加载中...
共找到 17,993 条相关资讯
Operator: Good morning, and welcome to State Street Corporation's First Quarter 2026 Earnings Conference Call and Webcast. Today's call will be hosted by Elizabeth Lynn, Head of Investor Relations at State Street Corporation. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Today's discussion is being broadcast live on State Street's website at investors.statestreet.com. This conference call is also being recorded for replay. State Street Corporation's conference call is copyrighted, and all rights are reserved. This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street Corporation website. Now I would like to hand the call over to Elizabeth Lynn. Elizabeth Lynn: Good morning, and thank you all for joining us. On our call today are CEO, Ron O'Hanley, who will speak first, and then John Woods, our CFO, will take you through our first quarter 2026 earnings presentation, which is available for download in the Investor Relations section of our website, investors.statestreet.com. Afterward, we will be happy to take questions. Before we get started, I would like to remind you that today's presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the earnings release addendum. In addition, today's call will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those referenced in our discussion today and in our SEC filings, including the risk factor section in our Form 10-Ks. Our forward-looking statements speak only as of today; we disclaim any obligation to update them even if our views change. With that, let me turn it over to Ron. Ron O'Hanley: Thank you, Elizabeth. Good morning, everyone, and thank you for joining us. I will begin with a few broader observations before John walks you through our financial results in more detail. Reflecting on the first-quarter operating environment for a moment, several factors shaped investor sentiment in Q1, including the Iran war, divided views on the long-term impacts of artificial intelligence, and rising concerns on credit quality in certain parts of the financial system. Against this geopolitical and macroeconomic backdrop, we remain firmly focused on serving as an essential long-term partner to our clients and helping to deliver better outcomes for the world's investors and the people they serve. We continue to execute effectively on our strategy, supported by our distinctive capabilities, deep operational strengths, and a conservatively positioned balance sheet. That strategic positioning allowed us to deliver strong growth, underpinned by continued financial and strategic progress during the first quarter. Our results in the first quarter also underscore the inherent strength and diversification of our business model, which allows us to successfully navigate times of uncertainty and heightened market volatility, as we saw in Q1, with both FX trading and NII contributing meaningfully to our year-over-year financial performance. The scale, capabilities, and leading market positions of our core businesses, working together as one State Street Corporation, provide balance across varying market environments, reinforce the value of our platform for clients, and accrete value for our shareholders. Slide two of our investor presentation outlines our first-quarter highlights excluding notable items, which John will address shortly. We had a strong start to 2026, with broad-based positive year-over-year revenue performance across the franchise. Reported earnings per share increased 22%, while excluding notable items, EPS grew a very strong 39% year-over-year, supported by record quarterly fee revenue, NII, and total revenue. Importantly, substantial positive operating leverage in the first quarter drove another quarter of year-over-year pretax margin expansion. Quarter after quarter, the proof points continue to demonstrate that our strategy is delivering consistent, durable improvements in financial performance, with Q1 marking our ninth consecutive quarter of year-over-year positive operating leverage, excluding notable items. Stepping back from the quarter for a moment, I want to highlight some of the many growth opportunities we are realizing and see ahead at State Street Corporation. Through disciplined business investments and focused execution against a clear set of strategic priorities, we believe we are well positioned to continue to accelerate growth and deliver substantial and sustainable returns for our shareholders. We are drawing on deep, broad-based, technology-driven innovation and delivering digital platforms, compelling AI tools in AgenTx, and client solutions. Together, these capabilities help our clients succeed in a constantly evolving market while strategically pivoting State Street Corporation to faster-growing segments of the industry. In digital, we are focused on building the market infrastructure clients need to bridge seamlessly between traditional and digital finance. Following the recent launch of our digital asset platform, we are executing against a clear and comprehensive product roadmap that includes tokenization of assets, funds, and cash for institutional investors. These capabilities are designed to drive greater efficiency, enhance liquidity, and support new avenues of growth for markets, our clients, and for State Street Corporation. We are well advanced with clients to support their launch of tokenized fund strategies this year. Furthermore, State Street Corporation is deeply engaged in a number of digital asset-related industry initiatives, including DTCC's tokenization efforts, as well as Fnality's work to create an ecosystem of central-bank-connected, blockchain-based payment systems. These initiatives are key to the development of digital markets and consistent with our track record as a critical infrastructure provider and standard setter. Across alternatives, including private markets and hedge funds, we continue to see compelling long-term growth potential as the segment matures, with clients leveraging State Street Corporation to bring innovative solutions to markets. Our leadership positions across both investment servicing and investment management position us well to capture opportunities as we broaden access and simplify operations for clients, and our clients' clients. In wealth services, we are investing in leveraging Charles River's capabilities alongside our strategic partnership with Apex Financial Solutions to build a differentiated, fully digital, and globally scalable wealth custody and clearing solution. This positions us to serve wealth advisers and self-directed wealth platforms and unlock a new avenue for growth that leverages our strength across investment servicing and investment management. And finally, in State Street Investment Management, our strong track record of innovation, differentiated solutions, and scaled franchises in areas such as ETFs, cash, and retirement, to name just a few, create multiple avenues for growth. An illustration of our progress is the way we provide barbelled investment exposure at scale to serve distinct client needs. At one end, SPYM, our low-cost S&P 500 ETF, is gaining strong traction in retail and wealth channels. It ranked as the number one asset-gathering ETF globally in the first quarter, with $27 billion of inflows in that fund alone. At the other end, SPY continues to anchor institutional usage as the market's liquidity benchmark, with nearly $4 trillion of notional value traded in the quarter, representing roughly 17% of total U.S.-listed ETF volume. Together, this underscores the strength, breadth, and flexibility of our platform across client segments, and our abilities to successfully extend from our leading position in SPY to other high-growth ETF segments. Our scaled franchises within management also create a competitive advantage and will enable us to capitalize on several important global trends, including the shift from savings to investment, the move globally towards funded retirement systems, the expansion of digital assets, and the continued democratization of investing. For example, in digital, we are preparing to launch the State Street Galaxy Onchain Liquidity Sweep Fund, a tokenized private liquidity fund designed to support 24/7 on-chain liquidity for institutional investors. Together, these strategic initiatives underscore the broad range of opportunities ahead as we focus on driving near- and long-term growth, enhancing client capabilities, and strengthening our platform. At the same time, the next phase of our operating model transformation will strengthen our ability to deliver sustainable growth and long-term shareholder value. We are scaling AI-enabled capabilities, embedding more agile ways of working across the organization, and continuing to modernize our technology. With a continued emphasis on operational excellence, consistent execution of our strategy, and delivering for our clients, we are strengthening and improving our core end-to-end capabilities in technology, for the deployment of our AgenTeq platform and AI foundry to scale and accelerate AI in high-leverage areas, while also advancing capabilities in areas such as State Street Alpha and Charles River Development. These actions position us to operate more effectively, partner more deeply with clients, and help drive the next phase of industry evolution. To conclude, we are pleased with our strong start to 2026 while recognizing that our potential is even greater. We see broad-based strength across the franchise, and our first-quarter results reinforce that our strategy is translating into consistent and durable improvements in financial performance. At the same time, we continue to transform across the platform and accelerate the deployment of AI agents, which holds significant opportunity for State Street Corporation and our clients given the investment, operational, and technology intensity of what we do. In July, we will provide a detailed update on our strategic growth and transformation initiatives and how these position us to drive stronger performance over the medium term. We are encouraged by our progress, mindful of the environment, and confident in our ability to continue delivering as we move through the year. With that, I will turn it over to John to walk you through the first quarter in more detail. John Woods: Thank you, Ron, and good morning, everyone. We had an excellent start to 2026, with broad-based year-over-year growth across the franchise, driving record quarterly revenues and over 600 basis points of positive operating leverage in the quarter, excluding notable items. These results reflect disciplined execution alongside ongoing investment across our portfolio of strategic growth areas. Now let me dive into the details of the quarter, excluding notable items, starting on slide three. In the first quarter, total revenue increased 16% year-over-year to a record $3.8 billion. Fee revenue of $3 billion increased 15% year-over-year, driven by strong performance across investment management, investment services, and markets. Net interest income of $835 million increased 17% year-over-year, primarily reflecting continued net interest margin expansion. Expenses of $2.7 billion increased 9% year-over-year, driven by higher revenue, strategic investments, and the impact of currency translation, which was a headwind to expenses but a benefit to revenues. Taken together, this performance drove a significant improvement in profitability with 400 basis points of pretax margin expansion and a roughly four percentage point increase in ROTCE to 20%. Before moving on, let me briefly touch on notable items recognized in the quarter. Notable items totaled $130 million pretax in the first quarter, or $0.35 per share after tax, reflecting repositioning charges and the rescoping of a middle office client contract. Turning to slide four, servicing fees in the quarter increased 11% year-over-year to $1.4 billion, reflecting higher average market levels, the benefit of currency translation, and continued organic growth supported by net client asset activity, flows, and new business. AUCA ended the quarter at a record $54.5 trillion, up 17% year-over-year, primarily reflecting higher period-end market levels, positive client flows, and net new business. First-quarter servicing fee sales were $56 million. These were well distributed across regions and aligned with our strategic focus areas, particularly back office services and alternatives clients. Looking ahead, we continue to target $350 million to $400 million of sales in 2026. The pipeline remains healthy, with broad geographic and customer segment representation including APAC, EMEA, emerging markets, and alternatives. Additionally, we reported one new Alpha mandate win during the quarter, highlighting continued client engagement with our integrated front-to-back platform. Moving now to slide five. Management fees increased 23% year-over-year to $724 million in the first quarter, driven by higher average market levels and net inflows. Assets under management increased 20% year-over-year to $5.6 trillion, reflecting higher period-end market levels and continued client inflows. Net inflows totaled $49 billion for the quarter, led by strength across index strategies and solutions including ETFs and fixed income, as well as our cash franchise. Within ETFs, net inflows were $25 billion, driven by strong flows and market share gains in our U.S. low-cost suite. As Ron noted, SPYM, our low-cost S&P 500 ETF, was the largest asset-gathering ETF globally during the quarter. We also continued to advance product innovation and strategic partnerships, launching 57 new products and solutions during the quarter that are creating new avenues for growth. As a signpost of that progress, our State Street Bridgewater All Weather ETF surpassed $1 billion in assets under management during the quarter. We were also pleased to see our investment-grade public and private credit ETF, developed in partnership with Apollo Global Management, reach a new high watermark during January with AUM of over $800 million. Turning to slide six. Markets remains one of the key pillars of our One State Street strategy. It plays a key role in linking our investment services and investment management platforms, strengthening the connectivity across the firm and enabling more cohesive client-led solutions. FX trading revenue increased 29% year-over-year to $435 million in the first quarter, reflecting a strong 25% increase in client trading volumes, which reached a new record level as we supported clients amid a dynamic market environment. Securities finance revenue increased 2% year-over-year, supported by growth in client lending balances. Moving on to slide seven. Software services revenue increased 7% year-over-year in the first quarter, driven primarily by higher professional services and software and data revenues, reflecting continued SaaS go-lives and platform adoption across our client base. Software business momentum is also reflected in our annual recurring revenue, which increased 12% year-over-year, and our revenue backlog, which increased 11%. Turning now to slide eight. First-quarter net interest income of $835 million increased 17% year-over-year, primarily reflecting a 16 basis point expansion in net interest margin to 116 basis points, and average interest-earning asset growth of 1%. The year-over-year increase in NIM reflected improvements in funding mix, continued benefits from investment portfolio repricing, and runoff from terminated hedges, partially offset by lower average market rates. Growth in interest-earning assets was driven primarily by higher client deposits, partially offset by a reduction in short-term wholesale funding. Turning to slide nine. Expenses were up 9% year-over-year in the first quarter, excluding notable items. Currency translation accounted for approximately two percentage points of the increase. Of the remaining seven percentage points, approximately five percentage points reflected higher revenue-related costs, with the remaining balance of two percentage points driven by continued strategic investments and run-the-bank expenses, net of productivity savings. Moving now to capital and liquidity on slide 10. Our capital levels remain strong, enabling disciplined capital deployment aligned with our strategic priorities. At quarter end, our standardized CET1 ratio was 10.6%, down approximately 100 basis points from the prior quarter. The decrease primarily reflects higher risk-weighted assets associated with a normalization of RWA in our Markets business from episodically low levels in the prior quarter, along with the impact of U.S. dollar appreciation in March and, to a lesser extent, equity market appreciation on the final day of the quarter. Turning to capital return, in the first quarter, we repurchased $400 million in common shares and declared $233 million in common stock dividends, resulting in total capital return of $633 million, equivalent to a payout ratio of 90%. Before moving on, I would call your attention to a new slide 13 in the appendix on our NDFI loan portfolio. This lending remains disciplined and client-focused, primarily supporting investment services clients. In addition, this is a highly collateralized and diversified portfolio that has performed resiliently across cycles and continues to support durable client relationships. Turning to our full-year outlook, which, as a reminder, excludes notable items. We continue to assume that global equity markets are flat this year on a point-to-point basis from 2025, while remaining mindful of the potential for variability in the operating environment. Against this backdrop, we now expect fee revenue growth in the 7% to 9% range, an increase from our previous outlook of 4% to 6%, reflecting a stronger-than-expected Q1 along with continued organic growth and solid momentum across the franchise. Turning to net interest income, following our strong first-quarter performance, we now expect NII growth in the 8% to 10% range, representing an improvement from our previous outlook for low single-digit growth. We currently expect expenses to increase by 5% to 6%, up from our prior 3% to 4% outlook, primarily reflecting higher revenue-related costs. Finally, we continue to expect an effective tax rate of approximately 22% for the full year and a total payout ratio of roughly 80%, subject to board approval and other factors. We will now open the call for questions. Operator: At this time, we will open the floor for questions. You may remove yourself at any time by pressing star 5 again. Please note, you will be allowed one question and one related follow-up question. Again, that is star 5 to ask a question. We will pause for just a moment. Our first question will come from Glenn Schorr with Evercore. Your line is open. Please go ahead. Glenn Schorr: Hi. Thanks very much. I am happy about the pickup in NII, and I think the NIM expansion during the quarter was great. I find it interesting that average interest-earning assets were only up 1%, so I am interested if you could talk to the tug-of-war dynamic of better NIM but not a ton of earning asset growth. And does any of that change within your updated guidance? Thank you. John Woods: Thanks for the question, Glenn. I would say that we are very pleased to see our net interest margin progress, and as mentioned, much of that is coming on the funding mix side of the balance sheet. As we see growth in deposit levels, which surged in the first quarter, we are continuing the plans from the last couple of quarters of reducing our short-term wholesale funding. That is higher-cost, and we find that to be an appropriate rotation to higher-quality funding on the funding mix side. Interest-earning assets will be less of the story. Q1 was driven almost entirely by net interest margin. I think that is a similar story for our guide for 2026. The range that we talked about earlier is almost entirely driven by net interest margin as well. Interest-earning assets are really going to be something we keep an eye on, but not what is going to drive net interest income in 2026. Elizabeth Lynn: Operator, we can take the next question. Operator: My apologies. Our next question will come from Alexander Blostein from Goldman Sachs. Your line is now open. Please go ahead. Alexander Blostein: Hi. Good morning. Thank you for the question. I was hoping we could spend a minute on the goals you are trying to achieve from the next chapter of State Street Corporation's transformation. I know you alluded to the fact that you will provide a lot more detail in July, but since you opened that door, can you give us the overarching goals you are trying to achieve? Is that faster revenue growth, better profitability, or both? I believe your last official medium-term pretax margin target is somewhere in the low 30s. Is the goal to get that into a higher range over time? Any high-level framework would be helpful. John Woods: I will start off here. As you may have heard me comment on this in prior sessions, we had a goal to get to 30% pretax margin, which we delivered on in 2025 and again here in early 2026. You are seeing us meet that threshold, and the guide that we delivered today, if you play that through, implies in the neighborhood of 31% pretax margin. We think we are moving the platform forward from a profitability standpoint. The second big driver will be growth. In July, you will hear from us an updated view about what we think this platform can deliver over the medium term from a profitability standpoint. We feel there are extremely attractive opportunities to grow profitability metrics—pretax margin and other metrics—and we also believe we have very unique opportunities to grow this platform overall from a revenue standpoint. The building blocks of all of that will be the increasing business execution discipline that is emblematic of what you are seeing in organic growth across our fee line items. We will talk about what that can deliver for us. The other two big categories I would highlight: first, a distinctive portfolio of strategic initiatives that can drive unique, outsized benefits into the platform over the medium term; and second, transformation. Within transformation, there are several pillars. We will talk through our ongoing operating model transformation, embedding agile ways of working across the entire enterprise, and really solidifying a product-platform approach to delivering our services to clients. A second pillar will be the ongoing modernization of our technology and infrastructure, which we are excited about. And lastly, all things AI, where we have continued to make investments and make progress. We will wrap all of those building blocks together and what we believe they will contribute over the medium term in our commentary you will hear from us in July. Alexander Blostein: That sounds great. Looking forward to that. My follow-up: a question around ETFs, both in terms of growth and expense perspective. There has been increased focus on distribution platform fees that may come online towards the end of the year—Schwab is discussing that. Any early thoughts on the implications that might have on both ETF growth for State Street Corporation and incremental expenses that you might be willing to incur if you were to stay on the Schwab platform? Ron O'Hanley: Alex, it is Ron. We are very familiar with what some of the platforms are doing. Most of these platforms are close partners. In terms of our long-term strategy and performance, we are not concerned about this. If you have been following what we have done in ETFs, we have continued to broaden that platform, moving from where we started as an institutional provider to not only maintaining that institutional leadership but growing both in client segments in the low-cost wealth channel and in channels outside the U.S. You will see pockets of the kinds of things you are talking about, but we do not see it as any kind of substantial risk or headwind to our overall ETF business. Operator: Thank you. Our next question will come from Kenneth Usdin with Autonomous Research. Your line is now open. Please go ahead. Kenneth Usdin: Hi. Thanks. Good morning. This quarter, you showed the ability to put up meaningful operating leverage and also have a higher cost growth rate to even deliver that. Were you able to pull forward some spending, or was it mostly revenue-related costs? And as you look forward to the new 5% to 6% cost guidance, how are you balancing expected efficiencies, and how much FX translation are you including in the full-year guide after the hurt that it was in the first quarter? John Woods: A couple of comments. In the first quarter, there was about a 2% impact from currency. When you take that 9% expense growth, you are really starting with 7% ex-currency. That 7% is predominantly revenue-related; five percentage points of that would be revenue-related, which leaves a net 2%. Within that 2%, we have run-the-bank costs and our strategic investments. Those are in the neighborhood of, if you break that out, call it 6% of spend in running the bank and investing in exciting initiatives. We fund a lot of that through productivity, which is the net 4% of productivity that we delivered in the first quarter. We will continue to monitor our productivity trajectory, and the same storyline holds with the 5% to 6% full-year guide: the incremental growth you are seeing is majority revenue-related, and then there will be other costs as we continue to fund strategic investments, partially offset by productivity. The storyline for Q1 holds for the full year as well. Kenneth Usdin: Thanks, John. As a follow-up, with strong NII and strong FX trading, do you expect that to run-rate, or do you expect a natural come-off given the types of volatility and environment that we saw in the first quarter? John Woods: On FX, we had a strong quarter. Two things have to come together: first, you need the franchise in place to take advantage of opportunities and be there for clients. The investments in client acquisition, product extensions, and geographic expansion in Markets have served us well in Q1. Second, we had elevated but healthy volatility where liquidity was still good but there was a lot of turnover. Those combined to deliver Q1. For the rest of the year, when you think about our fee guide of 7% to 9%, we assume those FX conditions moderate gradually throughout the year. We are not depending on Q1’s highly favorable conditions being maintained to deliver 7% to 9%. For NII, our original guide was up low single digits; now it is 8% to 10%. We originally viewed NIM at 100 to 110 basis points; for 2026 you could see 110 to 115 basis points, slightly off from Q1’s 116. NIM is the main driver, with funding mix a larger tailwind. Overall deposits will be up, helping that funding mix. We previously said maybe $250 billion of deposits; probably in the range of $250 billion to $260 billion for the rest of the year. We will look to pay down some higher-cost debt and continue to optimize the funding mix to drive NIM. All of those building blocks are incorporated into the 8% to 10% NII guide. Ron O'Hanley: Ken, I want to underscore a point John made on FX. We have invested for years in expanding client volumes and ensuring we serve as much of our investment servicing clients as possible. We expanded geographic capabilities and, importantly, expanded the ways in which we can meet our clients technologically and how they can trade with us. We did that when there was not a lot of volatility, preparing for when normal volatility returned. We are seeing the benefits of those past and ongoing investments. Operator: Thank you. Our next question will come from James Mitchell with Seaport Global Securities. Your line is now open. Please go ahead. James Mitchell: Maybe just a follow-up on deposits. Up nicely with a big mix shift to noninterest-bearing deposits, which I think was a particular benefit quarter over quarter. How can any further optimization around pricing affect deposit growth from here, and how are you thinking about the mix in your guide? Thanks. John Woods: I mentioned the level of deposits; I would anchor to that $250 billion to $260 billion range. On mix, we originally talked about around 10% noninterest-bearing. That is still a good anchor over time, but in 2026 it appears we have a slightly higher noninterest-bearing opportunity than that 10%. For deposit drivers, there are external and internal drivers. Internally, we control continuing to grow our platform, serving clients, and growing AUCA—another record this quarter—which is where we source those deposits. Second, client segment growth: alternatives is growing faster than non-alternatives and, pound for pound, brings more deposits with a more attractive mix. Externally, deposits tend to rise when money supply and GDP are growing, when rates are stable or falling, and given our business, if volatility and risk-off rise, we tend to grow deposits. Broadly, our NII line is a bit of an offset to other line items, similar to what happens in Markets during higher volatility like in Q1. James Mitchell: Any thoughts on April from here—what you have seen so far? John Woods: I would say moderating from here. We had extremely positive conditions in Q1. Still very solid trends. I would stick with the $250 billion to $260 billion deposits and maybe slightly better than our 10% noninterest-bearing guide, as mentioned earlier. April trends are good in NII and deposits. James Mitchell: Great. As a follow-up on the wealth management business—across regions, EMEA was the largest contributor to net flows in the first quarter, I think $29 billion. What vehicles and asset classes drove that? Was it lumpy, and can that momentum in Europe continue? John Woods: On net asset flows, fixed income was very strong and led the way, followed by multi-asset. And you heard how well our low-cost suite did this quarter, and ETFs in general. Those were the bigger drivers, with fixed income one of the biggest. Operator: Our next question will come from Michael Mayo with Wells Fargo. Your line is open. Please go ahead. Michael Mayo: One short-term question and one long-term question. Short term, I think you said revenue backlogs are up 11%. If that is correct, can you size that a bit more in terms of the level of backlog versus history and where that is coming from? Long term, Ron, back to AI: some say they will remodel their entire business around AI; one bank has specified expected AI benefits; some say business models will be destroyed due to the AI scare trade; others say it is overrated. Where do you stand? John Woods: Thanks for the question, Mike. That 11% was with respect to the Software Services line alone, and that is correct. Uninstalled revenue is up 11%. Multi-year revenue growth in this space has been around that level, so that continues our expectation of around 10%—low double-digit growth—over the medium term, and as we continue investing, we may do better. ARR grew 12% as well. I will turn it over on AI. Ron O'Hanley: Mike, we are very positive on AI, and a lot of that has to do with the nature of our business, which is investment, operational, and technology intensive. Where are we? First, it is comprehensively embedded across the enterprise. We have broad access and accelerating adoption—virtually every employee where it makes sense has access to the tools, and usage is scaling rapidly, with repeat behavior indicating the tools are becoming part of daily workflows. Second, on development and technology systems, we are fully enabled there, and we are already realizing productivity gains. It is giving us the ability to do more, faster, and get to projects that previously would not have made the cut. All of our developers have access to AI development tools, and we are seeing acceleration in new technology development and modernization. Third, it is what you do with it after that. We have built a centralized AI hub with a deep use-case pipeline that is beginning to scale and will scale over the back half of 2026. This platform supports over 200 AI use cases now, with 70 already live. As they mature, we expect tangible business impact to begin emerging in the back half of 2026 and then accelerating. Fourth, agentic service delivery: given the operational intensity of what we do, the opportunities are significant. We have agent-enabled service delivery coming online in July, and our AI Foundry to repeat and scale this. Do we think AI destroys the business model? We do not. These are widely available tools; the advantage is in how you deploy them. The real power is not just operational improvement, but creating real agility in how the organization operates—how we face off with clients and organize work internally. We see more opportunity than risk. Michael Mayo: The three words “annual business impact”—can you dimension this in any way, starting late this year or next year? John Woods: It will start scaling in 2026, and we are going to dimension what the impact will be over the medium term. It will be very meaningful and a very important pillar of how we drive value and bottom-line impact, while also expanding resources to invest in our strategic roadmap. As we get later in the year and start looking at run-rate benefits exiting 2026 into 2027, we will come back and articulate the near-term benefit. Michael Mayo: So we will get this on the second quarter earnings call? John Woods: Earnings call. Operator: Our next question will come from Ebrahim Poonawala with Bank of America. Your line is now open. Please go ahead. Ebrahim Poonawala: You spent some time in your prepared remarks around tokenization and your digital asset platform. Should we think about all of this as mostly retaining the customer activity that you already have, just moving from analog to digital, or are there new revenue opportunities from tokenization and moving on-chain? Ron O'Hanley: It is both. Given our client base and market share with sophisticated clients, they expect the best the market has to offer. Some use cases are already very real. Tokenization of assets is a net new opportunity for us. Tokenized money market funds are a real use case—beneficial to the market and liquidity, and will result in core revenues for us. The on-ramp/off-ramp bridge from traditional finance to digital finance is also a real opportunity. Think of new railroads being laid; the interchanges are underdeveloped. Volumes are growing fast off a small base, and part of the reason is underdeveloped on- and off-ramps. Being part of that infrastructure is a second source of new revenues. We see both retention and new revenue. Ebrahim Poonawala: Are these capabilities built in-house, or are there targeted platforms where M&A or partnerships make sense? Ron O'Hanley: We always think about make versus buy. Even on make, partnerships are another lever. Our Galaxy product is a partnership with Galaxy. We are tied into emerging fintech platforms in the U.S. and hotspots in Europe and India. We will continue to explore M&A, but we also have confidence in our organic capabilities. It will be all of the above. Operator: Our next question will come from Brennan Hawken with BMO Capital Markets. Your line is open. Please go ahead. Brennan Hawken: Good morning. John, you gave clear color on deposit trends and how those feed into NII. I was curious about expectations around the euro and GBP deposits. The forward curve there has gotten hawkish with two hikes in the outlook. Are those hikes included in your updated outlook? And betas on those currencies were low during the recent rate cuts. Should we expect low betas when those rates move up? John Woods: In the guide, we assume one hike, with the Bank of England and the Fed on hold, and the ECB in for one hike. We acknowledge there could be more than one. From a sensitivity standpoint, it is not a huge quarterly driver—around $5 million per quarter. On betas, for U.S. dollar, betas were relatively symmetric in the tightening and easing cycles, around 75% to 80%. For the euro, a similar expectation but lower than the U.S., maybe in the 50% range, and relatively symmetric up and down. Brennan Hawken: Follow-up for Ron: you do not expect much impact to your ETF business from changes wealth firms are working on. Active ETFs are not big for you, but could you share your perspective on active ETF platform fees and why the impact would be manageable for SPDRs? Ron O'Hanley: Active ETFs are absolutely growing, and we are a beneficiary on the servicing side. One reason for growth is the vehicle often being better aligned with distribution trends—control over portfolios in wirehouses and the rise of independents. The buyer’s fee comparison is less about active ETF versus passive ETF and more around active mutual fund versus active ETF, which helps the value proposition. We can realize opportunity in ETF growth around the world. We were early in Europe as a sponsor and servicer; growth was slow at the beginning, but take-up is accelerating, and we think real growth is yet to come as distribution shifts from banks toward platforms that will deploy ETFs. Even in places like the Middle East, funds businesses are skipping over old mutual funds and going right to ETFs, building modern platforms. It is a vibrant, growing sector, and we are well positioned as both sponsor and servicer. Operator: Our next question will come from David Smith with Truist Securities. Your line is now open. Please go ahead. David Smith: Thanks. On the capital front, you have been running more at the high end of the 10% to 11% CET1 range for most of the last year, but you were in the middle this quarter. Are you now more comfortable running mid-range, or is this just a transitory move down given elevated balance sheet at March-end? Then any early impressions on potential impact of the new RWA and GSIB surcharge rules proposed last month? And is the 80% payout ratio target on a GAAP or adjusted basis? Thank you. John Woods: Our operating range is 10% to 11%, and we have articulated recently that we have been operating at the upper end. That has not changed. You can see some variability on quarter-ends based on the specific day’s activity. March 31 was an exceptionally active day, with larger movements that drove the 10.6%. If you look at the averages for Q4 and Q1, average CET1 was at the upper end of 10% to 11%, and that is how we continue to operate. On Basel III, we are constructive on the proposed approach. It delivers a more targeted view of credit risk RWA, and we expect a benefit on credit risk RWA that exceeds the additional RWA on operational risk. We will frame magnitudes as we continue to study and await final rules, but generally we see a net benefit. Lastly, the 80% payout is on a GAAP basis. Operator: Our next question will come from Analyst with Morgan Stanley. Your line is open. Please go ahead. Analyst: Hi. Good afternoon. On the private credit side, appreciate the incremental disclosure on the NDFI loans. It looks like the majority of those loans are non-BDC loans, and you also mentioned some of the safeguards on the BDC loans themselves. How are you thinking about growth in that NDFI portfolio going forward, and how do you assess safety around that portfolio? John Woods: These are our clients—non-depository financial institutions broadly are an important part of how we support the customer segment, primarily investment services clients. As part of the broad suite of services, we support them from a balance sheet standpoint. This is highly strategic lending for us. The categories are extremely well positioned from a risk-return standpoint. We have never had losses in subscription finance or in the triple-A CLO book, which comprise the large part of the NDFI book. On BDC lending, we are down to $1.6 billion, senior secured with substantial subordination—about 80%—behind our positions. It is diversified with ongoing structural protections. This will be a growth area for us; you could see low- to mid-single-digit growth, commensurate with continued penetration of this attractive segment. On private markets servicing, elevated redemption requests can have a marginal impact, but it is limited. The round trip is a net positive for us: redemptions may have a small impact on servicing fees but result in higher deposits. Net-net, very stable in terms of revenues and fees. We see this as a temporary flow-related issue rather than systemic. Ron O'Hanley: It is important to remember the attention is on a very small piece of private credit—those in semi-liquid fund structures. The vast majority of private credit is not in those structures, and there is no reason to believe private credit will not continue to grow. In regions like Europe or Asia, significant expansion of bank balance sheets is unlikely, yet credit appetite will continue to grow. In the GCC, for example, banks are highly profitable but do not have many places for balance sheets to grow; capital needs are significant and will be fulfilled by private credit. You will see careful examination of semi-liquid vehicles and expectations for retail and affluent investors, but that is a relatively small segment. John Woods: To tie back to the $1.6 billion on the slide, less than half of that is in the non-public, semi-liquid space that is getting attention. Overall BDCs are 4% of loans; less than half of that—around 2% or less—is in the space getting headlines, and well less than 1% of total assets. Operator: Our next question will come from Vivek Juneja with JPMorgan. Your line is now open. Please go ahead. Vivek Juneja: Thanks. First, you had a scoping charge of $41 million. This was the second one in the last 12 months. Can you give some color? Is it the same client? Same type of issue? What is driving these, and why have we seen two in the last 12 months? Second, on Schwab charging a fee for their distribution platform—will you absorb it, or pass it on? Lastly, on the charge-off jump this quarter—what type of loan was that? Ron O'Hanley: These are idiosyncratic. It is not the same client and not for the same reason. In this case, it was an existing Alpha client that will remain an Alpha client. It was one part of their insource-to-outsource journey within our middle office business. They intended to outsource more; we mutually agreed this was not the time to continue that outsourcing journey. It is within the middle office and is an insource versus outsource decision by the client. On Schwab, we do not have a concrete plan yet because we have not seen the final. We will decide once we see it and come back to you. John Woods: On the charge-off, this was a COVID-era commercial loan. Coming out of high-margin contracts from around 2021, when those rolled off, the name had pressure and went into nonaccrual. We took the opportunity to exit. It was substantially reserved, so not a big P&L impact; we crystallized it and moved on in Q1. It does not extend into other portfolios and has nothing to do with NDFI. Operator: Our next question comes from Analyst with Wolfe Research. Your line is now open. Please go ahead. Analyst: Hi. Good morning. This is actually calling in for Steven today. We appreciate the color on the drivers of expense growth, including the 4% from net productivity savings. Given headcount was down 2% year-on-year, how much did that contribute to overall efficiency savings? Looking ahead, do you see potential for further headcount optimization? John Woods: Headcount will be something we consider, but there are puts and takes. We are growing and investing in businesses, so we may add in some places. Gross productivity levers—automation, reengineering, zero-basing processes—reduce reliance on headcount where possible, and we use that capacity to hire in other areas. Round trip, we expect continuing contributions from headcount, but with puts and takes as we invest elsewhere. It is a meaningful portion of the 4% productivity. Operator: Our final question will come from Gerard Cassidy with RBC. Your line is now open. Please go ahead. Gerard Cassidy: John, you have had strong positive operating leverage—ninth consecutive quarter excluding notable items. How much of it is structural—your scalable platform and mix shift—versus cyclical tailwinds like FX volatility or rising market levels? And Ron, with investing in AI today, does scale become an even greater challenge for smaller players to compete against companies like yours and the large money center banks? How important is scale to successfully compete in this business? John Woods: Across the board, we have had organic growth in the quarter—durable, reflecting multi-year investments, business execution, and a sales culture that is paying dividends. We are seeing organic growth across all fee line items. In Markets, from a distance one might say environmental factors, but it is not only environmental. Long-term client relationships and platforms we have built are very attractive, and connectivity between Markets and our Investment Services and Investment Management clients is very strong. We believe we have a durable opportunity to drive attractive positive operating leverage that will reflect in pretax margin improvements over time. Environmental factors can help, but even without them, we believe we have a very attractive opportunity to grow pretax margin through positive operating leverage given the organic drivers. Ron O'Hanley: The importance of scale has not gone down. The investments required around technology and cyber just to stay where you are—forget about growth—are significant, imposed by regulators and increasingly by clients. Layer on the revolution we are seeing with AI—not just bringing in the technology but profiting from it—the scale around people and know-how is hard for smaller players. If we are moving toward true digitization of finance, that will take time; it is not just showing up with a new platform, but recognizing the long-term transition and building on- and off-ramps, which is where you make money, and which require scale. We do not dismiss innovators; we follow them, partner with them, and in some cases buy them. But we are not seeing one of them developing into a true scaled player to compete in our pocket of the market. Operator: There are no further questions. I will now turn the call back over to Elizabeth Lynn for closing remarks. Elizabeth Lynn: Thank you all for joining us today. Please feel free to reach out to Investor Relations with any follow-up questions. Thank you again, and have a nice day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, April 17, 2026. I would now like to turn the conference over to Brian Heller, Senior Vice President and Deputy General Counsel of Cohen Steers. Please go ahead. Brian Heller: Thank you, and welcome to the Cohen & Steers First Quarter 2026 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer; Mike Donohue, our Interim Chief Financial Officer, and Jon Cheigh, our President and Chief Investment Officer. