payout ratios. Overall, we remain focused on disciplined execution, resilience and sustainability as we continue to progress the transformation of BOQ. I want to close by stepping back to where we are in the group's transformation. Our strategy to become a simpler specialist bank has been clear and consistent: strengthening foundations, simplifying the organization, digitizing the retail bank and improving returns. Since resetting the strategy in 2023, we have made tangible progress against each pillar and embedded new capability across the group. We are now entering an important next phase with several near-term milestones approaching, completing the ME retail customer migration and materially decommissioning the legacy ME Bank environment over the next half is the culmination of several years of foundational work. These milestones represent a further step in unlocking lower costs, better customer experience and improved returns over time. They reinforce our confidence in the strategic direction and our continued focus on sustainable performance. On a personal note, when I stepped into the CEO role 8 weeks ago, I reflected on the responsibility that comes with leading a bank with more than 150 years of history. It is a privilege to be a custodian of a brand that generations of Australians have trusted. I'm leading a committed team with a strong focus on the next phase of our transformation with a continued priority of improving returns and supporting customers, in particular, improving our cost of funding as we scale deposits on our digital bank, extend relationships in the business bank and leverage our capital partnership to support a sustainable return to growth. We face into this coming period of uncertainty from a financially resilient position with strong capital, liquidity and asset quality. As I look ahead, our focus is on the continued disciplined execution of our strategy to deliver a better experience for our customers and increased returns for our shareholders. I will now hand to Jess for Q&A. Thank you. Jessica Smith: Thank you, Rod. We will now move to questions. [Operator Instructions] Operator, may we have the first question, please? Operator: First question today comes from Ed Henning from CLSA. Ed Henning: The first one is just on asset growth and mortgages and thank you for your comments today and talking about returning to growth. And I understand continuing to focus on profitability. But can you just talk about as you move forward, both in the near and the medium term, are you willing to continue to lose market share on housing? At what point do you have to step back into the market? Or do you just don't think you need to, if you continue to see margins contracting like you are, are you willing to grow below system in mortgages. Rodney Finch: Yes. Thanks, Ed. So in terms of the mortgage portfolio, the focus is really on returning to growth in '27. If we think about the economics of the mortgage portfolio. The key areas we've been focused on is first is really scaling the digital bank. That's a really critical capability in terms of reducing cost to serve and providing a better experience for both customers, brokers and our bankers. We've talked today to some of those metrics. That platform is scaling to plan. We had around 75% of the originations flow through that in March. So we are well progressed. There's more work to do. I think that also combined with the branch network is really shifting the economics for us in that channel and in that mortgage portfolio. So for us, we're not going to chase short-term returns. We're really focused on the pathway back to returns above our cost of capital, starting with writing business that's accretive to current ROE and then making sure we're contributing to the fixed cost base and being really disciplined as we continue to step our way back to return to growth in '27. Ed Henning: And just on that, I understand the return to growth, but growth doesn't mean growing at system, I would imagine, or is your plan to be at system in '27? Rodney Finch: We're not putting a target on growth relative to system. I think our positioning is returned to growth from a book perspective. I think the priority there, Ed, is making sure that the growth that we are achieving is within the return profile that we're comfortable with. Ed Henning: Okay. And then just a second quick question. And again, thank you for your comments on the cost outlook and growing below inflation. As you move forward, you've made some significant changes in your cost base and you talk about the reducing investment spend. Over the next few years, in the medium term, do you still think you can grow below system or around system in costs? Is that your goal that we should be thinking about? Rodney Finch: We won't give long-term guidance on cost. I think for us, we have worked really hard on the productivity program. As I said, it was an ambitious target when we set it. We're making progress against that. I certainly think leveraging the investments we've made in technology and seeing further opportunities there around automation, digitization, there's continued work that we can do there. We have the benefits of the partnership with Capgemini also flowing through. So for us, we really think that's a key aspect of how we want to organize the business and run it. We think being disciplined on cost management and driving operational leverage in the business, given the investments we made will be a key focus for us into the future. Operator: Our next question comes from Andrew Triggs from JPMorgan. Andrew Triggs: Racheal, a question for you, please. Just on your exit NIM commentary, which you said was higher than the average for the half. Does any of that apply to -- or is any of that driven by lower liquid assets? I'm wondering if the same comment would apply on an ex liquid asset basis? Racheal Kellaway: There is benefit, Andrew, for the liquids portfolio. And so there's 2 elements of that. One is lower HQLAs and the second is a high yield on that portfolio. But it would still hold excluding the sort of comments around it being higher would still hold excluding the specific liquidity impacts. Andrew Triggs: And presumably, that 2 basis points of nonrecurring brokerage and amortization adjustment actually turned into -- does that reverse in the next half? Or just is it -- it will be a non-event in the walk for next half? Racheal Kellaway: It will be -- you'll see it as a negative 2 basis points because it's a non-repeat. So there won't be a P&L. There'll be -- it would come out of P&L, yes. Andrew Triggs: So what moving parts sort of moved in the right direction, therefore, to drive that to cycle that headwind, please? Racheal Kellaway: Yes. So I mean, there's a couple of things in the second, in the first half result, that will not repeat that are negative. And so the first of that really is, if you think about the timing of our end of half, it was the 28th of February. So our half actually saw the negative impacts of cash rates reducing. So there was 3 basis points of negative in this half from the non-repeat of benefits we saw in the second half last year that we called out. If I step back from that, the tailwinds into the second half are cash rate related. So we have seen February and March cash rate increases, that gives us a benefit, both the timing benefit sort of -- but also on the unhedged portfolio. So that is a benefit into the second half. And we have expectations that it is most likely that we will see more cash rate increases through the period as well. The other big driver is really on funding costs more broadly. And so currently, term deposit spreads, for example, are positive. We are expecting that to continue through the half. We're seeing favorability in terms of savings, repricing and then also some funding mix benefits both on an underlying basis, but then also as we optimize from the proceeds of the equipment finance sale. Operator: Our next question comes from Andrew Lyons from Jefferies. Andrew Lyons: Just a first question just on your provisioning. Geopolitically, a significant amount has changed in your result in October, your second half result in October, which appears broadly negative for the economy and your outlook comments appear to confirm this. However, your provision assumptions imply lower dollar value provisioning for each of your scenarios and you've also made no changes to any of your weighting. This does seem a bit at odds with the evolving macro conditions the economy is faced with and also what your peers are doing. Can you just explain why that is the case? Racheal Kellaway: Yes. Look, I mean, as you can imagine, we have thought a lot about our provisioning levels and continue to do so. A couple of comments. The weighting of our collective provision is 45% weighted to downside and severe downside economic scenarios. We have got a worsening outlook within those scenarios. So whilst the weightings haven't changed, the economic assumptions within those scenarios have. If I then step back just more broadly as to your comment around the collective provision in dollar terms reducing, there are 2 idiosyncratic kind of things happening for BOQ in that number. The first is, we did sell a credit card portfolio. That was all settled in the half. It's very small from a balance sheet perspective, but it did mean a reduction in the ECL of $8 million. So that was a step down. The second factor underlying here is our reduction -- overall reduction in assets. And so as our GLA balances have declined, that is also a driver. If you then take those and take those out of the impact, we have increased our CP balance by about 3%. That is actually in line with what we've seen really recently, some of our peers also do. So it's about a 3% increase in the CP. We're very focused there on specific overlays for industries. To call out accommodation in food services, construction, transport, particularly. And so from an overall provisioning perspective, excluding those movements that I called out as sort of one-offs, then we feel that at 39 basis points, we're well provisioned for what could come. But obviously, this is not an area we are really, really comfortable with, and we will remain super vigilant on this. Andrew Lyons: Great. That's really helpful. And then just a second question on costs. On PCP, software assets are up about 86% and yet your amortization charge is up just 23%. Now I realized your FY '26 expense guidance does take account of higher amortization in the second half. But can you perhaps talk to the extent to which the P&L faces a headwind into FY '27 from amortization? Or maybe as an alternative, where do you expect the amortization charge to ultimately peak? At what level and exactly when versus the $43 million 1H '26? Racheal Kellaway: Yes. So we have, as you just called out, we have been really clear that we expect amortization to increase and that is one of the key drivers into the second half that is requiring an offset from our productivity initiatives. So we'll see an increase into the second half. We'll then see quite a similar increase actually into the first half of '27 and again in the second half. So if you look into 2027, we will have higher amortization again, so effectively another half. It will then largely stabilize. So sort of through the end of FY '27 into financial year '28, you can expect our amortization profile to sort of normalize and flatten out at that point. Andrew Lyons: And can I hazard the question as to what that peak level will be in '27/'28? Racheal Kellaway: Look, I mean, we'll end this year close to $100 million. You can sort of expect that to increase by 20% to 25% through until that peak period. Operator: Our next question comes from Matt Wilson from Jarden. Matthew Wilson: Matt Wilson, Jarden. Just look broadly, the balance sheet shrinking and you're only yet -- you're only getting a small amount of capital being released, you hope to return the loan sale capital to shareholders, but at the same time next year, you want to return to system growth, your returns are very low. Do you need that capital to fund that future growth? And given the uncertainty in the macro environment, would it be better to hold on to that capital? It would be a shame if you had to raise capital next year because we went through a credit cycle. And I've got a second question, as per Slide 27, you highlight the impact of the loan sale. If we take the impact on your net interest income, it implies the loss spread of selling those loans, impacts your margin by about 7 basis points. Could you confirm that? And then how do you offset -- that's a lot of work to do by reducing liquids? Rodney Finch: Yes. Thanks, Matt. I'll respond to the first question and I'll just pass to Racheal on the question on the capital sale -- sorry, the capital partnership. Look, in terms of our capital level, we're, as to Racheal's comment, the way we've approached provisioning for the half, she’s going to give an outline of how we're viewing. We note that within the result, we've returned to CET1 well above our management target range of 11.18%. We -- in considering how we approach dividends and shareholder return the capital management plan, we obviously factor into how we're looking to grow and how we want to continue to deploy capital in a really disciplined way. And so when we look into that future scenario into '27, from our perspective, it accommodates how we want to grow within the Business Bank, where we think we have an opportunity to do that in a sustainable way with returns that we're comfortable with, and also in the mortgage portfolio as well as we talked to earlier, which is a pathway to returning growth within the mortgage portfolio. So from where we sit today, recognizing there is some uncertainty in the outlook. We sit here with a strong capital position. We have some flexibility of how we approach it. We have clear plans of where we want to grow, but we are going to be kind of continuing to watch really closely as the market evolves and respond accordingly. But Racheal, I'll pass to you on that. Racheal Kellaway: Yes. So look, on the capital partnership, I will answer your specific question, but I do want to just take the opportunity to step back and talk about the overall P&L impact because I think that is really important and also the sort of capital impacts of that as well. The impact on our 2026 NIM, so the end of this year, is broadly neutral. And so that is a reduction in the net interest income as you described and by sort of 1 or 2 basis points and then that will be offset by funding, largely offset by funding benefits by about the same amount, so broadly neutral to NIM specifically. I think what's really important in this structure is that whilst we recognize there is lost net interest income, we are generating noninterest income, which is capital-light revenue. And so that is the really key thing to look to here. It is also a cyclical business, so you can remove the loan impairment expense that we would have otherwise had. And so this is not a partnership or an arrangement or a structure that really is driving cash earnings impacts in a material way. It is about capital partnership. It is about capital release and then the ability to grow the business, scale the business and to generate more noninterest income capital-light fees without having -- without taking that onto our balance sheet. Matthew Wilson: Just to follow that up, it's -- if you do the math, you're generating 150, 160 basis points of spread on those assets that you've sold. You don't -- that spread you've given up, so that captures the less funding, et cetera. And then when you look at the origination side of the business, 90% of it comes through the broker channel, yet your call out an origination capability, the economics don't make sense either because you're obviously paying brokers. Rodney Finch: Yes. Look, Matt, in terms of the way we think about this business, obviously, it has driven the portfolio. It is a broker-driven industry as well, but there's also significant opportunities within our proprietary franchise as well. We see it as a really core need for many of our customers. If you think about our sector specialization in health care, it's a core need set of those customers as well as wider portfolio. So we see growth not just through the broker channel. We also see work within our proprietary channels as well. As we talked about when we announced this, we see an opportunity to scale growth in this portfolio. And this capital partnership gives us the foundation to do that, driving capital-light income. Matthew Wilson: And on the spread? Racheal Kellaway: Look, I don't think you've quite got the spread. We can go through the detail this afternoon, Matt, if you like. I mean I think I just need to really take you back again though, like we will absolutely be reducing our NIM as a result, of this, but we are looking at this much more broadly than just looking at the NIM. We will be generating noninterest income, as I said, and we will not see a cyclical portfolio and the impacts that, that tends to have on our earnings profile. And so there is a much more benefit to this structure than just the impact on margin. Operator: Our next question comes from Jon Mott from Barrenjoey. Jonathan Mott: I just got a question on the commercial portfolio. Obviously, this is a part of the book, which is growing very rapidly. So if I turn you over to Slide 42 of the presentation, which goes through this in a bit of detail, when we look at it, we can see the commercial book by industry. Property is now at 41% of the book. And if I look at that same slide from last half, it was about 37% of the book. So you work the math out and expand by the growth of the book. The commercial property book is growing at close to 20% half-on-half. This is the commercial properties, so it's growing 20% half-on-half and 40% versus the previous corresponding period. And then you sort of work the rest of the portfolio out, healthcare is pretty flat, agriculture is up a touch, and there's really no growth at all. And then if we look by state, nearly all of this is coming in New South Wales. So a couple of questions about what's driving this. Are you participating in any syndicated facilities that could come through? Can you continue? Are you comfortable with this rapid growth in New South Wales commercial property? And why is the rest of the book not growing? Rodney Finch: Thanks, Jon. So just a couple of comments. What you're seeing in terms of growth in the business portfolio is really the deliberated and targeted approach we've taken to growth corridors. So we have invested in bankers in New South Wales. We thought there was an opportunity to grow there. We were underpenetrated. And so that is really coming through. And more broadly than that, when we look at the types of loans that we're doing, we're really comfortable with the security that we're taking over it, these are quality assets that we're lending. We're well secured on that lending as well. We're operating in industry and sectors that we know well, and that's the experience of our bankers and the credit policy we're applying. So look, that is the composition of the portfolio. We are kind of continuing to focus on growth in the key sectors from a specialist perspective that we're looking at. But as we stand today, we're comfortable with the quality of the growth that's coming through as well. Jonathan Mott: Why so heavily in the commercial property and no growth in health care and all the other sectors, a little bit in agri, but everything else looks flat? Rodney Finch: Yes. Look, I think it's a reflection of where we've targeted growth. And so obviously, as we bring on bankers, they will build their portfolios and that is reflected, I think we take a really balanced approach to where we want to go. I think, obviously, we are well diversified across industries and geographies overall, and we're going to continue to kind of plan that out in terms of how we construct the portfolio. So I would view this as the lending we have done. It's really reflective of where we've looked to invest from a sector and geography perspective. But we're going to continue to take a really balanced approach as we think about growth in business banking. Jonathan Mott: Okay. And finally, is any of this syndicated or is this all purely originated by those banker teams? Rodney Finch: Look, there's some elements of syndication in there as well. From a syndication approach, our philosophy there is really following our customers and supporting our existing customers through that. So there is elements of it, but our really key core focus is on -- is working directly with customers on lending facilities. Operator: Our next question comes from Sally Hong from Morgan Stanley. Sally Hong: I just have 2 questions. The first being on the margin. For the outlook commentary on the deposit pricing and mix sounds quite favorable, and you talked about benefits from higher cash rates. It does sound like margins are going up in