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying first quarter earnings release and presentation, our most recent annual report on Form 10-K and our other SEC filings. We assume no duty to update any forward-looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicles. Our presentation also contains non-GAAP financial measures referred to as adjusted financial measures that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website at www.cohenandsteers.com. With that, I'll turn the call over to Mike. Michael Donohue: Thank you, Brian, and good morning, everyone. My remarks today will focus on our as-adjusted results. A reconciliation of GAAP to as adjusted results can be found in the earnings release and presentation. Yesterday, we reported earnings of $0.79 per share as compared to $0.81 sequentially. Revenue for Q1 increased from the prior quarter by 0.3% to $144.3 million. The change in revenue from the prior quarter was driven by higher average AUM, partially offset by 2 less days in the quarter. In addition, and as we noted in last quarter's earnings call, there were $1.7 million of performance fees recognized in Q4 related to certain institutional accounts. We typically don't recognize such fees early in the year and we have few performance fee accounts. Our effective tax rate during the quarter was 58.2 basis points. Excluding nonrecurring items, our fee rate was 58.4 basis points which is slightly lower than the prior quarter. Operating income was $50.7 million during the quarter compared to $52.4 million sequentially. The and our operating margin was 35.1% compared to 36.4% in the prior quarter. Ending AUM in Q1 was $93.1 billion, which was up from $90.5 billion at the end of Q4. This end of period change in AUM was driven by positive net inflows during Q1, primarily related to open-end funds. In addition, end-of-period AUM was positively impacted by market appreciation of $2.7 billion during the quarter. As a result, average AUM increased during Q1 to $94.4 billion as compared to $90.8 billion in the prior quarter. Joe Harvey will provide additional insights regarding our flows and pipeline shortly. Total expenses were higher compared to the prior quarter primarily due to increased comp and benefits and distribution and service fees expense. Compensation and benefits was higher compared to prior quarter as a result of the year-to-date compensation accrual true-up to actual that reduced compensation expense in Q4. The compensation ratio for the quarter was 40%, which was in line with the guidance we provided. Distribution and service fee expense was up due to the increase in average AUM, and G&A expense remained consistent with the prior quarter. Regarding taxes, our effective rate was 25.5% for the quarter on an as adjusted basis. Our earnings material presents liquidity at the end of Q1 and prior quarters. Our liquidity totaled $343 million at quarter end, which represents a decrease of $60 million versus the prior period. This quarterly change in liquidity is in line with prior years and driven by the annual incentive compensation cycle for the firm, which occurs in Q1. Let me now touch on a few items regarding guidance for the remainder of 2026. With respect to compensation and benefits, we would expect our compensation ratio to remain at 40% as we experienced in Q1. We expect G&A to increase in the mid-single digits for the year as compared to the prior year. Lastly, regarding 2026 guidance, we expect our effective tax rate to remain consistent at 25.5% on an as-adjusted basis. I will now turn it over to Jon Cheigh, who will lead the discussion of our business performance. John Cheigh: Thank you, Mike, and good morning. Today, I'd like to cover three topics: our performance scorecard, our 2026 outlook given the recent geopolitical events, and last, our long-term structural view of the economy, the market regime and some asset allocation implications for investors. Beginning with our performance scorecard. We continue to build on our record of consistent, long-term outperformance. On a 1-year basis, 86% of our AUM has outperformed its benchmark, while our 3- and 5-year outperformance rates are both above 97%. 95% of our open-end fund AUM is rated 4- or 5-star by Morningstar, which is up from 90% last quarter. In short, we continue to meet our primary objective of providing outstanding long-term performance for our investors. Turning to the investment environment. Coming into 2026, we expected both an acceleration and a rebalancing of global growth with a corresponding broadening of market leadership. While that outlook was spot on early in the year, the current Middle East conflict may have brought that market leadership shift into question. U.S. and global REITs were both up about 10% through February, well ahead of flattish equity markets. As we saw market rotation into the relative laggards of the last several years. While events in March raised some of those gains, REIT still posted positive absolute performance for the quarter with U.S. and global REITs up about 4% and 1%, respectively. Listed infrastructure performance was resilient, up 8% for the quarter. Businesses such as utilities and midstream energy continue to demonstrate their criticality in the world of short-term energy scarcity and the continued power buildout, needed to serve increasing industrialization and AI-related demand. Diversified Real assets rose 12% for the quarter, with strong gains in commodities and natural resource equities. As we saw in 2022, real assets have been a clear winner and diversifier for a 60-40 stock bond portfolio. The asset allocation case for real assets continues to be made. Preferred securities and fixed income classes broadly declined slightly in the quarter as renewed inflation concerns indicate that monetary policy could be tighter for longer. So as we update our economic and market outlook for the rest of 2026, our expectation is that the Middle East military deescalation that began several weeks ago, and will continue, including just this morning over the coming -- over the course of the coming weeks and months. We know it will have its starts and stops. But as long-term investors, our focus is on the trajectory of where we are headed. As a result, our initial 2026 view of broadening economic growth and financial markets remains intact. Now thinking beyond 2026, we believe investors must see recent developments, not as a one-off or a surprise. But instead, as another chapter in a book, which will continue to shape markets for the next 10 years or more. For some time, we have stated that the global economy is undergoing a structural transition one that looks meaningfully different than the prior 30 years. And there are four major themes that we expect will serve as important drivers of asset allocation shifts. First, deglobalization or what we would call geopolitical fracturing. For 20 years, the global economy enjoyed friendly trading relationships and uninhibited delivery of just-in-time resources. In the 2000s, this drove a buildup of global supply chains, primarily in Asia, but a [ deindustrialization ] for much of the developed world. For nearly 10 years now, we've seen repeated reminders that this system, while leading to lower consumer goods prices and higher profit margins was fragile and exposed the global economy to tail risks. In the last 6 years, we've seen four consecutive supply shocks, the pandemic, followed by the War in Ukraine, then tariffs and now the conflict in the Middle East. These are not one-off events. But again, an outcome of shifts in global power dynamics and alliances. This geopolitical fracturing will drive significant fixed asset investment boom greater than what the 2,000 saw from China, driven by reindustrialization and remilitarization. The second major theme is AI and technological disruption. Artificial intelligence is a transformational force on its own. But importantly, it is not a software but rather a hardware story. AI leadership will ultimately be about compute capacity and the marginal cost will likely be about the cost and availability of power. The third theme is inflation uncertainty. In the last decade, inflation consistently undershot expectations. In contrast, inflation in recent years has consistently surprised to the upside, confounding forecasts that expected a quick return to the old normal of low and stable prices. Even as headline inflation has moderated from recent peaks, underlying pressures remain. As you all read in our forthcoming capital markets assumptions, Cohen & Steers forecast consumer inflation to average 3% annually in the U.S. over the next 10 years. Below recent peaks, but well above the 1.6% experienced in the last cycle and significantly higher than the Federal Reserve's long-term 2% target. While AI may produce a productivity boom, which could prove highly deflationary, the investment needed to produce that deflationary boom is highly inflationary. The job of any central banker over the next 10 years will be challenging. Our conclusion is that while inflation is likely to be higher than markets expect. The precise path and pace of inflation represents a major market uncertainty and risk factor. The final important trend is the end of low interest rates. Some of this is about inflation and some is about persistent fiscal deficits. Importantly, we also believe that the market continues to underestimate that we will live in a more capital-intensive world, we took interest rates and credit spreads wider. Hyperscalers shifting from being highly cash flow positive -- [ CASM ] of this shift. Given these four major themes in the next phase, some of last cycle's winners may remain winner, but areas of structural change tend to disrupt market leadership new faces emerge, incumbents decline and entirely different parts of the economy of these shifts are natural resources and the picks and shovels of the global economy. Notably energy, infrastructure and the plumbing that supports construction, transportation and power delivery. This represents a tremendous investment opportunity but also one that comes with challenges of higher and more volatile inflation, as I mentioned earlier. So for our clients, our advice is simple. First, diversification not just in terms of asset classes or listed versus private but instead diversification of investment exposure to different economic drivers, inflation regimes and factors. Second, hard assets, including real assets must be a meaningful allocation sourced from equity and fixed income as a diversifier and as a total return opportunity. Third, investors should use a broader toolkit with some private exposure when it provides unique exposure or an illiquidity premium. But in a highly uncertain world, where the old models may not work, the cost of illiquidity is very high and should be used thoughtfully rather than just for quarterly statement diversification. We believe the first quarter is the continuation of the market's recognition of this major turn in leadership, which will unfold with the remaining chapters of this book. And with that, let me turn it over to Joe. Joseph Harvey: Thanks, Jon. You may be able to hear a fire arm in the background, everything is okay, we're going to proceed. Today, I will review our key business trends in the first quarter and provide an update on our growth initiatives. While we started the year with accelerating fundamentals on February 28, the world changed with U.S. military operations and Iran. As is typical in these situations, business activity slowed for a period as investors attempted to calibrate how long the conflict will last and what the short- and long-term ramifications could be for economies, geopolitics and asset allocation. If the U.S. economy Pre-Iran was reflationary with an upward bias in growth, consensus post war is for stagflation with the key unknowables being how much and for how long. Not to be forgotten, prewar investors were very focused on the existential risk of AI on certain industry groups in addition to credit and liquidity risk and private credit. We believe our liquid real asset strategies fit the so-called halo trade very well, that is heavy or hard assets, low obsolescence with liquidity becoming a more valued investment characteristic. The first quarter's fundamental highlights include net inflows of $497 million a strong one unfunded pipeline of $1.7 billion, characterized by good velocity with continued fundings and new mandates, stable fee rates strong absolute performance and neutral relative performance, while 1-, 3- and 5-year relative performance continues to be excellent. We made good progress with our growth initiatives, including active ETFs, offshore SICAV open-end funds, our non-traded REIT and our recently launched listed private real estate for institutions. Flow highlights by investment strategy include: multi-strategy real asset inflows totaled $142 million, the best quarter since third quarter of 2022. Preferred Securities generated $133 million of net outflows for its strongest quarter since the fourth quarter of '21. And global listed infrastructure recorded its fifth straight quarter of net inflows totaling $96 million after a record year in 2025. The firm-wide net inflows of $497 million represent positive organic growth for 6 out of the past 7 quarters. We recorded our seventh straight quarter of net inflows into open-end funds, with U.S. open-end fund inflows of over $300 million and broad-based contributions of over $100 million into each of our U.S. real estate, preferred securities and our multi-strategy real asset strategies. Our active ETFs continued their momentum with $224 million of third-party net flows in the quarter. Our international SICAV continued their streak of net inflows in 25 of the past 27 quarters. The SICAV recorded $62 million this quarter across a range of countries most notably in the U.K. and South Africa. The most popular SICAV allocations were to our multi-strategy real assets and global listed infrastructure strategies. Looking at institutional trends, our advisory channel had its second consecutive quarter of net inflows with $210 million in the quarter, comprised of five new mandates totaling $287 million partially offset by $76 million termination. Sub-advisory experienced $269 million of net outflows in the quarter with $164 million in outflows from Japan. While we experienced net outflows in Japan sub-advisory for the past 2 quarters, as real estate flows have been challenged industry-wide amidst flows into local bond funds and equity funds, we have slightly improved our industry-leading market share in Japan. The other sub-advisory outflows were due to normal rebalancing by existing clients, partially offset by two new mandates funding $83 million. Looking through the Iran conflict, I like our core strategies as it relates to inflation, deglobalization, AI, rotation to heart assets, among other trends. As we continue to experience inflation, we believe our multi-strategy real assets portfolio is a great solution, which investors are increasingly recognizing. With the long-term criticality of energy back and focus our future of energy strategy, which invests in both conventional and renewable energy could be upgraded to more than just a tactical allocation. Resource equities probably have the best supply-demand future of any strategy I can think of. And the Iran conflict has clearly demonstrated the strategic importance of these businesses due to the profound impact that resource scarcity can have on resource pricing and markets. Real estate returns could be tempered by stagflation, but remember, valuations have reset versus normalized interest rates. The fundamental cycle has turned positive and investors are rotating into tangible assets. Our global listed infrastructure strategy has shown both strong absolute and relative performance and is a beneficiary of the capital investment cycle underway. In addition, we have all been watching the growing concerns in the private wealth channel about liquidity strengths in private vehicles and private infrastructure is probably the most illiquid private strategy being brought to wealth. We, therefore, see global listed infrastructure as a winner and wealth, either as a stand-alone allocation or as a complement to private with proper liquidity protection. Our corporate strategy for active ETFs is going very well. Total AUM for our first five ETFs is currently $675 million. Flows are strong, investment performance is good, and we are gaining traction and scale. Our platforming efforts for ETFs are accelerating. And in the first quarter, we received our first placement on a major broker-dealer platform. We announced the conversion of our future of Energy open-end fund to an ETF which should occur sometime midyear. We intend to launch a version of our multi-strategy real assets portfolio later this year, and we filed for ETF as a share class as many other managers have done. We want full optionality to deliver all of our core strategies in the ETF structure. Our nontraded REIT Coasters income opportunities REIT has established a portfolio of 11 properties owned or under contract totaling $650 million in assets and continues to provide investment performance at the top of the real estate peer group with 10.6% annualized returns since inception against a 4.3% peer average. Our focus on open-air shopping centers has helped drive performance as occupancies of 97% on average translate into very strong pricing power for landlords. A key question for CNS REIT short term is how redemption constraints in private wealth vehicles will affect investor appetite for evergreen vehicles generally. As an industry, we must position these allocations as private strategies with liquidity provisioning as available. And emphasize the importance of liquidity frameworks to protect investors and effectively deploy a long-term investment strategy. In the case of real estate, it is possible that since the return cycle has returned positive -- has turned positive, the category to garner allocations that previously were taken by private credit. The early data in March show increased redemption activity in private credit and an uptick in sales in real estate and infrastructure. Time will tell. We remain constructive on the long-term benefits of blending listed and private real estate and wealth portfolios. And believe we offer compelling solutions across the liquidity spectrum for investors. We've previously discussed the launch late last year of an LP vehicle that invests in core private property funds and listed REITs together. The goal is to deliver a better core allocation to institutional investors using an indexed approach to core funds, combined with listed reach to enhance returns without adding too much volatility and implying an asset allocation overlay. We now have $250 million of fundings or commitments and the strategy is earning the support of a growing list of asset consultants. I wanted to also comment on our short duration preferred strategy. We now have three open-end vehicles with the launch of a SICAV and an active ETF over the past year to complement our $1.9 billion open-end mutual fund and our $1 billion closed-end fund. Our open-end vehicles have yields just shy of 6%, durations of 2.5 years and investment-grade credit profiles of BBB-. Taxable investors in the U.S. realized an additional 100 basis points of tax equivalent yield. Relative to corporate bonds of similar duration, short duration preferreds provide nearly 300 basis points of additional tax equivalent yield to compensate for just three notches of credit quality moving from A- to BBB. As yields on cash and other fixed income allocations have declined, these strategies are starting to see more investor interest. Related in our core preferred strategies, we saw a return to positive flows in the quarter, perhaps as a substitute for private credit. I wouldn't be surprised to see investors accept a lower headline yield with tax benefits for a portfolio of strong, transparent credits dominated by banks, insurance companies and utilities, in the midst of greater uncertainty and less transparency around credit quality within private credit. I'll close with a brief update on distribution, which we've highlighted as a priority for 2026 and 2027. We've made great strides on our plan to invest in distribution, including increased coverage of RIAs and expanded international coverage. All key hires have been made, including a new Head of Japan, a newly created Chief Operating Officer for distribution and additional RIA sales roles. We also promoted [ Brad ] is path to lead wealth and brought in a wealth sales leader on [ Brad's ] team. Our approach to expanding the sales team from here will be success-based, meaning additions will be tied to organic growth. That concludes our prepared remarks. Julianne, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from John Dunn from Evercore ISI. John Dunn: First on the advisory channel. You mentioned it's been 2 straight inflow quarters. Do you think you've moved to kind of a more sustainable place? And is it coming from more existing clients or new ones? And are you seeing potential for clients looking at multiple strategies? Joseph Harvey: Thanks, John. As we've been talking about for the past 3 or 4 quarters, we've seen an improvement in our institutional advisory business as broad conditions have become more favorable, more flexible in investor portfolios. An end toward upping allocations to fixed income and clients continuing to deal with liquidity in their private parts of their portfolio. But we now have a very strong pipeline, I think, for the third straight quarter at $1.7 billion. I talk about the velocity, meaning in the quarter, we were awarded $74 million of new mandates. There was another $45 million that was won and funded in the quarter. And then we also had another $490 million fund in the quarter. So that's good velocity and demonstrates that things have been loosening up in the institutional channel. We also just see more from an intangible perspective, increased activity by clients. It's not RFP business anymore, but we've seen a couple of large RFPs recently. So combined with the outlook that John laid out for our investment strategies, we're optimistic that the institutional advisory channel will continue to perform better and better. John Dunn: Got it. Maybe a little more on ETFs. I mean just -- could you give a flavor of how you're finding clients' acceptance of the vehicle? And are you seeing any cannibalization? And then maybe just could you describe kind of the demand of the different buckets in wealth management? And any potential for any activity for institutional down the road? Joseph Harvey: The tone in active ETFs is very good. You can see that as our flows ramp. And most importantly, it starts with delivering strong performance, which we have done. And the design of these ETFs are to present our core strategies. For distribution considerations, some of them have some slight differences versus our core strategies, but our performance has been very good. The so-called use cases make us very bullish on these vehicles. It starts with the RIAs, many of whom are converting their businesses to use exclusively ETFs compared with open-end funds. We're gaining scale, so that allows us to be placed into models. And as I mentioned in my remarks, with our real estate vehicle, which is now the largest and is what we're best known for, we've achieved platform placement on a major broker-dealer providers. So I would say I'm very bullish on this vehicle. Everything that we're seeing validates the decision to invest in this. And as I said, we're going to continue to get all of our core strategies in these vehicles. As it relates to institutional interest, they're going to need to scale up. We can see -- we've had discussions with different asset consultants about using the vehicles. So I think there are some use cases, but large institutions generally want to have a separate account. John Dunn: Right. Okay. And then you went through the component pieces of the private real estate effort. Are you seeing rising demand? And since you don't have a lot of legacy assets and you're entering or ramping up in a good part of the cycle. Is that a big part of the pitch? And maybe where do you expect demand to come from? Joseph Harvey: I'm not sure I understand the question, John. But as it relates to the private real estate business, when you look at private allocations in wealth, real estate has been the laggard. Private credit has been the leader, as I mentioned, that inflected in March, we'll see if that continues to play out. Infrastructure continues to have good growth. But we believe that based on our views and other views on the real estate cycle that you can see a rotation into the real estate strategies. We're seeing a little bit of that, but it's still early. Our approach to the wealth channel is that we believe that investors should have an allocation to both listed and private, and we're trying to coach our clients on how to do that and how to optimize those portfolios. With our nontraded REIT, as I mentioned, we have -- we're at the top of the leaderboard in terms of performance. And as we gain scale, we believe we'll have the ability to get platformed on more RIA as well as [ wirehouse ] platforms in the future. John Cheigh: Yes. Yes, that's what I was driving that. And then maybe just one more, thinking about the theme of rotation of some money moving to non-U.S. strategies. Global real estate was positive this quarter. Are you seeing any like interest in diversifying? And is that -- could that drive positive flows for global real estate in this year and next? Joseph Harvey: We have been seeing more of that. Go back 1 year, 1.5 years, there weren't a lot of flows into global strategies except for global infrastructure. So I'm talking primarily about global real estate. That was primarily related to U.S. exceptionalism and related stock market performance. But as the world has turned geopolitics have turned, and we've started to see better performance in international markets broadly. We've seen more interest and flows into our global real estate strategy. So I would expect that to continue. It's magnitude. I can't say, but I definitely would expect to see our global portfolios have more interest. Operator: [Operator Instructions] Our next question comes from Mac Sykes from Gabelli Funds. Macrae Sykes: Joe, I wish -- I wanted to ask a question about sort of historical context of shifts to real estate strategies. And I guess, as we think about some of the items you've mentioned this morning. When you're looking at educating capital allocators at some of these bigger platforms that do shifts in these models, what are some of the catalysts for that? Is it sort of adviser interest, is it returns that have just happened, so outperformance of the asset class interest rate. I guess, if you could just dig into some of the things we can watch for in anticipation of more sizable allocations to real estate. John Cheigh: Mac, this is Jon Cheigh. Well, first of all, of course, we're talking with all of the intermediaries about real estate. But of course, all of our asset classes, including infrastructure, preferreds and natural resources. But specifically to real estate, look, it's a combination of investors thinking about the interest rate cycle as well as the fundamental or supply and demand cycle. And so I've said a few times that when you look over the last 3 or 4 years, sometimes people would say, "Oh, well, real estate is done poorly because interest rates are higher." And that's really only half the story. The other reality is that we had too much new supply that got built. So fundamentals weakened. So over the last several years, REIT earnings have probably grown 2%, 3%, 4%, while the S&P was growing 10%, 11%, 12%. So yes, it's an interest rate story, but it's also a fundamental story. So when they revisit the story today, what they're looking at is the S&P is a lot more expensive from a valuation standpoint than it was 3, 4 years ago. It seems like the earnings growth is beginning to decelerate and we all know about the market concentration within the S&P and in some cases, concerns about the significant amount of CapEx that's occurring. So there's -- how is the S&P looking on a price-to-earnings basis versus on a free cash flow basis because you know just as well how capital-intensive the S&P 500 is becoming at the top end. So some of it is as far as real estate versus broader equities is valuations look better. The interest rate adjustment has happened. So being in this 4% to 5% -- 4% to 4.5% range is the new normal, as I talked about. But what we're also talking to them about is the reacceleration of earnings or fundamentals. So that 2% to 3% growth of REITs will probably be more like 5% or 6% this year, 7% or 8% next year. So I'd say that's I'd say the fundamental inflection is probably the bigger thing that our investors are focused on. And this kind of goes back to one of the earlier questions on shifts we're seeing on the advisory channel. We've had a lot of conversations with investors for the last few years. And I think they understood the valuation story, but they were focused on is today the right day? Why 2024, why 2025, why 2026? And real estate fundamentals are slow moving. They're not going to go from being below average to above average in 1 quarter. And so it's taken a couple of years. We've digested some of that excess supply. And that's why I think the story for 2026 to 2027 is about improving fundamentals and stable interest rates and attractive valuations. And that's why we're seeing some of those shifts, whether it's in the public markets but also within the nontraded REIT side, again, a lot of money went into private credit. But as Joe talked about, as that money is looking for the next opportunity you're beginning to see it in the flow data, but we're certainly starting to hear it of -- well, real estate lag, other things have gone up. It seems like a place to pivot back to. So I think we're early in that pivoting process. Macrae Sykes: Just one other question on the private credit side, as you compete, I think a lot of the sales channel adviser-driven component has been some of the fee structures with some of these products. coming with pretty large fee structures and incentives to the adviser. And with your products, actually much more rationally priced and compelling, I believe. But how do you sort of compete with that where the adviser centers? Maybe a more compelling yield perspective from you and liquidity and all that stuff, but yet they come with lower adviser incentives in terms of the sales component. Joseph Harvey: Well, I'm not too familiar with the adviser incentives that you're talking about. But what we think about every morning we would get up is delivering investment performance and managing risk. So we -- as it relates to the private real estate strategy need to deliver a good total return with a balance between current income and capital appreciation and not take undue risk. Unknown Executive: So as it relates to the fee structure for that vehicle, we've made it very investor-friendly compared with the peer group. Operator: [Operator Instructions] we have no more question [Audio Gap]. Joseph Harvey: Thank you, Julianne. We look forward to reporting our second quarter results in July. Meantime, if you have any questions, please reach out to [ Brian Meta ], and we'll talk to you soon. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2026 Fifth Third Bancorp Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to [ Matt Curoe ], Director of Investor Relations. Please go ahead. Matt Curoe: Good morning, everyone. Welcome to Fifth Third's First Quarter 2026 Earnings Call. This morning, our Chairman, CEO and President, Tim Spence; and CFO, Bryan Preston will provide an overview of our first quarter results and outlook. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Fifth Third's performance. These statements speak only as of April 17, 2026, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim. Timothy Spence: Good morning, everyone, and thanks for joining us today. At Fifth Third, we believe great bank distinguish themselves based on how they perform in uncertain environments, not in benign ones. We prioritize stability, profitability and growth in that order. We deliver them by finding ways to get 1% better every day while investing meaningfully in the future. Today, we reported earnings per share of $0.15 or $0.83 excluding certain items outlined on Page 2 of the release. Results reflect the February 1 closing of the Chimeric acquisition. Revenue was $2.9 billion, up 33% year-over-year and adjusted net income was $734 million, up 38%. Credit performance was in line with expectations with net charge-offs at 37 basis points. Both NPAs and criticized assets improved modestly. In the quarter, we closed the largest M&A transaction in Fifth Third's history. We delivered an adjusted return on assets of 1.12% and an adjusted return on tangible common equity of 13.7%. Our tangible common equity ratio rose to 7.3% and tangible book value per share increased 1%. We are the only bank among our peers who have reported to date to increase both of these key metrics during the quarter. Fifth Third's legacy strategies are continuing to produce broad-based growth while we execute the [ Comerica ] integration on plan and on schedule. In commercial, legacy Fifth Third C&I loan balances grew 6% year-over-year. Production remained healthy with the strongest activity in manufacturing and construction supported by reshoring and infrastructure investments. [indiscernible] acquisition more than doubled, led by our Southeast markets, and 35% of new clients were fee led with no extension of credit. Importantly, our commercial loan growth continues to come from relationship-based lending and knock from nonrelationship sources. In commercial payments, Newline continue to scale with revenue up 30% and deposits up $2.7 billion year-over-year. During the quarter, [indiscernible] launched a new payment product built on Newline, joining other marquee clients like Stripe and Circle and we advanced preparations for the second quarter launch of the new Direct Express platform. In Consumer, the legacy Fifth Third franchise delivered 3% household growth and 4% DDA balance growth. Southeast households grew 8%, led by Georgia and the Carolinas, and we opened 10 additional branches in the region during the quarter. Consumer and small business loans grew 7%, led by auto, home equity and our Provide fintech platform. Now turning to Comerica. Thanks to timely regulatory approvals, we closed earlier and originally expected on February 1 and have continued to make progress at an accelerated pace. Our top priority is our people, and we're working hard to become 1 team. Since Legal Day 1, leaders have been on the ground in Comerica's major markets nearly every week, and we visited every branch in the Comerica network. We've also hosted product showcases to highlight the breadth of our combined capabilities. Organizational design and leadership decisions are complete, and I'm very excited about caliber of our combined team. On technology, we remain on track to convert all systems over Labor Day weekend with our first full [indiscernible] conversion later this month. As a result, we remain confident that we will deliver $360 million of net cost savings this year and reached an $850 million annual run rate by the fourth quarter. We're also already building a strong pipeline of revenue synergies. In commercial, we're seeing early wins by bringing capital markets, payments and specialty lending to existing relationships. In the first 60 days, our capital markets team completed fuels and metals commodity hedges and executed an accelerated share repurchase for Comerica clients. We also booked our first Comerica to Fifth Third loan win in asset-based lending while Fifth Third referrals helped to build the largest ever pipeline in Comerica's National Dealer Services business. Commercial Payments has presented our managed services solutions to over 100 Comerica clients with 65 of them interested in moving forward. In Consumer, we launched our first Comerica branded deposit campaign in Texas in February. Response rates and average opening balances were broadly consistent with the results that we generate in our legacy Fifth Third markets, and nearly half of new savings customers also opened to checking account. We've hired more than half of the mortgage loan officers and auto dealer representatives that we plan to add this year in Comerica's footprint and pipelines in each of those businesses [indiscernible] build. We'll open our first Fifth Third branded branches in Dallas and Fresno this month, and we now have letters of intent in place or in progress for 81 of our targeted 150 de novo branches in Texas. As I wrote in our annual letter to shareholders, the global economy is a complex adaptive system and such systems react to change in unexpected ways. We're closely evaluating the direct impact of the [indiscernible] on the energy and other commodities as well as the implications for prices, interest rates and customer activity. In an environment where we may not see the macro tailwinds that many expected at the start of the year, the Comerica merger expands Fifth Third's organic opportunity set, and we do not need a perfect backdrop to deliver on our commitments. Before I turn it over to Bryan, I want to take a moment to say thank you to our colleagues. Earlier this month, we surpassed $300 million in total assets for the first time an important milestone that reflects the work we do together to serve customers, support communities and show up for one another. I know many of you are putting an extra effort to support the integration, whether it adds helping customers, learning new products, meeting new teammates or navigating change. Your commitment to getting 1% better every day and your dedication to our clients and to each other is what gives me confidence in what we're building and the opportunities ahead. With that, Bryan will provide more detail on the quarter and the outlook. Bryan Preston: Thanks, Tim, and good morning. Our first quarter results reflect the strength of what we have built and the discipline with which we are executing. Results exceeded our March expectations, driven by stronger NII, disciplined expense management and integration execution on plan. Adjusted ROA was 1.12% and adjusted ROTCE excluding AOCI was 13.7%. The Comerica acquisition closed without tangible book value dilution and and TBV per share grew 1% sequentially and 15% year-over-year. The earnings power of the combined company is intact, and the integration is on track. Given the magnitude of the acquisition, standard year-over-year and sequential comparisons obscure more than they revealed this quarter. What matters is how we exit, a larger, more granular loan portfolio, a lower cost deposit base and larger diversified fee income businesses. Each of those is a deliberate outcome and each positions us to generate stronger and more durable returns as the integration delivers. Now diving further into the income statement, starting with NII and the balance sheet. Net interest income was $1.94 billion for the quarter, above our March expectations. Net interest margin expanded 17 basis points to 330 basis points, driven by the impacts of the Chimeric acquisition. That includes 7 basis points from securities portfolio marks and repositioning basis points from cash flow hedge termination and 2 basis points from purchase accounting accretion on the loan portfolio. A full quarter of these impacts will benefit NIM by a few additional basis points in the second quarter. End-of-period loans were $178 billion, up 2% sequentially from pro forma combined year-end balances. Average total loans were $158 billion, reflecting the February 1 close. The growth was broad-based, strong middle market production, a rebound in line utilization and continued momentum in home equity, auto and our Provide fintech platform. In commercial, line utilization ended the quarter at 40.7%, up approximately 120 basis points from the pro forma combined year-end level and notably held steady throughout the volatility in March. Clients are cautious, but active. On a legacy Fifth Third basis, commercial loans grew 6% year-over-year. Combined with the Comerica addition, shared national credits now represent only 26% of total loans, a deliberate and ongoing reduction in concentration risk. On the consumer side, first quarter auto originations were the highest in 2 years with average indirect secured balances up 10% year-over-year. Home equity balances grew substantially, supported by both the acquisition and strong underlying production. We achieved the #1 HELOC origination market share in our legacy Fifth Third branch footprint. With an average portfolio of FICO of 773 and average loan-to-value of 64%, the production strength is real, and the credit discipline behind it is equally real. Turning to deposits. Average core deposits were $207 million, and the end-of-period core deposits were $231 billion. Noninterest-bearing balances comprised 28% of core deposits at quarter end, up from 25% at the same point last year. That improvement reflects the combined benefit of Comerica's commercial DDA franchise and our continued organic consumer DDA growth. The household growth can strip is showing up directly in our funding costs. On a legacy third basis, consumer household growth of 3% over last year, supported 4% consumer DDA growth. Total deposit costs, including the benefit of noninterest-bearing balances were 158 basis points in the first quarter, a funding cost profile that compares favorably across the peer group. Interest-bearing deposit costs were 215 basis points, down 27 basis points year-over-year, reflecting both that organic deposit mix improvement and the benefit of the Comerica balance sheet. Despite the larger balance sheet, our approach to balance sheet management is unchanged. We prioritize granular insured deposit funding over large wholesale holds. We maintain strong liquidity buffers, and we proactively manage the overall cost of funds. That discipline showed up again this quarter. Average wholesale funding declined 3% year-over-year, even with Comerica balances included. That favorable mix shift lowered the cost of interest-bearing liabilities by 36 basis points. We also maintained full Category 1 LCR compliance at 109% and a loan-to-core deposit ratio of 76%. Now turning to fees. Adjusted noninterest income, excluding securities losses and the other items listed on Page 4 of our release was $921 million, slightly above the midpoint of our March expectations. The most significant milestone here is that both wealth and commercial payments are now generating fee income at the run rate necessary to deliver $1 billion each in annualized noninterest income. That outcome reflects years of consistent, disciplined investment in both businesses and the recurring nature of the revenue. Looking further at wealth, fees were $233 million and total AUM ended the quarter at $119 billion. Legacy Fifth Third AUM trends remained strong, up $10 billion or 15% over last year. Fifth Third Securities delivered strong retail brokerage results, with revenue up 15% year-over-year. These are businesses that we have been consistently investing in and the returns are compounding. Commercial payment fees totaled $218 million for the quarter. Direct Express contributed $14 million in fees for the quarter and approximately $3.7 billion in average deposits for the month of March. New line continues to drive strong fee growth of 30% year-over-year and related deposits reached $5.5 billion, up $2.7 billion from last year. Capital markets fees were $134 million, up 11% sequentially. Increased hedging activities and commodities and FX and strong bond underwriting fees combined with 2 months of [indiscernible] activity were the primary drivers of this growth. Turning to expenses. Page 5 of our release details certain items that had a larger impact on the noninterest expense this quarter, primarily $635 million in merger-related expenses. Adjusted noninterest expense was $1.77 billion, consistent with our guidance. The adjusted efficiency ratio was 61.9%, which reflects the addition of Comerica and normal first quarter seasonality associated with the timing of compensation awards and payroll taxes. On the synergy front, we remain confident in our ability to achieve the $850 million of annualized run rate cost savings in the fourth quarter of this year. Integration activities are progressing as planned against our established milestones and savings are being realized. The expense benefit will build steadily over the first 3 quarters of this year with a more significant increase in the fourth quarter. Once the system conversion and branch consolidations are completed in early September. Shifting to credit. The net charge-off ratio was 37 basis points for the quarter, in line with our expectations and the lowest level in 2 years. The NPA ratio was 57 basis points compared to 65 basis points last quarter. Commercial net charge-offs were 26 basis points, also a 2-year low with stable trends across industries and geographies. Consumer net charge-offs were 58 basis points, down 5 basis points from last year. The consumer portfolio remains healthy with nonaccrual and over 90 delinquency rates relatively stable across all loan categories. We have been deliberate about where we choose to grow. Our exposure to nondepository financial institutions represents only 7% of our total loan portfolio, well below the industry average. Our 3 largest categories are subscription lines supporting capital call facilities, corporate credit facilities to traditional institutions such as payment processors, insurance companies and brokerage firms, and secured lending to residential mortgage-related entities. These are long-standing portfolios. We have deep underwriting expertise in each of them, strong collateral visibility and structural protections where needed, including borrowing base requirements and advance rates that provide significant loss absorption before we would recognize $1 of loss. On private credit, we have chosen not to participate meaningfully in lending to private credit vehicles and business development companies, which combined represent less than 1% of total loans. That was a deliberate decision, not a missed opportunity. The structural complexity embedded in these exposures introduces risks that are harder to assess through a cycle. We would rather grow in categories where we have more transparency to the collateral and have direct relationships with the underlying borrowers. On software and data center lending, we have maintained that same disciplined posture. We believe in the long-term demand for AI infrastructure, but we have also seen how quickly these build cycles can overshoot. We have remained selective and our exposure is intentionally limited. Software-related exposures is less than 1% of total loans, with the portfolio performing in line with expectations with no material migration in the quarter. ACL as a percentage of portfolio loans and leases decreased to 1.79%, primarily reflecting the [indiscernible] acquisition. The ACL as a percentage of nonperforming assets increased to 316%. Provision expense included $83 million for merger-related day 1 ACL build. Our baseline and downside cases assume unemployment reaching 4.5% and 8.5%, respectively, in 2027. We made no changes to our macroeconomic scenario weightings during the quarter. though a qualitative adjustment was applied to reflect the direct impacts of the elevated energy and commodity costs as well as the broader implications for economic growth, inflation and unemployment in the current geopolitical environment. Moving to capital. CET1 ended at 10% and reflecting the impact of the Comerica transaction and strong RWA growth. Under the proposed capital rule, our estimated fully phased-in pro forma CET1 ratio is 9.6%. The RWA benefit to capital ratios associated with the new rule is nearly a 100 basis point improvement, primarily due to credit risk RWA reduction. The proposed rule recognizes the granular, well-secured and relationship-based nature of our loan portfolio. The same portfolio characteristics we have been deliberately building toward over the past several years. The [indiscernible] should expand the ability of the banking industry to support the economy through increased lending capacity. Additionally, our tangible common equity ratio, including the impact of AOCI and the Comerica acquisition increased to 7.3%. Over the last 12 months, the impact of unrealized losses included in the regulatory capital under the proposed rule has decreased by 16%, a 25 basis point improvement to the pro forma capital ratios despite an 11 basis point increase in the 10-year treasury rate. That is the direct result of our strategy to concentrate our AFS portfolio and securities that return principle on a known schedule, which represents approximately 55% of the fixed rate holdings within our AFS portfolio. We expect continued improvement in the unrealized losses as the securities [indiscernible]. Moving to our current outlook. Our outlook reflects the forward curve at the end of March, which assumes no rate cuts or hikes in 2026. Given the updated rate outlook and our more asset-sensitive balance sheet, we are updating our full year NII outlook to a range between $8.7 billion and $8.8 billion. We will continue to take actions to move the balance sheet to a more neutral rate risk position over time. which could include investment portfolio and/or other hedging actions. Our outlook for full year average total loans remains in the mid $170 billion range. Full year noninterest income is expected to be between $4.0 billion and $4.2 billion, reflecting continued revenue growth in commercial payments, capital markets and wealth and asset management. Full year noninterest expense is expected to be $7.2 billion to $7.3 billion, including the impact of $210 million of CDI amortization and $360 million of net expense synergies in 2026. This outlook excludes acquisition-related charges. In total, our guide implies full year adjusted PPNR, including CDI amortization, up approximately 40% over 2025. We remain on track to exit 2026 at or near the profitability and efficiency levels consistent with our 2027 targets. For credit, we expect full year net charge-offs between 30 and 40 basis points. Turning to capital. With the release of the proposed capital rule, we are updating our CET1 operating target to a range of 10% to 10.5%. We expect to resume regular quarterly share repurchases in the second half of 2026 with the amount and timing dependent on the balance sheet growth and the timing of the remaining merger-related charges. Our capital return priorities are unchanged, pay a strong dividend, support organic growth and then share repurchases. For the second quarter, we expect average loans of $178 million to $179 million, driven by growth in C&I, home equity and auto, is projected to be $2.2 billion to $2.25 billion with NIM expanding another 3 to 5 basis points. Noninterest income is expected to be $1 billion to $1.06 billion, and noninterest expense is expected to be $1.87 billion to $1.89 billion. Finally, net charge-offs are expected to be 30 to 35 basis points. The first quarter established the foundation. NII above expectations, tangible book value per share growth intact credit at a 2-year low integration on track and early revenue synergies beginning to show. Those results matter, not just for what they are, but for what they signal. The core business is performing. The integration is delivering. And as we move through the year, the financial profile of Fifth Third will continue to improve in ways that are visible, measurable and consistent with everything we have committed to when we announced this combination. We have the balance sheet, the business mix and the team to get there. With that, let me turn it over to Matt to open up the call for Q&A. Matt Curoe: Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to 1 question and 1 follow-up and then return to the queue if you have additional questions. Operator, please open the call for Q&A. Operator: [Operator Instructions] We'll go to our first question from Mike Mayo at Wells Fargo. Michael Mayo: As you highlighted, this is the biggest acquisition in your firm's history. And it sounds like it's on track from your prior guidance with the Labor Day integration, $850 million run rate savings by the end of fourth quarter. I think we kind of knew that already, but what's incremental in the last 3 months or since your last presentation that you think is maybe going better than expected? Is that any of that higher NII guide due to the expansion in Texas and the promotions? And also, where are you seeing some of the snags? There's always issues with these things, what do you need to make sure you work out and doesn't kind of let down the progress? Timothy Spence: Yes. Mike, it's Tim. I'll take an initial crack at that one, and then I'll let Bryan clean it up. So yes, I mean, we think we did a pretty good job of summarizing the past. As you know, when it comes to these large transactions, the absence of any surprises is a positive, right? So getting 1 quarter closer to a point where we're operating on a single common platform is an important milestone unto itself. In terms of just the core integration, I think things have gone really well. There really haven't been big surprises. We have all the -- we completed the Walk-the-Wall planning exercise that we run all the customer day when deliverables have been locked. I think there are 46 new to Fifth Third applications, which, as we mentioned, from a technology perspective previously primarily support the Tech and Life Sciences business and the Dealer Services business. plus a couple of things in payments. I think the data strategy and the data conversion, that work is completed. All the risk-based process reviews we needed to get done which are essentially the click down from the work that got done in diligence have been completed, and we know where the product gaps are that need to get filled. The org charts are done, as I mentioned in my remarks, and we've selected the key leaders. I'm pleased it's very early days. So this is not by any stretch of the imagination declaration of success. But that sort of employee attrition is actually running a little bit below the historical levels. So we're not seeing any sort of elevation in attrition. I think the positive surprise is actually what is happening in Texas and then even more broadly across the Southeast, is it related to promotional activity. We got a lot of questions after we announced the deal about whether the playbook that's worked so well for Fifth Third and the Southeast would work in Texas and in the Southwest more broadly. So that initial mailing that I referenced in my prepared remarks was a test, right? It was the test and learn process so that we could reground our targeting and expected balance models on empirical data in Texas. We mailed 700,000 households. Response rates were good. The fact that more than half of customers open checking even in an environment where there are still -- all the legacy tech limitations that Comerica had are still in place. I think is very good. But maybe the more exciting thing is that having regrounded the models, we dropped the subsequent mailing on the 10 to 11 of this month to 6 million people and the very early results there are super positive. Like with the sort of reground of the analytic models, like we're getting 3x the response rate that we see at this stage in a campaign packets. And we actually expect that campaign alone to generate $1 billion in deposits across Texas, Arizona and California, which would be great. Now that is all incorporated in the guide to be clear. That's not above and beyond the guide. But it just speaks to a, the fact that the tactics that we are using in the Southeast are going to work in the Southwest and B, the fact that Comerica had not run any sort of external consumer marketing in 13 years. means it's a relatively unsaturated market for us. And therefore, if anything, I think my optimism about our ability to gain share there has improved. Then in terms of what what's not working. We got a little bit of an internal civil war here between people who like their Chile with beans, no beans or on spaghetti. So that we're going to have to solve before we can truly say we're one company. Michael Mayo: All right. That's kind of like my weakness as I work too hard. But okay, I'll [indiscernible] so just I guess is just interesting, like you guys said had very old last century, all these mailings and stuff, but 6 million mailings it sounds like you're getting $1 billion of deposits that will pay off. But how does -- this is all America accounts right now, right? And so after Labor Day, they're all going to become the third accounts. And so seems like that transition has some risk too, going from America to actually branded Fifth Third. How do you manage that transition? Timothy Spence: Yes. I mean the tech conversion, as you know, right, is the single largest point of risk in a transaction because I think we've got a very good employee value proposition here. we've got, on a combined basis, more capability than either company had to serve clients and those things are good for people that the Code Red event that could occur would be if you made a mistake on the tech conversion and either people couldn't access their accounts or you had service issues or processing issues or otherwise. So we're definitely always mindful of that. Assuming that we execute the conversion well, the way that we did with MD as an example, then I actually think the tech conversion is a positive. There'll be a bake-in period where people will need to learn to navigate new interfaces, whether that's the consumer mobile app or the commercial portals and otherwise. But the capabilities that are [indiscernible] in Fifth Third digital channels are much broader than exist inside Comerica's current channels. The point I made about the managed services, like those are software solutions that we offer in commercial payments. The fact that we've shown those things to 100 Comerica clients, we have 2/3 of them as qualified leads in the sales pipeline sort of speaks to the tech quality. What the conversion will allow us to unlock though, is all the digital marketing channels. Like the reason we're not doing digital marketing to support the Southwest markets today is because Comerica can't open consumer deposit accounts digitally. And therefore, there's no sense in using them. once we're under the Fifth Third brand and on the Fifth Third tax stack, the 50% of our direct marketing that gets done via digital today, all of a sudden then becomes viable in the Southwest and all the household growth tactics that we use in addition to the deposit growth tactics and the Southeast become viable as well. Operator: We'll move to our next question from Scott Siefers of Piper Sandler. Robert Siefers: Maybe Bryan hoping to start with you something you can speak to some of the underlying drivers in the core margin. I think I know you suggested the reported level should expand another few basis points in the second quarter due to the full quarter's impact of Comerica. But maybe you could sort of speak to dynamics such as overall rate positioning, which I think you touched on, but maybe competitive dynamics on the loan and pricing side, just those kinds of things that you're seeing? Bryan Preston: Yes. Absolutely, Scott. Thanks for the question. As I mentioned in my prepared remarks, we are asset sensitive today. That is certainly a factor that we are focused on as we think about trying to move to a more neutral position over time. We feel very good about how we're positioned, and that's obviously one of the things that's gone well for us with. The current volatility in interest rates, it's given us some opportunity to do some things in the investment portfolio and put a few positions on in the quarter at pretty attractive levels. So we do feel good about that. From a driver perspective, we do expect some additional improvement from fixed rate asset repricing over the remainder of the year. From a magnitude perspective, it's a little bit less impactful than it has been because 1/3 of our balance sheet was effectively repriced on the with the Chimeric acquisition. So we are still seeing some good trends there. on the legacy Fifth Third portfolio. But obviously, that's just a smaller percentage of the balance sheet now. That's probably 1 basis point, 1.5 basis points kind of pick up each quarter through the end of the year and feeling good about trajectory that gets us approaching to exiting the year closer to 340 from a NIM perspective. So a lot of things going well from a net trajectory perspective. The environment, obviously, it's competitive, we're in an industry that is always competitive, both on the lending side and on the deposit side. I would tell you that it is competitive but not irrational right now. Loan spreads have come in a little bit, but aren't crushing at this point. And we are just seeing normal deposit competition with the Midwest continues to be the most competitive deposit market that we're seeing from a consumer perspective, more competitive than the Southeast, and we're still trying to get a better sense of what Southwest looks like, but it does not look like it's going to be an outlier relative to other markets. Robert Siefers: Okay. Perfect. And then maybe a higher level question here. You all talked about the fourth quarter of this year, representing sort of the time when we really see the full run rate accretion, returns, efficiency. Basically, all the benefits from the Comerica transaction. Basically, all your numbers are going to be at or near best-in-class. As we start to look to a post sort of post Comerica time like into next year when those benefits have really become realized how will you sort of think about balancing additional improvement in profitability, returns, efficiency? Or will those at that point represent sort of steadier states as you do things like invest to just ensure that the levels you reach remain durable over time? Timothy Spence: Yes, that's a good one. And we've been getting a variant to that Scott, over the last, call it, 90 days about, hey, are the synergies durable? Or do they need to be reinvested? I have been telling people if you have to spend it in some other way, that's not an expense synergy. It's a capital application play. So we absolutely believe we can sustain the level of profitability that we expect to achieve in the fourth quarter and continue to improve it. I grew up in the cradle of distance runners and Nike posters as [indiscernible] on my wall going up. So the view here is like there's no finish line, right? We just have -- we've so much in front of us, right? So you want to generate a strong return on equity under any circumstances. But then you want to make the decision at the margin. So if we're at 19%, and we've got a 53% efficiency ratio, the decision on the margin should always be do we utilize continued strength in operating performance to drive higher profitability and boost the TBV the TBV multiple -- or do we focus on growing tangible book value per share or doing a little bit of both of those. I just think we're going to have the ability to continue to do both. Like when I got here 11 years ago, under [indiscernible] 1/4 of the U.S. population lives in our footprint. Today, more than half of the U.S. population does as Bryan mentioned in his remarks, 17 of the 20 fastest growing large metro areas in the U.S. are now in the footprint, and we have a credible as the top 5 market share in all of them. I think we have the freshest branch network. If you just look at it by age of any of the [indiscernible] 3 or 4 banks and maybe any of the LFI banks. We've got this payments business now that's benefiting when nonbanks actually take share from banks, which is great. And we have this huge influx of bankers from Comerica who have the shackles off of them, right, in terms of not being capital or liquidity constrained. And I'm proud of the track record we have for tech innovation. So we will continue always to invest in the core business with the expectation that at 19 -- like 19% ROTCE is great. And if we run out of ideas, then we'll focus on getting 19 to be 20 or 21 or 22. And otherwise, it will be about growing book value per share. Operator: Next, we'll go to Gerard Cassidy at RBC Capital Markets. Gerard Cassidy: Tim, did you have a [indiscernible] poster too with Steve's poster? Timothy Spence: I had Steve and Dick [indiscernible] At my height my lack of foot speed, you had to go with the field athletes as well. So [indiscernible] Gerard Cassidy: Got it. Good for you. When I look at your utilization trends that you gave us, and you touched on it in your prepared remarks, in the appendix, I think it was -- it jumped up nicely from 34.9% in the fourth quarter to 40.7%, and then you give it ex Comerica. Can you give us some color in 2 areas: one, legacy Fifth Third, what you're seeing there? And then also legacy Comerica what are they seeing? Bryan Preston: Yes. From a utilization perspective, Gerard, I would tell you, it's fairly consistent what we're seeing across the Fifth Third Platform and the Comerica platform. which is middle market customers, we're starting to see use a little bit more activity there. We also saw a nice rebound from a corporate bank perspective. I do think part of it was some of the activity that we were seeing from a capital markets perspective because we did see less pay down this quarter from a capital markets payoff perspective. But it was really a -- and we think it was the rebound that we were expecting associated with some of the tax bill benefits coming through, where we just saw some more active spending happening as customers were working through the environment. And then obviously, later in the quarter, obviously, some impacts associated with the situation in the Middle East. Timothy Spence: Yes. Maybe the one thing I'd add there, that is at least based on the cursory read I did other banks that have reported thus far as one thing we didn't see that a lot of other people size. We didn't get a lot of the loan growth from private equity or price capital. So if you look at the growth in loans, less than 10% of it, in our case, came from private equity or private capital. And my quick read through it may be as high as 80% of a lot of other places. One of the things that's comforting about the Comerica portfolio is, they're a lot like Fifth Third in the sense that we bank [indiscernible] businesses, right, primarily privately real economy businesses. People make things or move them or warehouse them or sell them or core services like health care. And otherwise, between the 2 of us, we were both on the low end of the as a percentage of total commercial loans tables. And it just hasn't been a growth focus for us. I think the other thing I might flag there since I know it's come up as we have less than $100 million of funded exposure to data centers, what we definitely have been on the more skeptical end of the spectrum on that front. We talk internally about the fact that we wouldn't underwrite an energy loan without a petroleum engineer looking at the projections. And I don't think there are a lot of us employing AI researchers the cost that they are to help underwrite data center facilities. It's just there's such a long history of overbuilding tech infrastructure anytime there's a platform shift. And the obligors are a little less clear than we personally would prefer. So that is where the growth wasn't coming from in our case. Gerard Cassidy: Very good. And then just one follow-up on the credit quality, which brand you pointed out, the guide for [indiscernible] is very good in the numbers in the quarter are good. One question in the commercial side of the portfolio. And I know this number moves around because of the nature of it. But the 30 to 89 delinquency numbers, even though low. When you look at the commercial and industrial going to 38 basis points of the CRE going up, any -- is it -- anything there that we should just keep an eye on? Or is it just because of the combination of the 2 companies and people maybe didn't know where to send payments. I know that sounds kind of strange, but any color there? Timothy Spence: Yes. It's not quite as basic as they didn't know where to send payments, but the majority of the increase there, Gerard, was 2 credits, and the payments got made on April 1. So if we could have reported all of this as of April 2, you wouldn't have seen the jump that materialize there. Operator: Our next question comes from Ebrahim Poonawala at Bank of America. Ebrahim Poonawala: I had a question first just on deposits. As we go through all these updates does feel like funding is a much bigger constraint for banks as we move forward than capital. Just talk to us around this Southeast strategy what seems like an intense environment. How we -- how are you converting clients acquired through promotions into core checking accounts. Is that happening? Just kind of remind us on where that stands? And maybe tied to the -- one of the previous questions, Tim, when you think about opening these branches in Texas 3 to 5 years from now, just a degree of confidence that branches will still be as relevant 5 years from now as a client acquisition tool as there today? Bryan Preston: Yes, good question. So Yes. I think your point is an important one, your ability to convert relationships into essentially new clients, right, whether you attract them through rate or cash bonus or because of the new branch opening or otherwise, in the primary long-tenured relationships. That's effectively the seed corn for everything that we do because we have an acquirer once and then maximize wallet share strategy. That's the reason we keep disclosing the household growth rates in the Southeast, like those are primary households. If accounts going active, they get washed out of that number. And so you could trust that the 3% overall and in this case, the in household growth in the Southeast, the sort of 7%, 8% range we've been running at as a real number. It's active accounts in 1 period divided by active accounts in the same period the year before, minus 1, right? Timothy Spence: So the population growth in the Southeast is 1.5% to 2% per year in any given market. Our growth rates have been 7% to 8%. So we're generating 3 to 4x the growth on a net basis that the market is experiencing on a net basis. which I think should be the sort of best proof point you can rely on that we're making the conversion. Savings promotions don't count in that number. anything we do with loan products, home equity, et cetera, that doesn't count in the number that's primary checking customers. In the Southwest and in Texas, that we have 81 or 82 of these properties locked up. We're going to have branches opening next year, not in 3 to 5 years, just to be clear. And I think the measure of their importance, like I actually like to think about branches, if you don't think about them as stand-alone mechanisms to generate new account growth, the other way to think about them is attributes, which boost response rates to direct marketing, whether that's digital or male. And there is a nonlinear decay function in response rates and expected value. The further you get away from a Fifth Third branch by drive time in our models today. It's 1 of the more powerful variables in dictating who gets a digital offer, like the IP range or the ZIP code in the case of a mailer actually drive whether or not you see Fifth Third promotions. And as long as that decay function exists, the branches are playing a role in driving our ability to grow the franchise. And I just don't expect human behavior to change that quickly. it certainly hasn't ever in the past. Ebrahim Poonawala: Got it. And just one quick follow-up. You mentioned this a few times in terms of do you mean anything between NBFI growth versus non-NBFI. One, like do you see -- like why do you not -- like do you see the embedded risks in that lending that you don't like? Just give us a sense of like when you evaluate why is it attractive for so many of your peers and not so much when you assess that for Fifth Third. Timothy Spence: Yes. I mean I'm not making a call on private credit and viability. I don't personally believe it's going to go away as a category. I think our view generally has been that the private credit industry is going to be much smaller in the future than people were worrying about like their 2 strategies for growth were retail money, which was always a bad idea and which has been demonstrated again to be a bad idea and by promising returns of 8% to 9%. And which we just viewed as being unrealistic, right? Banks run at like 8 to 10x leverage to get a 15% return. And we have loan revenue, deposit revenue, fee revenue in the mix. the idea that private credit could deliver 8% to 9% with, call it, 2x to 3x leverage with loan-only revenue, just always felt like it was unrealistic. So is there a place in the investment spectrum or on the efficient frontier for something that offers a return between corporate bonds and equities, like absolutely. It just doesn't feel like it's going to be anywhere near the size. Now we're not a very big player in this market. Comerica and Fifth Third together had somewhere around $1 billion of private credit or BDC activity. So I can't speak to the leverage points a lot of others are. The reason we avoided is because we couldn't figure out what total leverage was in these structures between the portfolio companies the back leverage and the NAV lending and the lending to the companies that were doing the NAV lending and the capital call and all the rest. And we don't like things that we don't understand. I think for me, at least, though, the bigger reason to avoid it is it's -- that is not an industry that like lending to is not a place where banks are going to build competitive barriers, which means the return profile is just eventually will gravitate to cost of capital. And we want to generate returns in excess of cost of capital. So when you let your line of business, get too addicted to getting growth from something that's going to be a cost of capital hurdle. It distracts them from focusing on the things that could generate excess returns like primary relationship lending, like managing wallet share, like establishing lead-left positions -- and so that is where we want to get the growth from. It's stuff that can generate a 19-plus percent return over time, not something that's going to generate 11%, 12%, 13%, 14% return over time. Operator: We'll move next to Manan Gosalia at Morgan Stanley. Manan Gosalia: I think in the prepared remarks, you mentioned that the proposed rules recognize granular, say, for well-collateralized loans. So I think you were pointing to opting into ERB. So first, I just wanted to clarify that. And then my main question, Tim, when you think about EBA given that it would allow banks to hold less capital against higher quality loans. Do you think it creates some sort of disincentive or negative credit selection for banks that don't opt in? Bryan Preston: It's Bryan. At this point, we're still evaluating whether or not we will opt in to era. It's not necessarily the driver of creating the big benefit for us. [indiscernible] is probably an incremental 10 or so basis points relative to the numbers that I quoted. And then obviously, there's some complexities associated with data and models and systems in place necessary to do some of the calculations. So that's something that we're still evaluating. There is always some regulatory arbitrage out there, whether it's within the existing capital rules and use of securitization style structures from just general lines or how private credit participates in in the regulatory landscape as well. So there is always that aspect of competition and ultimately, how you think about capital allocation across I don't think it will have ultimately [indiscernible] would have a really big impact ultimately on competitiveness across the industry and between the banks that opt in and those that don't. Timothy Spence: Yes. And I guess the only thing I'd just add there is it sort of depends on how you underwrite like not every bank, just at least 15 years ago when I was a consultant -- not every bank underwrote to the same binding constraints. Not every bank thought the same way about how they calculate returns. The binding constraint here. Obviously, we think about Red Cap and the return on Red Cap in terms of the performance of the company as a whole. But when we look at individual credits, we look at into the amount of economic capital that those credits should attract given the way that we risk rate the credits both in terms of default probability and loss given default. So if all you were looking at was the same capital charge for every loan you underwrite like in a non-urban environment. I think you run into that risk. But certainly the way that we approach it. The decision to opt in or out is going to get made at the macro level. and the individual underwriting decisions and the return calculations get done at an individual company level. Manan Gosalia: Got it. That's really helpful. And then now that we have the proposals for capital I think the focus has been turning to the liquidity rules. I guess the question for you is, what would you like to see there on the liquidity side? And is there something that you want to see that would cause you to manage your liquidity differently from what you're doing? Bryan Preston: Yes. I think the most valuable thing for the industry is some credit and the liquidity rules associated with your secured lending capacity at at places where you know the liquidity is going to be there. Think about your FHLB borrowing capacity against your securities, discount window or repo facilities like those will be areas where getting some credit associated with that off-balance sheet liquidity would be very valuable for the industry. That is probably one of the more significant. We would also like a little bit more rationality on deposit outflow assumptions. That is an area where there has been significant pressure on the industry across the old horizontal liquidity exams that were occurring. And I just think we've ended up in a spot where the assumptions that are embedded in most liquidity stress tests today are just absurdly high relative to some of the core banking relationships, in particular, the operational deposits that are attached to treasury management services. Operator: We'll go next to Chris McGratty at KBW. Christopher McGratty: Tim, I want to come back to the comment about the Midwest being more competitive in the Southeast. It seems somewhat contrary to where all the capital is being allocated from a lot of the banks. Can you unpack that a bit? Timothy Spence: Yes. I mean Chris, this has been true. It's like one of the interesting factors that just been true for a very long time. I think you had 2 dynamics in the Midwest that are a little bit unique relative to the rest of the country. One, historically, you've had a lot more regional banks headquartered in the Midwest, right, and less in the way of trillionaire market share and less consolidated markets tend to be more competitive. That's just -- that's not a blinding insight on my part. That's just economics 101. The second factor is credit unions play a much more prominent role in a lot of the Midwestern markets than they do other places elsewhere in the country. And credit unions tend to be optimizing for very different factors like do not help do a profit mandate and therefore, they tend to be optimizing around just absolute levels of liquidity needed or otherwise. And so the sort of combination of more fragmented markets and an actor that's optimizing around a different set of goals just produces higher levels of deposit competition. That, I think, for us has been 1 of the interesting things as we moved into the Southeast as we have this double benefit of both having a small existing share and, therefore, a low cannibalization cost of any new marketing campaign that we run, right, which is a little bit like Judo you're using your opponent's weight against them. And the fact that at the margin, the marginal dollar in the Southeast is still a little bit cheaper to raise than the marginal dollar in the Midwest. It means we can be more aggressive and still have a very nice impact on the franchise overall. Christopher McGratty: Great. Yes, definitely, with the Chicago being one of the more competitive markets and fragmented. Timothy Spence: I don't know that there's another state with 3 regional banks headquartered in it either the way that Ohio has [indiscernible] Fifth Third and [indiscernible]. Christopher McGratty: Sure. And then, Bryan, just on the full synergies, the cost saves mapping out, can you I guess, help with exit run rate on efficiencies. It feels like low 50s in this year and you kind of go into next year from a pretty good position. But just could you find in that for me? Bryan Preston: Yes. I mean we're -- the expectation is -- that we talked about as being in that 53% range in 2027. Our fourth quarter efficiency ratio is always our lowest efficiency ratio for the year. So I would expect us to be a good point, 2 points below that 53% in the fourth quarter. Operator: We'll go next to Peter Winter at D.A. Davidson. Peter Winter: I was just wondering -- when you first announced the Comerica acquisition, you were targeting a 27% EPS of 4.89. But now that you spent more time with the company, you're getting some early wins on the revenue synergy side, do you see upside to that number because it did not include any revenue synergies? Bryan Preston: Yes. I mean, obviously, that's something that's part of the deal that we would not contemplate any revenue synergies. So anything that we are seeing would be upside. So we do feel good about kind of the progress there. I think we will be striving to outperform what is there? Obviously, 2027 is a long time away and the environment, the rate environment and a lot of other things can change. But we certainly are more positive today about the opportunity in front of us, even though we were incredibly positive at the time of the acquisition. So a lot of things are going well, and we feel good about the trajectory of the company. Peter Winter: Okay. And then if I could just follow up, just -- if I think about Fifth Third, one of the strengths has been managing the balance sheet in different interest rate environments. But Bryan, where are you in the process of repositioning Comerica's balance sheet? You mentioned it's you're asset sensitive now, but how quickly do you want to get back to neutral? Or would you slow walk it just given the higher for longer rate environment? Bryan Preston: The higher for longer rate environment and our outlook and like we