the next half. Is that a reasonable assumption? Racheal Kellaway: Yes, Sally, that's absolutely reasonable. We don't usually go into as much detail on, in particular the quarterlies, but we thought it was important for the market to understand that we have a stronger second quarter than the first quarter and that we are seeing tailwinds into the second half. Sally Hong: Great. And you guys -- on costs, you guys reiterated that FY '26 cost growth should remain below inflation, and you've also talked to further benefits from Capgemini, decommissioning the ME Bank platform and as well as broader productivity actions. As we think about the medium term, how should we frame the cost outlook for FY '27? Should we assume that will come down again? Rodney Finch: Look, we're not giving guidance on FY '27, Sally. The way I think about it is, as I said earlier, we think we have more opportunity and more to do in terms of how we simplify the organization and creating the operational leverage, building on the investments we've made, particularly in technology. So coming into next year, we obviously have the decommissioning benefit and Capgemini coming through, as we called out. I think over the medium term, as we've completed the ME migration, we're turning our attention to the BOQ legacy environment. That will again be something that we work on over the kind of medium to longer term given the time it takes to safely migrate customers over time. So we've built really strong execution capability in that regard. We are redirecting the team to that as we close out ME migration. So that, combined with scaling the platform and leveraging the kind of leverage it allows you with the digitization and AI opportunities starting to emerge, we think this is going to be a key priority for us going forward as well. Operator: Our next question comes from Brian Johnson from MST. Brian Johnson: I have 2 questions, if I may. The first one is just on the agreement with Challenger. Two aspects of this. You speak about ROE and EPS growth. You've actually got about $600 million in surplus franking credits. You've got a share register skew very much towards retail shareholders who get a disproportionate benefit from the franking. I get the fact from a management perspective. ROE and EPS growth makes a lot of sense. But Rod, I'd just be interested, how should we be thinking about the fact that your share register is skewed to the group that get a disproportionate benefit from the massive balance in the surplus franking accounts that have not been able to be distributed thus far? Rodney Finch: Thanks, Brian. In terms of the capital management plan, as we've indicated, we're looking at a combination of a special dividend fully franked and an on-share market buyback, still subject to regulatory and Board approvals. And obviously, the conditions in the market in a buyback scenario. For us, the priority is really thinking through, as you said, the composition of our book, but also the efficiency in returning capital to shareholders, and it's really -- that principle that's driven how we're thinking about returning the capital post the transaction completing. Racheal Kellaway: I might just add... Brian Johnson: But Rod, just going back to that point, why isn't it all 100% of special dividend? Rodney Finch: Yes. Look, I think it's a combination of recognizing the shareholder, as you say, we do have a lot of retail shareholders today and they will benefit from the dividend. We want to reward shareholders who have stuck with us over the last few years, and certainly, that's a component. But we also recognize there's benefit for them going forward in a reduced share count in a buyback as well. So it's a combination of the 2 that we're looking at. Brian Johnson: Okay. The second one is, if we have a look at home loan profitability, and I appreciate the amazing efforts that you guys have made to digitize everything, but the operating costs in originating a home loan somewhere between $600 and $700 versus the net interest income is about $6,000. If we have a look at it, Patrick Allaway have been telling us that front book mortgage pricing was below the cost of capital. I'd nearly go so far as suggesting that Macquarie is still pricing the way they are, both deposits and home loans. Even with the digitization benefits that we get, can we just get a feeling about what your view is on front book mortgage pricing relative to the cost of capital regardless of whether it's done through, or through the 3 channel, digital, branch and broker? Rodney Finch: Yes. So I think just in terms of the way we've designed and built the digital platform, it is multichannel. So we'll support -- supporting brokers at the moment through our ME brand. We will roll it out over the next 12 months to our proprietary channels, both banker and direct as well. And so those benefits will kind of flow through across all channels. When we think about mortgage profitability, there's obviously the cost and the cost to serve and cost to originate funding cost is another element as well. I think the branch conversion also helps the economics in terms of that margin returning to us overall. Brian, for us, I think our priority is really the walk back up to returns above the cost of capital. Our focus is on returns above our current ROE and making sure we're contributing to the cost base of the wider group or the fixed cost base of the wider group. We're getting to a position where that is the case. And so for us, it's really continuing to work through that. We feel as though, that is a clear pathway for us. Obviously, it's subject to competition in the market. But I think the investments we've made and those priorities we'll called out are the right combination of activities to get us to where we want to be. Brian Johnson: So Rod, it's still below the cost of capital there, even through the 3 channels when you put all this through? Rodney Finch: Look, in terms of what's recent acquisition, I think we're above our current returns, and it's contributing to our fixed cost base with the pathway to get back up to the cost of capital. Operator: Our next question comes from Carlos Cacho from Macquarie. Carlos Cacho: I just wanted to get a bit more detail around those cash rate impacts you mentioned on the margins. You call out 3 bps to the non-repeat benefits in the second half. I'm guessing that's the timing benefit of taking a little bit longer to pass on the lower rates to some products. Is that going to work in reverse? Are you going to get a timing headwind with the rate cuts we've just seen the 2 in Feb, and March and potential if we look at market pricing and another 1 or 2 in the -- to come still in this half? Racheal Kellaway: Yes, Carlos, it's a great question. We, so the 3 basis points is exactly for the reason you outlined. So you're absolutely right. As you can see in the walk, we've called out a negative 4, which is cash rate timing. Negative 3 relates to the non-repeat of the benefit in the second half '25 and negative 1 actually does relate to the February cash rate increase. So yes, there is an opposite effect that happens as cash rates increase. I think though, if you step back, there are other benefits, obviously, in a cash rate environment, cash rate increasing environment for margin and particularly on the unhedged component of our low-cost deposits. Carlos Cacho: Great. And the second one, I just wanted to ask about provisions. I understand the economic forecast might be the product of the -- of your economist, but if I compare your economic forecast for a downside scenario versus major bank peers. They look to be quite a bit more optimistic. And unemployment rate that's in a downside scenario 1 to 2 percentage points less fall in house prices and commercial property prices, that's 20% small. Only 10% versus 30%. It looks to me like the downside scenario, the very modest downside and not quite as severe, how comfortable are you with those forecasts? Or take it that you're provisioning top-up to get your downside scenario is not significant, but it seems like the downside scenario itself is quite a bit more optimistic than what peers are forecasting their downside scenarios, which is more like 10% unemployment and 30% fall in property prices. Racheal Kellaway: Yes. Look, we -- what we haven't shown you here, and we do at the full year result is actually what the severe downside scenario looks like as well because we have a 45% weighting from a downside and severe downside and the kind of some of the measures that you just called out, the economic assumptions that you called out, actually, are much more aligned to our severe downside scenario, which has a weighting on the overall collective provision. I think if you were to take a view that we would get to 100% downside in this calendar year, so a fairly quick worsening of the economy, you would be taking an extra $68 million above the base scenario. And so that's the kind of -- that is one of the ways we look at this. I think as you can expect, we would obviously also look at and peers as a sort of outside-in-view on our provisioning levels, and as I called out earlier, if you take out the 2 one-off kind of benefits that we're getting from a CP perspective, we are increasing our collective provision, largely in line with the rest of the industry. And so we are tracking to industry metrics more broadly. And one of the ways we've done that this period is in the form of some specific industry overlays. I think just to summarize, our view is that we are -- as we sit here today, well provisioned, but we have definitely got a cautious bias when looking ahead. We are remaining very vigilant. Things are moving quickly. And so I think whilst we are well provisioned as of today, this is an area that we will closely monitor. Operator: Our next question comes from Brendan Sproules from Goldman Sachs. Brendan Sproules: Congratulations on the appointment to CEO role, Rod. Look, I just want to get a bit of a medium-term view of Retail Banking division. Obviously, as you've stated that you're resetting the economics here and the return you're scaling through lower cost and digital to serve. Slide 35 shows us. And in the last 12 months, the pre-provision profit has dropped around 20%, and this is despite the branch conversion. So a couple of questions for me on this. Firstly, on the deposit side, when do you think we'll start to see growth in lower-cost transaction deposit accounts? And I guess what is the medium-term outlook in terms of how much will that type of product fund the loan book. I mean you have one of the lowest funding in terms of mortgages from those particular products? And then I have a second question. Rodney Finch: Thanks, Brendan. So look, retail banking, I talked to this earlier just in the presentation. The economics of this has really been driven by a couple of factors. One is moving to a modern digital core. We're making great progress on that. We're really comfortable with the metrics that we're seeing both from the customer response. So it's a much stronger proposition than our legacy environment and customers are responding well to it and also the economics of the platform in terms of cost to serve and cost to originate. We do see a real opportunity to grow more transactional deposits on that platform. That is a long slow burn in this industry. I think our view is we've got the right product portfolio on that. We want to compete in that space. One of the key things that we've been looking for to really help that growth is bringing mortgages onto the platform. And what we actually see is mortgage customers are a good source of transactional deposits over and above what sits in their offset account just in the transaction account on balance, they tend to higher -- carry a higher average float than non-mortgage customers, mortgage customers. So from our perspective, that is the real focus with the build now completed and migration of ME. That gives us the capacity to really drive that growth. I would also say over the last 12 to 18 months as we've made the portfolio choices, the funding profile has really been reflected in the growth that we've required of what we needed from a funding perspective. So that is a big priority for us. I would also say outside of the Retail Bank, if we think about those lower cost deposits, we think there's a big opportunity in our Business Bank. We know that the proposition there has some gaps in it, and that's a priority for us in the near term to address that. And we think we can do more with our business banking customers and help meet their needs on the deposit side of the portfolio as well. So for us, we think we've got the right proposition. We want to get out there and compete and win more of those balances into the future. And we think that's really key to supporting growth for us in the longer term. Brendan Sproules: That's a very detailed answer. And just my second question is on the cost-to-income ratio, which is now moved into the mid-80s and a few years ago, particularly prior to the ME Bank acquisition, it was more like 50s or 60s. To what extent will this move to the lower cost to serve materially move that ratio? Or is there other initiatives that you have to put in place to really get that back to what has been the longer-term cost-to income within that business over a very long period of time? Rodney Finch: Yes. Thanks, Brendan. It's certainly not where we want it to be today. For us, the pathway back is a combination of factors. One is it's moving on to a simpler digitally enabled modern core, as I talked to, and that's -- we're seeing the metrics that we want in that space. I think more broadly, we still have complexity in the business that we obviously -- these numbers today still contain the ME legacy environment and the BOQ legacy environment as well as the digital bank. Our intent is to move all of our Retail Bank onto that modern core. I think the other element is what that provides is operational leverage. And so we see this is about returning to growth as well. As we talked to earlier, in response to other questions, we've been really thoughtful about planning for a return to growth in mortgages, what we want to see from a returns profile and how we work our way back to it. So I think it's 2. It's -- one, it's a combination of the operational leverage we're looking for from the platform, but also returning to growth through obviously our BOQ brand and the other brands that we have in the Retail Bank as well. Operator: Our next question comes from Nathan Lead from Morgans. Nathan Lead: Just 3 questions, if you don't mind. First one is about the digital bank. Your Chairman at the 2025 AGM seems to suggest that the Heritage Bank customers would be migrated across onto the digital bank platform starting in sort of 2027. And then your previous CEO also said there was a very large prize from that migration. So I just wanted to know whether you can sort of give us a bit more of a definitive target on that migration and if you can sort of firm up what the quantum of that benefit could be? Rodney Finch: Thanks, Nathan. So look, the way I would think about the migration of legacy. There's actually 2 legacy environments we talk about. There's the ME legacy environment, which we're kind of 80%, 85% done with final migration events planned for later this half and then we move into decommissioning. And then our attention, as I mentioned earlier, will turn to the BOQ legacy environment. I would be thinking towards what we've done on the ME migration is a good guide to how we'd approach it for the BOQ side. They are long exercises. There's obviously risk to migration. We've developed a great amount of experience on how to do that. We need to support customers through the friction that's caused with migration, and we also need to do this in the context of running the wider business. So we've got good capability in this space. We think our intent is to start migrations for BOQ in '27 and then work our way through it there. Obviously, as we've done with ME, we will take a really thoughtful approach to making sure we just manage the risk of that. But the types of benefits we see from decommissioning that environment, I think the ME is a good guideline to think about how we view the benefits you'll get from that as well. Nathan Zaia: Okay. Great. Second question is just the comment about returning to home lending growth in FY '27. Is that an intention that you expect the end of year balances to be higher than the start of the year? Or is it just some point within FY '27, you're going to start to see growth again? Rodney Finch: Look, our focus there is, we really want to do it in a way that we're not chasing short-term volume. We really want to prioritize returns. And so I think what we've established over the last couple of years is a really disciplined approach where we won't deploy capital if the returns aren't meeting the levels that we're looking for. So I won't put a data or a timing on it. It's really about us making sure we've got the capability in place, which, as I said, there's a little bit more work we need to do, but then really stepping back into the types of lending that we want to do, getting the balance across the composition of growth and making sure it meets the return profile and then over the course of the year, our return to balanced growth. Nathan Zaia: Okay. Great. And then final one for me. Just Slide 22 with the investment spend. Could you give us an indication now about what you're sort of thinking in terms of like where steady-state is in terms of that investment spend and the expensing rate attached to it? Racheal Kellaway: Yes, Nathan, we have clearly peaked in terms of investment. And so the way that we think about the overall envelope is we are looking to rightsize that investment to our earnings profile. However, we will always look for opportunity to go after investments if there is an appropriate benefit profile. And so we don't give specific guidance. It is about disciplined management of that portfolio just to ensure that we are getting appropriate returns for what we are investing in. And pleasingly, as we've described today, we are starting to see some of the benefits emerge from the investments that we've been making over the past few years. Operator: Our next question comes from Matt Dunger from BofA Securities. Matthew Dunger: Yes. I just wanted to follow up on the deposit growth. You've called transaction deposit growth a slow burn, and we've seen about $2.5 billion runoff in the term deposits year-on-year. Rod, are you able to give us a sense of how you'll fund the return to growth? Rodney Finch: Yes. Look, I think there's -- Matt, I come back to we have built a great proposition on the retail bank. We want to see growth there. Look at transactional growth -- transactional banking growth is important, but I would say -- would call as well and pricing discipline in that space, that all helps build that stable retail funding base. I would call out, I think we can do more in business banking, a real opportunity to get our fair share of our customers' deposit business. And so that's something we're going to be focusing on over the next period as well. I'd also say if we think about the funding stack and optimizing that overall, we also have the capital partnership is an important element of that, not needing to fund growth in asset finance with the capital partnership allows us to think differently around how we optimize that stack. And so it's really a combination of both growth in retail deposits, and I would call out both across our consumers and our Business Bank but also having the opportunity to optimize the funding stack with capital partnerships is another tool that we have available going forward. Matthew Dunger: And just a follow-up on that, if I could. On the branch conversion, are you able to share with us what impact they have had on deposit funding? Is there a future headwind from those OMB conversions? Rodney Finch: Look, we've worked through that over the last 12 months. We've reset onto a kind of optimized network. We've got a strong team in place now, and we're working to really grow the productivity through the branch network and customers. So we're comfortable with where we're at. We think with the digital bank available in deposit sense through the BOQ brand, there's a great opportunity here to continue to grow through the branches as well, and it's part of our thinking going forward. Operator: Our next question comes from John Storey from UBS. John Storey: Appreciate it's been a long call. I just wanted to ask you, Rod, last year, so you go look at your presentation last year and BOQ obviously called out the fact and have done a lot of work, I guess, ultimately to bring across the owner-managed branches, and you're pretty excited about proprietary channels, right? If you go and have a look at your flow rates during the course of this year in mortgage flows from brokers have gone from 60% to 70%. Just wanted to get your insight into why the proprietary channel