are very cautious around what could happen out the curve. So we are trying to make sure that we're balancing capital risk as well with a downrate risk. And all the things that's happened even over the last month or so when you think about what it's going to do to inflation and what is honestly still a fairly reasonably strong economic activity that we're seeing. We just see that there is more bias right now for the higher for longer outlook. So with that, we're probably moving a little bit slower. But as that outlook changes, we would have an ability to accelerate. There's probably in the neighborhood of $30 billion to $40 billion of kind of notional exposure that we could move out the curve as our rate environment out changes. That gives us a lot of flexibility as we navigate this environment. And we think even if you were to start to see some more significant cuts again that what you're likely to see is some amount of steepening that gives you some opportunity for us to deploy and maintain and even grow NII even in a falling rate environment. Operator: And next, we'll go to Erika Najarian at UBS. L. Erika Penala: Just one question because I know we're pushing the limits of length of time. But Bryan, given that there's no cuts in the curve, could Fifth Third maintain deposit costs even if there are no cuts Tim, your ears must be burning because even your money center peers are talking about your competitiveness in their markets. So just wondering what the deposit cost outlook is in an environment where the Fed is not cutting. Bryan Preston: Yes. We absolutely think we can maintain deposit costs even in an environment where the Fed is not cutting. The real wildcard there is ultimately what the balance sheet needs from a growth perspective. If we see a more aggressive loan growth environment, that is an environment that would put a little bit more pressure on deposit costs, but in a fairly rational kind of normalized growth environment, we think we could -- we think we have a lot of optionality to be able to maintain deposit costs where they are. Operator: And next, we'll move to John Pancari at Evercore. Unknown Analyst: This is [indiscernible] on for John. Just one on the fee side. Solid results in the quarter, healthy guide despite the volatility in headlines if this subsided at all, you see this driving much upside from the billion quarterly run rate. I think our wealth and capital markets like you mentioned, I think about how much conservative might be baked in the guidance now again versus potential upside? Bryan Preston: Yes. I mean there's always a little bit of conservatism we put in place relative to capital markets. which we've been talking about hoping for a kind of more stable productive environment now in the hedging environment for a couple of years. So we do think there's opportunity for that as a more stabilized environment to come out. Obviously, that will be helpful from an M&A perspective as well. The rest of the few businesses have been doing fairly well without or even with the uncertainty that we've been facing. So we feel like the tailwinds there and the investments we've been making from a sales force and a production perspective, positions those businesses to continue to grow as well as the investments from a payments perspective and just the categories that we're attached to. So certainly, we think that there is opportunity from a fee perspective to continue to see good outcomes. Operator: We'll take our next question from Ken Usdin at Autonomous Research. Kenneth Usdin: Just one question, just given that it's a partial close quarter. I just wanted to understand the moving parts a little bit. Can you help us understand the dollars of purchase accounting accretion that we're in what you're expecting for 2Q and just how that cascades in terms of the schedule? Bryan Preston: Yes. If you look at the -- we tried to lay that out in our slide deck and our NIM walk. So if you see, there was about $12 million of purchase accounting accretion associated with the loan portfolio in the first quarter. And I think the easiest way to think about that is it's really just 2 months of activity. And it will burn down relatively gradually over the next few years. Most of that is associated with combination of commercial portfolio. So that has a little bit shorter tail on it than if it were residential mortgage exposures. That is kind of the main piece from a purchase accounting accretion perspective. the securities, kind of what was embedded from a securities perspective is basically bringing those securities to current market rates. So the assumption there should there should just be based off of how you think about where market yields are going through the securities. Unknown Analyst: Okay. So basically, that if that's one line that you mentioned in your prepared remarks that [indiscernible] becomes a little bit more in the second quarter. So it's really just that 12% kind of run rating. Is that the only -- I just want to like understand the magnitude of how much of help that is going forward? Bryan Preston: Yes. Well, basically the 12 becoming probably closer to mid-teens when you think about adding a note [indiscernible] for next quarter. Unknown Analyst: Okay. And then just a real quick one. You mentioned also in your prepared remarks that you might get back into the buyback in the second half. Your CET1 with AOCI still on the lower end of peers. Any way to think about like what that looks like when you get to that point? Bryan Preston: Yes. I think in the normalized -- I think in a normalized environment, we would be talking about kind of $200 million to $300 million of buybacks is what our quarter was what our historical run rate has been. Obviously, it's going to be very dependent upon how much we need to support organic growth because being able to lean into lending is an area that is obviously a priority for us always because we'd rather deploy the capital. And earn a higher return, as Tim was talking about, our ability to attract customers and generate high-teens returns is we think, is the best outcome for shareholders. For this year, it's probably going to be a little -- it's going to be less than that as we get into the second half, but we still think there's going to be some opportunity to restart buybacks. Operator: Next, we'll move to David Chiaverini at Jefferies. David Chiaverini: Question on dividend finance. It looks like the deceleration you anticipated is starting to come through in the related uptick in NCOs there is beginning to occur as well. How high should we expect this NCO rate to trend so that we're not surprised given the slowdown is fully anticipated. Bryan Preston: Yes. I think -- it's a good question, and it's one that we think the range we're in right now is probably a reasonable range to expect for a period of time. Obviously, this is an industry that is facing a significant amount of disruption as a result of the tax bill and basically creating a war the leasing product is economically advantaged relative to the lending product. That was not an environment that when we did the original acquisition that we were expecting. We're having a -- we're working through it, and it's obviously not a growth asset for us anymore. But I think the range we're in right now from a charge-off ratio perspective is probably where [indiscernible]. David Chiaverini: Very helpful. And then shifting over to HELOC. The HELOC growth is off to a very strong start in the first quarter, and more than offsetting that headwind on dividend finance. What's driving the strong growth in HELOC? Is it Fifth Third's pricing? Or is it grassroots loan demand from customers? And what is the outlook for this business? Bryan Preston: Yes. The first quarter benefit some from the [indiscernible] acquisition as well. This -- of their consumer lending categories, HELOC was one of the categories that had some loan balance. So that is a driver of probably about half of the first quarter growth. But beyond that, what we're seeing is actually just good grassroots activities. We've made a lot of improvements to that business. and the customer experience in that business over the last couple of years. So it's put us in a spot where we have a really nice engine that's running right now. We're seeing good activity from a branch perspective. The improvements that we've made from a technology and underwriting experience perspective has made it a product that is easier for the bankers to sell. It has just been something that we're seeing a lot of good activity on, and we've also been able to actually lean in to a little bit of marketing in the space as well. And customer acquisition tactics. And honestly, when you just take a step back and think about the dynamics of the amount of home equity that is out there in the market right now and the lack of housing turnover that's occurring. It's just -- it's an area that we think you're going to continue to see significant growth in for some time. I mean we're 2 years -- 2-plus years in now seeing consistent growth equity perspective. Timothy Spence: Yes. The 1 thing I'd just add there is, I think, as Bryan said in his remarks, #1 in market share in our footprint in home equity originations and in the bottom half in terms of pricing. And there's very good pricing data available through aggregators. So we are not competing on lice. It's great originations volume effectively at better spreads than others. Operator: And we'll take our final question today from Christopher Marinac at Brean Capital Research. Christopher Marinac: I want to ask you and Bryan about the NBFI reserve allocation. Would that number necessarily not go up much this year because you're avoiding some of the higher-risk, lower-return pieces of [indiscernible] Bryan Preston: Yes. We're not seeing anything in our [indiscernible] portfolio that would cause us to have any need to build significant reserves related to what we're doing very well secured, very well performing, just not an area where we're seeing in [indiscernible]. Timothy Spence: Yes, absolutely. Before we wrap it, I just quickly want to say congratulations to Keith Horwitz on his retirement and on his 30 years in the community. -- my sense is that he's going to prove out the adage that old [indiscernible] never die. They just stop updating their outlook. So we appreciate Keith for all the years of coverage here and wish him the best in the next phase. Operator: And that concludes our question-and-answer session. I will turn the conference back over to Matt for closing remarks. Matt Curoe: Thank you, Audra, and thanks, everyone, for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up questions. Audra, you may now disconnect the call. Operator: Thank you. And this concludes today's conference call. We thank you for your participation. You may now disconnect.
Operator: Good morning and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Chris, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Dana Nolan to begin. Dana Nolan: Thank you, Chris. Welcome to Regions First Quarter 2026 Earnings Call. John and Anil will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP reconciliations are available in the Investor Relations section of our website. These disclosures cover our presentation materials, today's prepared remarks and Q&A. I will now turn the call over to John. John Turner: Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. Before we turn to the quarter, I want to take a moment and personally thank Dana for her service and leadership. After nearly 40-year credit regions, she's made the decision to retire. Dana has been a steady and trusted voice for our company and an important link between our leadership team and the investment community. Her deep understanding of our business, fair with her clear and straightforward communication style help strengthen our credibility with investors and are widespread respect across the industry. We're incredibly grateful for Dana's leadership and the standard she's set, and we wish her nothing but the very best going forward. Turning to our financial results. This morning, we reported strong first quarter earnings of $539 million or $0.62 per share. This represents an 11% and 15% increase, respectively, versus adjusted prior year results. Adjusted pretax pre-provision income was $805 million, up 4% year-over-year, and we generated a return on tangible common equity of 18%. The momentum we saw at the end of last year and carried into the first quarter. We grew loans and deposits on both an average and ending basis and our credit metrics continue to improve as we resolve our portfolios of interest. Conversations with customers suggest that despite recent volatility, sentiment remains generally optimistic. Businesses are continuing to manage their balance sheets and income statements prudently with strong liquidity and solid capital positions. On the consumer side, fundamentals remain relatively sound. Aggregate balance and spending trends for Regions customers are stable to mostly positive. The labor markets are not showing signs of material weakness. We are seeing some pressure among lower-income customers but larger income tax refunds compared to last year have helped to offset a portion of that impact. Importantly, our consumer loan portfolio continues to be primarily prime to super prime. We continue to make good progress on our core transformation, including investments in artificial intelligence. We are on track to deploy our commercial lending system and small business digital origination platform this summer and system testing on the core deposit system is also underway. We expect to launch a pilot in the third quarter and begin conversion in 2027. At the same time, we remain focused on near-term drivers of growth. Our strategic growth hiring initiative is on track, and we continue to make targeted investments in products and services across all 3 of our lines of business. There's a lot of internal energy and excitement around our technology enablement initiatives, and we're motivated to continue building on that momentum. I'll just conclude by saying that we're pleased with our first quarter results and are excited about the opportunities that lie ahead. With that, I'll hand it over to Anil to walk through the quarter in more detail. Anil? Anil Chadha: Thank you, John. Let's start with the balance sheet. Ending loans grew 2% while average loans increased approximately 1%. Growth was driven by broad-based C&I lending, including power and utilities, manufacturing, health care and asset-based lending. Roughly half of this quarter's growth came from higher line utilization with the balance driven by new loans, approximately 80% of which were to existing clients. Almost 2/3 of the growth was investment-grade credits with the majority of the remaining growth near investment grade for very high quality. While the macroeconomic outlook remains volatile, we experienced strong loan growth in the latter half of the quarter. As John noted earlier, client sentiment remains broadly positive. Loan pipelines and commitments remain strong, and overall lending activity remains at a good pace. An area that has not been a meaningful growth driver over the past year is NDFI-related lending. These lines reflect long-standing client relationships with predominantly investment-grade credits with nearly half of balances associated with our long-standing REIT business. Private credit exposure remains limited, less than 2% of total loans largely investment-grade, well enhanced and existing client paydowns exceeded draws during the quarter. With respect to our full year growth expectations, we continue to expect full year average loans to be up low single digits versus 2025. Turning to deposits. Average balances increased modestly, while ending balances increased approximately 1%, reflecting normal seasonal patterns associated with tax refunds and payments. Balances grew while total deposit costs continued to decline, supported by our strong deposit franchise and focus on customer acquisition and retention. Through deliberate product management, we continue to see a shift from CDs into money market accounts across both our consumer and wealth businesses with growth in the combined balances. Our noninterest-bearing deposit mix remained in the low 30% range, consistent with our target and reflective of the operational nature of our deposit base. As a result, we continue to expect 2026 average deposits to be up low single digits versus the prior year. Let's shift to net interest income. As expected, net interest income was lower linked quarter, driven primarily by 2 fewer days in the quarter and the absence of nonrecurring items that benefited the fourth quarter. The net interest margin of 3.67% continues to evidence region's profitability advantage. That said, margin came in below expectations for the quarter, reflecting tighter asset spreads as a result of market conditions paydowns of higher-yielding loans and remixing into higher quality credits. The core balance sheet performed well during the quarter and provides a solid foundation for net interest income growth over the remainder of the year. Our neutral interest rate positioning once again performed as designed in the quarter with minimal impact to net interest income from the Fed's fourth quarter interest rate cuts. During the first quarter, interest-bearing deposit cost declined 13 basis points. The following cycle interest-bearing deposit beta stands at 35%, and we remain confident in the mid-30s beta with the potential to outperform over time. Net interest income also continued to benefit from fixed rate asset turnover with elevated long-term rates supporting pricing on term loans and securities. At current rate levels, we would expect balance sheet repricing to support margin expansion over multiple years. Finally, recent loan growth acceleration positions us well for future interest income growth. Subsequent to quarter end, higher interest rates created an opportunity to sell approximately $900 million of shorter duration of securities that no longer support our balance sheet management objectives at a $40 million loss, repositioning those into longer-duration product types. The transaction is also well aligned with our overall capital deployment priorities, carrying a short approximately 2-year payback period and enhancing overall securities yields. In the second quarter, we expect a strong rebound with approximately 2% net interest income growth, followed by additional expansion in subsequent quarters. Fixed rate asset turnover, seasonal average deposit inflows accelerating loan growth and continued discipline and funding costs will drive net interest income growth and a stable Fed funds environment. For full year 2026, we reiterate our net interest income expectation of between 2.5% and 4% growth and for the net interest margin to exit the year at low [ 3.70s ]. Now let's turn to fee revenue performance for the quarter. Adjusted noninterest revenue declined 2% on a linked-quarter basis as seasonally lower card and ATMs and a decline in other noninterest income were partially offset by higher capital markets revenue. Capital markets income increased 5% during the quarter, driven by improvements in commercial swap, loan syndication and securities underwriting activity partially offset by lower real estate capital markets and M&A fees. Despite ongoing headwinds associated with market volatility and elevated interest rates, we continue to expect Capital Markets quarterly revenue to increase within our $90 million to $105 million range, trending near the lower end of the range in the second quarter and moving higher thereafter. Wealth Management remains a good story for us, supported primarily by continued sales momentum with revenue up 9% year-over-year, and we expect this business to continue to be a steady contributor to fee revenue growth. Card and ATM fees declined 5% from the prior quarter reflecting typical seasonal patterns. We expect this line item to draw normal patterns peaking next quarter and moderating throughout the second half of the year. Other noninterest income declined 29%, driven primarily by commercial lease sales activity with $6 million of gains recognized in the fourth quarter and $7 million of losses recognized in the current quarter. Service charges remained stable during the quarter as record treasury management fees offset seasonally lower consumer revenue. Overall, treasury management grew 6% on a linked-quarter basis, including strong growth in core payments revenue. We continue to invest in talent and innovation within the treasury management space with a focus on embedded payments and digital client experiences. We expect this business to remain a source of growth within overall service charges. For full year 2026, we continue to expect adjusted noninterest income to grow between 3% and 5% versus 2025. Let's move on to noninterest expense. While we continue to make meaningful investments across the franchise to support long-term growth, we remain focused on maintaining a disciplined approach to expense management. Adjusted noninterest expense declined 4% linked quarter reflecting broad-based improvement across most expense categories. Salaries and benefits remained relatively stable as lower incentives and declines in market value adjustments for employee benefits liabilities offset the seasonal increases associated with payroll taxes, 401(k) match and merit. For full year 2026, we expect adjusted noninterest expense to be up between 1.5% and 3.5%, and we expect to deliver full year adjusted positive operating leverage. Annualized net charge-offs as a percentage of average loans decreased 5 basis points to 54 basis points, reflecting continued progress on resolutions within previously identified portfolios of interest, which we reserved for in prior periods. Business services criticized and total nonperforming loans remained relatively stable during the quarter as risk rating upgrades continue to outpace downgrades. The resulting NPL ratio declined 2 basis points to 71 basis points, and the business services criticized ratio declined 16 basis points to 5.15%. Allowance increases tied to loan growth and greater macroeconomic uncertainty were more than offset by meaningful progress in resolving loans within previously identified portfolios of interest sustained risk-rating upgrades, exceeding downgrades and continued improvement in the business services criticized and total nonperforming loan ratios. As a result, the allowance for credit losses declined $39 million. Strengthening asset quality across portfolios, combined with high-quality loan growth drove an 8 basis point reduction in the allowance ratio to 1.68%, while coverage of nonperforming loans remained solid at 238%. We expect full year 2026 net charge-offs to be between 40 and 50 basis points. Let's turn to capital and liquidity. We ended the quarter with an estimated common equity Tier 1 ratio of 10.7% while executing $401 million in share repurchases and paying $227 million in common dividends. We are encouraged by the proposed changes to the regulatory capital framework, which will revise the definition of capital to include AOCI and implement broad updates to risk-weighted assets calculations under the standardized approach. Including AOCI reduces our reported CET1 ratio to an estimated 9.4%. However, based on our preliminary assessment, the proposed changes are also expected to result in an estimated 10% reduction in risk-weighted assets, contributing to an approximate 100 basis point increase in capital. Taken together, the proposed changes are expected to result in a fully implemented Basel III common equity Tier 1 ratio of approximately 10.4% on a pro forma basis. Importantly, our capital priorities remain unchanged. Once finalized, we expect to continue managing our fully implemented Basel III co-equity Tier 1 ratio around the midpoint of our established 9.25% to 9.75% operating range. Finally, liquidity remains stable and robust with ample capacity to support future growth. As John indicated, we are pleased with our quarterly performance, particularly given the evolving market dynamics and believe we remain well positioned to continue delivering consistent, sustainable, long-term performance for our shareholders. This covers our prepared remarks. We will now move to the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from the line of Ryan Nash with Goldman Sachs. Ryan Nash: It was good to see that you reiterated the guidance across the board despite a slightly softer start. So I wanted to focus on revenues, whether it's NII or fees, given 1Q along with some of the 2Q commentary, maybe just give us a sense of how you're tracking relative to your ranges and what is your confidence in terms of reaching the middle or the upper part of the NII range? And what do we need to see that happen? I have a follow-up. Anil Chadha: So first of all, we're very confident in hitting the ranges. Let me start with net interest income. So I think importantly, exiting the quarter with the strong loan growth that we saw $2.3 billion point-to-point is really a great tailwind for us heading into the second quarter, our deposit performance. The growth that we saw during the quarter was also really strong. our ability to continue to bring down deposit costs. We exit the quarter on interest-bearing deposit costs of 1.69%. That's another good tailwind for us. And as we've talked about before, we still have fixed asset turnover that will benefit us over the course the remainder of the year. So all of those things coming together is really what gives us the confidence in terms of what we expect to see for NII, both in the second quarter and going forward through the year. And I'd say loan trends are still look good. So we're confident in what we're seeing will continue to persist. With respect to noninterest revenue, a couple of things there. So first, cyclically, the first quarter is typically low for some of the consumer fee items, consumer service charges, card and ATM fees tend to be lower in the first quarter. We expect that to rebound in the second quarter. So that will be a nice tailwind. We've talked about capital markets and gave our guide for the second quarter and for the rest of the year. And then treasury management wealth just continue to be good growth stories for us. We continue to expect to see growth there. It's great to see another record quarter on treasury management. Wealth Management, up 9% year-over-year. So -- so all these things are really pulling in the right direction. And so what we're seeing right now really gives us confidence that we'll operate within the range that we've given. Ryan Nash: And then I have a follow-up and a comment. First for my follow-up. You noted that you still expect to manage to the midpoint of your range on capital, but I think you noted that it creates meaningful flexibility. So just given the coming changes, maybe just talk about the potential to manage the low end or even below given that these changes are coming and maybe expand on the flexibility comment? What else do we see for leveraging the capital? That's my question. And then my comment Dana, I just want to say thank you for all the help over the years and enjoyed taking care of your grandchild and doing some traveling. Dana Nolan: Thank you, Ryan. Anil Chadha: Yes. Great question, Ryan. So we don't want to get too far ahead of the proposed rule. So as we indicated, based on the proposal when you include AOCI and then the expected benefit in risk-weighted assets, we expect to be around 10.4%. The timing of each component, the phase-in schedule things of that nature will matter a lot. And so we're not going to get -- we're not going to get ahead of that. We're going to continue to manage capital the way you've seen us. Our capital distribution priorities are unchanged. We'll monitor these proposals and once finalized, it will be our plan to continue to manage capital within that range. That is unchanged. But we don't want to get too far ahead of this. We're fortunate we generate enough capital to do everything we want today to grow the business. And so we don't have to distribute capital ahead of this. We'll take our time. But when we get final rules, our distribution priorities are unchanged, and we still believe our targets are where we should be. Operator: Our next question comes from the line of Scott Siefers with Piper Sandler. Robert Siefers: Maybe, Anil, I was hoping you could sort of address a little -- in a little more detail the moving parts in the margin outlook for the remainder of the year. I think you touched on combination of the tighter asset spreads and loan remixing as factors in the first quarter. Maybe just going forward, how much will those need to find relief? Or is there simply enough balance sheet repricing opportunity going forward that you can absorb continued pressure from those dynamics that hit the first quarter but still see both the margin and NII? Anil Chadha: Sure. So first of all, managing deposit cost is still the primary mechanism that we have to continue to meet our margin objectives for the year. As already alluded to where we exited the quarter from an interest-bearing deposit cost. So the opportunity there is still going to be a meaningful driver in terms of where we go over the balance of the year talked about the fixed asset repricing opportunities that we have, about $9 billion looking forward. So that will be helpful. We did see, as we alluded to, some investment-grade credit draws late in the quarter, we like that credit. It's lower credit risk, great returns. We also saw a good kind of middle market growth throughout the first part of the quarter. So we expect to see that over the course of the year, and that's going to benefit the margin as well as we look forward. So deposit growth that's going to continue to grow. I already mentioned, we had good growth this quarter. We're going to see seasonal uptick in the second quarter. So all those factors coming together really going to be positive in terms of where our margin goes from here over the course of the year. Robert Siefers: Terrific. Okay. And then, John, your commentary on customer sentiment sounded pretty good. And I think, Anil, you mentioned that about half the first quarter loan growth came from higher line utilization. Maybe where are utilization rates versus, say, 90 days ago, where would you hope to see those advanced to as the year unfolds? John Turner: Yes. So utilization rates are up about 200 basis points, I guess, across both the corporate banking markets or customer base and our middle market customers. And we'd expect to see a little more activity as the year goes along, it is based upon the constructive feedback we're getting from customers. I will say that we observe liquidity -- customer liquidity is up, at least in -- at Regions by about 7% year-over-year. So customers are still creating additional liquidity. At the same time, we are seeing borrowing activity, which is positive. Robert Siefers: And then just final, Dana, same thing, thanks for all the help. Best wishes. Dana Nolan: Thank you. Operator: Our next question comes from the line of John Pancari with Evercore. John Pancari: On the deposit backdrop. I know you had indicated some pretty good deposit dynamics. So I wonder if you can elaborate on the competitive backdrop that you're seeing in the Southeast. You've had a number of banks flag seemingly intensifying competitive pressures on the deposit front from not only some incumbents, but some newer entrants to the market. So what are you seeing in terms of deposit pricing dynamics, has that been impacting your expectation at all underlying the margin? Anil Chadha: Sure, John. Yes. So we've been in a highly competitive deposit backdrop, I'd say, for north of a year. The one thing I'd say that's been consistent is we are seeing banks and we are as well, offering promotional offers in certain key markets where everyone is looking to grow customers. What I'll also say is banks are also being prudent in terms of how they think about the back book of their deposit base to manage that in the context of their overall deposit cost. And so the strategies are very similar to what we've seen over the past year. We've adopted an approach that we think appropriate, where we can continue to grow new customers, especially in these high-growth markets. but also take advantage of our back book to price that in a way that's able to manage our deposit cost where we think it should be over time. We're seeing the same thing within our customer base -- sorry, amongst our peers. And so we think that dynamic will continue to hold as loans continue to grow, I'm optimistic in terms of what we're seeing in the capital markets, the debt capital markets where banks are accessing liquidity there. And so from what I see now, the way banks are managing their deposit base and other funding sources, I think, will continue as we all have opportunities to grow loans from here. John Pancari: Great. All right. And then on the margin, I know you cited the pressure from tighter asset spreads. If you can give us a little more color there on where spreads stand, what loan types are you seeing that compression? Is that competitive pressures? And you also mentioned the paydown of some higher-yielding loans. So if you can just give us a little more color on that? And is there any incremental actions you expect on the portfolio reshaping? Anil Chadha: Yes, really on the tighter spreads, it's primarily in larger C&I where we saw line utilization late in the quarter. That's a primary area. We also saw just earlier in the quarter broadly across the balance sheet in terms of tighter mortgage spreads for some of the actions the government is taking as well as retail [indiscernible] that we saw earlier in the first quarter. But primarily where we're seeing the tighter spreads is in IG within the C&I space. John Pancari: Got it. Okay. And then the portfolio reshaping efforts, anything incremental that you expect on that front? Anil Chadha: I think all that's proceeding just as planned. And as we alluded to last quarter, a lot of that is behind us. And so we're -- we'll continue going down that path as we have. John Pancari: Best of luck Dana on retirement. . Dana Nolan: Thank you, John. Operator: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: You spoke about line draws. I mean it sounds like it's a good fundamental demand coming through. Just wanted to see if you've seen any defensive line draws any reason that utilization rates may flatten or even decline from here? Anil Chadha: Yes. The line draws that we saw were predominantly late in the quarter when there is volatility in the capital markets. So that's really where we saw most of that come in. I wouldn't call it defensive in nature. I would just say given where the [ counter ] markets were, as we saw uncertainty in the market, customers drew on bank lines. So I'd expect that to abate through time as capital markets reopen, but nothing defensive in terms of what we're seeing. . Manan Gosalia: Got it. And then maybe on the capital markets side, I guess your expecting that trend to the lower end given volatility in rates. Most of your comments in the environment have been fairly constructive. So I guess what market conditions would move you back towards $100 million-plus range on capital markets revenues? John Turner: Well, the primary business that's impacted is our real estate capital markets business, and it's been soft now for 4 or 5 quarters based on just the rate environment. So as rates -- longer-term rates come down, we would see, we believe, a benefit in the real estate capital markets business, which would be important. And that would more than offset any impacts on other parts of the business. . Manan Gosalia: And Dana, all the very best. Dana Nolan: Thank you, Manan. Operator: Our next question comes from the line of Gerard Cassidy with RBC. Gerard Cassidy: And Anil, in talking about the loan loss reserve, I think you pointed out that the increases were tied to loan growth, but also the macro uncertainty out there. If the conflict in the Middle East takes decided to turn for the better. The straits opened up today as you probably saw the headlines. What would that do for the second or third quarter allowance does that start to reduce the loans as that macro risk drops meaningfully and kind of surprises all of us that it's maybe going to be resolved sooner than expected? Anil Chadha: Yes. And if you look on the waterfall that we included in the appendix, we attributed about $17 million of growth quarter-over-quarter to macro uncertainty. That's primarily what we're seeing in the Middle East. So to the extent that gets resolved and the other kind of second order effects resolve in a positive to neutral way, we could see a modest release in the allowance of that. I wouldn't say it's overly material, but we did feel appropriate to put up a little bit in terms of macroeconomic uncertainty, but that's the part of the allowance that I'd point you to. Gerard Cassidy: Very good. And then to follow up on the commercial loan conversation, that you guys have presented, you're not really big NDFI lenders as a regional bank, you're down at the bottom of kind of the group, which lowers the risk, of course. But what -- I guess, why haven't you maybe pursue it as aggressively as some of your peers in terms of the different categories of NDFI lending. What do you guys see there that makes you maybe a little more cautious? John Turner: Well, I think we just generally are more cautious, Gerard. And as we think about our lending activities, they're principally based on relationships that are established within our footprint. We have some businesses where we have specialized capabilities, and we actually do lend out of footprint. This would be an area where we're getting our feet wet, learning a little more about it. Today, we have relationships with about 20 -- just in excess of '25 funds, and those funds are fairly broadly distributed in terms of the businesses, the sectors that they're lending into total exposure, I think just above $3 billion to those funds within private credit, about $1.8 billion. So we're just in exposure, I mean, in outstandings. I think we're just trying to learn to understand can we build relationships, can we gain deposits? Can we participate in capital markets activity? Because that's fundamental to how we want to operate our business. We can't do that, then it's just not an appropriate allocation to capital for us. Gerard Cassidy: And Dana, hopefully, you have tons of fun in retirement. Dana Nolan: Thank you, Gerard. Operator: Our next question comes from the line of Ken Usdin with Autonomous Research. Kenneth Usdin: It was good to hear about -- sorry, let me start it again. First quarter credit quality was exactly as expected, taking care of that already expected stuff and then your outlook for the year looks good and there was good stability in the NPAs and some of the other metrics. So just are you kind of through that piece of taking care of some of that legacy stuff? And just your general line of sight on some of those other portfolios that you've mentioned in the past. John Turner: Yes. I would say, Ken, we previously identified office, multifamily, transportation and communications as portfolios where we have some credits we're working through, working out. We have generally seen most of that activity has been completed, but we still have a few credits of some size that we're working on. And so while we are indicating that we expect charge-offs over the course of the year to be between 40 and 50 basis points of the timing of which we get back within that range is still not entirely clear, but we think credit quality is continuing to improve, as indicated, reflected in our metrics. Nonperforming loans down to 71 basis points, criticized loans continuing to decline charge-offs should follow as their trailing indicator of improving credit quality. Anil Chadha: And I'll just add, as all that happens, our 1.68% allowance ratio should approximate down to the 1.62% that we disclose or kind of day 1 that assumes we resolve the credits that John mentioned, and that assumes that the macroeconomic uncertainty gets resolved in a positive way. The timing of which that happens, we'll see. That's where we think we'll end up based on the composition of our loan portfolio. Kenneth Usdin: Understood. Okay. And then just second thing on -- Anil, you're starting right off of the back following David, on the hedging and securities portfolio repositioning activity. Is that at all any adjustment to that higher for longer? Or is that -- is this more just kind of a normal course of moving some stuff further out to later time periods? I'm just wondering if it's just like normal course or if any adjustments you're making because the environment? Anil Chadha: No, it's just normal course as security shorten. They don't accomplish our balance sheet management objectives as they once did. And so we'll extend duration on the new securities that we purchase. So just an extension of what you've seen us do before. Operator: Our next question comes from the line of Matt O'Connor with Deutsche Bank. Matthew O'Connor: I just wanted to follow up on the fees. I guess some of these categories, if you look year-over-year, the growth was a little bit less than I would have thought like the consumer service charges flat operate up a little bit, hard flat? And maybe just talk about kind of some of those dynamics, and I know you gave some guidance for card in 2Q, but just kind of thinking about those categories maybe more medium term. Anil Chadha: Yes. So I'd say in terms of medium-term guidance, they are cyclically lower in the first quarter. They tend to peak in the second quarter and then kind of hold flat from there. From a year-over-year comparison standpoint, we do have some kind of one-off items, if you just look quarter-over-quarter, in particular, in terms of how we treated certain expenses associated with some of those programs. So there are some onetime changes if you just look year-over-year, would mute the growth. But in terms of past from here, we expect to peak next quarter at hold at that level throughout the rest of the year. Matthew O'Connor: And that will be for the card and ATM fees, right, to the... Anil Chadha: And the consumer service charges portion. Operator: Our next question comes from the line of Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: I guess first question, just around looking to your sort of messaging on the drawdowns towards the end of the quarter due to market, does that create a risk of payoffs? And I'm just wondering if some of the macro subsides markets are less volatile, do you see customers paying off and that credit then moves off balance sheet? And secondly, as we think about just capital markets, obviously, it's a more real estate bias. In your case, without getting any rate cuts for the year, do you think just CRE lending, real estate capital markets can still have a good year? John Turner: So maybe I'll answer the second question first. Yes, we continue to lean into that opportunity. We have actually a fairly significant portion of our portfolio is maturing towards the back end of the year. There will be some opportunities within that portfolio to help customers with permanent placement of those obligations. Additionally, we see other opportunities with customers who have debt and other places that will need to refinance. So I think the real estate capital markets business can still have a good year even if we don't get a lot of improvement in rate, but if we do, it gets materially better, we think. With respect to line utilization, about half of the increase in line utilization was attributable to our larger corporate customers. The other half to our market customers, who are continuing to invest in their businesses and grow. And while there is some risk that we'll see some paydowns amongst those larger corporate customers, we expect the middle market customers, again, to continue to borrow as they invest in their businesses. Pipelines are up for the year fairly significantly. And so we also expect new originations to overcome any paydowns that we might experience in the corporate space. So all in all, we feel still really good about our ability to deliver the loan growth that we've guided to. Ebrahim Poonawala: Got it. And then just maybe, Anil, for you or both of you and we think about the declining RWA density on the back of the capital proposals, how sensitive are you to managing to a certain level of tangible common equity ratio. Just any thoughts there? Anil Chadha: Yes. I wouldn't say that we're managing to a tangible common equity ratio. I'd say what we're thinking about really is, one, across all the changes that are being proposed, hey, we think they're positive. We'll continue to manage to a total CET1 ratio within that 9.25% to 9.75% range. We think it's appropriate. We'll manage through that through time as we get finalization of the rules, with respect to the proposed RWA changes themselves. We have to think about not just the regulatory implications, but other constituents as well and how they think about RWA and the capital that's needed on our balance sheet. Again, we think all of this is positive to what we can do to capital through time. But our caution will be one tied to finalization of the rules and two, just to make sure that we understand where each of the other constituents land as well when it comes to these proposed changes. Ebrahim Poonawala: Got it. And Dana, all the best, and I'm sure we'll stay in touch. Take care. Dana Nolan: Appreciate it. Thank you. Operator: Our next question comes from the line of Dave Rochester with Cantor Fitzgerald. David Rochester: Just want to go back to the credit discussion. I'm trying to figure out how you're thinking about the trajectory of the problem loan buckets from here. Just given all the work that you've already done, are you expecting to see more meaningful moves lower in NPAs and criticized assets as we get to the back half of the year? And then if you could just update us on your progress in the transportation book, that would be great. John Turner: Yes. We should see -- continue to see some improvement in credit quality and NPAs could come down a little further. I would say if you look back over time, NPAs have averaged closer to 1%, I think. And so I wouldn't expect them to come down too much further than 71 basis points. Maybe we get into the 60s, but I don't see a lot of movement beyond that. But I would tell you that we think credit is pretty well normalized in our book given the composition of our portfolio today, and we feel good about our ability to deliver on the 40 to 50 basis points of charge-offs as we indicated. With respect to transportation, we're still working through a couple of credits there. But generally speaking, I think we have identified and resolved most of the exposure. We provided some slides in the deck. I can't recall which slide it is exactly on transportation, 24, give you a little insight into our exposure there. And think of what you'd see is, one, we've had a fairly significant reduction in the size of the outstandings or commitments representing about 1.2% of total loans. NPLs have come down to about $51 million. And again, just look at our reserve against that portfolio, we think it's appropriately reserved for any losses that we might experience. David Rochester: So you're in the latter innings on that one [indiscernible]? John Turner: Yes, we are. David Rochester: Great. And then just back on the securities repositioning you did, just given today's rates, is there any more you could do there? Anything that's left on the table that you could potentially source at some point in the future? Anil Chadha: Yes, I'd say it's small. There's not much right now. What we'll continue to look at as securities as they get closer to maturity, that creates an opportunity, but we'll need to see where rates are to see if it makes sense to do. As you've seen from us in the past, we're very mindful of thinking about it through returns, payback period, really strong payback period on this trade we did 2 years. So we're disciplined when it comes to using capital in this way. David Rochester: Anil, welcome. And Dana, it's been great working with you. Good luck and enjoy. Anil Chadha: Thanks. Operator: Our next question comes from the line of Erika Najarian with UBS. L. Erika Penala: Anil, just a two-parter for you on CET1 first. Given your risk profile, what was the consideration? Or what are your considerations in terms of RSA, which you showed us versus ERBA? And you mentioned other constituents. A few of your peers have talked about the ratings agencies and perhaps because of the benefit to RWA, particularly for the regional banks that there might be a tendency for the rating agencies to look at unrisk-weighted assets. or sort of unrisk weighted capital measures. And so just wanted your comments on those 2 topics. Anil Chadha: Sure. So you really hit the second point. That is the other constituency that we need to be mindful of. And as you alluded to, some use direct regulatory risk-weighted assets and their approach. So we will need to see how they think about this. And we'll clearly work with them to share our thoughts on that, but you really hit the second piece there. On the first piece, just to walk you through our preliminary view of the 2 approaches. And so we communicated our 100 basis point expected impact under the standardized approach. We've looked at the ERBA approach. In particular, as you know, the 2 primary benefits that we would get through that approach are the incremental benefit of risk weights on investment-grade credits that we've talked about today. So that's meaningful. And then also other retail exposures where you could get an incremental lift in terms of risk-weighted assets. The counter to that for us is the operational loss add-on. And so our current oculation of that for us actually overwhelms the benefits from the other two. It's something we have to continually assess. We're fortunate that as proposed, you kind of have an evergreen option to opt in, which is beneficial. But for us right now, the operational loss component overwhelms the benefits, in particular, from investment-grade credits and retail exposures as currently proposed. L. Erika Penala: Got it. And just -- and Tom will follow up with you a little bit on capital during our catch-up call. But the second question I want to pose is, maybe just directly asking you mentioned that deposit costs are a big factor in terms of your net interest income outlook. And again, you must be very flat or that a lot of your peers, both money center and regional are coming into the markets that you've long dominated if the Fed doesn't cut, what is sort of the trajectory for deposit costs at regions? In other words, are you -- will you be able to keep deposit costs flat if the Fed isn't cutting this year? Anil Chadha: Yes. We will. And we think -- I talked about the 1.69% exit rate. We think that will continue into the second quarter, and it will decline modestly. Total deposit costs will decline modestly from there. Again, we think the competitive pressures banks are kind of performing as we'd expect in terms of how they're managing deposit costs, and we expect that to continue into the future. Operator: Our next question comes from the line of Chris McGratty with KBW. Christopher McGratty: Intra-quarter, you talked about living in the 16 -- the high end of the 16% to 18% return on tangible common equity range for the next 3 years. You were slightly above that next -- last year. I think the Street's got you a little bit over 18%. Is the outlook that those comments were made now that we have some clarity on regulatory how much does the numerator versus denominator play in maintaining that level of profitability? Anil Chadha: Yes. So looking forward, there's a couple of things to think about. One is with let's talk about the proposed capital changes first. If those go in as proposed and if the other constituents don't meaningfully impact how we think about capital, that in and of itself is a tailwind to returns to the extent we reduce the buyback shares from that. so that would prop up returns overall. But look, our -- the reason we frame up our guide of 16% to 18% is really because, as we've said before, we need to be top quartile when it comes to overall returns. We don't need to be #1. We need to make sure we make all the right investments into our business. And we believe that we can continue to do that. We do it this quarter in terms of the growth that we saw. But when we do that, we're going to continue to grow income and so returns will be increased from that as well. But the point of us making that statement is we want to reiterate that we are well positioned to grow we do not feel like we have to be #1 in our peer group. We're committed to invest capital as long as we get a good return out of it. But that's really why we positioned it the way we have. We'll continue to monitor the peer landscape Back to my earlier point, everyone is going to benefit to some degree from these capital proposals. Others are taking actions where they think they may be able to raise returns. And so we'll continue to reassess what the right levels are for us through time, but our goal is to remain top quartile amongst our peer set. Christopher McGratty: That's great color. And my follow-up would be just more capital beyond buybacks. You've been clear about inorganic not being a focus today. I guess, maybe remind us where you are with some of the projects internally. As you fast forward to the back half of the year, is that something where you may have to consider to be more flexible with inorganic growth if the right opportunity came about? John Turner: We'll deliver the loan system conversion. The end of May, we've got a fairly significant improvement in our digital offering to particularly small businesses that delivered over the course of the summer and then begin piloting our deposit conversion in the third quarter. And that project continues to progress on track. We feel really good about it. And so that will position us, we believe, to do a number of things, focusing on how do we continue to improve our business improve the customer and banker experience once we get that work done. So those are important areas of focus for us. In terms of what it means for inorganic growth, we're going to stay focused on executing our plan. We believe our plan will allow us to deliver top quartile results for our shareholders, consistent with the same good execution that we've experienced over the last 5, 6, 7 years, and we'll -- that will be our focus going forward. Operator: Final question comes from the line of David Chiaverini with Jefferies. David Chiaverini: Follow-up on deposit costs. There's been some discussion about how cash optimization by customers in an AI world, could pressure deposits at banks that have a lower cost of deposits relative to peers. Can you talk about your view on this and how Regions plans to protect its market share? Anil Chadha: Sure. No, it's a great question. And what could happen from AI is kind of proliferating several parts of the economy. When we think about the impact on deposits, we kind of start with the nature of our customer base. So our customer base average deposit is about $5,200. And when we think about the ability for customers to move money around what our customers are really using their account for is for ease of payments. And so we have to stay focused on making sure we're providing them the most efficient way to make payments across their daily lives, a much lower percentage of our customer base is really yield seeking. And so that, in my opinion, will be the first place where you will see the use of AI allow people to move funds around. I'd also say it's pretty easy to move funds around today. I mean it doesn't take too much effort to move cash in and out of accounts to get a higher yield. I'm sure AI can do it marginally quicker, but I'll just say, I think today, it's pretty efficient as well. So I think it's something that could play out. I think it will play out more severely for those customers that have larger balances seeking yield. We see them do it today. But as of right now for our customers, we need to make sure we're giving them all the payment capabilities they need to be done efficiently. And we'll continue to monitor this space, but that's kind of how we're thinking about it right now. David Chiaverini: Very helpful. And then shifting over to the hiring pipeline, how does that look given the M&A that's occurring in your footprint? John Turner: It's good. It's good. We have hiring plans in our commercial banking business, in our wealth banking business, in our branches. And we're moving along having accomplished more than 2/3 of the hiring that we hope to do as part of our plans, part of our 3-year plan. And so we feel really good about the quality of the bankers that we're hiring and the opportunities that we have associated with that. It takes a little while for those bankers to begin to generate new business once they get settled in. So we'd expect to see the impact of some of that hiring in the latter part of this year and into 2027, which is again another tailwind for growth, we believe. Anil Chadha: Yes. I'd just say even for our existing banker population, our platform is really delivering them the opportunity to grow their business. We're seeing a really nice decline year-over-year in attrition, even amongst our existing bankers. And so for us, we view that as a great lot of confidence that they have the platform they want to be able to deliver to their customers. David Chiaverini: All the best, Dana. Dana Nolan: Thank you. John Turner: Okay. Thank you very much. Well, I appreciate everybody's participation. And once again, congratulations to Dana. We appreciate her leadership, commitment, connectivity with all of you in the investment community. We will miss her, but we're confident Tom is going to do a great job. So thank you, and have a great weekend. Operator: This concludes today's teleconference. You may disconnect your lines at this time.
Ken Murphy: Good morning, everybody, and thank you for joining Imran and me as we talk through our results for the year. We will also provide an update on our strategic ambitions as we set ourselves up for longer-term delivery in an ever-changing retail landscape. I'm really pleased with our performance across the last year. Against a backdrop of increased competitive intensity, we took decisive action to further strengthen our investments in price, quality, and service. These actions resonated strongly with customers, driving further gains in customer satisfaction and continued growth in market share. Our commitment to delivering the best value for customers remains firm. In a period of continued pressure on household incomes and global uncertainty, this matters more than ever. In a year of strong momentum, customer satisfaction stepped on further, and we reached our highest market share for a decade. This translated into a strong financial performance with both profit and cash flow ahead of our guidance ranges. Alongside strong operational execution, we have been working across the business to unlock long-term growth opportunities, leveraging our unrivaled customer reach, data insights, and digital expertise, including the use of AI. As part of my strategic update a little later, I will cover some of this progress in more detail. Increasing customer satisfaction and market share are priorities for us. Following our progress over the last four years, we were pleased to see further momentum this year. Our Net Promoter Score increased ahead of the competition, including an improvement in value perception. In the U.K., our market share reached 28.5%, outperforming on both a volume and a value basis and taking our total share gain across the last three years to 120 basis points. In Ireland, we are now in our fourth year of gains, with market share increasing 32 basis points over the year to 24.2%. We started last year with a strong price position versus the market, and despite an increase in competitive intensity, we've exited the year in a similarly strong position. Across the last 12 months, our investments into price, including tripling the number of products in everyday low prices to 3,000, running alongside over 10,000 Clubcard prices and more than 600 Aldi Price Match lines. We finished the year with over 10,000 prices lower than at the start of the period. Quality is a crucial part of the value equation, and I am proud of our work over the year to deliver continuous innovation and improvement across our ranges. Finest is a key part of this story, delivering sales growth of 15% with our popular dine-in deals performing especially well. We also launched exciting new ranges like Chef's Collection, which offers restaurant-quality centerpieces designed by Tesco's in-house development chefs. It's not just about Finest. Our frozen range refresh in the second half, our biggest for many years, saw hundreds of new and improved products across tiers, from tasty new recipes and prepared meals and pizza to delicious new frozen desserts. Our colleagues are the driving force behind our performance, and I would like to extend my personal thanks for all their hard work over the past year to deliver these strong results. In recognition of the exceptional service they have given customers, we're really delighted to be announcing a GBP 65 million performance award for our hourly paid colleagues in stores, distribution centers, and customer engagement centers. This follows a further GBP 209 million investment in colleague pay for our U.K. store colleagues, bringing our total hourly pay increase to 43% over the past five years, which comes alongside a comprehensive range of colleague benefits. One of those benefits is our Save As You Earn company share scheme, and I was particularly delighted to see that over 22,000 colleagues, mainly those working in store and our distribution centers, were able to benefit from a GBP 134 million payout from the schemes maturing this year. By consistently delivering for customers, we are creating long-term sustainable value for all our stakeholders. Our Fruit & Veg for Schools program continues to make a significant impact in some of the most disadvantaged communities across the U.K. It has now expanded to 500 schools, offering children improved nutrition and education on healthy eating. A further 320 schools in Ireland also benefit from our Stronger Starts food program. Strong supplier relationships and collaboration are fundamental to our success, and we were delighted to be ranked first in the Independent Advantage survey for the 10th year running. We've also made good progress with our Planet Plan, including a 68% reduction in our Scope 1 and Scope 2 emissions, well ahead of our plan for a 60% reduction by the end of 2025. For our shareholders, we returned GBP 2.4 billion through dividends and buybacks during the year. I'll return shortly to provide you with an update on our strategic ambitions, but before that, I'll hand over to Imran. Imran Nawaz: Thank you, Ken, and good morning, everyone. I'm really pleased with the performance across the year. Following several years of good progress and against the backdrop of elevated competition, we saw consistent market share gains and improved customer satisfaction, which is reflected in our strong financial performance across the year. I'll now take you through our financial performance before taking a step back and setting out our longer-term financial priorities. This year, our statutory results cover a 53-week period. For comparability, the headline results are presented on a 52-week basis unless otherwise stated. Group sales grew by 4.3% at constant exchange rates. This included a 3.5% increase in like-for-like sales, reflecting growth across all our operating segments. Group adjusted operating profit increased by 0.6% at constant rates to GBP 3.15 billion, driven by sales growth and progress on our Save to Invest program, offsetting operating cost inflation and investments in value, quality, and service. Our headline earnings per share increased 6% year-on-year to 29p, benefiting from our ongoing share buyback program and growth in profit after tax. Our cash delivery was strong, with GBP 1.96 billion of free cash flow up 12% year-on-year and above the upper end of our guidance range. We have proposed a final dividend of 9.7p per ordinary share, resulting in a full-year dividend of 14.5p. This represents growth of 5.8% and is in line with our policy of setting our annual dividend at broadly 50% of earnings. Our balance sheet remains strong. Our net debt, including capitalized leases, was GBP 10.56 billion at the end of the period, with our net debt-to-EBITDA ratio at 2.1x. The U.K. and Ireland saw total sales growth of 5% and adjusted operating profit growth of 0.7%, with further volume and value market share gains and progress in Save to Invest more than offsetting significant investments into the customer offer and operating cost inflation. Booker sales increased by 0.6% and adjusted operating profits grew by 0.7% year-on-year. Sales growth in our Core Catering and Retail businesses, together with a strong Save to Invest contribution, more than offset operating cost inflation. In Central Europe, our sales grew by 3.7%, with the adjusted operating profit performance reflecting the net effect of the benefit of sales growth, a further contribution from Save to Invest, and lower rental income following the sale of some of our mall properties in the prior year. Now what I'll do is I'll go through each market's performance in more detail, starting with sales before moving on to profit. In the U.K., sales growth of 4.9% included like-for-like sales growth of 4.2%. Our food like-for-like sales grew at 5.2%, with a strong contribution from fresh food up 6.9%. Finest was once again a standout performer and grew 14.5% over the year, driven by strong volume growth. Our clothing like-for-like sales grew by 5.1%, driven by womenswear, with expanded ranges in activewear and our curated F&F Edit ranges both performing very well. Like-for-like sales grew across all channels, including large store like-for-like of 3.9%. We also took share across all channels, including 71 bps of market share gain in convenience and 30 bps in online. U.K. online sales grew by 11.2%, driven by volume growth, and included a circa two percentage point contribution from Tesco Whoosh, where we extended national coverage to over 70% of households. Average online orders per week for our grocery home shopping business grew by 6% as we rolled out more slots to customers and made further improvements to our website. In Ireland, like-for-like sales grew by 4.6%. Total sales were up 6.6% at constant exchange rates, including the contribution from nine stores we opened in the year. Food like-for-like sales grew by 5.1%, supported by a fresh food offer and further growth in Tesco Finest. As in the U.K., we grew across all our channels, with online delivering 17.4% growth as we reached over 94% national delivery coverage. Home and clothing like-for-like sales were down 1.8%, reflecting the impact from the transition to a commission model for toys as in the U.K. Booker like-for-like sales increased by 0.2%, despite the ongoing decline in tobacco sales. In Core Retail, like-for-like sales were up 2.2%, and we continued to expand our Symbol brands, adding a further 369 net new partners. Core Catering like-for-like sales grew at 3.8%, and customer satisfaction scores improved as we continued to deliver great value and availability for our customers. Growth was further supported by Venus, our specialist wine and spirit merchant, as well as the benefit from good weather over the summer. In Central Europe, like-for-like sales grew by 2.2%, with fresh food up 4.1%, supported by our investments in value. Finest performed strongly with over 30% sales growth. All three of our channels grew over the period, with online reaching 17.5% growth, while growth in large stores was impacted by softer home and clothing sales, reflecting lower consumer confidence in the region and poor weather during key trading periods. Customer satisfaction continued to grow through the year, and we stepped up our customer rewards as we celebrated 15 years of Clubcard in the region. Let's now turn to profit. At a group level, we delivered GBP 3.15 billion of adjusted operating profit, up 0.8% at actual exchange rates. Our strong trading performance, together with a GBP 535 million contribution from Save to Invest, more than offset the impact of our significant investments in the customer offer and elevated operating cost inflation, including from increased regulatory costs. This slide reconciles adjusted operating profit to statutory profit after tax, which is presented on a 53-week basis. Total adjusting items represent a net charge of GBP 153 million. This includes the ongoing amortization of acquired intangible assets of GBP 78 million, principally relating to the merger with Booker, and a non-cash net impairment charge of GBP 53 million. Restructuring costs mainly relate to our Save to Invest program, including costs associated with our multi-year program to optimize our distribution network in the U.K. We incurred GBP 28 million in separation costs relating to the disposal of our banking operations. We do expect the transition to complete in the current financial year. We delivered strong free cash flow of GBP 1.96 billion versus GBP 1.75 billion last year. Cash generated from operations increased by GBP 522 million, driven by profit growth as well as strong working capital inflow of GBP 385 million. The working capital inflow was mainly driven by our sales performance, strong working capital management, and higher non-trade payables. Cash CapEx was GBP 1.5 billion. Looking back over the last five years, our disciplined approach to investing in high-return areas has fueled sustainable growth and cash flow. This, in turn, has allowed us to steadily increase our capital expenditure while significantly improving return on capital employed, which remains well above our weighted average cost of capital. Over the period, we have continued to return cash to shareholders in the form of dividends and share buybacks. Since the commencement of our share buyback program in October 2021, we have bought back GBP 4.3 billion worth of shares at an average price of GBP 3.17 per share. This slide provides some additional detail on the nature of our capital investments. Our core operations are the foundation from which our opportunities are built. We continue to maintain and refresh our estate, ensuring that customers get the store and online experience they expect from Tesco. We are also investing strongly into productivity and growth initiatives. Our Save to Invest Program has allowed us to simplify, become more productive, and reduce costs across our business. This includes the ongoing optimization of our distribution network, which powers our market-leading availability. With a focus on leveraging our existing assets, our future growth opportunities are generally capital light. The capital that we do spend is focused on high-return areas such as technology, including investments into new digital platforms and AI. Looking now to the balance sheet, which remains strong. Net debt was GBP 10.6 billion versus GBP 9.5 billion last year. The increase is mainly due to the prior year including around GBP 700 million of proceeds from the sale of the group's banking operations, which we returned to shareholders during the course of this year. Lease renewals and extensions also drove GBP 168 million increase in lease liabilities, and there was GBP 144 million net outflow for property transactions, primarily the buyback of 7 stores in the U.K. Our net debt-to-EBITDA ratio is at 2.1x, and our fixed charge cover is 4.1x, in line with the prior year. During the year, alongside the scheme's trustees, we agreed to triennial funding valuation for our principal defined benefit pension scheme. On a technical provisions basis, the funding position of the scheme remains in surplus, and it was therefore agreed with the trustees that no pension contributions would be required from the group. Our progress across the last year builds on our strong delivery since we first set our multi-year performance framework in 2021. We are proud to have delivered average sales growth of 5.2% across the period, alongside group adjusted operating profit growth of 7.9% and adjusted EPS growth of 12.2%. With nearly GBP 8 billion of cumulative free cash flow across the four years, we have comfortably exceeded our expectations of cash delivery. Our capital allocation framework has been a crucial foundation for our financial performance. In a moment, Ken will cover our evolved strategic ambitions, and as we position the business for future growth, the framework will remain central to how we execute our strategy and create long-term value. Our first priority is to reinvest into the business and strengthen our customer proposition, prioritizing high-returning areas and supporting sustainable long-term growth. As we reinvest, we will remain committed to maintaining a solid investment-grade balance sheet. We continue to deliver a progressive dividend, targeting a payout ratio of roughly 50% of earnings, consistent with our recent track record. We also remain disciplined, yet alert to inorganic growth opportunities that complement our longer-term strategy. Finally, any surplus capital after these priorities will be returned to shareholders. For the year ahead, we expect around GBP 1.6 billion of capital expenditure, and we are announcing today a further GBP 750 million share buyback. We first set out our multi-year performance framework in 2021, and it continues to guide our approach. By focusing on improving customer satisfaction and growing, or at least maintaining our U.K. market share, we intend to drive top-line growth. By leveraging our assets, growing new revenue streams, and targeting productivity initiatives to offset inflation, we aim to grow absolute profits and maintain sector-leading margins. Since setting out the framework, our delivery has exceeded our initial expectations. With our confidence in future cash flow increasing, we're upgrading our medium-term free cash flow guidance to between GBP 1.5 billion and GBP 2 billion per year versus the old range of GBP 1.4 billion and GBP 1.8 billion per year. In summary, I'm pleased with our strong performance across the year. We have delivered further improvements in customer satisfaction, market share gains, and cash flow ahead of guidance. Our performance and capital frameworks continue to guide us and underpin our delivery, and we have returned GBP 2.4 billion this year to shareholders through a combination of dividends and share buybacks. For the year ahead, we are providing a wider range of guidance than we were previously planning, reflecting the increased uncertainty caused by the conflict in the Middle East. Much will depend on the duration of the conflict and the consequential impacts on U.K. households and the economy more broadly. At this stage, we expect group-adjusted operating profits of between GBP 3 billion and GBP 3.3 billion. We expect free cash flow within our upgraded medium-term guidance range of GBP 1.5 billion to GBP 2 billion. I will now hand back to Ken, who will provide an update on our strategic ambitions. Ken Murphy: With our highest market share in a decade, meaningful growth and new revenue streams, and strong free cash flow, our delivery against the multi-year performance framework we set out in 2021 has exceeded our expectations. As we look to the future, we have built strong digital capabilities, including in retail media and personalization. Our success has been shared with our broader stakeholders too, including investing more than GBP 1 billion in store colleague pay over the last five years. However, the retail landscape continues to evolve and so do we. Households have had to adjust to persistent cost of living pressures and competition remains intense, with new entrants and technologies giving customers more choice than ever. Customer expectations are increasing too. In addition to fantastic value, customers also want food that supports their health goals from a brand they can trust to do the right thing. To continue delivering for all of our stakeholders in this changing landscape, we have evolved our strategic ambitions into five mutually reinforcing goals. These ambitions position us to deliver even better value to our customers while driving sustainable long-term growth. Our five ambitions form a connected ecosystem, all designed with one clear purpose, continuing to deliver for our customers. Over the next few slides, I will take each ambition in turn and explain what they mean to us, what we have achieved so far, and offer some insight on how we are building for the future. Our first goal is winning in food. Delicious, affordable, and nutritious food matters more than ever to our customers and their families, and we know that they are looking for the best combination of price and quality across our ranges. With 3,000 everyday low prices, over 10,000 Clubcard prices, and more than 600 products on Aldi Price Match, we offer customers an unrivaled value proposition. We're proud of the improvement we have made in our price position in recent years, but this is an area where we can never be complacent. As our digital and personalization capabilities evolve, we are constantly looking for new ways to help customers to save. Of course, value for money is about quality as well as price, and we're continuing to invest in quality at every tier. Finest has been a great success story for us, but there is so much more to go for. Through developing new products, expanding ranges, and getting Finest in front of more customers, including through AI-powered ranging tools, we aim to grow Finest well beyond GBP 3 billion in sales. At the same time, we're launching new products that reflect changing customer trends and preferences, such as expanding our Gut Sense and high-protein ranges. Through our market-leading presence across stores, online grocery, and rapid delivery, combined with the reach of Booker's wholesale business, we are better placed than anyone to serve customers' food missions wherever, whenever, and however they want to be served. Whoosh is a great example of this. Launched just five years ago, Whoosh has grown to be a meaningful part of our online offer, generating over GBP 400 million of sales and now covering over 70% of U.K. households. We see more to go for in this fast-growing part of the market. This year alone, Whoosh grew by 51% in the U.K., and we have started to roll out the service in Ireland too. We've achieved this largely through using existing infrastructure and resources, demonstrating our ability to grow new revenue streams in a capital-light way. The frequency and trust we have built through food allows us to serve families a much wider range of products and services, and we want to help meet even more of their everyday needs. Some of these are well-established. For example, since its launch in 2001, F&F has been known for providing stylish and affordable clothing at outstanding value, available in our stores and now online too. Tesco Mobile is the U.K.'s largest mobile virtual network operator. With over 5 million customers, it was recently voted the U.K.'s best network for customer service for the fifth year running. Our insurance and money services business is providing cover to our customers through 2.5 million policies, and 4 million customers are accessing a range of banking products through our partnership with Barclays. We see huge potential to enhance and grow our existing products and services, and F&F is a great example of this. F&F online has made an encouraging start following its launch last year, but we know we can go further enhancing the customer offer. Later this year, we will be launching an exciting new F&F website, which includes a fashion-forward look and feel, greater style curation, and smarter search functionality. In the past, expanding into new retail categories tended to be expensive and high risk. Our approach is focused on leveraging what we already have and committing capital in a disciplined way. Marketplace is an example of this and has great potential. We are making good progress and already have seen the benefits it can bring to the wider business. Marketplace has now served over 1 million customers, and more than half of them have never shopped online with Tesco before. As part of refining the offer, we have recently migrated our platform to Mirakl to improve the seller onboarding process and enhance the customer proposition. Our 355 in-store pharmacies give us a real point of differentiation in the market. Combined with our ability to offer an even wider range of healthy, nutritious food, they give us a great opportunity to be customers' first choice for health and wellbeing. We already serve 0.5 million customers per week with everything from prescriptions to vaccinations, blood pressure checks, and expert advice on a range of common conditions. Our pharmacies also play a key role in our long-standing charity partnerships with Cancer Research, the British Heart Foundation, and Diabetes UK. By using our unique data and insights to build new partnerships and revenue opportunities, we can become the most strategic partner for our suppliers for innovation and brand building. Clubcard is the U.K.'s largest loyalty program, regularly used by more than 24 million households. Spanning our offer from food and telecoms to banking, it gives us an unrivaled understanding of our customers, enabling us and our supplier partners to serve their needs more effectively. Tesco Media is the largest closed-loop media and insight platform in the U.K. Leveraging our expansive store and digital canvas, it has seen significant growth in recent years and ran over 12,500 campaigns in the last year alone, with over 90% of advertisers increasing their spend on the platform year-on-year. The Tesco Media team are innovating at pace. For example, our recently launched AI-powered creative studio tool helps advertisers streamline the production of digital content, making the platform accessible for all brands, regardless of their size or budget. Building strategic brand partnerships is about more than retail media. The scale and breadth of Tesco means we are uniquely placed to help brands grow. Our platform can offer everything from access to distribution through our grocery and wholesale channels to self-serve tools that provide insights into customer behavior and opportunities to grow further. Our well-established accelerator program helps small and trend-led brands, offering mentoring and development experience, including supporting product formulation, marketing, and enhancing their supply chains. We are already partnering with hundreds of suppliers to drive development and innovation, and we think there is potential to bring our expertise to many more. Underpinning all of this is our dunnhumby business, a market leader in data science. dunnhumby's team of data scientists, engineers, and retail consultants further develop Tesco's intelligence layer, connecting customer and brand insight, analytics, and global retail expertise. Using dunnhumby's data science and AI to connect the dots across our retail business is helping us to make smarter decisions at pace. For example, with dunnhumby, we're using AI-enabled data science to transform ranging decisions, moving a process that took weeks into minutes. Our next goal is to be connected, personalized, and loved by customers. Alongside our stores, our colleagues are central to the customer experience. We are incredibly proud of the service our colleagues give customers day in, day out. Last year, we invested in over 1 million hours of training for our U.K. store colleagues. We want our colleagues to be our biggest advocates. We have great foundations for this, with the proportion of our colleagues recommending us as a place to work and shop significantly above industry averages. With the largest network of stores in the U.K., we continue to meet local needs better than anyone. From large stores offering our full range of services to Express and One Stop serving the local communities, we continue to invest in our estate with a particular focus on our fresh offer, helping every Tesco become the preferred store in its community. Customers should feel rewarded every time they shop with us. Clubcard has been at the heart of this for over 30 years, and we're always looking for ways to make Clubcard even more rewarding, whether it's new ways to collect points, making Clubcard points go further, or small but meaningful gestures that make a customer's day a little better. By harnessing advancements in AI, the power of Clubcard data, and our own digital capabilities and partnerships, we see enormous potential to make every interaction more seamless and relevant by anticipating needs, offering timely nudges, and making smarter recommendations. Our strategic partnerships with Adobe and WPP are an important part of this, unlocking new opportunities to provide real-time personalized content, whether direct to customers or through third parties. Another opportunity is personalized offers. We have made great strides on this already, from personalized coupons through to gamified experiences like Clubcard Challenges. We're pleased to take this a step further with the recent launch of Your Clubcard Prices to 1.5 million customers and a wider rollout coming later this year. Key to personalization is showing customers that we understand them, offering interesting and timely communications that inspire and anticipate their needs. Our new brighter and bolder style of customer communication is one of the ways we're achieving this. We're also excited about our new AI assistant with large-scale trial launched to around 280,000 of our colleagues ahead of a wider launch later in the year. The AI assistant is part of the Tesco app and will initially help customers with meal planning, offer inspiration, and help build shopping baskets. We are always looking for ways to make our business even more sustainable for the long term. We have a strong track record of making Tesco simpler, more productive, and more cost-efficient through our Save to Invest program. This has helped us to unlock GBP 2.2 billion worth of savings over