is not yielding the expected benefits that you guys laid out last year? Rodney Finch: Yes. Thanks, John. Look, I think we've worked through -- it was a big transition the branch network in terms of part of what we had to do as part of that is go out and hire the existing teams from the franchisees to work into our branch network. So look, the change journey that we've been through, that change program has taken some time to work through. We've obviously optimized the footprint as part of that as well. We do have some stats in the back of the pack. We are starting to see the productivity we would expect on that network. That is, again, more work to do there, but we think we've got the right, as I said, the right team in place and the right focus on productivity. And going forward, it's a key part of our thinking of the proposition that we've got. And I think one of the other aspects of the OMB conversion is, it's really allowed us to think about where we want to invest from a geography perspective, not just for home lending managers or from a retail perspective, but able to put our business bankers in key growth corridors where we see an opportunity to grow as well. So we've got more work to do in the branches, but we think we've got the right set of activities to lift productivity over the near term. John Storey: And then just on the 2 half trading and obviously, results for the end of Feb, right, but maybe if you could just give a little bit of color on some of the trends and trading conditions that are starting to evolve through March and I guess, into April, interested to get your insights into things like mortgage applications, business activity. Have you seen any kind of increased flows into arrears? Just general kind of trends that you can comment on, particularly over the last kind of 2 months, March and April? Rodney Finch: Sure. Thanks, John. So look, at this stage, we're not seeing anything material. And we're being really -- we're looking hard, we're looking very closely to see the impacts. In terms of the mortgage portfolio, you'll note that the arrears are down. I think that we reported for the half. We're seeing hardship levels remain consistent with what we expect. We are starting to see some impacts come through probably that transport sector with fuel prices. Again, that's probably more a compounding factor than a factor in its own right that's driving some of the deterioration there. I think in agri, we are conscious of the agri sector where they're getting both the fuel price impacts as well as fertilizer. But again, we're staying very close to our customers and working through it with them. So at this stage, we're not seeing anything significant emerge, but we are staying really close to our customers, as you'd expect and being vigilant. Racheal Kellaway: I might, John, just take a perspective on market more broadly as well, which is we have seen absolutely sort of a higher volatility experienced due to those energy-led inflation risks, but functioning is still remaining intact actually, and conditions are how we would describe as orderly. We are starting to see some spreads repricing quite selectively. We think that is largely driven by kind of underlying valuation as opposed to any sort of significant market disruption or funding disruptions, but it is certainly a little bit more volatile out there. We have seen sort of a slowing in overall market activity. Operator: Our next question comes from Tom Strong from Citi. Thomas Strong: Just a follow-up, on the capital partnership numbers on Slide 27. In terms of the FY '26 noninterest income guide of $8 million to $10 million, to what extent is there seasonality from an origination perspective in that in terms of -- and how to extrapolate those, that run rate into '27? And then, I guess, more broadly, how are you thinking about the origination opportunity in '27 versus FY '26 just given the potential slow? Racheal Kellaway: Yes, I think I caught the question, just cut out there at the end. But look, noninterest income in that portfolio, there's 2 elements of the numbers that you're seeing on the page. The first is the servicing fee that we will receive on the sale of the back book. So that is broadly stable. We will see some runoff in that portfolio. As an asset finance portfolio, it is a bit shorter, but that is one driver of the fee income coming through there. And then the second is the new originations as you've called out. And so that is the establishment of the forward flow partnership. This is a really exciting development for us. From our perspective, we have the opportunity to do more in this market. We are a strong player in asset finance across the industry, but we certainly think there's opportunity to do more. That's obviously subject to conversations with Challenger, but there is the intent certainly for this partnership to be not only long term but to do more business over time as well. And so this is something that we think even despite sort of a slight downturn in the market, we would be able to pick up more volume. Thomas Strong: So you think that the arrangement with Challenger would allow you to do more business that you wouldn't have otherwise done on balance sheet? Is that the implication? Racheal Kellaway: Well, look, I think the way to sort of think about that is we have concentration of it as a balance sheet. And so that was certainly going to be something that we were going to find a constraint at some point. And so we are absolutely looking to do more business. We have a very strong SME business in our Business Bank, this is a core product for those customers. And so the ability to do more of that, to generate income and do more with those customers that we have and then also to kind of get more customers as well, I think, is really exciting. The parameters are really clear with Challenger, but there is certainly opportunity for us to do more business in this space. Operator: Thank you very much. I will now hand back to Jessica. Jessica Smith: Thank you for joining today's call. That's the last of the questions. If you have any further questions, please reach out to the Investor Relations team. We look forward to connecting with many of you over the coming days.
Operator: Ladies and gentlemen, welcome to the Temenos Q1 2026 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Takis Spiliopoulos, CEO and Interim CFO. Please go ahead, sir. Panagiotis Spiliopoulos: Thank you. Good afternoon, good evening. Thank you for joining our Q1 '26 results call. As usual, I will talk you through our key performance and operational highlights before updating you on our financial performance. Starting on Slide 6. We delivered a strong performance in Q1 '26 across all our key metrics and our product revenue continues to grow above market. This follows on from the strong performance in 2025, where we delivered above-market growth in product revenue in the first year of our strategic plan. The sales environment remained stable through the quarter. And in fact, we had a particularly good performance in the Middle East and Africa, signing a number of deals with new and existing customers. Importantly, we also saw good momentum in the U.S. As we discussed at our Capital Markets Day, we have a strong pipeline of deals in the U.S. and several of these are progressing nicely through the sales process and we fully expect to sign some of them this year. Of course, it is hard to give precise timings given the complexity of the deal process. But I'm confident we will convert the U.S. pipeline into revenue and this is one of our key measures of success for the business this year. We also delivered another strong quarter of growth for maintenance, again, largely driven by premium maintenance signings as we continue to upsell across our customer base. We have a well-funded investment plan in place for the year, with planned incremental investments of $28 million to $35 million partially offset by around $10 million of cost efficiencies. One quarter into the year, we are on track with our investment plan, and I would like to highlight that we made several senior hires in sales and product. I'm also pleased to announce the hiring of our new CFO, Daniel Schmucki, who will join us on August 3 this year. Daniel brings a wealth of experience, most recently as CFO of SIX Group and before that, as CFO of publicly listed Zurich Airport. Daniel has a strong track record in building and leading high-performance teams in complex international businesses and he will be an excellent addition and strong partner for Executive Committee and senior management. Turning back to the business. We delivered good operational leverage in the quarter with a cost base growth from investments we made last year, offset by strong revenue growth in Q1 '26. And lastly, we have reconfirmed our 2026 guidance and 2028 targets. Moving to Slide 7. I'd like to highlight some of the key deals with clients in the quarter across different geographies and peers. We had a number of expansion deals with existing clients, including a Tier 1 bank in Japan for new core and payments solution and a leading Swiss private bank expanding their payment suite across several geographies. In SaaS, we extended our partnership with a digital arm of a leading bank in GCC, and we signed with a leading bank in APAC for core, payments and FCM to support their launch of a new digital bank serving retail, corporate and wealth clients. The diversity of deals across customer tiers, geographies, business models, products, and delivery types demonstrates the breadth and depth of our banking domain knowledge, customer trust and product capability. Turning to Slide 8. I'd like to highlight the value we are delivering to our customers. Given all the focus on the Middle East, I'd like to show one success story from the region this quarter with Al Salam Bank in Bahrain going live on our core banking platform. They selected Temenos to future-proof their business as we were able to demonstrate our platform's scalability and support their future growth. They wanted a platform that could enable market-leading digital services, support their AI initiatives and help them meet their regulatory compliance requirements. In the implementation, we replaced multiple siloed legacy systems with 2 acquired banks migrating to our single platform, delivering a significant increase in capacity and throughput and enabling the bank to launch a new digital app for real-time integrated services, thus creating new revenue opportunities. This is a great example of what our platform can do for banks looking to scale with confidence and reflects the kind of partnership and execution that sets Temenos apart. Moving to Slide 9. We showed this slide at our Capital Markets Day in February, but I want to reiterate our positioning in the AI era. AI is clearly reshaping technology markets. But banking is not a typical technology environment, and that distinction matters. Banks operate at the intersection of 2 of the highest thresholds in technology, product complexity and customer risk aversion. This is not an environment where generic AI solutions can simply be dropped in. The requirements are fundamentally different, and that is where Temenos' competitive moat is strongest. On the product side, banks demand trusted domain expertise that handle highly complex workflows, proprietary data and platforms that can be extensively audited. These obligations do not shrink with AI. As banks automate more, these obligations become more concentrated in critical systems. From a customer risk perspective, our solutions are mission critical. Banks operate in one of the most highly regulated sectors and have 0 tolerance for errors or hallucinations. Every decision must be deterministic. The cost of getting it wrong is existentially high. That's why we sit in the upper right quadrant of this matrix, where both product complexity and customer risk aversion are highest as is the threshold for AI adoption. But the benefits of AI are real and adoption will increase over time, and Temenos provides the regulated backbone for banks globally. By embedding AI into our platform, it allows customers to automate, scale and innovate without compromising on compliance or reliability. We are not only protected from AI innovation from peers, incumbents and customers, it is increasingly foundational to our right to win. Turning to the next slide. We have a well-defined AI strategy to capitalize on our advantage across our products, our process and our people. Our strategy will lower total cost of ownership for our customers to embedding AI across our products, and it will speed up our software development life cycle and support customers with GenAI assistance. And lastly, it will empower our people to leverage AI and enable greater productivity. As I mentioned before, the adoption threshold for AI in the banking sector is very high, where there is high product complexity and significant risk aversion. This combined with deep customer trust and domain knowledge creates a strong competitive moat for Temenos and gives us the right to win in the AI era. Moving to Slide 11. I'd like to give you an update on the progress we made in the first quarter on executing our strategy. Our product teams have made good progress on the product road map and we are on track for several new product launches in the second quarter across core, digital, AI and composability while also increasing the range of AI capabilities embedded in our products. We have continued investing in the business, in particular with several senior hires in our global sales organization. These individuals bring significant expertise to Temenos to further support and drive our core banking sales pipeline as well as expanding our team responsible for delivering large complex deals with Tier 1 banks in particular, which requires a specific skill set and the ability to manage highly complex negotiation to a successful closing event. We also launched our new pricing and packaging in the first quarter, which will drive better value for our clients and for Temenos by simplifying our approach, especially for deals involving multiple modules or products. And lastly, we continue to roll out AI tools across the company, most notably including the rollout of Anthropic in our product teams to enhance our software development life cycle. I will now run through our Q1 '26 financial highlights, focusing on constant currency non-IFRS financials. On Slide 13, we delivered strong ARR growth of 13% and despite the headwind from the BNPL client that moved off our platform at the end of last year. For those interested, we have shown the underlying growth rates for all our key metrics this quarter in the appendix excluding the impact of the BNPL client. We had good growth this quarter across all our recurring revenue lines, both subscription and SaaS as well as maintenance. And this was also reflected in the strong product revenue growth of 14%, well above the market run rate growth. Turning to Slide 14. Subscription and SaaS grew 12% in Q1 '26 continuing the strong performance from the previous year. As I mentioned earlier, there has been so far no visible impact from events in the Middle East with the region having a strong quarter in terms of deal signings with a good performance in SaaS in particular. Outside of EMEA, we also saw broad-based growth across client tiers and products. This was complemented by strong growth in maintenance and also decent services growth, which together drove total revenue growth of 13% in the quarter. Moving to Slide 15. Both non-IFRS EBIT and EPS grew 20% in the quarter. The year-on-year increase in our cost base is reflecting the significant investments we made throughout 2025 in product, go-to-market and operations. However, this was more than offset by the strong revenue growth and benefits from efficiency gains in the quarter. Pro forma non-IFRS R&D costs were up 14% year-on-year in constant currency as we are accelerating our investments into product as communicated in February. All this together demonstrates the strong operational leverage in our business. Premium maintenance, in particular, attracts a high margin and continues to help drive the growth in profit. Let me highlight a few items on Slide 16. ARR stands at $860 million despite the headwind from BNPL giving us excellent visibility on future recurring revenue and cash flow. The 15% growth in maintenance revenue was largely linked to strong premium maintenance signings as our sales teams continue upselling to our existing client base. We continue to guide for maintenance growth of 7% to 8% for the full year as we are taking a prudent view on the remaining demand for premium maintenance across our customer base. On profitability, EBIT margin improved by 190 basis points to 32.7% year-on-year, reflecting strong operating leverage and some benefit from cost efficiencies. Moving to nonoperating items on Slide 17. Net profit was up 19% in Q1 '26 and EPS grew 20%. Our EPS continues to benefit from the strong growth in profit and the lower share count from the shares canceled at last year's AGM from prior buybacks. We saw an increase in net finance charges and taxes in Q1, partially offset by FX. We had a slightly higher tax rate this quarter with the expected full year tax rate unchanged at 19% to 21%. On Slide 18, free cash flow for the quarter came in at $60 million, growing 22% year-on-year, driven by strong ARR growth, good EBIT to cash conversion and our disciplined approach to capital allocation, which we outlined at our Capital Markets Day in February. Our strong growth in free cash flow is a key metric for us and is in line with our expectations, given we are now in the fourth year since introducing subscription contracts in 2022. We raised our 2028 target for free cash flow in February this year, reflecting our confidence in the strength of our operating model, balance sheet and cash generation. On Slide 19, we set out our changes in group liquidity in the quarter. We generated $204 million of operating cash and bought back $104 million worth of shares as part of the buyback launched in December. We ended the quarter with leverage at 1.3x comfortably within our target range of 1.0 to 1.5x. Turning to Slide 20, a few comments on our debt, leverage and capital allocation. We completed our share buyback program for a total of CHF 100 million in April 2026. With shares representing 1.9% of registered capital purchase to be used for general corporate purposes. This was the second share buyback we launched in 2025 with the first for CHF 250 million completed in August 2025. The shares purchased in that larger buyback are to be canceled at the AGM in May this year. Our reported net debt stood at $609 million at quarter end. We reiterated our disciplined approach to capital allocation at our Capital Markets Day in February. Our priority is to invest in our business, in particular, to accelerate our R&D road map and using share buybacks to ensure capital efficiency and enhance shareholder return while maintaining flexibility to support our growth levers through bolt-on acquisitions. We also have a progressive dividend policy, which reflects the recurring nature of our business model. Next, we have reconfirmed our 2026 guidance, which is non-IFRS and in constant currency, except for EPS and free cash flow, which are reported. The guidance reflects the strong performance in 2025 and the investments we made last year which we are now starting to benefit from. The guidance includes the headwind from the termination of a BNPL client in 2025, which we have given on the slide. There will be no further headwind from this beyond 2026. And lastly, we have reconfirmed our 2028 targets based on our strong first year of execution, confident in our strategic positioning and good visibility. Operator, please can we open for questions. Operator: [Operator Instructions] Our first question comes from Charlie Brennan from Jefferies. Charles Brennan: Congratulations on good results. Maybe I'll start just with a geographic question, if I can. If I've done the numbers right, it looks like most of the growth in the quarter has come from Middle East and Africa, perhaps maybe not what I would have expected given some of the news flow that we've seen. Can you give us a sense of whether you felt any disruption in March and could the numbers have been better? And I guess, aligned to that, it looks like the U.S. was broadly flat in the quarter. Was there any sense of disappointment for you in the U.S.? Panagiotis Spiliopoulos: Charlie, thanks for the question. So maybe first on, I think, the situation in the Middle East. And clearly, when they started at the end of February, we, like everyone else, were worried about the safety of our people. So we went into this like prepared from past events like COVID. So the company handled this really well and especially locally. So thanks to everyone. Now from a business perspective, I think it's worth taking a step back in Middle East and Africa. These are 2, let's