the last four years, providing the fuel for our investments into the customer offer and higher pay for colleagues. We are also investing to strengthen our resilience, efficiency, and sustainability. Ready for future growth, we recently opened a new semi-automated fresh distribution center in Aylesford, and during the year, we started construction on our new distribution center at London Gateway. Our work to further optimize the business will continue with a target to unlock a further GBP 500 million of saving in the year ahead. Supply chain resilience is central to managing risk. We're proud of the strength of our supplier relationships. With long-term commitments to many of our key partners, they can have the confidence to make long-term investments in their businesses. Technology plays a key role in supply chain resilience, and we have developed new and unique risk mapping capabilities that identify and help us address potential sourcing challenges. As British agriculture's biggest customer, we're committed to deepening partnerships with farmers, including through our six Tesco Sustainable Farming Groups, covering everything from cheese to lamb. The farming industry faces a long list of challenges, and the Sustainable Farming Groups provide a forum to collectively improve innovation, quality standards, and industry collaboration. We see a much wider opportunity for technology and AI to further enhance our business. Over the last six years, we have doubled the size of our technology team, and we are equipping our colleagues with tools that simplify everyday tasks, freeing them to focus on what matters most. AI is evolving at an extraordinary speed, so putting the right frameworks and governance in place is essential, both to protect our business and to capture the full value of these innovations. We've recently consolidated nearly 250 individual work streams into a single coherent AI strategy focused on four domains, customers, colleagues, supplier partners, and operational efficiency. Our Planet Plan is another key element of our wider business sustainability ambitions. We were an early adopter of science-based emission targets, and we're making good progress, having now reduced Scope 1 and 2 emissions by 68% versus our 2015 baseline. We were also pleased to reach our target at year-end of 65% of our sales being classified as healthy, and we've got ambitions to go further. Achieving our individual ambitions can help us deliver even better value for customers. The real power comes from bringing these five goals together, creating a leading food-first retail ecosystem. By winning in food, we can build frequency and trust, which helps us meet more everyday customer needs. That, in turn, grows household spend with us, generating capital-light revenue streams and a richer, more holistic data set. As we combine that data with our store and digital footprint, we can build stronger and more strategic supplier partnerships. Partnerships that further reinforce our ability to win in food. At the center of this ecosystem is the most connected, personalized, and loved customer experience, holding everything together. Throughout it all, our purpose remains clear: delivering even better value for customers, and in doing so, generating long-term sustainable growth for all of our stakeholders. Thank you all for your time today. Imran and I would now be delighted to open the floor for your questions. Operator: [Operator Instructions] We'll now take our first question from Rob Joyce. Rob, please go ahead. Robert Joyce: I might try three, but the first one, just a backward-looking one. In terms of last year, I think this time last year, we were thinking EBIT would come in at GBP 2.85 billion and delivered sort of 10% ahead of that. Can you just tell us what went differently to expected? How did you manage to deliver so far ahead of that? Would be the first one. Second one, I guess you mentioned that the range for the year ahead is a lot wider than it would've been. I guess to help us understand the underlying business trajectory on the 26th of February, what do you think that range was going to be? The final one, Ken, a lot of focus on areas that we maybe haven't discussed as much before in the business outside of core food. Can you give us an idea as to the size of their contribution to the business today? Going forward, do we think of those as kind of funding investment in price, or are they margin accretive, EBIT growing parts of the business? Imran Nawaz: Yes. Let me just maybe take the first two. In terms of what went differently to what we expected. You're right. When we set out in April, we said we would make sure that we continue to protect the price position that we set out over the last four years and make sure that we do not cede any ground on that. We spent the money, we invested, and the differences between the guidance that we gave versus what we delivered, the investment choices we made basically had better returns. We invested in price, we invested in quality, we invested in range, we invested in hours, and those things worked. I would say to you the proof point of that was the market share gains that we delivered landed us in volume growth pretty much every single month of the year. That really combined with the saving problems that we have, delivered the profit growth that we saw. What I'm pleased to be able to say to you today is, I didn't start the year thinking we'd grow profits last year, and the fact that we grew profits and EPS of 6% is a nice outcome because it's coming from market share gains. I would say to you, that's the one thing that I really love about the delivery for the year. In terms of the range. Look, I'm not going to go maybe into what if the conflict wasn't there sort of situation, but what I would say to you is to give you some color on the range. Ultimately, we aim to grow our business every year, right? We want to deliver the best performance that we can every single year as we set out to do. You see that in Save to Invest. We want to continue to gain shares. We want to continue to run our program. There is the uncertainty driven by the conflict, as you know, and the duration and the impact of that is an unknown. What I want to make sure, what we want to make sure is if that conflict continues or if the impact's duration lasts longer, that we can continue to execute the program that we have. If we're at the bottom end, to your question, that really means that we would have the flexibility to continue to do what we want to do. At the upper end, it means it's the same program that we want every year, which is gain share, gain volumes, and continue to do well. Ken? Ken Murphy: Yes. Thanks, Rob. In terms of contribution of activities outside that core food business, I think if you kind of walk through our evolved strategy, the way we described is actually the strategy starts and ends with core food and building and maintaining exactly what Imran has just described in terms of a reputation for being the best value in the industry, being the most innovative in terms of product quality. Being the best for availability and customer service, and then being the most convenient for ease of access. That's really at the heart of it. Around that, as you've seen, we have, over the last number of years, started to build additional ways of serving customers that are not necessarily core food. They include things like pharmacy, things like our cafe business, things like our mobile phone business, our financial services business, and of course, our media income and supplier services business through dunnhumby. Every one of those have delivered a meaningful improvement in contribution over the last four to five years and have been meaningful contributors to profit alongside, of course, market share growth, which has also been a big engine of our performance over the last three to four years. At the end of the day, the plan is to be able to reinvest the earnings from those activities back into the core business to continue to grow and create this virtuous cycle. So that's, if you like, the kind of elevator pitch in terms of how we're evolving our thinking on strategy. There are, of course, a couple of areas, and Marketplace would be a good example, where we're at the investment stage of that cycle, where we're building the capability, where we're creating the proposition that won't be contributing meaningfully yet to profits and may not for a few years. Robert Joyce: Imran, I guess quickly follow up. I guess just to understand the guidance. I guess if trading continues as we see it right now, are we hitting midpoint or are we getting to the top end of that guidance? Imran Nawaz: Look, let me keep it in simple terms. So far, we haven't seen any real discernible change in consumer spending behaviors, right? You see that in our Kantar data. You see it in both the volume and the value share. I feel good about how we started the year, but it's early days, and I would say to you that we aim to grow profits every single year. Operator: We'll now take our next question from Manjari Dhar at RBC. Manjari Dhar: I just had two, if I may. My first one, Imran, I was just wondering on the upgraded free cash flow envelope. Appreciate the upgrade, but I guess it's a little bit wider the range than it used to be. I just wanted to know the rationale for the thinking around that. Perhaps connected to it, given the working capital performance last year, how should we be thinking about working capital for the current year? My second question was just on the rollout of electronic shelf edge labels. I wondered if you'd give us some color on how long that will take and how you're thinking about the saving potential that this could bring. Thank you. Imran Nawaz: Sure. Let me take the cash flow number one. I feel good about the cash flow delivery for the year, close to GBP 2 billion. That's clearly on the back of the strong profit performance, but also really strong working capital management. We ended up delivering, what is it, GBP 385 million of an inflow. Think of that as better sales performance, tight management on working capital practices. There's also a one-off EPR payment in there as well. The way we normally think about working capital and an ongoing assumption is think of it more as a normalized year being over GBP 100 million or so of inflow. That's sort of how I think of it, but it's a good performance in the year. There are no one-offs in there that I would call out beyond what I've just said. In terms of the range, look, after four years or so, we've delivered around GBP 8 billion of cumulative cash, which is nice. I'd expect us to have working capital swings every year, as I just said this year. My view is the range is the right range for the delivery of the business, and I feel comfortable with the fact that it gives me the room in terms of working capital swings one way or the other. The fact that we upgraded, I think, is a recognition of the fact that we have confidence in our ability to leverage the strategy we've laid out to translate that into continued cash flow deliveries every year. Ken Murphy: And then Manjari, in terms of the rollout of ESL, I think we have taken our time thus far to make sure that we have the best and latest possible technology. That it means that probably over the next 3-4 months, we will kind of finalize what that rollout looks like. I would expect it to have some in-year impact in terms of better efficiency in store, better price compliance, and also a number of other features that these latest ESL technologies will give us in terms of better on-shelf availability, better picking accuracy for our online shopping pickers, et cetera. Really, the full year effect of those savings will be felt in the following year. We don't obviously individually call out the size of the savings, but what I can tell you is that they're pretty meaningful. Operator: We'll now take our next question from Monique Pollard at Citi. Monique Pollard: Two, if I can as well. The first one, just on the competitive landscape. You mentioned in the statement that the competitive background remains intense. Just wondered what you're seeing from peers, conscious that one of the major peers that had been maybe a bit more disruptive last year is guiding to EBITDA and cash flow growth this year. And whether you could just talk a bit about how you think your pricing sits versus your main peers now. That would be helpful. The second question, just on the outlook for food inflation. Conscious that some commodity prices are coming down, but obviously there's concern about food inflation building from the conflict and the impact that might have on things like fertilizer pricing. Any sort of thoughts you could give on the outlook for food inflation would also be helpful. Thank you. Ken Murphy: Fantastic, Monique. Thank you very much. Well, look, in terms of the competitive landscape, we started the year last year in a really competitive place from a price index versus our key competitors. As you say, despite the best efforts of those competitors, we have finished the year in pretty much the same shape, if not slightly better. We feel really good about where we are in terms of our price position. That said, those competitors have announced their intention to keep going. Our expectation is this will be another intense year from a competitive perspective, but we feel really well set for it. My sense is it'll be a bit more of the same, but you can count on us to stay competitive and more importantly, to keep investing for the future as we stay competitive. In terms of the outlook for food inflation, as you see that the industry and things like ONS, CPI, food inflation, and non-alcoholic beverage inflation has shown a kind of a moderate decline, as you say, over the last three months. Kantar is showing just over 4%, but of course, we always are well under the kind of industry headline rate of inflation because of our promotional plan and also our investment in price. I think for now, inflation is stable, and it has been moderating slightly. Clearly, we can't predict what the future is going to look like from the impact of the conflict in the Middle East at the moment. Clearly, those pressures are going to place more weight on the industry, require us to be more competitive in terms of our savings programs and our commitment to keeping costs down for consumers. I wouldn't want us to give you a prediction of what inflation will look like. As usual, Monique, you can count on us to work very hard to mitigate that for our customers. Operator: We'll now take our next question from Xavier Le Mene at Bank of America. Xavier Le Mené: Two questions, if I may. First one is, given your emphasis on Tesco Value products, the fact that you've got quite a lot of advertising, as I can see right now, just want to understand the kind of long-term proposition you've got with Tesco Value. Is it more a kind of cyclical response that you got right now or do you see that a more structural shift going forward? That would be my first question. The second one, you mentioned retail media. So what should we expect from retail media in terms of profits, revenues, and can you potentially give us a bit of indication of what you were able to achieve so far? Ken Murphy: Great. Thanks, Xavier. On Tesco value products, I think our insight was at the start of the calendar year that customers were looking for greater certainty around those key value items that they have in their shopping basket. That as a consequence, we took our every day low pricing mechanic from 1,000 products to 3,000 products. So a significant increase in what we would describe as branded low everyday pricing that customers can rely on. We've seen quite a material volume uplift in sales of those products as a consequence. Our Aldi Price Match, which is our anchor everyday low price mechanic on our fresh food lines and our own branded lines is consistent at around that 600 products level. And that's become really relied upon by customers as a kind of a value guarantee, if you like. Of course, we have over 10,000 products on Clubcard prices every week that are giving people deals on those kind of brands that they love. That's working well for us as a combination. So the logic really was just the insight of more reliable pricing for everyday low prices, but the mechanics and how they work together are largely remaining consistent. In terms of retail media, we've had a really good year on retail media. I think our investments in that retail platform and our desire to be the best brand-building partner for our supplier base is really starting to pay dividends. Over 90% of our suppliers have increased spending with us this year, and I think it's because they really see the value of a much deeper relationship rather than just buying ad space. They recognize the combination of the insights that we provide through dunnhumby, our ability to build audiences that are a lot more tailored to them through our Sphere platform in our retail media, and the investments we're making with Adobe and Kevel and others to make that whole retail experience a lot more seamless and cost-effective is really, really working for them. We feel really good about our relationship with our suppliers and ability to be a great partner with them through our retail media platform, and we're quite optimistic about growth for the coming year. Operator: We'll now take our next question from Frederick Wild at Jefferies. Frederick Wild: First of all, could I just understand a bit more about your leverage targets? Obviously, you've left them unchanged in terms of where you're looking for your target leverage to be, and you're still well under that. Can we think about maybe the opportunity if, and when markets calm down, you would look to increase leverage back to within that target range? My second question is about where this extra capital that you're generating is going. Obviously, you've kept buyback unchanged. You flagged that there may be more property buybacks coming. Is that your preference for property buybacks over raising the share buyback? Or how should we think about maybe some of this free cash flow growth, which is coming through so strongly, coming back to shareholders? Imran Nawaz: Sure. Maybe, look on the leverage ratio, it all goes back to the credit rating and how we see the merits of a strong balance sheet. As you might imagine, especially during the last four years, but even going ahead into this year, having a strong, I'd almost call it a pristine balance sheet, at 2.1 leverage is nice. I would say is a source of power, right? Because it gives us a lot of flexibility in uncertain times. I'm quite happy at the lower end of the range. Will we inch our way back up to the 2.3? Probably, yes, over the next few years, but so far, I'm happy with where we are at the 2.1. As it comes to shareholder returns, look, it's a really important part of the equity story of Tesco, right? Since we started this program, we have returned GBP 4.3 billion worth of shares at an average share price of around GBP 3.17. We've taken out 17% of the equity doing that. You can imagine it's been a great investment for us, and I believe that share buybacks are absolutely the right way to continue to go forward, and therefore, we've announced the 750. There's an elegance when I think about the total dividend and the total buyback in terms of using the excess free cash that we have. In terms of overall capital allocation and the uses of the cash, first and foremost, it'll always go into the business and making sure that we invest for customers into our stores, into our distribution centers, into automation to make sure we have the best possible shopping experience and the best possible setup that you would want to imagine we have. Very keen to continue to invest into AI and technologies and the digital proposition that we have. Honestly, as there is excess cash and leftover after any sort of property buybacks where it makes sense, then the idea is absolutely to continue to return that. I think the combination of progressive dividends and a steady buyback that people can rely on is very attractive during these days. Operator: We'll now take our next question, that will be from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Listen, I'll go with three. I think firstly, Imran, I think you talked about the multi-year framework and growing profits over that multi-year period. I think in another slide, you've shown 7.9% CAGR in operating profit over the past five years. Is that somehow an exceptional level of profit growth that you can't repeat over the next five years? Obviously, barring any sort of external shocks, such as the one that we probably are seeing now. Secondly, I think you've said you haven't seen any impact from sort of customer point of view from the conflict. Is there anything creeping into cost lines in any meaningful way? If you could talk about it, that would be great. Maybe just on free cash flow and capital allocation. Very small one really. Imran, I think you've referred to inorganic growth opportunities.... Imran Nawaz: Yes. Sreedhar Mahamkali: I'm keen to understand what that is. Imran Nawaz: Yes, sure. Look you point out to a very strong performance over the last four years and, as we just presented, we're pleased to see that. I'd say to you, the way I think about laying out the strategy this morning or the evolved strategy, the way you should take that is, it is renewed confidence that we can continue to deliver what we said we would do. What we said we would do from a performance framework is very clear, right? We'd say we aim to hold or gain share every year. We want to therefore grow the profits every year. We want to make sure we have the buybacks as part of that, and therefore deliver a nice EPS growth every year as well. Ultimately, as a proof point, translate that into the upgraded cash of GBP 1.5 billion-GBP 2 billion. Every year is going to be slightly different in the sense that the circumstances, as this year is a really good proof point, is going to be different and therefore we set out guidance as we have. In terms of cost lines, look, I think the thing that I'd point out to you at the moment, obviously, fuel prices, energy prices have gone up. As they relate to our own operating cost expenses, it's not going to be a headwind because our hedging strategy protects us from that. Clearly we have to wait and see because it's early days and the stresses and the duration and the implications of the conflict will obviously have an impact at some stage. Hopefully, we can minimize that as much as we can via the Save to Invest program that we've put in place. In terms of inorganic opportunities. Ken Murphy: Well, look, I think, as always, Sreedhar, we have through, as you saw, the evolved strategic kind of five-point plan laid out, a desire to drive core food performance. To meet progressively more everyday needs of customers as we build out that ecosystem, as we get more personalized through the power of the Clubcard. As and when we see opportunities to bolt on other kind of everyday needs that could enhance or improve that customer experience or give people more reasons to come and shop with us, then we will always keep an eye on that. Imran Nawaz: On property buybacks to give you a sense. When you have a strong balance sheet, the ability to buy back your strong properties, then own them in your portfolio and then avoid future inflation is no bad thing. It's a really good use of cash. Sreedhar Mahamkali: Just to follow up on what you said, Imran, I think it's something Rob touched on earlier already a little bit. The assumptions you're making, especially at the lower end, the GBP 3 billion. Is there an assumption that the conflict lasts through the year, six months of the year? Imran Nawaz: No. Look, the way I think about it's not just the duration, it's sort of the consequences, the implications. Those are so hard to judge because it's such a moving feast. I don't really want to speculate. All we were trying to do was to say, well, the conflict could have certain implications that change consumer behaviors, shopping behaviors. We haven't seen that yet. It could have an impact on the U.K. economy. We haven't really seen anything yet that has influenced shopping. Look, if it does, we want to have the flexibility to continue to execute the programs we've built in, because it is those programs that continue to allow us to win market share and grow this business. Operator: We'll now go to Clive Black at Shore Capital. Clive Black: Thank you for the presentation and also, I have to commend you on fabulous delivery. A few points if I may. First of all, Imran, I think you said that your average buyback price was 317p. I just wondered at 485p whether the buyback needs to be thought about in a slightly different way, maybe more akin to Sam Walton. Your thoughts would be much appreciated on that. Fascinating to hear, Ken, your thoughts on where the business is going, particularly around being connected. I just wondered if you could maybe drill down to what you think that actually means for shareholders. I understand all your stakeholders that you must and are supporting. What do you think it actually means for shareholders? I also just wanted to drill a little bit deeper in the importance of dunnhumby to your business, which you raised today, especially as something that's quite proprietary and exclusive. Again, what do you think that delivers for shareholders? Imran Nawaz: Look, on the buyback price, the way I think about it is any use of cash, Clive, that we have, whether it's CapEx, whether it's the buyback in this example, or properties, discipline and making sure it has a good return and is a good use of cash is the first question we ask ourselves. As we look at buybacks, of course, we have, and we look at the IRR, if you wish. We look at the intrinsic value of the business. We look at the situation, and I'm very confident that the buyback continues to be an excellent use of cash. Ken Murphy: So, Clive, in terms of the kind of evolution of our strategic thinking and what it means for shareholders, and I think it's linked a little bit to how we set our stall out in 2021, where we said, if we look after all of our stakeholders, then we will build a strong, sustainable business that will be good for shareholders over the long term. I think that's proven to be the case, and it's absolutely our ambition looking forward for the next 5 to 10 years. I think we, as I said earlier, have an ambition to maintain market share growth in our core food business. We think that's absolutely critical to the success of the company. Our strategy starts and ends with our core food business. We're going to keep investing in price, keep investing in quality, keep investing in our supply chain so we can be the best providers of fresh food in the country. But linked to that, and I think these are some lessons we've learned from the past, Clive, is that we are looking in a capital discipline, capital light way to leverage those assets. Use the infrastructure, both the physical infrastructure, but also our Clubcard proximity to customers to really start to build out other reasons why customers might shop with us, whether it be financial services, Marketplace, quick commerce, phone contracts, fuel, whatever it is, such that we can create additional revenue streams that then get reinvested back into driving core food performance, building market share. Because as we know, food is the most frequent retail purchase, and it drives that glue and that connectivity with customers, which is so essential for building trust and being able to be relevant for other shopping missions that they might have. The key, though, which Imran is very strong on, is it has to be done in a capital disciplined way and within our financial framework that we also set alongside our strategy. I think what shareholders will see and can expect is a very ambitious strategy that will maintain top-line growth, a very disciplined approach to capital expenditure that will mean we'll be sensible and look for high returns, and therefore we will maintain strong cash, very healthy balance sheet, and keep returning to shareholders, but only after we've made sure customers are happy, colleagues are happy, and we have strong supplier relationships with our suppliers. Clive Black: Just on dunnhumby, Ken, just a word? Ken Murphy: Dunnhumby, for me, it's the intelligence engine of the business. It is designed to harness the latest technology, whether that be AI or our own data science capabilities internally in dunnhumby to understand how do we optimize how we think about all of our category management decisions, how do we optimize our customer decisions in terms of personalization and getting closer to them, how do we become the best brand-building partner for our branded suppliers through our end-to-end retail media platform. All of the additional kind of components we're building onto that in terms of helping them with their innovation pipeline, their go-to market strategies, et cetera. Then helping with things like personalized ranging. We're looking to use the data science to get a lot more specific about our ranging in our individual stores to be more relevant to that local demographic. They're just some of the examples of where dunnhumby is really helping the strategy. Operator: We'll now go to William Woods from Bernstein. William Woods: The first question is on market share. You've obviously gained a lot of market share over the last few years. When you look over the next 3 to 5 years, where do you think you take share from either formats, categories, channels, regions, et cetera? The second one is, if you look back over history, one of Tesco's downfalls over the last maybe 15 years was getting distracted by other things, banks, garden centers, coffee shops, et cetera. Now I suppose we've seen a reasonable shift in your tone from focusing on food to things like retail media and clothing and Marketplace. How do you ensure the problems of the past don't reoccur? I'm not necessarily even thinking about CapEx, but more about the culture of how you're running the business in terms of people focusing on food. Ken Murphy: Great. Look, I think the first thing to say is that the market share gains we've achieved over the last number of years have been quite broad-based. They haven't come from one source. I think they've been underpinned by the fact that we've made massive investments in value, quality, and availability over the last five years. We're keeping building our infrastructure, building out capabilities like quick commerce, et cetera. That means we're more relevant for more shopping missions more often with customers. That's working really well for us, Will. I think the first thing I'd say is that, that momentum will continue. As Imran just said, we have a very strong balance sheet. We have a very strong efficiency program, and our commitment is we will keep investing in the core. The one thing I wouldn't want you to think somehow is that we're all as distracted running after shiny new things. Our core Save to Invest program of over GBP 0.5 billion a year is almost entirely invested back into the core business. We're using some of the gains from market share gains and some of our new income streams to reinvest back in those activities that I just mentioned that are strategically important. As I said just a moment ago, it starts and ends with our core food business. The whole objective of the strategy is that through our success in core food, we're able to, in quite a capital light way, in a connected way. If I give you a very classic example of, say, Marketplace or other things, historically, Tesco Direct was set up on an entirely separate platform with a separate set of systems, with a separate website. It had to generate all of its own customer acquisition and traction because, but in the case of Marketplace, it's completely integrated into the Tesco app. It is seamless for customers to access it when they're doing their regular shopping, as is, by the way, Whoosh. If you want to go and do a weekly shop, but you need it in half an hour, that capability is available for you on the same app. We're using all of our core assets and our traffic to drive people into the enhanced set of propositions that we're building. I think that's the key difference of lessons from the past. We've been quite disciplined about it, Will, I promise you, we obsess as much about the price of carrots and whether we've got availability of raspberries and blueberries on the shelf as we do with how is F&F and Marketplace doing, I can promise you that. Imran Nawaz: If I could add maybe one or two just nuggets as well from my side, Will. It's clear that when you look at the return on capital employed over the last few years, over the last four or five years of this business, we've nudged up CapEx because we've been reinvesting into the business and expanding the business. At the same time, the return on capital employed has also improved steadily year-on-year. I think that's a nice proof point that where we spend the money makes us a better business. The other angle I'd like you to think about is it's clear that when you have a market share in online of around 36%, 37%, depending on when you measure. You have a massive asset and you have to continue to look about where do customers spend their time and where do they shop. Personally, I love the fact that we're being able to leverage the strength online that is unparalleled to anyone else in the industry to provide F&F online, to provide Marketplace, to provide a Whoosh, to provide media income opportunities for our suppliers. It is all in aid of making sure that what we've got is actually maximized as well, and that's why it is capital light. Operator: We'll now take our next question from Ben Zoege at Deutsche Bank. Benjamin Yokyong-Zoega: I just had one follow-up on the profit guidance and perhaps one on cost savings. Firstly, on the profit guidance, is it fair to assume that this range is really about uncertainty around demand and the response that households may kind of shift their behavior rather than uncertainty around cost pressures? Then secondly, on cost savings, just within that GBP 500 million target, could you talk a bit about the main buckets and opportunities you see within that, please? Thanks. Imran Nawaz: Yes, sure. On the cost savings, to take that one first, look, it's an always-on program, right? When I think about it, the way I look at it's simplifying how we work. It's taking out inefficiencies, so waste management, transportation, automation in warehousing and distribution, better buying of services, leveraging our shared services more, simplifying in-store logistics, leveraging AI to optimize forecasting, to optimize promotions. I feel like it's all in, it's what we've been doing, and it's working well for us. As Ken said, we use that to reinvest back into the business and manage our own OpEx in a nice way. When it comes to the guidance, look, it's very clear that when you think about, I assume when you say cost, you mean energy costs? Our energy costs are sort of, given the hedging we've taken, we're in a good place on avoiding any ups there that are unnecessary for us. I think we're in a good place there. It really is about trying to put sort of a wider range out because of the uncertainty as to the implications on what happens to consumer behaviors, what happens to the wider economy at large. It's hard to call, and this is really just making sure that at the lower end, we've got the flexibility in case we need it to continue to do what we've been doing, which is win. Operator: We'll now take our next question from Matt Clements at Barclays. Matthew Clements: Hi. Morning, both. Two quick questions if I can. One on IMS, which was clearly a strong contributor to profit and seems to be outperforming your initial expectations. How should we think about IMS profits going forward? The second question, just kind of extending your comments around strategic ambitions to maybe touch more on Booker and Central Europe within those comments. Where do they sit and what should we be expecting into the medium term for those businesses? Imran Nawaz: Great. Should I take the IMS one? Ken Murphy: Sure. Imran Nawaz: Look, on IMS, you're right. It's done a fabulous job, and I'll be honest, better than I was thinking. When we laid out what we were thinking, we said it'd be around, what? GBP 80 million to GBP 100 million a year was the profit number we gave, and I think now the way I think about it is this year it's at GBP 167 million. That GBP 160 million, GBP 170 million number is a good number. That's sort of where my head's at on that front, which is nice given we got rid of the riskier credit book, but actually retained the business that we wanted to retain, and frankly, now make as much money as we did before. That's good. Ken Murphy: Thanks, Imran. On the strategic ambitions, I think that I would say a couple of things. First of all, starting with Central Europe. Central Europe is clearly a Tesco retail business. All of the innovation and investment that we do in Tesco UK around technology, AI, grocery home shopping capability, quick commerce capability, just simply transitions into our other businesses. Ireland, for example, will get the benefit of all of that technology, and it's been a real driver for them of market share growth in Ireland, where it is, by a country mile, the leading online shopping experience, and we've just launched Whoosh there in the last 12 months, and it's growing very strongly. It's a similar story for Central Europe. It's a business that obviously is operating in challenging countries from an economic and geopolitical perspective, but benefits from the innovation that's happening centrally. That's how I would describe how Central Europe and Ireland fit into the context of the strategy. In terms of Booker is really interesting. Booker growth on the top line may not look that spectacular, but actually its underlying growth in terms of its catering business and its independent retail business is pretty strong. Particularly against the market, it's growing quite well. That is predicated on being the leading value wholesaler in the country, being an innovator around food development, so very similar to the core strategy in Tesco, and increasingly looking to benefit from our thinking around that broader ecosystem thinking. This year, Booker are going to be investing more heavily in the digital experience, particularly for its catering customers, looking to be ever more relevant and helpful in terms of how caterers can run their businesses and deliver a great experience for customers, but also make some money. As we think about the long term, of course, Booker gives us access into hundreds of thousands of food outlets around the U.K. That means we can be relevant for every food and food-related experience in the country, which is kind of an overarching ambition, if you like, of the strategy. We see Booker quite core to the overall strategy, but clearly it needs to continue to win in its core wholesale market, which it is doing at the moment, and I believe will continue to do for the future. Imran Nawaz: Maybe one bullet to add on that as well is one of the features that both of them have in common is they have really got really strong cash generation properties. They're really, really helpful from that side as well. It's not a bad formula to have to generate the cash and reinvest. Operator: We'll now take our next question from Francois Digard at Kepler Cheuvreux. François Digard: A few points, if I may. The first on volume price balance in '25, '26 on its evolution during the year. Could you share with us how it has evolved and how you see the balance in the coming year, in the current year? Second point on the fresh product growth, it grew faster than the rest of the food. Does that benefit from the Tesco Finest fresh range or is it a different scope? What can you tell about the margin of fresh products? Finally, do you expect any impacts of fuel price increase on your working cap during the year? Thank you. Imran Nawaz: If I take the volume price balance, in terms of the way you should think about it is the Worldpanel number of inflation throughout the year has been between what? 4%-4.5%. We've been below that every single quarter, every single month, and we've been in volume growth every single month of the year as well. Now, clearly what we did benefit from in the first half you would have seen, Francois, was a very, very hot summer and it was brilliant because people were out and about enjoying themselves. I look out the window and I wish there was a bit more sun. It would be good to see. We'll have to wait and see how it plays out. As you know, inflation, given the uncertainty, it'd be wrong of me to give you a false sense of precision at this early stage and I don't really want to speculate on that. We'll see where that lands. What I would say is we'll continue to make sure that if we are safe to invest, we continue to protect our price position. Ken Murphy: In terms of fresh product growth, Francois, I would say that the balance of it is a mix. I think absolutely Finest has played a role. It's been a fantastic added value proposition for us. We've doubled the size of the brand over the last 3 to 4 years to make it now a GBP 3 billion plus brand and we've got ambitions to grow it even more in the coming years. That said, our fresh core product has performed incredibly well and this has been a combination of really close working relationship with our growers and suppliers on fresh produce and some great innovation in some of our meat, fish and poultry categories. An example would be our Finest Steakhouse range which has been a phenomenal success with customers and shown us real growth and added value growth. To your point around margins, we have seen a modest improvement in margin mix over the last 12 months in fresh driven by a combination of a lot of work on efficiency but also some great success in our added value ranges such as Finest and Steakhouse range. Imran, do you want to pick up the working capital point on fuel? Imran Nawaz: Yes, look, obviously the way I think of a working capital at the moment in terms of fuel is it's so unpredictable. Clearly when it moves up it's favorable, when it goes down it's unfavorable. When I looked at the year we just closed there was actually a bit of a negative because it had gone down. What will matter is where it is before half year and before year end, but we'll keep you posted. Clearly given the working capital cycle on fuel it can be a benefit. Operator: We'll now go to the telephone lines for our next question which is going to come from Karine Elias from Barclays. Karine Elias: A lot of them have already been answered but just going back a little bit, if I may, to the competitive environment. Obviously, despite some of your competitors embarking on price investments last year, albeit they did have some issues specific to IT for some, would you still maybe describe the environment as being rational to a certain degree or do you feel that anything has changed? Then my second question was really more on the convenience. Some again have talked about how convenience was struggling on the back of weaker tobacco sales. Yours has done much better. Maybe if you can expand a little bit on that would be helpful. Thank you. Ken Murphy: Thanks Karine. Look, I'd start by saying that the market is and always has been intensely competitive. At any given moment you have a number of competitors making moves and attempting to take share and win with customers. It's what makes this business such a fantastic business. There's never a dull moment and I think we can expect that to continue. That said, I think such are the cost pressures the industry has been facing over the last number of years between energy issues, commodity issues, regulatory and tax issues, that has forced a certain amount of rationality in the market. What I would expect the coming year to be is largely the same, is a very intense competition for the shopper basket, but a certain rationality driven by the need to combat costs and maintain a control over those cost pressures. That's how I would kind of describe the last few years. That's how I see the next 12 months as well. On convenience, I think that you're right. We have outperformed the market in convenience. I think a lot of that is down to the fact that, on the top 100 essential lines, our convenience stores are the same price as our large stores. We are a strong value proposition in convenience in relative terms. I think the second thing to say is that we have a greater fresh penetration in our convenience stores. That's worked well for us as well. The third thing to say is that, of course, we're the only major retailer that have real critical mass in our quick commerce proposition through Tesco Whoosh, which will be a GBP 400 million business this year. That has also helped a lot in terms of driving our convenience business. I think those factors will continue to help us as we go into the coming year. Thanks, Karine. Operator: Thanks. Why don't I take our last question for this morning from Rob Joyce at BNP. Robert Joyce: Hey, thanks for letting me on again. Very quick one. Just in terms of the shape of the EBIT you're expecting for the year ahead, anything you'd flag in terms of differences versus FY '26? Imran Nawaz: Look, the one thing I would flag is maybe the fact that lapping the hot summer, that's clearly going to be a thing. We'll wait and see how it all plays out because that uncertainty thing is still something we need to work through, as you can appreciate. Look, last year we were close to 5% growth top line, driven by the strong volume growth and the hot summer. Let's see how it plays out. Ken Murphy: As an Irishman, you never thought you'd hear me say this, but we're really hoping England and Scotland do well in the World Cup. Robert Joyce: We've got it on video now. Operator: Okay, Ken, so that wraps up the questions for this morning. Just back to you for your closing remarks. Ken Murphy: Listen, I would just like to thank everybody who's joined us this morning for taking the time to listen to our presentation and for all the excellent questions we had. As you can see, we are consistent in our messaging. What you saw this morning was an evolution of our strategic intent and our commitment to keep focused on our core business, delivering great value, great quality, and consistent high standards in our stores and in our online proposition, despite whatever the environment might throw at us over the coming months. Thank you again, and we look forward to seeing you all early in the summer. Take care.
Daniel Morris: Hello, everyone, and welcome to the presentation of Ericsson's First Quarter 2026 Results. Joining us by video today is Borje Ekholm, our President and CEO and in the studio, I'm joined by Lars Sandstrom, our Chief Financial Officer. As usual, we'll have a short presentation followed by Q&A. [Operator Instructions] Details can be found in today's earnings release and on the Investor Relations website as well. Please be advised that today's call is being recorded, and today's presentation may include forward-looking statements. These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties. Actual results may differ materially due to factors mentioned in today's press release and discussed in the conference call. We encourage you to read about these risks and uncertainties in our earnings report as well as in our annual report. I'll now hand the call over to Borje and Lars for their introductory comments. Borje Ekholm: Thanks, Daniel, and good morning, everyone, and thanks for joining us today. Q1 was a solid start of the year and with the results that reflects our continued execution against our operational and strategic priorities. We saw a very large currency headwind during the quarter, probably one of the toughest quarters from a comp ratio as the Swedish krona strengthened towards almost all currencies compared to last year. So this, of course, materially impacted every line of our financial statements with reporting sales falling 10%. At the same time, we performed well operationally realizing strong organic growth of 6%, with all segments contributing. Our results are a testament to our leading portfolio and the investments we've been making in furthering our technology leadership. Over the last few years, we've actively managed to reduce dependence on geographic mix. Of course, we realize that North America often receive a disproportionate interest from, I guess, the community -- analyst community, but also around the world. And that's, of course, natural because it is a front-runner market. And this quarter, we saw sales reduced by mid-single digits in North America. But we could still deliver a gross margin of 48.1% for the group and 50.4% for segment networks, indicating that the work we've done to balance out the geographic mix is coming through in the results and giving us less sensitivity to geographic mix. Cloud Software and Services continue to execute well. We reached a gross margin of 43.2%. That's up more than 300 basis points year-over-year. Revenue seasonality was in line with the guidance we had for the quarter and we saw some deals being pushed into Q2. And we expect to see that, therefore, stronger seasonality than normal next quarter. EBITA came in at SEK 5.6 billion with a margin of 11.3%, and the strengthening of the Swedish krona affected EBITA by SEK 2.2 billion. And you've also seen we have the revaluation of the long-term stock-based programs. And all of those are, of course, included in the results. Cash flow during the first quarter is seasonably lower typically. Despite this, cash flow came in at a healthy SEK 5.9 billion with a net cash position of SEK 68.1 billion. And as you've seen just a couple of weeks ago, the AGM approved the Board's proposal on increased dividend and our first share buyback program. We will start to execute on the share buyback program next week with a target to buy back SEK 15 billion. In the next phase of AI, we see that high-performance mobile connectivity will become increasingly important. Even so, our planning assumptions for the RAN market remains flat over the longer term. With disciplined execution, we create room to make selective investments in growth to broaden the mobile platform to new use cases and new sectors. We believe the growth will come in areas outside of our traditional CSP markets. And then we're talking about areas like enterprise and mission critical networks. In our Enterprise segment, which includes our wireless WWAN business, private networks, network APIs or as we now call it, actually network-powered solutions and mobile money, organic growth was stronger, which is encouraging. There are new markets that we see as key opportunities going forward. Of course, new markets take time to develop but we're now seeing these efforts start to scale. I would also comment on the loss in Enterprise of SEK 1.4 billion. It's clearly unacceptable, but it also includes a number of onetime costs and have an improvement plan in place that we're executing on and we will expect to see that coming through shrinking losses during the rest of the year, comes from growth, operational discipline and of course, at the onetime cost base. We're also driving several other growth initiatives. And there, we see good progress in mission-critical networks which tend to be a bit lumpy and vary by quarter. We're experiencing strong interest in several verticals, particularly within Defense Solutions. In modern defense applications, high performance, and then I'm talking about large capacity connectivity is required. And this will make 5G stand-alone a cost-effective alternative. And we've seen a trial with the Italian Navy -- or actually deployment with the Italian Navy this quarter. Another very exciting area is 5G-based sensing where one of many use cases is about detecting unconnected drones. And a few weeks ago, we showcased our solution, which is seeing significant customer interest, of course, given a difficult current market environment geopolitically. We see that our technology here has a great market potential, and we're now starting to invest to capture these opportunities. I would say this is just one example that you don't have to wait for 6G to get part of new exciting use cases with the technology we have. So we're seeing good momentum on our strategy execution, and we've strengthened Ericsson operationally. And I would say this is showing now in our Q1 results. With that, let me give the word over to you, Lars, to go through the numbers in some more detail. Lars Sandstrom: All right. Thank you, Borje. I will begin with some additional comments on the group before moving over to the segments. So net sales in Q1 totaled SEK 49.3 billion with organic sales growing 6% year-on-year. The growth was broad-based and sales grew in all segments and 3 market areas delivered double-digit organic growth, driven by continued 5G rollouts and increased uptake of 5G core. Americas declined 2%, with strong growth in Latin America, more than offset by a mid-single-digit decline in North America following a strong quarter last year. Reported sales decreased by 10%, impacted by a negative currency effect of SEK 7.8 billion then. So organic growth again grew 6%. IPR revenues were SEK 3.1 billion, and this run rate coming out of the quarter is approximately then SEK 13 billion. Adjusted gross income was SEK 23.7 billion with a negative currency impact of SEK 3.8 billion. Adjusted gross margin was 48.1%, in line with last year, excluding iconectiv. On the cost side, operating expenses, excluding restructuring charges, dropped to SEK 18.4 billion, around SEK 2 billion lower year-over-year, driven mainly by currency as well as the divestment of iconectiv. Underlying inflationary pressures were more than offset by cost reduction driven by headcount as well as efficiency measures. And as Borje mentioned, adjusted EBITA, which excludes restructuring, but includes the other one-offs was SEK 5.6 billion. This is down by SEK 1.4 billion, including a negative impact of SEK 2.2 billion, the divestment of iconectiv and SEK 0.5 billion of additional share-based compensation costs coming from the increased share price here during the quarter. The EBITA margin was 11.3%. Cash flow before M&A was SEK 5.9 billion, driven by earnings and reduced net operating assets. So let's move to the segments. In Networks, sales decreased by 8% year-on-year to SEK 32.9 billion with a negative currency impact of SEK 5.2 billion. Organic sales increased by 7%. Organic revenues grew in 3 of our 4 market areas. 2 strategic markets, India and Japan grew strongly. North America declined, impacted by customer spend reallocation in Q1 this year following recent market consolidation. Customer investments were also elevated last year due to tariff uncertainty impacting the comparison. Networks' adjusted gross margin decreased slightly to 50.4%, mainly reflecting actions to enhance resilience in the supply chain. Adjusted EBITA was SEK 6.4 billion, impacted by a negative currency impact of SEK 2 billion and benefiting from lower operating expenses, which were also supported by continued efficiency improvements. Adjusted EBITA margin was 13.3%. Looking at the right-hand graph, the rolling 4 quarter gross margin stabilized around 50% and adjusted EBITA margin at around 20%. Moving to the segment Cloud Software and Services. Sales here decreased 9% to SEK 11.8 billion, including a negative currency impact of SEK 1.6 billion. So organically, sales grew by 4%, with growth primarily in core. Adjusted gross margin came in at 43.2%, an improvement from 39.9% last year, supported by improved delivery efficiency and a favorable product mix. Adjusted EBITA increased to SEK 0.6 billion with a margin of 5.3% despite a negative currency impact of SEK 0.3 billion. Lower gross income was offset by lower operating expenses here. And looking at the right-hand graph, the rolling 4 quarters adjusted gross margin was around 44% and adjusted EBITA margin around 12%. And these are both new high levels. So reported sales on the Enterprise side decreased 30%, impacted by the sale of iconectiv and currency. On an organic basis, Enterprise grew by 4%, and this marks the second quarter of organic growth. Adjusted gross margin declined to 49.0%, reflecting the impact of the divestment of iconectiv and change in business mix in Global Communications platform. Adjusted EBITA landed at minus SEK 1.4 billion, reflecting the divestment of iconectiv and nonrecurring cost of SEK 0.3 billion in the current quarter. Turning then to free cash flow, which was SEK 5.9 billion before M&A in the quarter. We delivered a cash to net sales of 13% for the rolling 4 quarters, above our 9% to 12% target. And cash flow generation was strong, supported by earnings and a stronger-than-normal seasonal reduction in operating net assets. Net cash increased sequentially by SEK 6.9 billion to SEK 68.1 billion here in the quarter. The buyback program of up to SEK 15 billion was approved by the AGM and share repurchases will start now soon. Next, I will cover the outlook. Global uncertainty remains elevated given the broad geopolitical and macroeconomic environment, including the global semiconductor situation, and Borje will come back to this. The Q2 outlook assumes no tariff changes and the exchange rates specified in the report. For Networks, we expect sales growth to be broadly similar to the 3-year average quarter-on-quarter seasonality. And for Cloud Software and Services, we expect sales growth to be above the 3-year average quarter-on-quarter seasonality. We expect Networks' adjusted gross margin to be in the range of 49% to 51% and restructuring charges for 2026 are expected to be at an elevated level with a fairly large part already seen in Q1. So with that, I hand back to you, Borje. Borje Ekholm: Thanks a lot, Lars. So our Q1 results demonstrate the strong execution on our strategic priorities and the actions we've taken over the last several years to strengthen the company operationally. This includes how we made Ericsson less reliant on any specific geographical mix, enabling us to sustain healthy margins in varying market conditions as you have seen in today's report. Our actions also include how we diversified our supply chain to mitigate as much of the geopolitical disturbances as possible. This continues to be a clear competitive advantage, enabling us to meet customer commitments amid the current backdrop. Of course, the global semiconductor situation remains challenging as the AI boom is increasing input costs. We continue to take actions, and Lars mentioned this as well, to mitigate this impact by working closely with both our customers and suppliers, of course, including our pricing. While we believe we're in a good position, we are not immune to these disturbances. So they will have consequences on price and availability. As of course, AI may be the key driver for our industry longer term, we see AI as a net positive for us. The next phase of AI will see AI being industrialized, shifting focus from current focus on data centers, large language models rather to applications, devices, use cases. This will require advanced mobile connectivity with capabilities such as ultra-low latency and high uplink. This puts us in the middle of the next phase of the AI era. With our strategy, we are well positioned to capitalize on this opportunity. We're doing this by providing the industry's best networks for AI and by expanding the mobile platform to new use cases and sectors. This includes exposing network capabilities through network-powered solutions, allowing developers to use the network capabilities to create new use cases. It also includes opening up new addressable markets such as enterprise solutions based on cellular technology and mission-critical networks. And this will allow us to capture a greater share of the value from connectivity and drive mid-single-digit growth for Ericsson while achieving our long-term margin targets of 15% to 18%. So with that, I think it's time for some Q&A. Daniel Morris: Thanks Borje. [Operator Instructions] Thanks, operator. Time for the first question. The first question this morning is going to come from Simon Granath at ABG. Simon Granath: I have a question on Lars on the memory and cost inflation. And the Q1 margin performance for Networks was, in my view, strong. But given the rising memory prices and as inventory runs down through the year, how confident are you that memory prices won't be a significant headwind for the rest of the year? And all else equal and on this topic, should we see Q1 marking the highest level for the year? Lars Sandstrom: All right. Thanks, Simon. When it comes to outlook, we give, as you know, outlook for the first -- for the next quarter here. So -- but when it comes to memory cost and other semiconductor costs, there is, as we say here, a headwind coming. And -- but we should also remember that it is a smaller part of our total cost base, of course. But there is a headwind coming, and we are working hard to mitigate together with our suppliers, but also together with our customers to share the burden here. And then it comes to what can we do when it comes to product substitution, et cetera. And it is a bit too early, I think, already now to say how the impact will be. But you will -- if there is -- and when there is things happening, you will see that more coming into the second half of the year. Daniel Morris: The next question will come from the line of Andrew Gardiner at Citi. Andrew Gardiner: So just on the North American revenue trends that you saw in the quarter, you've highlighted the pressure there, Borje, sort of mid-single digit down year-on-year. I'm just wondering what your view for 2026 as a whole is for that region. The comps, as you suggested, were particularly tough in the first quarter given the tariff impact last year and some buy forward. Does that -- does the decline that you've seen in the first quarter, should that lessen as we come through 2026? Or are there other factors we should be aware of? Borje Ekholm: You see a lot of forecasts in the market on the North American market. And I would say the development you've seen during the first quarter is probably similar to what we should expect for the year. I think that's fair to say given our customers' guidance. At the same time, we have a little bit different mix compared to the market where, as Lars noted, we were maybe hit a bit harder than the general market, the first quarter because of the consolidation we've seen among the operators in the U.S. that was closed. So if you net-net, I don't see a changing market condition, but I see a bit better mix for us vis-a-vis the market. And as you noted, we had a tough comp in Q1. But don't assume the U.S. all of a sudden is going to change direction. That's why I want to come back to what I think is more important today is we're less exposed to North America from a geographic mix perspective and the investments and commitment we have been talking about to diversify our mix. So if we are a bit weaker in North America, but stronger in another market for a quarter, we can actually compensate that and keep a very healthy gross margin. And that, I think, lends for a better predictability of the total company and actually for a healthier way of operating the company. So -- well, I think North America always will be important. From a mix point of view, it will be less important going forward. We work with the customers as front-runner customers, but it's always going to swing a bit up and down in a quarter. So we're -- on the one hand, yes, I would always prefer them to grow, but the reality is it will swing. So the question is more how we can provide a healthy gross margin, a much more stable gross margin. And I think Q1 is a good indication of the work we've done. Andrew Gardiner: I mean I suppose related to that, I mean you mentioned the other strategic markets. I mean India and Japan have been the 2 you've highlighted away from North America. You did see good growth there. I mean is that something that is not just a 1Q impact, but we should expect steady growth from those 2 key markets through the year? Borje Ekholm: I would -- there, we have actually strengthened our market position. So we should see healthy growth as we continue to deliver on those opportunities. So I'm actually very comfortable about that. Daniel Morris: The next question is going to come from the line of Erik Lindholm-Rojestal from SEB. Erik Lindholm-Rojestal: Just one question here. I wanted to ask on OpEx and the impact of cost savings. I mean it looks like underlying OpEx is down around SEK 0.5 billion, as you mentioned, despite the one-off impact that you flagged here. So what sort of inflationary pressures do you see in OpEx for the rest of the year? And when should we start to see the impact from the cost savings that you've launched in Sweden here at the start of the year, for example? Lars Sandstrom: Yes. When it comes to OpEx, I think in the quarter here, it's down organically. I think it's currency and iconectiv that is impacting and then there is somewhat also underlying cost reduction coming through here. And we are continuously working with that. The inflation we talk about since a big portion of the cost base in OpEx is related to people. Of course, there is an underlying continuous salary increase that is coming that we need to work with. And our working assumption is that we live in the flat RAN market and that we need to accommodate too by continuously working and finding efficiencies and reductions where it is possible. And then we do that continuously. So that is what we are working with here every quarter continuously. And you saw there was quite a bit of restructuring here coming in the first quarter now, primarily to the Sweden area, but also the rest of Europe. We have activities in North America, in Asia, et cetera. So that is a continuous work that we are doing, and we will continue that also in the coming quarters. Erik Lindholm-Rojestal: All right. But I guess it's fair to say that these measures will more so show in the second half then? Lars Sandstrom: The ones that we announced today or in this quarter, of course, they come more in the second half of the year and into next year. And then we have the previous ones that is coming, you can see now. So that is a continuous work that we do. Borje Ekholm: I would just add there, by experience, it takes a bit longer than you hope to see it in the numbers. So theoretically, it should come in Q3, of course, or Q2, Q3, but it will be a bit of a delay there. That's why you see the cost kind of not exactly following the number of employees because it's simply associated with costs around when we take costs out. So -- but you will see it after the second half and into next year. Daniel Morris: The next question is going to come from the line of Andreas Joelsson, DNB. Andreas Joelsson: A follow-up on the COGS question that we had. Of course, there's a headwind coming from the component prices, but you have been able to increase the gross margin in Networks for some time and now it has stabilized. What other areas within costs have you sort of from experience the last few years, learned that there is maybe that you can use to compensate for component price increases. So it's not just negotiations with vendors and customers that could keep the gross margin resilient, as you say, if you understand that blurry question. Borje Ekholm: Thanks for the question, Andreas. I can try to give you a notion. Of course, the most important one is to work on the prices. It's undoubtedly the case, and that we continue to do. The other levers we have, which actually have proven to be very sizable is product substitution, i.e., we can -- through technology development, we deliver a product that performs the same, but at a lower price or a lower cost point, I should say. So that actually is maybe the most important one that we've been able to do for quite some time. And I feel quite comfortable we'll get that with the next-generation ASICs coming within not-too-distant future. Then we have also been able to take a lot of costs out on service delivery. And there, I think there are more costs to be taken out. So I think we have -- it's not -- it doesn't come easy. It doesn't come in that sense for free. But I do think there is a number of areas we can kind of leverage to protect a healthy gross margin longer term. And that's why I feel we have kind of reached a different level of performance and control on the cost side. And you know component prices have varied already now. So we've been able to handle that in many different ways. And our ambition is clear. That's what we intend to do going forward as well. And we have a number of degrees of freedom in what we actually do to manage the margins. Daniel Morris: The next question is going to come from the line of Richard Kramer at Arete. Richard Kramer: Borje, you mentioned the early stages of physical AI, which would involve greater mobile connectivity. But can you point to anything within your portfolio which could provide a material uplift to group sales growth, especially addressing the sort of data center AI spending boom given that enterprise remains fairly small in the mix? Borje Ekholm: Yes. Richard, it's a good question. We're not going to see any sales directly from data center expansions right now. Our, call it, exposure to AI is more going to come from the applications when you start to see inference play a very different role. So we may not be the frontrunner on the AI wave, but we are rather the longer term, I would say it's one of our key drivers of traffic in the networks and the connectivity will does look different. That's why I believe the exposure we have is going to come more from that traffic development from AI moving into implementations, but it's also going to come from AI in enterprises. And here, we start to see some front-runner industrial companies, still small, but actually picking up demand in 2 areas: enterprise connectivity, i.e., wireless solutions or as a matter of fact, in interest for network APIs and embedding that into enterprise use cases. So I would like -- I don't want to promote that we have any exposure to data center. So that wave is going to go. We're more a little bit behind that, I guess, in the -- I don't know what to call it, but kind of benefiting from the overall migration of applications towards AI. Daniel Morris: Next question is going to come from the line of Felix Henriksson, Nordea. Felix Henriksson: Good to see the Cloud Software and Services EBITA margin expanding to around 12% on a 12-month rolling basis. I wanted to ask, is there any reason why the margin expansion in this segment should not continue given that growth seems to be led by very margin accretive 5G core demand? Lars Sandstrom: It's a good question. I think what we have said is that the first aim here is to reach a stable double-digit margin and then we work from there. And I think we need to remember that the cloud software is also connected to the flat RAN market. So there is -- but still, there is an underlying growth that we are able to capture with in the core area, which is good, I think. And we have managed to show that we are having a good market position there. So we continue to work on that. So we don't promise. We guide quarter-by-quarter, as you know, but we feel we have reached a stable level now in a good way in the company. Daniel Morris: The next question will come from the line of Ulrich Rathe at Bernstein. Ulrich Rathe: This is more a question for Lars, please. You talked about how you have immunized margin to the foreign exchange moves by matching cost and revenue better. Can you sort of talk about that a little bit more? And I'm wondering, in particular, 2 areas here. One is to what extent are you still benefiting from hedging that could roll off and produce an incremental headwind if the FX rates stay at where they are? And also, with the current level of FX matching in cost and revenue, what would be the effect of a strengthening -- sorry, of a weakening Swedish krona? Would that actually correspond to a material margin driver for you or not? Lars Sandstrom: I think we need to separate between gross margin and EBITA margin here. On the gross margin, we are fairly balanced in the currency baskets, whereas in the OpEx side, we are much more exposed with the Swedish SEK ratio there. So it's higher as we get more of an impact from that end. So I think from -- so that's what's impacting, so to say, the FX mix that we have. So I think that -- and if there is a significant change, you would see that more impacting EBITA rather than gross margins in that sense. And then when it comes to hedging, we have some hedging, but rather low levels and they are coming out. So it should not be a big impact going forward. Daniel Morris: Next question will come from the line of Sandeep Deshpande at JPMorgan. Sandeep Deshpande: Could I ask -- I mean, you've seen this weakness in North America. In terms of your exposure to 5G and 5G core outside North America, do you see there is a potential for significant upgrades? I mean that is the market hasn't shifted as much to 5G or 5G core over the last few years as it has in North America and thus, the growth outside North America could compensate if North American growth over the next few -- couple of years is not going to be as strong. And the question I'm asking here is that historically, outside North America, they have not been as keen to quickly upgrade to next-generation technologies like 5G or 4G even before that. So I mean, how do you see that progress, I mean, at this point? Daniel Morris: Borje, maybe we ask you to take that one. Borje Ekholm: Yes. That's a very good question. North America have been a front-runner market. It's still not fully migrated to 5G SA even there. The only market which is fully 5G SA actually is China. So we see that that's where the market will go. We see a number of operators today increasingly focused on migrating to -- from 5G non-standalone into 5G SA and then 5G advanced. It's still largely a work in progress. So if you try to give some sort of statistics, maybe 1/4 of the operators have some sort of 5G SA and 5G SA of scale is fewer than that. So I would say that's actually one of the major opportunities for our industry. And it's 2 things. Of course, it's an upgrade cycle for us. But I think more importantly, it will allow the operators to start offering differentiated services. So you can have network slicing, dynamic network slicing, for example, can happen when you have 5G stand-alone. So the way we think about this is it's actually one of our more positive opportunities from a medium-term perspective as companies or operators upgrade. And the way to think about this is in order to prepare your network for 6G that eventually will come, you need to actually migrate through 5G standalone into 5G advanced and then have built the architecture that's prepared for 6G. So I see while not everyone have transitioned today, they will need to go that way. And so it will provide an interesting opportunity for us as operators upgrade. So that's why we've invested in positioning us well on 5G core, and we are now starting to see growth coming through on 5G core. So it's actually, I think, a net-net positive for us as we move forward. Daniel Morris: Next question is coming from the line of Daniel Djurberg at Handelsbanken. Daniel Djurberg: A question. I was quite impressed by the network gross margin given the geographical mix with large deployment in India and also growth in LatAm. It could indicate that it was capacity heavy. And if that is correct, should we expect more coverage and hardware deployment in second half in India, for example, and Japan, i.e. supportive on gross margins and then also we have the cost inflation that you mentioned. Daniel Morris: Maybe, Borje, we can start with your thoughts on those 2 markets more broadly and Lars on the margin. Borje Ekholm: Yes. I know we were often talking about coverage and capacity before. I would say what we have tried to do is actually to reduce the dependence on that as well. So when you look at this, there is always an element of higher-margin software sales versus hardware, but it's less important going forward. So the comment here is probably to say that there is a tad more capacity, but it's not meaningfully impacting the profile here. Lars Sandstrom: Yes. No, I think you covers it well. So I think the outlook you see in -- for the Q2 here for Networks is 49% to 51%, and that is what we see now based on the product portfolio and product deliveries and market mix we foresee now. So I think signals rather stability as well. Daniel Morris: The next question is coming from the line of Sebastien Sztabowicz at Kepler Cheuvreux. Sébastien Sztabowicz: On the defense market opportunity, you've been talking about a $10 billion opportunity in that market. Now you are talking about some trials happening currently in Italy. When do you expect those opportunity to materialize and generate first significant revenue? Is it an opportunity over 3, 5 or beyond 5 years? Just to understand a little bit the phasing and the ramp of this technology. Daniel Morris: Sure. Borje, your thoughts on the overall opportunity. Borje Ekholm: I actually think the opportunity is more near term. It's very hard to judge. But I think it's a very good question. And your perspective may be as good as ours. What we see though is a very near-term, very strong need in the market for modern, call it, modern warfare involves a lot of AI and actually heavy need of communication and connectivity, therefore. So we see that this is much more of a near-term opportunity. I wouldn't say 5 years plus. It's more kind of a mid, call it, use 3 years, for lack of a better word, before this opportunity. But if you start to think about -- take a critical site, it could be a sports arena or a nuclear power station or an energy generation station or something like that. The threat from drones are pretty much today. So when you start to think about when is the technology needed from a risk perspective and protection perspective, it's actually a near-term risk. So as I know it or as I see it, I think we need to tackle that need when the market is there. So had I wished we would have started a few years earlier, yes. But I think we're in pretty good shape to start to see these opportunities materialize over the next even maybe 9, 12, 18 months opportunity, and then they start to scale at 2, 3 years. So I'm quite excited about these opportunities because the communication network and the scale we have makes our solutions rather competitive. So I'm actually -- I'm thinking this is -- our ambition is that this is a nearer-term opportunity than 5-plus years. But then putting an exact number on it, I can't, to be honest. But I'm -- but the reception we get from customers is very positive. Daniel Morris: The next question is coming from the line of Sami Sarkamies at Danske. Sami Sarkamies: I still wanted to go back to the rising input costs that were discussed earlier in the call. I have a 2-part question. Firstly, can you elaborate on your current operator agreements allow you to raise prices if needed? Do they, for example, cater for above normal cost inflation? And then secondly, when you look at your operator customers, are you seeing rising energy costs to have an impact on their behavior and potentially investment plans for the year? Daniel Morris: Lars, we start with you on the first and Borje... Lars Sandstrom: We start on the customer side. There are -- it depends on the renewal cycle of contracts that we have with customers, and that can vary a bit in different markets and different customers. So there are -- but there are still an opportunity, I think, to take this discussion because we are -- these are a bit exceptional times. So there is -- we need to take this in a good commercial discussion with our customers. And when it comes on the energy impact on operators, I think that is an important part, the TCO where our products with the right investments they do, they can drive down their TCO. So I think in that sense, it helps our competitive advantage in the market. But we have not seen any big impacts yet. But of course, if there is a prolonged situation with high energy costs, that could have an impact, but we have not seen that. And I think you should also remember the revenue base of our customers is very stable. So they have quite -- we have seen this historically. And normally, our industry or our customers are quite resilient over time. I don't know if you want to add more on that, Borje. Borje Ekholm: You've captured it. What we see and we see an increasing focus on energy efficiency in discussions with customers. So I think this will be a topic -- and as Lars said, it kind of goes both ways, right? It's an opportunity because they need to actually upgrade some of the old equipment, and they actually need to move towards modern. And at the same time, they get a bit tougher on their own cost position. So it kind of sits in that cost a bit [indiscernible] as we say in Swedish, I don't know what that translates to. But that's kind of the situation, right? The interesting thing is that when we now are around, we start to see customers talking about how you actually phase out old technology. And we're even starting to see customers in some markets talk about how do we phase out 4G and actually migrate to 5G and in a way, then have only 5G and 6G. Of course, 3G being phased out in most regions, except Europe possibly. That will also support energy efficiency. So we're actually -- this energy squeeze leads to a bit of a -- when you asked about change in behavior, yes, it is a change in behavior, but much more focused on how do I get on the latest technology curve that helps me with lower process cost. And that will include phasing out 2G, 3G and soon 4G in some markets. Daniel Morris: Moving on to the next question, please, which is coming from the line of Oliver Wong at Bank of America. Oliver Wong: I wanted to focus on perhaps the cost from things like logistics and transportation since given ongoing global geopolitical events, it seems like there could be some impact on that. And also perhaps on the instability of the supply chain, could that be a risk to you? So yes, it would be great to kind of discuss about the logistics and transportation costs. How is that relative to perhaps the impact from rising memory in terms of potential headwinds going into the year? Lars Sandstrom: And I think when it comes to logistics and transportation, we have seen some impact now. But in the total scheme of our cost base, it's limited. So we should remember that. I think it's important. And especially now in Q1, we had some additional costs with the Middle East conflict there where we had to do some rerouting, changing transportation lines, et cetera, utilizing then our flexible production system and supply chain. So I think, yes, it has given some, but we have been able to make sure that we deliver to our customers, which is, at the end of the day, most important for us. So I think -- and that ties a little bit into your supply chain question there. We have a rather well-distributed supply chain today to manage disturbances. We have proven that, I think, during the pandemic. We have proven that now during last year on the tariff side, et cetera. So we continuously work with this and try to mitigate when the things are happening. And of course, as we have said on the tariff side, we cannot guarantee that we are immune, of course, but we are, I think, managing it pretty well. Borje Ekholm: The fair comment is also that we have a distribution hub in the Middle East. So we've been impacted for sure already and been able to mitigate that fully by leveraging the flexible supply chain. So I think this -- we'll have to focus on managing it, monitoring and managing it as well as we can. Daniel Morris: We have time for one final question this morning. We can move to the next. So a follow-up question from Daniel Djurberg at Handelsbanken. Daniel Djurberg: I know I should ask your customer this and I will, but still Latin America saw good growth in Networks, and this is a geography with really tough competition. To me, your radio access network portfolio is more competitive to [ Pearson ] for many years, you showcased at Mobile World Congress. Can you give -- or obviously, can you give any examples of this, if it's correct? And how we should think about markets like Latin America, Sub-Sahara, Eastern Europe, where you have tough Chinese competition? Borje Ekholm: It's a good question. And the reason why I'm hesitating is more that we get into specific customer situations. And I don't want to talk about that for the simple reason that if I would be our customers, I wouldn't like us to talk about it because it may be my competitive positioning in the market that I'm revealing. That's why I think it's inappropriate for us to talk about customers. But what I can say is that we've -- we think our -- the competitor we have to always beat is one of the Chinese. They're, of course, very strong. I have no doubt about that. But we can see that we can actually go head on with our product portfolio, thanks to the strong performance, the strong infield performance we see on quality benchmarking when we compete with them, where we come out well. You can see that in all the -- whether it's Umlaut test or OpenSignal or whatever, we come out well in that comparison. We perform also very well on energy once you're in the field. And it's because the way we have focused on developing the products, it's actually dedicated not to lab trials, but more to infield performance. So operators that looks at that total perspective there we can compete, right? And we've seen that in Latin America. We see it some -- in Africa, it's maybe the hardest market to compete. And you've seen us fight there. But at the end of the day, we remain competitive, and it depends on operator preferences as well. We certainly, in Southeast Asia, win market share when we compete also with the Chinese competitors. Daniel Morris: Thank you. So that comes to the end of the Q&A session. Thank you for joining us. Thanks, Borje and Lars as well. Borje Ekholm: Thank you.