say, large regions broadly balanced in terms of contribution. So both the Middle East and Africa, with Africa having seen, in the past, quite strong growth, stronger than the Middle East. We have, throughout the month and actually also into April, seen overall a stable sales environment and also specifically to the Middle East and Africa region -- or Middle East, no change. So I think this is important to note. And while there was some limited disruption of travel at times, we should note and if you look at the situation on the ground, governments are putting significant resources and everything they can to keep business operating as normal. This is what we saw throughout March. So yes, no impact seen in terms of -- no negative impact seen so far, either on pipeline generation or conversion rates, and this is what we have seen also in the first few weeks in April. Now looking at the other regions. I think on specifically the Americas, U.S. developed actually as planned, LatAm as well. Europe was probably also in line where we saw some, I think -- because we had a tough comparison base with Asia Pacific. But overall, I think the performance was pretty much in line what we expected. We didn't -- I think we didn't save deals or anything for Q2. So nothing actually specifically to call out in terms of the regional performance. Operator: The next question comes from Frederic Boulan from Bank of America. Frederic Boulan: If I can ask a question on the revenue guidance. So we have subscription and SaaS growth of 12% in Q1. You've kept full year guidance unchanged at around 9%. It would be good to discuss any specific phasing we should expect or specific points. And maybe we can also extend that question to the EBIT guidance, 20% in Q1, guidance of 9% for the full year. So here as well, I mean, any specific items we should have in mind? Or is just a guidance framework prudent at this stage? Panagiotis Spiliopoulos: Fred, so on guidance, I mean, we've never raised guidance after Q1. Q1 is like every year, the smallest quarter. There are still quite a number of uncertainties out there on the macro side. We don't know what's going to happen. So I think we having a good start is really helping with the full year guidance visibility. But at this point in time, I think it's the right approach to stay prudent. Also, if you look at the details, clearly, we had good performance in subscription and SaaS and maintenance and services. So across the board, we invested as planned. So the upside ultimately on the growth came really from stronger top line, demonstrating the operating leverage. Yes, we're tracking ahead on all KPIs. Q2 is a bit a more difficult comparison base. Let's see where we end up then. But for now, I think it's the right prudent approach. Operator: The next question comes from Toby Ogg from JPMorgan. Toby Ogg: Maybe just bigger picture one. We've obviously seen over the last couple of quarters, better momentum, and that's obviously been translating into upward revisions to expectations. When you take a step back what do you think are the key drivers that have been yielding that upward momentum? Panagiotis Spiliopoulos: Toby, good question. Overall, if you look at the track record over the last few quarters where we put a lot of effort into transforming Temenos across the organization, clearly accelerating on the product road map, putting a lot of investments into the company across go-to-market and also product and operations. All this on the back of, let's say, stable sales environment. We have seen an environment where banks were printing good results. And I think that's also the expectation going forward. It's also -- so that's -- if you want a stable sales environment, coupled with a more determined, more focused organization is clearly something that's helping us on top, and this is where we always believe it's worth and the first time we do upfront investments, we're reaping now the benefits of that. We -- if you go back early 2025, we said it's going to be an investment year. We've done the investments. We said in February, we're accelerating the investment because there is a very, very large revenue opportunity. And this is what we're seeing the benefit from. And the one element, what I mentioned, expanding what we call the large deal team. This is also driven because we see, as we've seen in the past years, more and more large deals coming into pipeline, which -- where we need -- where we want to have dedicated resources driving those deals end-to-end. And this is across the regions, and this is across the tiers, not just Tier 1s, so this is -- again, you need to invest ahead and reap them the benefits, and this is what we are seeing and obviously striving for more. Operator: The next question comes from Grégoire Hermann from Barclays. Grégoire Hermann: Maybe just I think you had clearly a good start into the year. But I think Q2 is maybe a very difficult comp. Can you tell us maybe how is the pipeline coverage looking like next quarter? Can you provide any indications on the level of growth we should expect for the second quarter, please? Panagiotis Spiliopoulos: Grég, so as we said at the start of the year, that was 2 months ago when we initiated -- when we issued the initial guidance for 2026, we said the pipeline coverage is there for delivering those numbers, also stating we want to be prudent. So 2 months down the road and as you would expect with more salespeople being onboarded and being now live and generating pipeline, the pipeline evolution has been very pleasant to put it like this. What we also said is there are a number of large deals embedded in our full year guidance, and we didn't sign any large deals in Q1. We had a good start in Q2. So we're always taking a risk-weighted approach to large deals, yes? Not all of them need to come. So we're confident that we can grow our SaaS and subscription as well also in Q2 despite the, yes, tougher comparison base. Operator: The next question comes from Mark Hyatt from Morgan Stanley. Mark Hyatt: Congrats on the results. I've just got 2, please. Firstly, if we just touch on the maintenance side of things. Obviously, you called out strong growth there, 15% and strong premium maintenance signings were a driver of that. Obviously, you've given some guidance and help around how we should think about the full year result. But could you just tell us a little bit more around how sustainable that tailwind is for the rest of the year? How should we think about the phasing? And if you can quantify how much of that upsell opportunity you've already worked through, that would be really helpful. And then secondly, maybe just a bigger picture question on AI. Could you talk about what you're hearing from bank's C-suite members today on the AI type priorities? Are they still mainly focused on productivity uplifts and customer-facing use cases? Or are they starting to think about AI more deeply being embedded in core banking and operations? How are they engaging with Temenos as a strategic partner for that at this stage? Panagiotis Spiliopoulos: Mark, so on maintenance, yes, 15% growth was a bit ahead of the full year growth rate we have envisioned, we said about 7% to 8%. But you need to think about it's Q1 '25, which posted a relatively benign comparison base, which is going to become incrementally more difficult to lap. And clearly, we see -- we're always positively surprised and continue to see a good uptake of our premium maintenance offerings on the one hand. But it's also we have -- we see very little downsell or attrition on that, yes? So that helps basically with the -- on the renewal of these maintenance offerings. Overall, I'm not going to -- I can't give you that level of detail how much opportunity there is still there. But clearly, we are -- it's still a very small part of our overall maintenance number. And therefore, I think the growth will continue. I think with 7% to 8% for the full year, clearly, growth rates probably coming down into single digits for the rest of the quarters. I think this is the phasing we would see. And then longer term, so '27 and beyond, we said about 6% -- 5%, 6% is the right number. Again, let's stay prudent because we've been positively surprised before, but I think we're now seeing really the tracking according to what I just said. On AI, there is -- basically, there are 2 areas where we see demand from our banking customers. On the one hand, is overall use cases around the core, if you want, whether it's in digital or something like FCM AI. And this is where we're going to launch a number of new ideas, a number of new products this year. What we do with our clients, with our banks is really develop those use cases in what we call a design partnership, we're trying to find ideas where we can basically take across our installed base. If something is very bank specific, we're not the ones to basically do the custom development of that. But if we find AI use cases like FCM AI, this is something we can then deliver to our installed base. The other area where I think clients are very keen to get AI expertise is -- and this is the main questions they're asking us, and we're developing some ideas, trialing some ideas, both ourselves, but also with partners is can you, with the help of AI, help us accelerate the implementation time line, the upgrade time because this is where they would save a lot of money. So far, we don't have discussions on AI in the core, but really those areas, specific use cases around the core in digital, in FCM and then can you help us accelerate the implementation and the upgrade time because this is where they spend a lot of money. And we have some ideas, but I think it's still early to talk about. Operator: The next question comes from Pavan Daswani from Citi. Pavan Daswani: Could you maybe come back to the EBITDA growth guidance question, given the strong start to the year. Are there any kind of phasing of costs that we should be thinking about for the rest of the year particularly, you mentioned some senior hires in the quarter? And are there any further investments needed to drive the pipeline conversion that you kind of aim for, for the rest of the year? Panagiotis Spiliopoulos: Pavan, so there is, I think, nothing unusual what we plan in terms of the phasing this year. As you heard, we have an investment budget of $28 million to $35 million, which is clearly something we're putting in place, especially in the first half of the year. There's also the exit cost. We exited 2025 with our fully invested cost base. There is clearly -- if we continue to see if there is upside on the top line, this will -- this shows the operating leverage on this. But again, as with the top line, I think we want to stay prudent. We want to see -- so far, we see the investments coming through. There is nothing extraordinary planned. The bulk of investments really go into product acceleration. So -- and this will continue throughout the quarter. So I think the cost base as you would expect, let's say, normal seasonality. And so let's say, Q2 will be maybe, I don't know, $12 million to $15 million higher as we had last year, yes, and then also increase slightly in Q3. And then in Q4, you have basically all the variable costs coming in, yes. So this is overall the $50 million cost increase year-on-year. Operator: The next question comes from Mohammed Moawalla from Goldman Sachs. Mohammed Moawalla: Congratulations on the quarter. I just wanted to concentrate a bit on North America. I know sort of 18 months back with regard to add more capacity, you've obviously been bringing some of that on. Can you give us a sense of sort of the pipeline? I know you touched on potentially some larger deal wins to come how is North America kind of a key part of that? And more importantly, obviously, in terms of the strategy more broadly for North America, are you focusing more on that kind of Tier 2 of regional banks and credit unions versus a very long sales cycle of kind of Tier 1 deals? Panagiotis Spiliopoulos: Mo, on the U.S., so we have seen and we continue to see good progress on a number of -- a lot of deals through the pipeline, as you would expect. Now given this is all new logos and new procurement, it's usually difficult to quantify the time until really you have -- from being selected until you have the contract signed. But this is what's driving the pipeline and where those deals stand, which is driving our confidence that they will get converted in 2026. Now if I look at the pipeline overall, and we always targeted those 150, 160 banks we have a very substantial number of these banks is in our pipeline, which shows also the effectiveness of building pipeline. We still have to convert those and maybe not all will turn into deals. But clearly, that drives our confidence on the -- in the U.S. Now what we see is given we hired a lot of salespeople, what we also see is the U.S. innovation hub is really making a difference for the U.S. pipeline because it's something which we didn't have before. It's a different approach, and it's resonating well with prospects. The other thing which we didn't do before is investing upfront in not just go-to-market, but also the support organization and the backbone. And this is something clients want to see there happening because these are long-term decisions they're taking in the core space. So I think where we still have opportunities is that, as you mentioned, in larger deals, and this is why we're expanding the teams. This is not specifically to the U.S., but clearly also in the U.S. We still haven't moved away from a target market in the U.S. It's still the lower Tier 2, Tier 3 market as occasionally, you get also Tier 1 opportunities. But clearly, again, we're taking a very risk-weighted approach on large deals, whether they are in the U.S. or in any other country. So overall, we're feeling very confident about execution of the pipeline. Operator: The next question comes from Justin Forsythe from UBS. Justin Forsythe: Congrats on a good start to the year. Just a couple of questions from my end, if you don't mind. The first one, I just wanted to unpack that Middle East and Africa number a little bit more. Understood that you said earlier in the Q&A that Africa is contributing a little bit more than the Middle East. I think you talked a little bit about that win in Bahrain as well. Maybe you could just be a little bit more specific on the countries within Africa, which you're seeing strength and the type of banks which you're working with and what types of products you're selling them? Is it the Islamic banking solution? I think you've talked about that in the past? Or is it something else? And maybe what degree of continued strength in the Middle East is baked into the guidance versus closing of some of those U.S. deals popping through the pipeline? And then just a broader high-level question for my second one. Can you just talk a little bit about the mix within core banking between some of these different factors? So for instance, retail side of core banking, corporate, LMS and wealth, clearly, it encompasses a lot of different types of products. And what is expected to be the go-forward driver of growth, the most material go-forward driver of growth within those? Panagiotis Spiliopoulos: Justin, thanks for the question. Let me start with Middle East and Africa. What I said is it's broadly balanced in terms of size, but Africa had the -- more recently, the faster growth rates, yes? So if you look at back some of the last few quarters, yes? We don't -- I think if I look at the pipeline across both the Middle East and Africa, it's very strong. It's very healthy. And Middle East and Africa has been a strong performance over the last couple of years, a lot of structural reasons. So we don't expect any change or we don't assume any change in conversion rates, neither an improvement nor a deterioration for the rest of 2026. As we've shown on one slide, the -- we're doing everything in Middle East, yes. It's also picking up in terms of SaaS. We signed this Tier 2 bank where basically they expanded the core banking partnership with their basically digital subsidiary in GCC. So that's just one example. In terms of products, it's really front to back for many banks, but also core, also digital. I think wealth, we're seeing quite some pickup as well. Islamic banking that remains a key pillar. So it's really across the products we see for Middle East. On your second question, it's quite an interesting one. So wealth, I think we see wealth for especially the larger banks. We're especially dominant and play in the high-end ultra-high net worth piece. So that's for the wealth opportunity. If you look at pure core, it's mainly retail and corporate. What I would say is the last few years, so post COVID, you saw a lot of demand for retail because this is where banks felt the pressure from basically the nonincumbents, yes, with price pressure. So they needed to lower the cost. So their investment was first and foremost in retail because they wanted to protect their offering, their profitability. I would say in the last 2 years because they basically fought off the nonincumbents to a large extent. Now their focus has turned more towards corporate. There is still very good profitability and banks want to protect and even expand profitability. And there is much less competition on the corporate side from non-incumbents, whether it's trade finance, treasury and so on. So this is where we see clearly -- from a pipeline perspective and from a demand perspective, this is clearly where we have seen the pickup in the last 2 years. Operator: The last question comes from Josh Levin from Autonomous Research. Josh Levin: Just 2 questions from me. Takis, you said there's no visible in -- can you hear me? Panagiotis Spiliopoulos: Yes, we can. Yes, Justin, yes, we can. Josh Levin: Yes, yes, yes, you said there's no visible impact so far from the war in the Middle East. But if the war resumes or oil prices stay high and we're heading towards sort of a global recession that some people are talking about, how do we think about how exposed Temenos is to that? How do bank executives think about sort of this as -- they're going to push through this because this is really a long-term project versus actually retrenching on spending on software because they are concerned about the recession? And then secondly, the Orlando investment hub, I think it's been open since June, so it's maybe a bit early, but any lessons so far, any successes, anything that's unexpected from that? I know it's a key part of the U.S. strategy. Panagiotis Spiliopoulos: Josh, yes, unfortunately, we don't have a crystal ball here at Temenos. So we take a prudent view on uncertainty and macro risks coming back to the Q1 performance and the guidance. So what we believe is -- and this is the lessons learned from the past, if you see -- as long as you see only a short-term disruption to anything, so short term being a few months, there is maybe a lower likelihood for a recession. If this keeps going and lasts into well into, I don't know, Q3, the second half, then probably you would expect to see an impact on overall GDP growth and maybe a higher risk for global recession. What we have seen, again, in the past is sometimes countries tipped into like technical recessions without any impact on demand for our software, yes? So we're not -- we have not been benefiting in upward cycles if economies were booming, but also being less affected in, let's say, more recessionary environments as long as there is no massive external event like GFC or COVID. So for now, the way we look at this is obviously being very alert on what's happening day-to-day. Again, the countries there, and we have most exposure is obviously Saudi and UAE, much less on the other ones. Clearly, the governments are doing everything to keep operating normally. They're open for business. And I think this is how we see the banks behaving so far, yes? So this is as much as we can say, again, taking an overall prudent view on what can happen and will happen. On Orlando, it's really a success story from different angles. It's on the one hand, we're getting very good, highly skilled people there. It's something we see resonating well also for our prospects. We have a lot of banks coming in, ideaizing, looking at what can be done. We have very interesting demos there. And it's really the hub where we keep investing and keep hiring as we do in India as well. It's -- we do a lot of 1 or 2, ultimately, a lot of U.S. product-specific development there, which is obviously also resonating well with clients. We're now about 70-plus people, and we'll keep expanding there because, yes, we have demand for U.S.-specific product, and we want to deliver, but clearly also have a strong pipeline in the U.S. So this will -- I'm very happy about the progress in Orlando. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Takis Spiliopoulos for any closing remarks. Panagiotis Spiliopoulos: Yes. Thanks, everyone, for joining us for this Q1 update. Looking forward to update you in July with our Q2 '26 results.
Operator: Good day, and welcome to the East West Bancorp's First Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Adrienne Atkinson, Director of Investor Relations. Please go ahead. Adrienne Atkinson: Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review East West Bancorp's First Quarter 2026 Financial Results. With me are Dominic Ng, Chairman and Chief Executive Officer; Chris Del Moral-Niles, Chief Financial Officer; and Irene Oh, our Chief Risk Officer. This call is being recorded and will be available for replay on our Investor Relations website. The slide deck referenced during this call is available on our Investor Relations site. Management may make projections or other forward-looking statements, which may differ materially from the actual results due to a number of risks and uncertainties. Management may discuss non-GAAP financial measures. For a more detailed description of the risk factors and the reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8-K filed today. I will now turn the call over to Dominic. Dominic Ng: Thank you, Adrienne. Good afternoon, and thank you for joining us for our first quarter earnings call. I'm pleased to report that East West had another record quarter for loans, deposits, and fee income. Our consumer and commercial depositors continue to place their trust in us, helping grow total deposits by 9% year-over-year. Growth in noninterest-bearing deposits was particularly strong this quarter, up nearly $800 million, driven by our continued focus on providing solutions to retail and small business customers. We also delivered 7% year-over-year loan growth. C&I loans increased by more than $900 million quarter-over-quarter, driven by higher line utilization, particularly amount capital call borrowers. We also achieved a record quarter of fee income growing 12% year-over-year. We saw strong momentum and wealth management this quarter as we stayed closely engaged with clients. We continue to see opportunity to grow and diversify our fee revenues over time. Credit performance remained stable. Net charge-offs and nonperforming assets were low in absolute terms consistent with our expectations and reflecting our disciplined approach to risk management. Our capital position remains a key advantage for East West with a tangible capital ratio of 10.3%. We maintained this capital level, while growing our balance sheet, increasing our dividend and opportunistically repurchasing shares. We continue to be focused on being disciplined stewards of our customers' trust and our shareholders' capital. I will now turn the call over to Chris to provide more details on our first quarter financial performance. Chris? Christopher Del Moral-Niles: Thanks, Dominic. Let's start with deposit growth on Slide 4. Our end-of-period deposits grew by $1.8 billion quarter-over-quarter. Average DDA growth was up 12% year-over-year and nearly $0.5 billion on an average basis. This checking account growth led us to price our leaner New Year CD campaign more conservatively this year, allowing us to focus on CD balance retention and drive a better mix of deposit costs for the quarter and going into the rest of 2026. Money market deposits were also up 9% year-over-year, as we continue to further diversify away from CDs and other higher-cost deposits. Turning to loans on Slide 5, as we have emphasized before, our focus has been and continues to be on growing our C&I portfolio, and C&I was the primary driver of growth in Q1. Most of the increase was driven by net line draws from existing customers. While utilization ticked up across a range of industries, as Dominic mentioned, capital call-related borrowings made up the lion's share of the first quarter's net growth. The quarter's net draws on capital call lines reflected broad-based increases in M&A and real estate property acquisitions across the quarter. While some of these lines have already been paid down here in the second quarter, private equity markets and real estate markets remain active and we expect to continue to participate in this activity during the remainder of the year. Residential mortgage experienced a seasonally slower Q1 than we expected, but our pipelines have grown and continue to grow into Q2; and we expect residential mortgage to be a consistent contributor to our overall loan growth during the year. We also grew commercial real estate balances this quarter. Our priority continues to be on supporting our long-standing real estate relationship clients. Given the level of net growth we saw in the first quarter and the pipelines we see going into Q2, we are comfortable reiterating our guidance for the full-year loan growth to be in the range of 5% to 7%. Now turning to 6, our loan portfolio remains well-diversified, with over 70% of our loans to commercial customers across a broad range of industries and commercial real estate asset types. C&I now represents 34% of our total loans, reflecting the results of our focus and emphasis on balanced growth across our balance sheet. Our CRE portfolio remains diversified by a number of product types with an emphasis on multi-family, retail, and industrial projects. As we look ahead, we remain focused on growing the portfolio in a disciplined way that enhances diversification and remains aligned with our overall risk appetite. Turning to Slide 7, we provided incremental disclosure on our NBFI portfolio. Growth in this portfolio this quarter has been driven primarily by capital call line. Our NBFI portfolio is granular, with diversification across industry and category types. 99.99% of our NBFI loans are current, and the past decades, there have been virtually no net charge-offs in this portfolio. Approximately 30% of this portfolio is made up of capital call lines. Capital call is not a regulatory classification, and our capital call loans are spread across a range of private equity, mortgage credit, and business credit borrowers. I'll now turn to net interest income and margin discussion on Slide 8. Quarterly dollar net interest income increased to $671 million, reflecting our ability to grow our balance sheet while overcoming the headwinds of rate cuts in Q4 and 2 fewer days in Q1. Our short-term liability sensitivity on deposit pricing dynamics and our positive deposit remixing during the quarter allowed us to continue to reduce our deposit costs, driving period-end costs down a further 6 basis points quarter-over-quarter. Looking back to the start of the cutting cycle, we have decreased interest-bearing deposit costs by 111 basis points, comfortably exceeding our 50% beta guidance shared in prior periods. Moving on to fees on Slide 9, fee income grew 12% year-over-year to a new record $99 million for the quarter, with significant growth in wealth management fees driven by structured note and annuity sales and deposit-related fees, driven by higher customer activity. We will remain focused on driving this growth and further diversifying our revenue overall, and are quite encouraged by the pace of growth in fee revenue so far this year. We continue to aspire to deliver double-digit year-over-year growth in fee income in 2026. Now turning to expenses on Slide 10. East West continues to deliver industry-leading efficiency while investing for future growth. The Q1 efficiency ratio was 36.2%. Total operating non-interest expense was $258 million for the first quarter and included seasonally higher payroll-related costs, some increased stock-based compensation costs, and higher incentive comp, reflecting increased commissions for our wealth management activity. Nonetheless, overall, we continue to expect expenses to come in line with our guidance for the year. Now let me hand the call over to Irene for comments on credit and capital. Irene Oh: Thank you, Chris, and good afternoon to all on the call. As you can see on Slide 11, our asset quality metrics held stable and continue to broadly outperform the industry. Quarter-over-quarter, non-performing assets remained stable at 26 basis points as of March 31, 2026. We recorded net charge-offs of just 9 basis points in the first quarter of 2026, or $12 million, compared to 8 basis points in the fourth quarter. We recorded a higher provision for credit losses of $36 million in the first quarter, compared with $30 million for the fourth quarter. We remain vigilant and proactive in managing our credit risk. Turning to Slide 12, the allowance for credit losses increased $26 million to $836 million or 1.44% of total loans, as of March 31, reflecting quarter-over-quarter loan growth and the portfolio mix shift. We believe we are adequately reserved for the content of our loan portfolio given the current economic outlook. Turning to Slide 13, all of East West's regulatory capital ratios remain well in excess of regulatory requirements for a well-capitalized institution and well above regional and national bank averages. East West Common Equity Tier 1 capital ratio stands at a robust 15.1%, while the tangible common equity ratio now sits at 10.3%. These capital levels continue to place us amongst the best-capitalized banks in the industry. In the first quarter, East West repurchased approximately 938,000 shares of common stock during the first quarter of $98 million. We currently have $117 million of repurchase authorization that remains available for future buybacks. East West also distributed approximately $111 million to shareholders via a quarterly dividend, East West's second quarter 2026 dividend will be payable on May 18, 2026, to stockholders of record on May 4, 2026. I will now turn it back to Chris to share our outlook. Christopher Del Moral-Niles: Thank you, Irene. We've assumed the forward curve as of March 31, which models no rate cuts. And therefore, we're updating our full-year 2026 net interest income guidance to grow between 6% to 8%, up from our prior expectations of growth between 5% and 7%. We're also updating our net charge-offs and now projected to fall between 15 and 25 basis points for the full year. With that, we'll be happy to open the call for questions. Operator? Operator: [Operator Instructions] And the first question will come from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: I guess, maybe the first question, just given the capital proposals that were put out by the Fed last month. I'm wondering if you can quantify what impact you expect to your capital ratios -- and yes, I guess, first, just what's the impact that you expect for what are really strong capital levels? And where is this headed if the proposal becomes a final rule? Christopher Del Moral-Niles: We are happy to cover that for you. The risk-weighted asset adjustment from what has been put out there as Basel III Endgame is roughly a $7 billion reduction in our current risk-weighted assets relative to our current balance sheet. And that would probably translate to something on the order of magnitude of 1.6% to 1.8% increase in our various respective regulatory capital ratios. Ebrahim Poonawala: Are you going to use all that excess capital to start another bank, but... Christopher Del Moral-Niles: Dominic is very opportunistic. And I think we are very comfortable maintaining very strong capital levels and having more capital has never served this bank badly. Irene Oh: We're going to use that capital to grow organically. Ebrahim Poonawala: That's the best answer. So I hope you do. So -- and maybe, I guess, moving to the P&L, strong deposit growth. I wanted to get on the private capital call-line lending. Lots of focus on just private equity in that space. One, it didn't sound like that any of that drawdown on capital call-line lending was stressed and it felt like there was more activity that drove that, if you can confirm that? And why are we not seeing more diversified C&I growth pick up, given just the broader momentum. I understand the macro volatility, but are you seeing at least green shoots of other areas where C&I is picking up? Christopher Del Moral-Niles: Well, Sure. So EB, I think on the capital call lines, it was pretty diversified. It was the lion's share of the total growth, but it was across a range of industries, and that gives us comfort that things are happening out there and there are green shoots in general. And of course, there was a component that was a capital call line, which is well over $300 million, and that was all encouraging evidence of continued activity across a range of industries. So, we saw activity in true distribution. We saw some cross-border. We talked commercial real estate. We saw a lot of areas that had positive momentum and continue to have positive momentum going into Q2. Irene Oh: And maybe I'll just add to clarify as a clarifying point, none of the drawdowns that we saw in the quarter were anything distressed. Opportunistically, it really is the time of that. And I think, as Chris alluded to, some of those, there's a timing component of this, right? Some of those did pay off in the early part of the second quarter, normal activity. Operator: The next question will come from Dave Rochester with Cantor Fitzgerald. David Rochester: I just wanted to ask about the deposit growth. Very solid this quarter. Can you just give an update on the competitive environment there? Do you find yourself having an easier time growing core deposits. I mean normally, this is a softer quarter for that for most banks. The DDA trends look really good. How do you feel about that going into 2Q and the rest of the year, especially on the DDA side. Christopher Del Moral-Niles: I think the DDA growth that you saw has been the result of a now more than a year's long campaign to really deepen our connection with retail, small business customers across our footprint. That's been successful and continue to bear fruit into Q1 '26. We're not letting up on that strategy. That campaign has been working arguably better than we expected here going after it for more than a year, but in a way that we are continuing to go more time and effort to make sure we nurture it even more. The landscape for deposits, however, is not easy. It is a very competitive landscape. And from a pricing perspective, the fact that we moved from the outlook with multiple customers to an outlook with no cuts means that deposit pricing pressure is real and coming upon us. And so the reality is, it's doubly impressive from our perspective that our teams are able to go out there and win non-interest-bearing DDA money in an environment where rates aren't expected to come down anytime soon. Kudos to our retail team, kudos to our strong business teams, kudos to all commercial RMs out there working with their customers to find opportunities for us to add value, really paid off here in the first quarter. But no, I don't think pricing is going to get any easier, and I don't think competition is going to get any easier. David Rochester: I appreciate that. Just a follow-up on wealth management and you talked about staying close to the customer and that helping you guys out this quarter. It's a really big number this quarter. Can you just talk about how you see that trending moving forward? If you've added new people that are helping boost that number, you've got new products. Just anything else that can help us figure this out going forward. Christopher Del Moral-Niles: There was a fair amount of volatility in Q1 and some of our clients decided that some structured notes were a good thing, and we added some notable volume in structured notes. We also added some annuities during the quarter as people moved out of equities at record highs into annuity products. But we also added people late in the quarter, so it don't have a big impact to the Q1 numbers, but we expect it will continue to support continued growth in wealth management as we roll through the rest of the year. Operator: The next question will come from Jared Shaw with Barclays. Jared David Shaw: I guess sticking on the deposit theme, with the good growth that you're seeing in the mix shift, how should we think about sort of the trend of deposit pricing costs in a flat environment? I mean, do you think you're still going to be able to continue to march that lower as we go forward? Christopher Del Moral-Niles: I think, Jared, in some prior calls or meetings, I had alluded to the fact that we have been benefited from rolling down the hill and there would come a point in time where the hill would stop to be so steep and flatten out. And I think we've hit that point now. So no, my comments earlier that I don't think deposit pricing is going to get easier allude to the fact that I think our ability to march down or roll down the next wave of CDs that sort of run its course to a large extent. That having been said, I'll just remind you all, we are asset sensitive which is why when we're changing our guidance from cuts to a flat rate environment, we're also upping our NII guidance because higher for longer is net better for East West Bank. Jared David Shaw: Okay. That's good color. And then any color, maybe, Irene, on the growth in resi nonperformers? Are you seeing any areas of stress there maybe from tech worker disruption from AI or anything that you're spending a little more time looking at? Irene Oh: Yes. That's a great question. We have seen a little bit of increases in that, ultimately, there isn't anything that we view as systemic. It really is customer by customer loan by loan. And ultimately, for us, given the low loan to values we underwrite it, we don't see a lot of loss content there. Operator: The next question will come from Casey Haire with Autonomous Research. Casey Haire: I wanted to touch on loan growth. Apologies if I missed this, but the guide of 5% to 7% off of a quarter where you're growing at 8% annualized and pipeline sound pretty constructive kind of a recurring question for you guys, but why -- is that a little conservative? Or what are we missing here? Christopher Del Moral-Niles: I would point you to Page 9 of our press release tables which says that from March 31 of last year to March 31 of this year, we grew by exactly 7.0% on total loans. So that felt like it was in the range of 5% to 7% and warranted holding the range. Casey Haire: Okay. Yes. I mean last year, it was much different. I mean, we had the tariff and obviously, the macro is -- okay. I get it. All right. Just moving back to the capital discussion. Irene, I heard you say you're going to grow organically. I've also heard you guys talk about some M&A aspirations on the East Coast where there's pockets of Chinese American populations that would fit well with the strategy here. Just some updated thoughts around that. And just given the excess capital under the Basel III proposal, what -- if you were to find an opportunity that you did like what are some parameters around earn-back and tangible book value dilution? Irene Oh: Well, I'll start and maybe Dominic and Chris can chime in afterwards. We have a kind of hierarchy organic, right? Organic growth is our priority, and we've been able to show over many, many years the ability to grow our franchise through organic growth. Although, as you know, we have a history many years ago also of being able to do successful well priced strategic acquisitions as well. So organic growth is our #1 priority. I think, certainly, when is opportunistic stock buybacks, you know what the return is and then also acquisitions, well priced, strategic, makes sense for the franchise, something that ultimately has to be a better return than our ability to grow organically. Christopher Del Moral-Niles: And we complement that, of course, with the regular dividend and we review the dividend at least annually and then the dividend is our second go-to after organic growth, and that's where we have most recently increased our dividend, you'll recall in the first quarter by 1/3, and we'll continue to look at that to make sure it remains competitive. And then as Irene mentioned, follow up the organic growth with dividends and then inorganic opportunities at the right price and then share buybacks perhaps opportunistically. Operator: The next question will come from Manan Gosalia with Morgan Stanley. Manan Gosalia: On the deposit growth side, the question is do you typically see some sort of flight to safety from clients, clients just holding more liquidity at times when there is elevated geopolitical risk. And I guess the question is, did you see any of that this quarter? I'm just trying to assess how much of the strength in DDA growth is seasonal or idiosyncratic versus how much of that -- do you see this as a new base to grow off of? Christopher Del Moral-Niles: Clearly, East West Bank over the last 15 years has been the beneficiary a very strong, well-capitalized and highly liquid bank of net deposit flows from our customers and increased balances from other banks in the region, from other banks in the country and even some pockets outside. All of that has served the East West benefit and continues to be. And it does feel like whenever there's an errant headline, we see more opportunities to engage with more customers and have been successful at gathering more deposits. So we like the positioning that we have. It apparently pays dividends to be the best capitalized bank in the industry and one of the most profitable banks in the industry and for everybody to recognize that and trust us in that way. And so I think we are well positioned, and I don't think it's temporary. But yes, we do see flows come in and out and tax flows do happen on April 15, and we saw some of those flow out, but we feel good about the base that we've built and the year-over-year growth in deposits that we've been seeing for almost 15 straight years. Manan Gosalia: Right. Perfect. And then you guys gave the C&I loan yields at the back and not a surprise to see that edge down slightly. Is that all just rate related? Or is there anything that comes there from mix shift maybe to capital call or investment-grade clients? Or is there anything you're seeing in terms of competition impacting spreads? Christopher Del Moral-Niles: I think we have seen competition broadly impact spreads over the course of the last year. We also provide the net interest margin table on Pages 10 and 11 of the press release. And what you'll see there is a broad repricing downwards because most of our portfolio is floating rate and that just come through as those naturally move forward with the rate cuts that we saw last year, including the ones that happened in December. But as we've mentioned, our reset here sometimes don't kick in for about 45 days late. So we saw still repricing impact in Q1 related to the December rate cut. Operator: The next question will come from Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: Chris, you mentioned the checking account growth led to pricing the Lunar New Year CD campaign more conservatively this year, allowing you to focus on CD retention. Can you just remind us how much CDs rolled off during the quarter? How much was retained? Any color on expected improvement in pricing from rolling forward CDs in 2Q? Christopher Del Moral-Niles: Yes. So we had a little over $10 billion of rollover during Q1, and we net grew CDs as presented on Slide 4 by $127 million. So we eventually priced for retention and achieve retention. And then from a pricing perspective, as I mentioned earlier, we've been benefiting from rolling downhill, but we sort of flattened out that role. And as we sit here today, I'm not sure incremental new CDs will be necessarily repricing with much of a benefit as we roll into Q2 and Q3. We're currently pricing our CD special at 3.60%, which is not going to necessarily move the needle a lot on our CD price. Bernard Von Gizycki: Okay. And just as my follow-up, I think in last quarter, you mentioned the impact from hedging impact. There was a headwind of about $2 million. What was it this quarter? Any expectations for full year you can provide? Christopher Del Moral-Niles: Yes, it's roughly flat and all those hedges today are in the money looking forward, given the backup in that but we're still in the money -- on all the mark-to-market value of all the trades is positive. So we're going to add value moving forward. Operator: The next question will come from David Chiaverini with Jefferies. David Chiaverini: On the NII outlook, so you raised it 6% to 8% from 5% to 7%. You alluded to higher for longer being good for East West. Was this the main contributor to raising the guide? Or was the loan outlook also part of it? Can you unpack that a little bit? Christopher Del Moral-Niles: Yes. We would attribute the guide increase exclusively to the change in the rate outlook. And as I noted earlier, we're not raising our loan guidance at this point in time. So that's still baked in there at 5% to 7%. David Chiaverini: Got it. And on the net interest margin, how should we think about the outlook from here based on your commentary on the deposit front, is a dip a reasonable way to think of it? Or how should we think about the NIM going forward? Christopher Del Moral-Niles: So we're thinking about the margin and dollar NII as moving higher, they'll probably both track at least flat to positive. David Chiaverini: So the NIM flat to positive from here? Christopher Del Moral-Niles: Correct. Even though -- and this sort of leads to the question I answered earlier, even though there's incremental deposit pressure, the fact that loans will be yielding higher for longer this year, we will still end up with a better net interest income and likely slightly better net interest margin than we were previously projected. David Chiaverini: Very helpful. Thank you. Christopher Del Moral-Niles: I would remind you, though, that the first quarter has fewer days, but don't index off of the Q1 number, index off of the day count adjusted number. Operator: The next question will come from Chris McGratty with KBW. Christopher McGratty: The tweak in the credit guidance is a tweak, but it's -- I think it's a fairly important vote of confidence or statement. Could you unpack what drove you to change the charge-off guide after 1 quarter? Irene Oh: Yes. That's -- it's simply put, right? When we look at the portfolio and we look at kind of what we're seeing, this is our view as far as at least today where we think the net charge-offs are going to be. Christopher McGratty: Okay. So good visibility on the outlook. Okay. And then within the 7% to 9% expense growth. I'm wondering if you could parse out, run the bank versus invest in the bank and how over time, this level of growth. I think this is a similar guide you gave last year at the beginning of the year, how AI might influence that over the medium term? Christopher Del Moral-Niles: In the short to medium term, AI is a cost because we all have to run to figure out how we're going to combat missiles and everything else that the market is doing at. And so the reality is we're spending time to make sure we're -- as we have been for the last year, investing in our cyber defense and investing in our monitoring tools, investing in our daily operating capability to make sure we're as resilient as possible. And those are investments that I'll highlight are not regulatory-driven. There are investments that are driving us to be the best bank we can be every day for our customers, and we're going to continue to make those investments every day. And that's why we will continue to believe 7% to 9% expense growth is the right level while delivering the best efficiency ratio in the industry. Operator: The next question will come from David Smith with Truist Securities. David Smith: Good afternoon. I was wondering if you could give us any updates on how you're looking at blockchain or stablecoins as you look at ways to better help your plans with international business needs, transfer money more efficiently? Christopher Del Moral-Niles: We continue to see the vast majority of our customers wanting and continuing to transact in Fiat currencies, but we do have customers that hold a variety of crypto and stablecoin, and we're monitoring those continued conversations, development, new products and new solutions. We have put some projects sort of into the hopper that we think we'll be able to deliver at the appropriate time when there's a little more market acceptance to those, and we've been working with 1 or 2 clients on select opportunities to be supporting them on a back office basis. And so we'll continue to be active around the state, but have not yet rolled anything out to customers. David Smith: Are tokenized deposits part of that potentially or anything there? Christopher Del Moral-Niles: We have explored those. We have not yet rolled out or put something like that on the shelf, but that's one of the things that we've looked at in concert with, I think, some larger industry vendors that have proposed solutions, and we're trying to figure out if we want to use those or something different. So we're just exploring that and monitoring those development cycles. Operator: The next question will come from Janet Lee with TD Cowen. Sun Young Lee: In recent years, your deposit, you generally were able to grow deposits at a pace that's modestly above loans. Is it fair to assume that your deposit growth for 2026 would be the same as in coming in, in line to above your loan growth guide for the year, given the strong results, especially given the strong results from the first quarter? Christopher Del Moral-Niles: Janet, I would note that on Page 3 of our financial highlights. We led with deposit-led growth as the story. And so we continue to see deposit-led growth as the story and continue to expect deposits to help us drive a better funding mix, a better liquidity profile and more reservoir dollars available to meet our clients' needs as borrowers over time. But yes, it's been a deposit-led story. Sun Young Lee: Okay. And maybe I'm missing something here, but if you were able to keep your net interest margin flat to modestly improving versus the first quarter, I guess, excluding the day count impact and then loans growing at 6.5% to -- sorry, what was your loan growth guide? Loan growth in the 5% to 7%. Your NII, what would be the puts and takes around you getting to that lower end versus the high end. It looks like you're tracking at least at the higher end and potentially better or... Christopher Del Moral-Niles: I think some of those things are true, but the other things that we talked about are that deposit pricing pressure continues to build, and we would expect that to eat into some of the benefit that we might see from higher for longer as we move through the course of the year. If the economy is strong enough, or inflation levels are strong enough such that rates are not nearly lower then probably there's more net funding going on in the industry and deposit pricing competition strengthens or becomes more rigid or even increases and makes that more costly, and we factor that into our models for 2026. Operator: The next question will come from Timur Braziler with UBS. Timur Braziler: Just circling back on the loan growth, maybe specifically for the coming quarter. I appreciate the comments that some of the capital call lines had already paid down. That's going to be offset with improvement in the mortgage warehouse business. I guess, net-net, in 2Q, are you still expecting those loan balances to grow? And are we still thinking that 1Q is kind of seasonally softer for some of the traditional commercial business lines? Christopher Del Moral-Niles: So unpack that question again because you said something about warehouse, and we don't do a lot of warehouse. So repeat your question, Timur, sorry. Timur Braziler: Yes. Just the puts and takes on some of the lines being paid down in 1Q versus the growth that you're expecting in the second quarter and whether or not that's going to net positive balances in 2Q? And then just the seasonality on some of the commercial pieces. Christopher Del Moral-Niles: Sure. So on the private equity capital call line activity that we saw in Q1, Irene mentioned and I mentioned, we've already seen some of that pay off here in April. And we probably expect more than 1/3 of it to pay off, frankly, in the ordinary course during the ordinary second quarter. So that uptick that we saw should be in the ordinary course paid down to some extent. However, we continue to see continued activity in private equity and in mortgage private capital. And those 2 areas may therefore offset those paydowns and allow us to deliver additional growth in Q2. As we sit here today, we would expect that. Too much seasonality per se in the other areas of our commercial business. Timur Braziler: Got it. And then one on credit ACL has been building over the last couple of quarters. I think you guys called out some mix shift here in the first quarter. Just give us a sense of where you are likely in that ACL build. And should we expect that to start settling out and being utilized here at some point? Or is that going to remain fairly conservative in holding up at these kind of levels? Christopher Del Moral-Niles: I think the bank has traditionally approach ACL as being making sure it was appropriate. And perhaps on the margin, making sure it was modestly conservative, I think we've continued to do so. From a build perspective, it was 2 basis points for the quarter. I'll defer to Irene on specific comments around the portfolio. But I think the reality is, with our visibility that we do have in the charge-offs, we feel pretty good about where we stand. Irene? Irene Oh: Yes. Maybe I'll just add a little bit on the technical side of that. You use a multi-scenario model for calculating our allowance. And as of March 31, the downsides scenario did change quite substantially from what it was at year-end. That certainly was one of the factors. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Dominic Ng: Well, thank you to everyone for joining us today. I want to thank our team for their continued hard work and dedication, which continues to show in our results. We appreciate everyone your time and interest and looking forward to speaking with you again next quarter. Goodbye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the MSCI Inc. First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded. At this time, participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Jeremy, you may begin. Jeremy Ulan: Thank you, Operator. Good day, and welcome to the MSCI Inc. First Quarter 2026 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the first quarter of 2026. This press release, along with an earnings presentation, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of the presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-Ks and our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You will find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics, such as run rate and retention rate, is available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO, and Andy Wiechmann, our Chief Financial Officer. With that, let me now turn the call over to Henry Fernandez. Henry? Henry Fernandez: Thank you, Jeremy. Good day, everyone, and thank you for joining us. MSCI Inc.’s first quarter results affirm our foundational, mission-critical role in global investing while also showcasing the highly diversified nature of our business. Our key financial metrics included organic revenue growth of over 13%, adjusted EPS growth of nearly 14%, and adjusted EBITDA growth of almost 19%. We remain long-term believers in the MSCI Inc. franchise, and we are committed to maximizing value creation through the disciplined deployment of our excess capital. Between January 1 and yesterday, we repurchased more than $464 million of MSCI Inc. shares at an average price of about $556 per share. In addition, we recently completed three very exciting and highly strategic small bolt-on acquisitions in key growth areas. Our Q1 operating metrics included total run rate growth of nearly 13%, fueled by a record asset-based fee run rate of $872 million, growing 25%, and recurring subscription run rate growth of 9%, fueled by net new recurring subscription sales of $39.6 million, growing 52%. It was our best first quarter for net new recurring subscription sales since 2022. The retention rate across all MSCI Inc. product lines was 95.4%. Our increased business momentum is starting to reflect the relentless adoption of agentic AI in everything we do, ranging from how we capture data and build models and platforms, to how we launch and market our products, to how our people work every day. This momentum cuts across geographic regions, product lines, client segments, and asset classes. We did well in all regions in Q1, with Asia Pacific a particular standout. In fact, we posted our strongest ever Q1 on record for recurring sales in APAC, at $15 million, up 46% from a year earlier. Across product lines, MSCI Inc. has built our momentum through sales of both newer and more traditional solutions. In Index, for example, subscription run rate growth returned to double digits in Q1 at 10.7%, and we achieved a record level of Q1 recurring sales at nearly $33 million. These results were driven mainly by our market cap indices, but we also delivered impressive growth in custom indices. With more than $21 trillion in AUM benchmarked to MSCI Inc. indices, the ecosystem around our products is scaling to new heights. This includes $7.4 trillion of indexed equity benchmarked to MSCI Inc. indices, comprised of $2.4 trillion in ETF products and $4.9 trillion in non-ETF products. Q1 was our best quarter since 2023 for traded volumes and run rate from listed futures and options contracts linked to MSCI Inc. indices. This further reinforces the power of our ecosystem and our shared success with the MSCI Inc. exchange partners, including our new licensing agreement for options on MSCI Inc. indices listed on the New York Stock Exchange. AI is helping us capitalize on these trends by offering more flexibility, faster customization, and greater interoperability. For example, our new IndexAI Insights connector makes it easier for clients to answer questions about our index data and methodologies using their preferred AI large language models, such as GLOWL and ChatGPT, or on MSCI One. Hundreds of clients have used IndexAI Insights since our launch in late February. MSCI Inc.’s recent acquisition of Compass Financial Technologies, a Swiss-based provider of index calculation services, extends our customization capabilities into additional asset classes, such as commodities, digital assets, and equity derivatives. Meanwhile, in Private Capital Solutions, we delivered recurring net new sales growth of nearly 44% in Q1 while driving adoption of both newer and established solutions. Some of our reimagined and innovative new tools include daily private valuation indices and benchmarks for private equity and private credit. MSCI Inc.’s AI capabilities in private assets have increased dramatically over the past year, including a new connector on cloud linked to our Private Capital Intelligence fund benchmarking. We are helping allocators streamline the due diligence and evaluation of private fund managers at scale with our private asset due diligence platform. Our recent acquisition of VantageR, a platform built entirely on AI, accelerates our ability to help clients perform better due diligence when investing in private markets. Likewise, our acquisition of PM Insight earlier this month will help us deliver secondary market pricing, liquidity, and reference data, which will support more robust portfolio construction and the development of indices and analytics solutions. Turning back to MSCI Inc.’s Q1 performance, in Analytics, we drove recurring net new subscription sales of $8.2 million, up nearly 55%, reflecting large wins and renewals of our equity offerings and enterprise risk tools. These wins underscore the continued innovation of our factor capabilities, such as our next-gen models and the release of basket-building solutions for the market-making and trading community. They also demonstrate our advancements across total portfolio solutions, including our unparalleled private asset coverage, as seen in our new private credit risk models. Among client segments, MSCI Inc. had an especially strong quarter with hedge funds and traders. Among hedge funds specifically, we posted subscription run rate growth of 17%, along with our highest ever level of Q1 recurring net new subscription sales, at roughly $12 million. These results were driven mainly by Index and Analytics. These wins included a seven-figure Index rebalancing deal with a top global hedge fund. In Analytics, hedge funds are also licensing our crowded trade datasets to support their alpha generation. Among banks and broker-dealers, we delivered subscription run rate growth of almost 11%, along with our best ever Q1 for recurring net new sales at nearly $11 million. Shifting to asset owners, MSCI Inc. achieved subscription run rate growth of nearly 10%, driven by Private Capital Solutions and Analytics. As more pension funds diversify into private markets, we see growing demand for our total portfolio solutions and private asset tools, including our tools for benchmarking and for transparency. Moving on to asset managers, we posted subscription run rate growth of over 6%, along with nearly 11% recurring net new sales growth, including notably strong growth in Analytics and a retention rate of close to 96%. MSCI Inc. is executing on key growth opportunities for the asset management segment, including advanced datasets, private assets, total portfolio solutions, and active ETFs. Looking at our Q1 performance as a whole, we once again demonstrated the benefits of our all-weather franchise. Our client segment and product diversification, recurring revenue financial model, and the growing liquidity and scale of the investment ecosystem linked to our indices and our IP are key strengths. Our ongoing technology- and AI-driven transformation will strengthen these advantages. To help us lead that transformation, Dinesh Gupta joined MSCI Inc. last month as our new Chief Data Officer and Global Head of Operations. Dinesh came to us from Goldman Sachs, where he spent nearly three decades and held leadership roles spanning multiple business lines, including asset and wealth management. Dinesh served as Global Head of Data Engineering at Goldman, and he also led the organization responsible for building agentic AI platforms and machine learning capabilities across the whole firm. He is ideally suited to help MSCI Inc. strengthen our comprehensive data strategy, reinforce our technology- and AI-first mindset, and accelerate our transformation. And with that, let me turn the call over to Andy. Andy? Andy Wiechmann: Thanks, Henry. As you indicated, it is a very exciting time to be at MSCI Inc. We closed one of the strongest first quarters in our history, reaffirming our traction across key initiatives. We are growing our market share and expanding our influence in the increasingly AI-centric investment industry. Index organic subscription run rate growth reaccelerated to low double-digit levels at over 10%, with record Q1 recurring net new sales of $25 million, up 75% year over year. We benefited from a few large deals with trader and hedge fund clients, where these opportunities included new custom index content, such as our non-ETF custom index and constituent datasets, which span rebalancing and history use cases. Additionally, we had another quarter of strong traction with our market cap modules, where we saw success across asset managers, hedge funds, and broker-dealers. Index retention was nearly 97% for the quarter, further improving from last year’s levels. Asset-based fee run rate growth was 25%, fueled by the incredible flows to products linked to MSCI Inc. indexes. Equity ETFs linked to our indexes captured a record $103 billion of inflows during the quarter, representing roughly 35% of all flows in equity index-linked ETFs. To put that in context, the prior record for quarterly inflows was $67 billion, which occurred in the fourth quarter of last year. Global investors continued to deploy significant capital into ETF and non-ETF products linked to MSCI Inc. developed markets ex U.S. indexes and MSCI Inc. emerging markets indexes. Additionally, our clients are seeing very strong performance in European-listed ETFs linked to our indexes. In general, we see attractive whitespace opportunities in the European market. Nearly $1.1 trillion of the $2.4 trillion of AUM in equity ETFs linked to our indexes comes from European-listed products. During the first quarter, we saw European-listed ETFs capture $46 billion of inflows, which was nearly 50% of all flows in the region. In Analytics, run rate growth was in the high single digits, driven by new recurring sales of $17 million, which grew 30% from a year ago. We saw continued strength in equity Analytics, and we had some large enterprise risk and performance wins. The Analytics Q1 revenue growth was over 10%, although this reflected a higher volume of implementations recognized in non-recurring revenues. For Q2 2026, we currently expect Analytics year-over-year revenue growth to be roughly 5% for the quarter. In Private Capital Solutions, subscription run rate growth accelerated to nearly 16%. We have seen strong momentum with our transparency data, Private Capital Intelligence, and Total Plan offerings, all of which have benefited from numerous enhancements and new capabilities. In Real Assets, we still face some headwinds with our property transaction solutions, although we had another quarter of improving cancels and solid sales of our Index Intel offering for property benchmarking use cases. In Sustainability and Climate, while new recurring sales grew modestly, they were offset by higher cancels. We are seeing clients focus spend on their most critical sustainability priorities, which leads to some down-sells, although it has also led to competitive wins for us. We expect these pressures and the muted growth in Sustainability and Climate to continue in the near term. Our capital position remains strong with close to $400 million of cash on our balance sheet at the end of March. As Henry noted, we completed the acquisitions of VantageR and Compass during the first quarter and PM Insight earlier this month. These three acquisitions add a relatively modest contribution to run rate and ongoing expenses. On guidance, we updated our full-year outlook on D&A by $5 million to incorporate the impact of intangibles related to the acquisitions. Given the strong ABF performance, and the assumption of very gradual market appreciation in the back half of the year, we are trending to be in the top half of our expense guidance range. The Q1 effective tax rate reflected lower tax windfall benefits from the vesting of stock-based compensation compared to recent years. I would highlight our effective tax rate outlook for 2026 is unchanged, and for Q2, we expect to have an effective tax rate between 18% and 20%. The free cash flow outlook for the full year is unchanged, although Q2 is seasonally the highest quarter for cash tax payments for us. Looking ahead, we have an attractive pipeline of opportunities as we drive adoption of our new and existing solutions across the investment landscape. Our strong start to 2026 reaffirms the mission-critical nature of our solutions in today’s AI-first economy. We are seeing solid momentum in delivering new products and capabilities, supported by enhanced go-to-market efforts, which are translating through to tangible results. We are focused on meeting client needs and enhancing value across client segments. We look forward to keeping you posted on our progress. And with that, Operator, please open the line for questions. Operator: Certainly. As a reminder, if you have a question, please press 1-1 on your telephone. We ask that you please limit yourself to one question each. You may get back in the queue as time allows. Our first question comes from the line of Alex Kramm from UBS. Your question, please. Alex Kramm: Yeah, hey. Good morning, everyone. I just want to talk about the sales momentum a little bit here. I mean, the first quarter had a choppy ending with all the volatility in markets in March, so good to see still good momentum there. So just wondering, did anything slip given the environment? But more importantly, given the second quarter is generally a more important sales quarter for you, any kind of insight into what you are seeing so far, in particular in Index and Analytics? Thanks. Henry Fernandez: Hi, Alex. Thanks for the question. Except for a slowdown in dialogue and presentations and, obviously, demos in the Gulf region—the countries in the Arabian Gulf region—we have not seen any effect of the Iran war anywhere else in the world. It has obviously been a bit surprising to us, but we have not seen clients pull back. We have not seen clients delay decisions. They have been operating on a business-as-usual basis, and that was the case at the end of March and also in the first three weeks of April. Thank you. Operator: One moment for our next question. Our next question comes from the line of Manav Patnaik from Barclays. Your question, please. Manav Patnaik: Thank you. Good morning. I just wanted a little bit more color. These are obviously some impressive net new sales numbers out there, especially in this environment where we all perceive your main customers to be budget challenged. Are you taking share? Are you just taking more of the wallet? Can you talk a little bit about some of the product areas, innovation, and where this growth is coming from? Henry Fernandez: Yeah. In our own internal discussions and analysis, we have not seen—the operating environment and the end markets that we are serving have not changed for the last few quarters, not changed almost at all. A few things are a little better, a few things a little worse, but they have not changed. What has changed in terms of this performance of Q1, and also the past performance of Q4 of last year, is stronger execution across MSCI Inc. in three big categories. The first category is selling what we currently have—the products that we currently have—more aggressively, more creatively, more energetically across all client segments and all regions of the world. Number two is significant acceleration of the launch of new products, or I should say the start of an acceleration in the launch of new products. We launched an equal number of products in Q1 as we did in the full year of 2025. And number three, a significant acceleration in adoption of AI tools in everything we do, along the lines of what I said in my prepared remarks. Those three areas have helped us increase our recurring and new, have bigger penetration, take market share away from competitors—especially in the Sustainability and Climate area—and grow faster. We believe that, as we have said before, Q3 was a little bit of the bottom, Q4 was better, Q1 is better to expectations, and we think we are on a growth path here. Operator: Thank you. Our next question comes from the line of Toni Kaplan from Morgan Stanley. Your question, please. Toni Kaplan: Thanks so much. I was hoping if you could talk about whether you have seen any uptick to revenue specifically related to AI. I know you talked about the products built on AI. And any quantification around expense savings with regard to AI? Thanks. Henry Fernandez: Yeah, Toni, basically every new product we are launching has an AI component to it. Some of them are AI native, some of them are AI powered, and some of them have some AI enablement. Depending on the product and the area, the importance of AI is very big in the AI-native ones or is just one of the ingredients that go into the launch of the product. That is pretty much across the board in any new product. Therefore, we have been tracking last year the revenues associated with “AI products,” and we keep doing that, but it is almost irrelevant right now because everything that we are launching has an AI component to it—it is just a matter of degrees. The second part of your question is efficiencies. We are seeing significant early efficiencies in the use of AI across the whole board. That started in earnest in applying AI to the data and the data development in private assets and in Sustainability and Climate. That has accelerated significantly to the point that it allows us to dramatically increase the amount of data gathering and data development with the same level of headcount that we have, rather than adding headcount. We are beginning to see significant productivity as well in software development—new software development, new software applications—and we have not yet started rewriting the current software that we have, in terms of either production or applications, with AI, but that will be a big project that we want to get into in the near future. And then thirdly, and also very importantly, we began to use AI across the board in the development of models and methodologies. For example, in custom indices—we are ramping up the development of custom index capabilities—we are now using AI, obviously managed and monitored by our humans in our Research department, in the creation of custom indices at a much faster speed than we have ever done before. We are also using AI for Analytics models, and we just revamped the entire Sustainability ratings system, ESG ratings systems, using AI. That is in the process of being relaunched, and that is going to give us enormous productivity and scalability. Andy Wiechmann: Toni, one other point to highlight which adds to the benefit side of the ledger from AI is we are starting to see clients that are interested in licensing more content and getting access to more content for AI-driven use cases. We think that is early days and potentially a huge opportunity for us—something we get very excited about given the unique content that we have. So, that added to all the points that Henry highlighted reaffirms that AI is definitely a boon for us. Operator: Thank you. Our next question comes from the line of Owen Lau from Clear Street. Your question, please. Owen Lau: Hi. Good morning. Thank you for taking my questions. So Analytics revenue was up over 10% year over year, and, Andy, you also mentioned that you had some pretty strong nonrecurring revenue related to implementation. Could you please talk about the outlook there, in specific for implementation? And then how high is the correlation between the strength of Index and the strength in Analytics in the first quarter? Thanks. Andy Wiechmann: Sure. A few points there. Let me talk first about the momentum we are seeing in Analytics, which definitely has been encouraging. We continue to have strong success with our equity Analytics, and we had some big wins in the quarter, and we also had some nice wins on the multi-asset class side. The success that we saw in Analytics in the quarter was across multiple fronts. We are seeing strength across client segments. We continue to see very strong growth with hedge funds—we actually had 14% growth in Analytics with hedge funds. We are also seeing strong momentum with banks, where we had 10% growth, and asset owners also are a big win area for us, which Henry highlighted earlier. A lot of that is enabled by our total portfolio capabilities, which really lean on our differentiated private content. We saw 9% growth with asset owners. So, good momentum across client segments. Our factor franchise continues to get a strong boost within the hedge fund community, but excitingly, we are seeing traction outside of hedge funds. We had some wins with traditional asset managers as well. We are encouraged by the momentum across Analytics, and you see that in the run rate where we have been kind of steady in the high single-digit type area. Your comment about Analytics revenue growth is that there are some unique factors at play in the quarter. We did have a large implementation that was completed during the quarter, and hence you saw some meaningful nonrecurring revenues within Analytics, which drove the overall revenue growth to be slightly above 10% within the segment. As you have seen in the past, there can be some lumpiness with regard to when those implementations are completed and the comparisons to the prior-year period. In Q2, we do expect the revenue growth to be more mid-single digits—so closer to 5%—within Analytics. Beyond Q2, we do expect the revenue growth to track much more closely to run rate growth. Looking forward longer term, we think run rate growth is a good indicator of the revenue growth and, as I alluded to, that is an area where we see good momentum and strong traction. Your question about correlation with Index—there are dynamics that are overlapping. Within the trading and hedge fund community, our content sets are very complementary. We have seen strong traction both in Analytics and in Index within that client segment. We also see general environmental factors at play that drive both. As you can tell by the results, we had a good quarter in Index and a good quarter in Analytics, so there is some correlation there. But there are also different dynamics across different parts of the business, so I would say it really depends. Operator: Thank you. Our next question comes from the line of Ashish Sabadra from RBC Capital Markets. Your question, please. Ashish Sabadra: Thanks for taking my question. Really strong subscription run rate growth in hedge funds, asset owners, and broker-dealers. But I wanted to focus on the asset manager where it moderated a bit from 7%, I believe, last quarter to 6%. Can you just talk about the puts and takes there? How should we think about that momentum in asset managers going forward? Andy Wiechmann: Sure. There are some FX factors at play with the growth rates in any given sector. We actually have seen good momentum and a pickup with asset managers in spots. As Henry alluded to earlier, we are benefiting from the innovations that we have made—the new product development—as well as just more generally enhanced execution, and that includes how we cover our asset manager clients. The success was multifaceted. We had success in licensing more content and broader usage of our tools across asset managers. For many of the larger clients, we have taken more of an enterprise-type approach to how we work with them, and that leads to some very attractive additional licensing opportunities, and it also leads to more stability in the segment. As we alluded to, we saw very strong retention with asset managers in the quarter. From a geographic standpoint, we saw good momentum in EMEA and good momentum in APAC, and we have seen it both in Analytics and Index. To double-click quickly: on the Index side, beyond broader licensing, we have released content sets that are helping these clients in the portfolio construction process, but also in the sales enablement process—meaning how they communicate to their clients and how they think about launching new products. We also have solution sets that are getting traction for active ETFs, and more generally supporting indexed investing in many forms and fashions. On the Analytics side, we have had some big multi-asset class wins, and we have also seen some traction with our factor franchise. Overall, it is encouraging. A lot of it, as Henry alluded to, is driven by our efforts and our execution, and we continue to view asset managers as a key and core client segment for us. Operator: Thank you. Our next question comes from the line of Craig Huber from Huber Research Partners. Your question, please. Craig Huber: Thank you. Maybe just talk a little bit further about the little bit better numbers in Sustainability and Climate there. It is obviously nowhere back to where it was before. Seems like the environment for that has not dramatically changed here in recent quarters. But just talk about what is driving a little bit better momentum there, if you would, please. Thank you. Henry Fernandez: Craig, it is important to start by differentiating Sustainability—formerly ESG—from Climate. They have been a little bit linked in the past, not because they have similar dynamics or supply and demand or competitive landscapes, but because sometimes the sales that we did were in one package, which we are increasingly separating. We believe that Sustainability we will continue to sell—and sell well—but there is a lot of rationalization of cost, and there is significant market share that we are taking away from competitors on Sustainability. On Climate, we are cautiously optimistic that at some point it will reaccelerate, especially in physical risk. This past quarter, we had an important win with the central bank of Germany, which subscribed to a series of climate risk tools from our side on behalf of the European Central Bank system, which incorporates all the national central banks. We are very encouraged by that because it was a competitive win—we were selected as the best provider—and now we have the work of penetrating each one of the national central banks. That tells you how important they view climate risk and how important they view the MSCI Inc. offering. We continue to focus on the transition elements of climate change, but very importantly, we are now more and more focused on the physical risk part, and we see increasing demand there. We believe that the Iran war and the energy shock that has come out of that will underscore significantly the energy transition that many countries need to make to ensure less dependence on oil and gas coming from the Gulf, and that is going to bode well for a lot of our tools. Operator: Thank you. Our next question comes from the line of Alexander Hess from JPMorgan. Your question, please. Alexander Hess: Hi, guys. I want to jump into the active ETF business. It seems like, from our data, there was some pickup in active ETFs more broadly, and they seem to be doing pretty well as a category. Maybe you could highlight what that business looks like, how that may have helped your fund flows in 1Q or not, and then anything we should understand about how you participate in that business and how that flows through your numbers? Thank you so much. Henry Fernandez: We are very excited about that part of our business, for a number of reasons. First, we believe that this is an area of significant expansion by the active asset management industry. A lot of what they are getting hit with in outflows in mutual funds and other forms of active management, they can latch onto active ETFs and revive growth. This is a client base that we know exceedingly well. They recognize our datasets and our indices extremely well, and therefore we can be very helpful to them. Second, it is important to recognize that something like 70%–80% of the active ETFs that are being launched have some elements of systematic investing or index investing in them. They are not pure-play stock-picking ETFs like some mutual funds could be. That is fertile territory for MSCI Inc. to be of significant help—in terms of the underlying database and the organization of the database, to the indices that are built on the database, and then to the quantitative tools that can be applied on top of the indices to do overlays that are more actively managed. We are very bullish about that. Third, our role in this industry on the passive side is significant, as you know, and a lot of our clients are coming to us to help them on active ETFs because of our brand and the trust in our database, indices, and methodologies in order to build this active ETF business. We are very hopeful that will be a growth area for us with active managers around the world. Andy Wiechmann: And, Alex, to answer the part about where it shows up in our financials: we are very actively used as a benchmark on active ETFs. Oftentimes that is not a new sale for us. If a client is licensed already for the module, when they use us as a benchmark on the active ETF, that is not going to be a new sale. But to the extent it helps with the health of the asset manager and helps them grow, that can lead to additional sales for us. As Henry alluded to, we also license additional content sets—specific sets like our Index Universe data but also broader content sets—that can be used as part of the portfolio construction process, overlays, and risk management as part of our clients’ active ETF management. That is an additional module license for us on the subscription side. We have also launched our financial product license—this is where we can do more for the client and be an integral part of the overall portfolio management, including calculating the index on an ongoing basis—and that can translate through to ABF revenue. We can benefit both on the subscription side and the ABF side. It is very early days, so it is small for us. We are getting good traction as a benchmark and have had quite a bit of success early days in licensing additional content sets, but we think the opportunity is much bigger going forward to help on both the ABF side and the subscription side. Operator: Thank you. Our next question comes from the line of Faiza Alwy from Deutsche Bank. Your question, please. Faiza Alwy: Yes, hi. Thank you so much. I wanted to ask about the strong growth that you saw in custom indexes. I am curious if it is driven by your ability to process things faster, or is it more a function of end market demand? Just trying to understand the sustainability of the higher growth that you saw this quarter. Henry Fernandez: Basically, let us start with the end market demand. In systematic investing—and a big part of that is index investing—the vast majority of the historical work that we have done has been on market cap exposures. That is “give me the market cap of your emerging markets,” “give me the market cap of Japan or Europe,” or one way or another. What is now happening is that the door is now wide open to do systematic investing and rules-based investing—in what we call non-market cap—which is “give me a portfolio or an index of all the equity securities in the world that have low volatility, high quality, high ESG ratings, low climate risk,” or whatever the flavor. That is an investment thesis, not just a market exposure. Therefore, there is incredible growth in that in equities. We are now seeing it in fixed income. We are even getting requests about that in private assets, like private credit or private equity. We are uniquely positioned to benefit from that because not only do we have the index universe, the index methodologies, and a great index brand, but we have all the other ingredients: we have the factor models to create factor compositions; we have the ESG ratings; we have the climate exposures; we have the thematic scores. We can put everything together to build an index. Some of that gets translated into standard, off-the-shelf indices that we create, but the vast majority is coming into the form of a custom index—for either active management for active ETFs, for passive management in ETFs or institutional, for structured products, for an over-the-counter swap or option, and so on. The demand is very significant. We have been ramping up our ability to meet that demand. That comes in three components. First, the workflow application to help people and help us design these indices, and that is the acquisition of Foxbury. Second, once you have that workflow application and you design what you are looking for, how do you link that to an industrial-scale production environment in which you have tens of thousands of custom indices being produced safely and with high quality? We have done that work already. Third, how do we accelerate the process of creating the methodology—the index algorithm? We were doing that with humans in our Research department, and we are now doing that with AI to help accelerate it. The demand is there. We are meeting most of the demand, but we are leaving some money on the table, and with these improvements in these three areas, we are now well-positioned to capture the vast majority of this demand in the world, and we are uniquely positioned to achieve that. Operator: Thank you. Our next question comes from the line of Analyst from Goldman Sachs, on behalf of George Tong. Your question, please. Analyst: Hi. This is Anna on for George. We saw very strong AUM growth of ETFs linked to MSCI Inc. indices last quarter, especially in developed markets ex U.S. and emerging markets over the period of time. Can you provide more color around the momentum of the international inflows outside of the U.S.? How do you see the trends going forward? Additionally, do you expect the trends to drive broader subscription growth opportunities for you going forward, given MSCI Inc.’s unique exposure to international markets? Andy Wiechmann: Sure. As you alluded to, we have a unique and differentiated franchise in ex-U.S. markets. If you look over the last ten years, we have captured about a 35% share of ex-U.S. equity ETF AUM. That sustained leadership is supported by consistent inflows, the strength of our comprehensive offering, our strong position with the asset owners of the world, and the fact that we really have fit-for-purpose indexes tailored to whatever need our clients have. Over that ten-year period, you saw meaningful outperformance of the U.S. market for most of the period, and we did fine during that period. But over the last eighteen months, you have seen a rotation start to take place into international equities—non-U.S. equity exposure—and that has been a big benefit for us. We saw tremendous inflows throughout last year. We saw record inflows into ETFs linked to our indexes in the first quarter—north of $100 billion—and, importantly, we are capturing a significant percentage of the market share of those flows, which speaks to the strength of the franchise. Another stat to highlight: within the European-listed ETF markets, we have a very strong position. We captured 40% of flows into European-listed funds within the first quarter. We also had very strong flow capture in the U.S. for international exposure products, but Europe has been an area of outsized strength for us. The growth in AUM in European-listed ETFs, and ETFs more generally, helps fuel the broader ecosystem for us. It drives more demand for clients to create new ETFs based on our indexes and helps in the derivatives markets, both over-the-counter and listed. It is an important point of strength. I do not want to speculate on what happens going forward, but given many of the fiscal and geopolitical dynamics at play, we have seen sustained momentum of outsized growth into international exposure areas, and that is a huge opportunity for us. We have an all-weather franchise that can benefit in all environments, but this environment creates numerous opportunities across different product areas, client segments, and geographies for us. Henry Fernandez: I normally say that we are only getting started in the indexed investing world and, in this case, the ETF world. The only thing that has been largely captured and conquered is market cap exposures. When you think about the non-market cap investment thesis—which is the vast majority of the investment process worldwide—it is being systematized, turned into rules-based, just like the active ETFs I was mentioning. There is now a revolution going on in fixed income as well, and in commodities and in equity derivatives. The acquisition of Compass Financial that we made is going to help us dramatically penetrate other asset classes like commodities—creating indices and systematized structures for commodities, for cryptocurrencies, for other digital assets, and for equity derivatives. I want to make sure you pay attention to that acquisition because it is going to open up a lot of new doors for us. By and large, we are the provider of choice for these custom indices across the board. That has been the strength of our fixed income ETF franchise linked to MSCI Inc. indices—not the market cap fixed income indices, but the non-market cap, where there is an ESG overlay, a Climate overlay, or a Factor overlay. You are seeing that growth. Lastly, to reinforce what Andy was saying: the two big ETF markets in the world are the U.S. and Europe. Our presence in Europe is $1.4 trillion-plus out of the $2.4 trillion, and we are extremely well positioned, capturing a significant amount of the flows there, in addition to the strength we have in the U.S. Operator: Thank you. Our next question comes from the line of Scott Wurtzel from Wolfe Research. Your question, please. Scott Wurtzel: Hey, guys. Thanks for taking my question. Just wanted to ask on the growth that you are seeing with hedge funds. It has been pretty impressive in this quarter and in the past couple quarters as well. I am just wondering if you can maybe contextualize what inning we are in in this opportunity to sell into the hedge fund channel, given the growth that you have seen in recent quarters? Thanks. Andy Wiechmann: Sure. Maybe I can broaden it to traders, broker-dealers, and hedge funds—what we have referred to as the trading ecosystem in the past. This has been a strong growth area for us, and it has been our highest growth area for the last couple of years, but it is also very strategic for us. We have seen growth in both Index—where we had 27% subscription run rate growth within Index with hedge funds—and in Analytics—where we saw 14% subscription run rate growth with hedge funds. We have similarly had very strong traction with trading firms and with broker-dealers. A lot of this is fueled by our actions. We have benefited from the health and asset growth that you have seen within multi-strat hedge funds and the growth of certain strategies, but importantly, we have been actively innovating and enhancing the services that we deliver to these organizations, and we have been becoming much more of an enterprise-wide partner to many of them. We offer custom indexes used for structured products and over-the-counter derivatives, custom bespoke strategies, custom index stats and content sets used for systematic and index rebalancing strategies, related index methodology datasets, and we continue to enhance our risk models and broader systematic solutions, which create additional upsell opportunities. We believe this is a big market where we will be a critical partner to these organizations. It is a sustainable area where we have a long way to go in terms of doing more for them at an enterprise level. As I alluded to earlier, this is very strategic for us as a firm because it helps fuel opportunities in the ETF market, the non-ETF passive market, and the over-the-counter market as well. It provides more liquidity and more opportunity for asset owners looking to implement index strategies, and opportunities within the wealth segment. It has been a nice growth engine in the short term within those three client segments, but more generally it is helping to fuel the power of the overall franchise for us. We believe it is attractive and sustainable, and we continue to innovate and enhance our service there. Operator: Our next question comes from the line of Analyst from Bank of America. Your question, please. Analyst: Great. Going back to the net new, very notable in 1Q—great results. Andy, would you be able to disaggregate how much of that was due to larger, concentrated deals, which you alluded to in the prepared remarks, versus the substantial increase in product velocity and execution? Any comments on that would be helpful. Andy Wiechmann: Sure. As Henry mentioned, we saw a notable pickup in the number of new products launched in the first quarter, and we also saw a notable increase in sales from new products compared to the first quarter of last year. Our actions are definitely playing a role in the acceleration in growth we have seen. If you look at where some of that momentum is, we have seen strong momentum in Index, where growth reaccelerated back to double digits. We have seen an acceleration in PCS on both fronts. We have been very active in the pace of new product development as well as enhancing our go-to-market efforts. Things like new Index content sets that we have been delivering; within PCS, a host of new capabilities like our Document Management and Source View offerings; our asset- and deal-level metrics; and a number of content sets that are helping drive growth across basically all of our PCS offerings—all have been released in recent periods. On the custom index side, Henry alluded to that area where we have been heavily investing, broadening our capabilities, and becoming a partner of choice. There are probably some environmental aspects at play; the momentum is constructive, but a lot of the momentum has been driven by the efforts and actions that we have been taking. Operator: Thank you. Our next question comes from the line of David Motemaden from Evercore ISI. Your question, please. David Motemaden: Hey. Thanks for squeezing me in. I wanted to talk a little bit about some of the momentum since the February rollout of IndexAI Insights. It sounds like that is driving increased monetization, or at least a bit of a pickup in licensing data. How might the economics differ whether it is going through MSCI One or third-party apps like Copilot or ChatGPT? Thank you. Andy Wiechmann: Sure. Consistent with our past approach, we want to make our content as easily accessible and available however clients want to get access to it. As we alluded to, you can get access to it through Cloud MCP, through MSCI One; we even have certain content sets available through Copilot. The economics are generally consistent regardless of how clients access it. Depending on how and where they are using it, there can be upcharges and upsells for us, but our goal is to make it easier for clients to access the content and use it in a multitude of use cases. This is one of those areas where we are increasing value to clients. We have seen notable traction, given that we just released it in February, in clients accessing IndexAI Insights. Clients are getting more value out of the content sets they have, so they can query and interrogate what is going on in the index, what drives the methodology, and what the constituents are. It is also a natural upsell driver for them to ask for additional content sets and to want to get insight into our risk models across the firm. We think this is a key enabler. It does help support price increases on the margin and can lead to upcharges around usage. This is step one for us, and over time, we think clients are going to want to use more of our content within their AI-driven processes. As they start to want to use that content to train models and use it as part of their AI investment processes, those are areas where there are meaningful sales opportunities for us. We are spending a lot of time thinking about the right licensing models there and how we can capitalize. We know directly from our clients that they want to use our content heavily, and these initial ways that clients can access the content via AI channels are the first step, but we believe there is a long journey of additional things that we can do and opportunities to monetize the content we have. Operator: Our next question comes from the line of Jason Haas from Wells Fargo. Your question, please. Jason Haas: Hey, good afternoon. Thanks for taking my question. There has been a lot of fear in the private credit markets recently around credit risk. How is that impacting your PCS business? Is it a headwind or a tailwind? Thank you. Henry Fernandez: It is definitely a tailwind for us. Think about it similarly to our Analytics offering. In equity factor Analytics and multi-asset class Analytics, the period of highest interest and highest demand is when there is a lot of volatility in the marketplace. What we are seeing right now in private credit is that, because of the lack of transparency on the funds, people do not understand the sector exposure of various credits, what the valuations are, what the liquidity is, and so on. There is increasing interest in many of the tools that we provide: transparency tools to understand what is in the fund, the terms and conditions of the loans in the fund, the credit assessments—in our partnership with Moody’s—what is the market risk of those funds based on factors, and the like. We are increasingly focused on creating valuations on private credit. This is a major tailwind for us. There will be more and more people wanting to look at that in order to understand what they bought and whether they should keep it, sell it, or add to it. Operator: Thank you. Our next question comes from the line of Kelsey Zhu from Autonomous. Your question, please. Kelsey Zhu: Good morning. Thanks for taking my question. How does AI change the competitive dynamics for you, particularly for the Analytics business? Are you seeing any intensified competition there? And if so, is it coming from startups or large customers who may try to build some of these products themselves? Thanks a lot. Henry Fernandez: It is a very good question. So far, we have not seen any kind of intense competition from either the traditional competitors of MSCI Inc. or the startups. We are not relaxed—we are monitoring and focused on that intensely to make sure that we continue to have a very deep and wide competitive moat. What we have seen is a significant acceleration from MSCI Inc. in terms of product creation: starting with gathering more data, accelerating the pace of model creation and methodologies and index production, and creating efficiencies that can help us save headcount and expenses that we can then reinvest into even more product creation and more distribution. I believe that the ultimate big opportunity for us is not only in the data and the models and the enhancement of the software capabilities that we have, but in changing the business model of how our clients consume our content. As you know, a lot of our content is consumed either by our own applications—MSCI One, RiskManager, Private i, etc.—by clients’ own software applications, or by third-party applications that aggregate our content with others. Through what we are doing—significantly increasing the creation of agents that our clients can use to consume our content—we can change that. We can get clients to consume a lot more of our content with a lot more people in many different locations. That is what we are aiming for in the medium to longer term, and that will dramatically redefine how clients consume our content and give us a lot more control and ability to expand. Operator: Thank you. This does conclude the question-and-answer portion of today’s program. I would like to hand the program back to Henry Fernandez for any further remarks. Henry Fernandez: Well, thank you all for joining us today. I would like to emphasize that our strategy last year and going forward is to significantly increase the pace of growth of our existing product segments like Index and Analytics with our traditional client segments of asset owners, asset managers, hedge funds, broker-dealers, etc., and simultaneously step up significantly the pace of development and growth of our newer product lines, such as Climate and PCS, sold to the traditional client base and newer client bases like GPs, banks as principals, insurance companies, market makers, and other parts of that trading ecosystem. Ultimately, we aim to become an even bigger long-term compounder of growth, which has always been our goal. We are underway on that strategy. The benefit of what you are seeing is that this is not growth in the periphery; this is growth in the existing big parts of the product line with existing clients, highly supplemented by the newer product lines and the newer client segments to add to that growth. We are very optimistic. It is an all-weather franchise—diversified across products, client segments, and asset classes. The question is how far and how aggressively we can optimize and monetize it to develop compound growth over the years and significant value creation for all of our shareholders, including our shareholders in the management team. Thank you very much. Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.