Operator: Welcome to a WaFd Inc.'s Second Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Goode, Chief Marketing Officer and Investor Relations Manager. Please go ahead. Brad Goode: Thank you, Kevin. Good morning, everybody. Happy Friday. Let's dive into our second quarter earnings report. You can find our earnings press release, along with our detailed fact sheet and investor scorecard on our website, that's wafdbank.com. During today's call, we will make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. Information on risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and the Form 10-K for the fiscal year ended September 30, 2025. Forward-looking statements are effective only as of the date they are made and WaFd assumes no obligation to update information concerning its expectations. We will also reference non-GAAP financial measures, and I encourage you to review the non-GAAP reconciliations provided in our earnings material. With us this morning are President and CEO, Brent Beardall, Chief Financial Officer, Kelli Holz, and our Chief Credit Officer, Ryan Mauer. I'd now like to hand the call over to Mr. Beardall. Good morning. Brent Beardall: Thank you, Brad. Let me start by saying I thought we had an outstanding second quarter, and we are excited to elaborate on the results. This morning, we will cover four areas. First, Kelli Holz, our CFO, will provide you with a detailed review of our balance sheet and our income statement for the quarter. Next, Ryan Mauer, our Chief Credit Officer, will provide comments on the current status of our loan portfolio and credit quality trends. Third, I will provide my insights on the quarter potential for growth capital management strategies and regulatory developments. Finally, we will be happy to answer any questions you have at that point. Kelli, please walk us through the quarterly results. Kelli Holz: Thank you, Brent. As announced, WaFd Inc. reported net income available to common shareholders of $61.9 million or $0.82 per diluted share for the quarter ended March 31, 2026. This compares to net income to common shareholders of $0.65 per share for the second quarter of fiscal 2025 and $0.79 per share for the December 2025 quarter. The $0.03 increase in earnings per share for the quarter was a result of a modest increase in net interest income, controlled expenses as well as 2.7 million shares repurchased during the quarter at a weighted average price of $31.85 per share or 1.05x tangible book value. Our share repurchase spend currently has a remaining authorization of 8 million shares, which depending on share price, provides a compelling investment alternative. For the balance sheet, loans receivable increased $119 million during the quarter, primarily due to an increase in our active loan types Commercial Real Estate, Multifamily, Construction, land A&D, C&I and Consumer, which combined, increased by $359 million. Loan originations and advances for the quarter outpaced repayments and payoffs in our active loan types with originations of $1.5 billion and repayments and payoffs of $900 million. For the inactive loan type, advances were $21 million with repayments and maturities at $276 million. The weighted average rate on originations was 6.22% for the quarter, and the weighted average rate on repayments and payoffs was 6.12%. Please see the tables in our fact sheet that provides a breakdown between our active and inactive loan types. Total investments and mortgage-backed securities increased $191 million during the quarter, funded by borrowings, which increased $626 million. Investment purchases were primarily discount-priced agency mortgage-backed securities with an effective yield of 4.8%. The increase in mortgage-backed securities as part of our overall investment strategy currently replacing the single-family mortgage loans balance runoff. Total deposits decreased by $292 million during the quarter, with noninterest-bearing deposits decreasing $115 million or 4.3% and interest-bearing deposits remaining stable, decreasing just $4 million and time deposits decreasing $174 million or 2%. Deposit outflows in the first calendar quarter reflect predictable seasonal patterns, including annual distributions, tax payments and bonus disbursement. Core deposits ended the quarter at 80.4% compared to the December quarter at 79.7% and up from the September quarter at 77.9%. Noninterest-bearing deposits ended the quarter at 12.2% of total deposits. The loan-to-deposit ratio ended the quarter at 94.5%. WaFd's capital profile remained strong. We estimate our CET1 ratio at quarter end to be 11.4% and our total risk-based capital ratio to be 14.4%. Liquidity is strong with $4.2 billion of on-balance sheet liquidity, a robust core funding base, low reliance on wholesale borrowings and significant off-balance sheet borrowing capacity. For the income statement, net interest income increased $6.5 million from the prior quarter. The effect of the reduction in interest paid on liabilities outpacing the reduction in interest earned on assets by 5 basis points. The net interest margin was 2.81% in the March quarter compared to 2.7% for the quarter ended December 31, 2025. For the spot rate as of the March quarter-end, the yield on interest-earning assets is 5.06%, the cost of interest-bearing liabilities, 2.78% and the margin at 2.81%. Comparing the linked quarter, I'll walk through from the December to the March margin, a 5 basis point net improvement with deposit rates, repricing more favorably than loan rates, a 7 basis point improvement recognizing nonaccrual interest during the quarter, a 6 basis point improvement for day count February being 28 days. We have 50% of our loans and 75% of our securities on a [indiscernible] accrual basis. Offsetting the increases was a 5 basis point decrease related to our securities growth, the mortgage-backed securities purchases at a net spread of approximately 1%, although it puts pressure on the margin, it does add $1.5 million in net interest income per quarter. Absent any changes in interest rates, we expect our margin to be flat in the near term, acknowledging the day count for the March quarter and the funding of loan growth and deposit activity. One piece of good news that will materialize going forward for us is the accretion of $167 million of deferred income related to the interest rate mark on the Luther Burbank loan portfolio. Currently, this is being accreted into income at a rate of $6 million per quarter. We expect this to accelerate as these loans begin to adjust or repay. Total noninterest income decreased $400,000 compared to the prior quarter to $19.8 million, contributing to noninterest income is $6.7 million in commission revenue from our WaFd Insurance subsidiary compared to $4.4 million in the prior quarter, offset by losses of $1.1 million taken on certain equity method investments in the quarter compared to losses of $408,000 realized in the prior quarter. As a reminder, the December 2025 quarter also included a $3.2 million gain from the sale of a branch property. Total noninterest expense increased $4.1 million or 3.9% from the prior quarter as a result of increased compensation and technology expensed reflecting annual merit increases, implement taxes and continued investment in technology. The company's efficiency ratio for the quarter was 55.7% compared to 55.3% in the prior quarter. I will now turn the call over to Ryan to share his comments on WaFd's credit quality. Ryan Mauer: Thank you, Kelly, and good morning, everyone. As reflected in our earnings release, we had a solid quarter of new loan production along multiple product lines. As Kelli indicated, total production in our active portfolio was $1.5 billion for the March quarter. This loan production was centered in Commercial and Industrial of 37%; Commercial Real Estate of 15% and Construction of 35%. Importantly, we were able to achieve this level of loan production with a consistent approach to underwriting that maintained a moderate risk profile. Adversely classified loans decreased by $65 million in the quarter and now represent 2.6% of net loans compared to 2.9% as of the December quarter, and 2.5% as of March 2025. Total criticized loans decreased by $65 million to 4.2% of net loans compared to 4.6% as of the December quarter and 3.3% as of March 2025. It should be noted that the criticized loans are not concentrated in any one business line or industry and are reflective of the economic environment where elevated interest rates and economic uncertainty impacted both commercial and consumer borrowers. In addition, an asset being criticized does not imply that loss exposure exists. Rather, it is a representation that the borrower is experiencing some level of financial stress that needs to be addressed. Nonperforming assets decreased to $132 million or 0.48% of total assets from $203 million or 0.75% at December 31, 2025. The change is due to nonaccrual loans decreasing by $67.5 million or 35% since December 31, 2025. REO decreased slightly to $8.1 million and other property owned decreased to 0 with USDA receivable proceeds received. Delinquent loans decreased to 0.78% of total loans at March 31, 2026, compared to 1.07% at December 31, 2025, and 0.27% at March 31, 2025. While still elevated in comparison to recent periods, these credit metrics are trending positively, remain modest in light of WaFd's loan loss reserve and capital position and are indicative of our culture of early and proactive portfolio management. It is important to note here that delinquencies and nonperforming assets are impacted by a large commercial relationship over 90 days past due. Outstanding balances for this relationship amounts to $51 million. Although appropriately placed on nonaccrual per policy, there was no charge-off taken upon revaluation at this point, and we are actively collaborating with the borrower to resolve the issues. If nonperforming assets and delinquencies were adjusted for this relationship, NPAs would be 0.3% of total assets compared with 0.6% at September of 2025, and delinquencies would be 0.52% of total loans compared to 0.6% at September 30, 2025. The net provision for credit losses in the quarter was $4 million, the provision is primarily the net result of increased commercial loan originations. Net loan charge-offs for the quarter represented a nominal 1 basis point annualized of gross loans at March 31, 2026. The allowance for credit losses, including the reserve for unfunded commitments, provides coverage of 1.05% of gross loans at March 31, 2026, compared to 1.01% in March of 2025. For the commercial portion of the portfolio, the allowance represents 1.33% of net loans compared to 1.24% as of March of 2025. Credit metrics at March quarter end, while still elevated from prior quarters, are trending positively, remain at healthy levels overall and continue to be impacted by two primary drivers. First, the elevated interest rate environment has impacted borrowers' expense structures. Second, the economic uncertainty originally driven by tariffs with further expected impact by war in the Middle East and energy supply shocks will continue to impact borrowers' top line revenue results as well as operating costs. Looking forward, these factors remain headwinds for credit quality. With that, I will turn the call over to Brent for his comments. Brent Beardall: Excellent. Thank you, Ryan. No question, the headline for this quarter is loan growth in my opinion. After over a year of seeing our loan portfolio contract, this quarter, we saw growth in the overall net loan portfolio, including inactive segments. More impressive, we saw a 12% increase on a linked quarter basis in the active portfolio. And if you included the yet to be funded loans, gross active loans outstanding increased by 20% on a linked quarter basis. I am pleased to report that the biggest contributor to that growth came from C&I lending segment from a percentage standpoint. Bottom line results for the quarter improved nicely with 4% linked quarter EPS growth and 26% year-over-year, even better if you compare the first 6 months of the year, versus the prior year, we improved earnings per share by 35%. With all of the discussion, an understandable worry about loans to non-depository financial institutions, so-called NBFI loans. I'm very happy to report that NDFI loans at WaFd are only a rounding air at $35 million or 17 basis points of our loan portfolio. We have historically been very skeptical of lending money to others that are going to turn around and lend it out to consumers and businesses, typically at credit standards that are looser than our own. One of the great ironies we see with the surge in NDFI [indiscernible] in the industry over the last few years is that it represented the bulk of C&I loan book. The crowd rushed to get out of CRE assets, or fear potential losses. And many went into what I think were riskier NDFI loans, all for the sake of diversification. We have long believed that concentrations can be a double-edged sword. It all depends on what concentration is in. That is why we remain bullish on well-underwritten commercial real estate loans that typically have a diversified cash flow, real underlying collateral, significant upfront equity and strong sponsor support. Our strategic plan, Build 2030 is designed to fully shift our focus to where we can add the most value for our clients and shareholders, serving the banking needs of businesses. This shift takes time, discipline and effort and comes with specific goals. The most important goal is increasing our noninterest-bearing deposits the total deposits from 11% last year, up to 20% by 2030. Today, we sit at 12.2%. It is an ambitious goal, but it is what we need to do as it will also drive increased loan demand and branch utilization. The way our peers achieved their lower cost of funds is to focus on serving small businesses, which is exactly what we are doing. Here's what we've accomplished so far. It was just last January that we recognized or we reorganized our frontline bankers in three teams. We kick off, Build 2030. During that time, we have become a preferred SBA lender, 99% of our branch managers, formerly specializing mortgage lending have now passed our Small Business Certification process. And we are formed into three business lines: first, our business bank and what commercial credit needs up to $10 million and all small, medium-sized business needs and consumer deposits. This includes our 208 branches. Our corporate [indiscernible] handles all of our large commercial credits and treasury clients and their treasury management leads. Lastly, our Commercial Real Estate Bank, recognizing our historical strength and expertise in CRE, we have a dedicated team to serve the credit and treasury needs of real estate developers and investors. We acknowledge that we have work to do to improve our profitability. As you have heard, our margin was 2.81% from this last quarter with our return on tangible common equity of 10.8%. If we can get our margin up to a little bit higher to 3%, which is our short-term goal over the next 2 years, everything else being equal, ROE or ROTCE would be 12.5%. The key from my perspective is growth in direct C&I loans and low-cost deposits, supported by growth in CRE loans while running an efficient bank. I'm pleased to see our efficiency ratio remain near the top end of our target range at 55.7%. We believe that we have products and the teams in place to grow our active loan portfolios by 8% to 12% going forward. Looking forward, our lending pipeline continues to be quite strong, building on the very strong second quarter we had of $1.5 billion of originations. It is also very encouraging to see new deposit pipeline increased by 66%, on a linked-quarter basis. To give you some specific numbers, our lending pipeline actually decreased from $3.6 billion as of December to $3.2 billion, but that's because of the robust originations we have. The lending pipeline has actually grown down 12.7%. Our deposit pipeline, however, increased from $264 million as of December 31 to $439 million as of March 31. So a 66% increase. It is fun to see the traction [indiscernible] are gaining. Let me speak on deposit competition. As you are all well aware, competition for low-cost deposits is robust and growing. Between the two big [indiscernible] banks that have the advantage of the implied guarantee of the federal government on all deposits, to other regional banks to credit unions and fintechs, there is no shortage of competition and that looks to be getting even more challenging with the upcoming entrants of Elon Musk into the space with this new product X Money. Early indications are they are going to be very aggressive in looking to take market share, advertising 6% rate on FDICEC insured deposits and 3% cash back on debit card purchases. Both of these are fairly loss leaders. What gives me [indiscernible] is the fact that the sponsor is the richest person on earth and confirm losses to take market share for an attending period of time, if he chooses to do so. The good news. We are a relationship bank. We are not priced at the high end of the market today, and I think most consumers will see through the loss leader, [indiscernible] and be skeptical about what the long-term value proposition will be. All of that said, I think X Money could be to traditional banking, what Tesla has been to the auto industry, and it certainly has our full attention. We launched [indiscernible] management on August 31 of last year with the hiring of an experienced team of professionals from a [indiscernible] firm here in Seattle. Our goal is to organically grow wealth management to $1 billion in assets under management in the first 2 years. Early indications remain very positive. AUM amounted to just under $450 million as of March 31, and it is nice to fill a hole we have had [indiscernible]. We see wealth as an essential element growing noninterest income and commercial deposits as many prospects want to find one bank for their full banking relationships. Two significant developments regarding technology. As many of you have -- know we have established a subsidiary, [indiscernible] Labs, that is dedicated to building software for the benefit of our customers. We are the only bank, our size in the country that I know of, that has built its own consumer online and mobile applications. Coming up in this third quarter, we are excited to launch the next generation of our mobile app, which will reduce the time it takes from launch of the app, until a client can see their balances by more than half. Speed matters to our clients, and this will be a huge upgrade. This will also enable us to launch additional differentiated features like consumer positive pay and real-time peer-to-peer payments within the WaFd ecosystem. The developments in AI technology were perhaps the biggest news in the market over the last year. We are actively using AI to assist our software developers which is increasing the pace of development by over 2x. Additionally, this next quarter, we will be launching our AI Call Center Agent that I am really excited about. Our goal is that customers will be able to get the answers to their questions immediately 24 hours a day, 7 days a week, which will provide bandwidth for our bankers to deepen relationships. Let me be clear, customers will always be able to access a live banker, if that is their preference. Our perspective is technology is a tool for clients and bankers to make us better bankers. It is not a replacement for bankers. We sincerely believe that everyone deserves a banker. Turning next to capital. With our stock price written near tangible book value, for some of the last quarter as Kelli mentioned, we were aggressive in repurchasing shares. We repurchased 2.7 million shares at a price of $31.85 or just 105% of tangible book value. This represents 3.6% of the shares outstanding on December 31, 2025. That's still a staggering to me that in 1 quarter, we were able to buy back 3.6% of the company. We continue to believe that with our robust capital levels, when our share price is compressed, share repurchases are the best use of capital. Considering our 10.8% return on tangible common equity this last quarter. Last month, the Federal Reserve announced potential changes to capital calculations that could have a material positive impact for WaFd if approved. The proposal would adjust risk weightings for different loan categories. Specifically, single-family residential loans with the loan to value below 60% would go from a 50% risk weighting to a 25% risk weighting. As of quarter end, the weighted average loan-to-value of our 7.5 -- $30 single-family loan portfolio is less than 40%. What does all this mean? Our initial estimate is, if approved, it would increase WaFd regulatory capital levels by approximately $400 million. This would give WaFd, [indiscernible] and management more options going forward. With a solid preference to fund additional loan growth, followed by returning capital to shareholders, and lastly, looking at strategic M&A. For years, WaFd has been telling all that we're missing a little risk there is in these low loan to value single-family loans. It is gratifying to see regulators acknowledging that with this new rule. At this stage, it is just a proposed rule in making, but we will be paying close attention. By comparison, WaFd should benefit more than peer banks by this proposed rule because of large concentration of single family loans we have. For the past year, we have repeatedly heard from investors that they understand our plan and agree with why we are making the changes [indiscernible] the strategic plan. The only pushback has been they wanted to see execution on the plan. We hope this quarter and future results begin to answer that question. Finally, I want to acknowledge all of the incredible bankers that call WaFd home, to make these results possible. Our most valuable asset is our team. We have bankers that care and want to serve our clients. What we are doing is challenging, but we are making significant progress to becoming a business [indiscernible]. With that, Kevin, we'll open it up to questions. Operator: [Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Kelli, I wanted to ask about the margin. You mentioned 7 basis points on nonaccrual improvement. Is that the linked quarter swing, I think last quarter, you had some headwinds associated with it? Or was that just this quarter alone, positive impact to margin? Kelli Holz: So that's the linked quarter swing. So bringing one of our large nonperforming credits current and bringing back the interest income on to accrual and recognizing that is where you get to 7 basis points. So there was about $2.2 million that was recognized this quarter that is really from prior quarter activities. Jeff Rulis: I see. So the -- I guess, the go-forward kind of flat expectation is sort of absent nonaccrual impact the core flat -- I wanted to check back in -- you've mentioned the path towards 3% in a couple of years. And I guess, as you scratch out gains, where do you see that from? Is that on the funding side mostly? Just trying to kind of get to that 3% figure in over the same time frame? Brent Beardall: Yes, Jeff. So I'll opt in on that one. I think when we say kind of 3% over the short term, that's absent of changes with interest rates, right? Because the who knows where rates are going. We know, who the [indiscernible] of the fed would be at this point. We think just organically, as we reprice the mortgage loans and performance come due. We have that accretion to come into income and then we get a pickup yield as the sort of repriced to come into current market remits on more commercial loans. Then you compound that and drive lower cost deposit growth, there's even more upside with deposits. That's how we think. Jeff Rulis: And Brent, you did allude to the fact of securities growth is actually a net headwind, but a benefit to NII. But that's all sort of baked into the gradual increases, assumption of the positives you mentioned, but maybe additional maybe securities investment kind of headwind margin? Is that all kind of baked into the expectation? Brent Beardall: That is kind of baked in. And you've seen we've been pretty aggressive with the security repurchase -- purchases to this point. we'll probably take our foot off the gas on that as well going forward. So there won't be additional headwind from that. Jeff Rulis: Great. And then my other question was just on the growth or I should say net growth I think, encouraging to see some low single-digit pace so far. If we were to kind of extend that out, and we'll stop short of guidance, but thinking about how you're feeling about the inactive runoff versus active growth. Was this an outlier? Or do you think kind of trying to keep a low single-digit net growth pace is possible in future quarters? Brent Beardall: No, I would say we're very bullish on being able to continue the pace. It feels like we're getting traction, and I think you can see that with our pipeline. And so to have the 12% net growth on the active portfolio and you look at all our growth. So we've overcame what was $275 million of repayments of the inactive portfolio. That's huge [indiscernible] producing that [indiscernible]. I think in the, we've said it kind of 8% to 12% growth on the active portfolio. I think the higher than that range appears very reasonable for us. Operator: Our next question comes from Matthew Clark with Piper Sandler. Matthew Clark: First one for me, just on the loan growth. solid increase in C&I. I just want to get a sense for how much of that growth may have come from [indiscernible] or club deals and where that portfolio sits today? Brent Beardall: Yes. I don't think any of the growth came from [indiscernible] club deals at this point. We have a couple in the pipeline, but no sort of direct originations for this -- and Kelli, you have the overall portfolio of our club yields and a last i checked, we were around $500 million total bookings. Kelli Holz: I can get that number and get back to that. Matthew Clark: Okay. And then on the fee income run rate straight out the noise, it looked like a good result from insurance commissions. I know you've got some wealth is a growth area and SBA gain on sale is as well. But how should we think about that a $20 million run rate that you put up this quarter going forward? Should we cut that down a little bit? Or do you think that's sustainable? Brent Beardall: No. I think that's sustainable. And you mentioned exactly where we want to go, but let me be clear, right now, well we're still working to get profitable. So right now, wealth not a net [indiscernible] item to us, as we understand as part of the business plan and the SBA gain. Right now, we're looking for every earning asset we can. So we're not finding [indiscernible] SBA portion. So this is just good organic fee income and the insurance side. So about $20 million, we think it's very sustainable. Matthew Clark: Okay. And then just on the CD repricing, the CDs that are coming due this quarter, what's the renewal rate we should assume on that slug? Brent Beardall: Yes. So the CDs have gotten more expensive lately because [indiscernible] the market's [indiscernible]. We don't know the rate decreases are coming in [indiscernible]. So we're seeing actually some of the wholesale corporate deposits pricing [indiscernible] those treasuries. So we have balance of $4.2 billion of CDs repricing at 3.68%. And I think right now, we're [indiscernible] to 3.60% rates. Matthew Clark: You said 3.60%? Brent Beardall: Yes, 3.40% to 3.60%. Operator: Our next question comes from Kelly Motta with KBW. Kelly Motta: I didn't [indiscernible] to slide that it was a great quarter for loan growth in the active portfolio. It's really nice to see the commercial growth. Squaring your margin expectations to get to 3% over time clearly requires some -- bringing on some low-cost funding. I think you gave some color about the deposit pipeline. But I was wondering, clearly, part of this plan to shift towards commercial is for the strength of funding. Wondering understanding that some of these relationships take time for deposits to come over. If you could size like how much of this new commercial funding is coming with a core deposit relationship over time? That would be helpful. Brent Beardall: Great question. And Kelly, thank you for acknowledging. We believe this was just a fantastic quarter for us from a lower growth standpoint. The first net growth that we've had in over 5 quarters. So thank you for acknowledging that. And every one of these commercial relationships [indiscernible] operating accounts. So when you get the accounts, the question is how much do they have in deposits. And so typically, we don't get very much new deposit balances, but you get the accounts. So we're seeing a number of accounts continue to be an increase, the balances [indiscernible], and that's just the nature of what we're trying to do. Kelly Motta: Got it. That's helpful. And then I understand that these aren't [indiscernible] or club deals. I'm wondering if you could provide just given how strong the growth was at the average size of the new relationships coming on? Brent Beardall: Yes. We'll follow up with that. It's broad-based because you've got those -- the smaller deals coming in from the branches and the branches are on average between the deals, there are probably $200,000 each on the C&I side, then we've got some larger true commercial deals that are in the $20 million to $40 million range. But we'll follow up with that number for you. Kelly Motta: Last question for me and then I'll step back. Expenses were up quarter-over-quarter, pretty understandable given the strength of growth and and the revenue growth that you had, and there's some seasonality. I know you don't give guidance, but wondering within that, that's a good number to build off of or any sort of puts or takes or special seasonality considerations impact in Q2? Brent Beardall: Yes. No. Good question, though. This is the quarter where we see the annual merit increases kick in and, of course, the increase in taxes for the first calendar quarter. So this is a good run rate for now. But if we continue to produce at these lines, I would expect compensation to increase its -- some of our variable compensation increases, but we want to do that and we're driving value for our shareholders. I think it's a good solid run rate. It could go up slightly from here. We continue to prove outperform, if you will, in terms of [indiscernible] production. Operator: [Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to Brad for any further remarks. Brad Goode: Kevin, thank you so much. Thanks, everybody, for joining the morning's call. Please contact me if you have any questions? Have a great rest of the day and a great weekend. Appreciate you being here. Thanks. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Walter Hess: Good morning, everyone, and welcome to our Q1 '26 trading update. I'm Walter Hess, the CEO, and I'm joined today by our CFO, Daniel Wuest. In line with what we announced at the full year conference, we will provide transparent quarterly insights into our path to EBITDA breakeven, which is why we are hosting today's call. Just a few weeks ago, during our full year '25 results, we outlined our strategic evolution from an online pharmacy player to the leading digital and AI health platform, the engine for our profitable expansion at scale. Today, we will show you the facts that validate our successful development. Let's move straight to the Q1 highlights on the next slide to demonstrate how well this engine is now accelerating. Overall, we achieved a strong revenue growth of 10.7% year-over-year. Our Rx business showed outstanding momentum with a 30.4% growth year-over-year alongside a strong 7.6% sequential growth compared to the previous quarter. The growth was fueled by accelerating month-over-month with a remarkable uptick in March, which also continues in April. Our high-margin Digital Services business continues to scale rapidly, achieving an impressive 63.1% growth rate while consistently increasing margins. In Q1 '26, we successfully expanded our ecosystem platform, growing our active customer base by 1 million year-over-year, whereas 0.4 million in Q1 '26, to a total of 12.6 million, which is a great achievement. And most importantly, and as you know, our main priority, we improved our adjusted EBITDA by CHF 10 million year-over-year to minus CHF 6 million, proving we are on track to achieve our breakeven target in the course of 2026. Let's move to Slide #5 now. The 30.4% year-over-year Rx growth clearly proves that our strategy to capture the potential of the Rx market is highly effective. It shows that the patients are more and more familiar with our Digital Services and increasingly value the comfort of home delivery. We saw a growth in Rx orders from month-to-month with a significant uptick in March, rounding off a very successful first quarter and also continuing into April. And this acceleration comes together with a more and further optimized channel mix, which pleasingly increased RAS, return on advertising spend, and decreased our customer acquisition costs even further. Ultimately, this is a strong start into the year, and it demonstrates the growing stickiness of our health platform. Our non-Rx business remains a reliable driver of value, delivering continuous and profitable growth of 6.5% year-over-year to fuel our broader ecosystem. We managed our OTC and BPC business according to plan to a growth rate of 4.4%. Our Digital Services, including TeleClinic, Retail Media and our Marketplace grew further by an outstanding 63.1%. These digital business lines are not just growing top line, they are delivering increasing margins and therefore, a significant EBITDA contribution. And on top of it, the strong platform performance and expansion also forms an excellent basis for our Retail Media business. And now I would like to hand over to Daniel. Daniel Wüest: Thank you, Walter. And also from my side, a very warm welcome to all the participants. Let's move to Slide #7, where you see the EBITDA bridge, which we also provided to you during the full year figures in March. And I want to start this with the following comments. We closed Q1 with an adjusted EBITDA, as Walter already said, with minus CHF 6.3 million, representing a substantial improvement of almost CHF 10 million, exactly CHF 9.8 million compared to the quarter of last year. That's proving our continuous path to profitability. The adjusted EBITDA margin improved by over 360 basis points from minus 5.7% to minus 2.1% in Q1 compared to the previous year's quarter. If you look at the chart and you see since Q1 '25, we have seen an ongoing quarterly EBITDA improvement driven by basically 3 factors: Better operational performance, focus on marketing efficiency and also very important to mention, disciplined cost management. Amongst other, you remember, we have closed the Heerlen Logistics operations last year. And this year, we have announced the closing of Ludwigshafen, the warehouse and their respective logistics operations, which have already contributed substantially on the cost side, but will further contribute during '26. And I can also confirm that with the closure of Ludwigshafen, we are very well on track. We will see first positive operational effects there in the second half of '26. We continue to be very transparent, and you see with this minus CHF 6.3 million in Q1 '26 in the chart on Page 7 that we expect the quarter result almost on the same level for Q2. And then as already mentioned in March, we aim for getting close to EBITDA breakeven in Q3 and there will be definitely EBITDA breakeven in Q4. And I think that's what the management team is kind of aiming to achieve. All in all, our Q1 results demonstrate that our measures are working and will further work because it's not yet done, and bet DocMorris is very well on track to achieve EBITDA breakeven in the course of the year. We are relentlessly executing our plan with precision, knowing that our strategy, the evolution from a leading online pharmacy to a leading digital and AI health platform will pay off. With that, I would like to go to Slide #8. There, nothing new. Backed by our strong Q1 performance and our current trading, where we see an ongoing positive trend from March, we are fully confirming our short and midterm guidance as laid out on the full year presentation in March. That means we confirm our '26 adjusted EBITDA target in the range of minus CHF 10 million to minus CHF 25 million, strongly supported by the improvements we have already seen and delivered in Q1. We are confident to achieve EBITDA breakeven even if we would be at the higher end of the guided external revenue growth guidance. And just for your memory, we guided mid-single-digit to low teens percentage range. And as you have seen in Q1, we can deliver on the EBITDA target even if we are at the upper end of the overall revenue guidance. All in all, we firmly reiterate our commitment to reaching EBITDA breakeven during '26 and achieving positive free cash flow in the course of '27. And with that, I hand over to Walter. Walter Hess: Yes. Thank you, Daniel. So before we move to Q&A, I want to briefly address the upcoming Annual General Meeting and the future Board composition proposals. Our Board proposes 3 independent nominees, Thomas Bucher, Nicole Formica-Schiller and Dr. Thomas Reutter. Together with our existing Board members, this composition brings targeted expertise across the areas most critical to further execute on our strategy. Management's clear preference is for continuity and stability. We are at a pivotal point in our development. Consistent, focused execution requires a Board that is aligned, experienced and ready to act, not one in transition. All proposed new nominees are fully independent and stand for the interest of all shareholders. We believe this is the right team to take DocMorris forward, and we encourage shareholders to support these nominations at the AGM. Let me conclude the call with a clear message. Our vision of health in one click is not just a concept. It is fully operationalized through our integrated digital and AI health platform. However, a strategy is ultimately defined by its execution. Our Q1 results deliver strong proof that our measures are working and DocMorris is firmly on track. We are not just making promises for the future, we are delivering today. This is clearly demonstrated by our strong Rx growth and the 63% expansion in Digital Services and our continuous EBITDA improvements. My clear statement to you is that the transition to a profitable digital health ecosystem is fully underway and is yielding tangible financial results. We have the right strategy. We have the right management team and the operational proof is in place. We are executing with absolute focus, and we are pairing the necessary sense of urgency with a clear commitment to long-term value creation. And with that, we would like to move over to the Q&A part of this call. Operator: [Operator Instructions] And we have already some questions. The first question comes from Mr. Koch from Deutsche Bank. Jan Koch: My first one is on Rx. Encouraging to see that the growth rate has accelerated again in Q1. If I analyze your Q1 number, I'm already quite close to your full year guidance. So is there anything we should consider here? Or is your full year guidance just a bit more conservative than in recent years? Then secondly, on profitability, could you confirm that the loss in Q2 is not expected to be higher than in Q1? And if so, the upper end of the EBITDA loss range looks quite unlikely as well. Any comments here? And then lastly, are there any upcoming regulatory changes that we should keep in mind? There have been some headlines on the potential changes to the cold chain requirements. So any color here would be helpful. Walter Hess: Yes. Thank you, Jan, for your questions. Let me take the first and third question. And then the second one, I would like to hand over to Daniel. On the Rx, what I just can confirm that we continuously improve the marketing mix, the performance of the marketing. And with that, we just see a really good development. And yes, so let's meet again in August, and then I can further -- or we can further give you more details about the growth and what you can expect also in the second half year and for the full year. About profitability, maybe Daniel? Daniel Wüest: Yes. I think that's always the backside of being very transparent and you did the right math or measuring up on the scale. I think it would be -- if you already would know how Q2 would come in, especially on the bottom line, then my life would be much easier, and we would now go out and [indiscernible] join with the fun. No, but on a more serious note, definitely, we aim for EBITDA -- quarterly EBITDA in the area of Q1 and knowing that Q1 and Q2 are usually the weakest quarters and with acceleration in Q3 and Q4. However, having said this, as Walter already mentioned, we see very good traction coming from March and also has been transferred into April, even that basically, we had 2 slower weeks due to the Easter time and related vacation. And therefore, I would kind of confirm your view that you could assume that it will be roughly on the level of Q2. But of course, we have -- the management has a higher ambition to maybe improve it to the upper end of the midpoint of the shaded bar, which you see in the chart. Walter Hess: Okay. And then coming to your third question about the regulatory development, and you mentioned the cold chain. So as you all know, there is a draft of regulation, which has been issued by the Ministry of Health. And now the EU Commission intervened and basically said that it's a violation of EU law again, we have to say. For us, it's a positive signal because we see it equally. So now the ministry has to adjust this draft. And it's really just a draft, and it's only on the regulation level. So we see it as a really positive sign as I think also the market has seen. Operator: The next question is from Mr. Kunz from Research Partners. Urs Kunz: I have just one question regarding Digital Services. If I calculated correctly, you had a growth rate of 110% in Q3 and then 95% in Q4. Now you have 63% in Q1. And this is a rather steep deceleration. Is that something we have to think about that it's going further down in the coming quarters? Or is it going to stabilize? Because you have your guidance or your inofficial guidance of mid-double-digit percentage range for the whole year, which would translate to, I guess, 40% to 60%. Daniel Wüest: Thank you, Mr. Kunz, for the question. I think your calculations of the last year and the quarterly development are, let's say, more or less right. And as mentioned, we indicated when we guided for Digital Services that we are aiming for mid-double-digit growth, which we would also translate into 40% to 60%. And with the -- we are now actually at the upper end. And I think in relation to TeleClinic, there, the TeleClinic was slightly below the average, but we have kind of disclosed for Q1. But as mentioned, you have to remember that last year, TeleClinic has won the TK tender, which is by far the biggest insurer in Germany. And there you have seen a huge increase in volume starting in December, but mainly in Q1. And you can expect and assume that there will be kind of a leveling out, i.e., that the base effect will then, from Q2 onwards, play in favor of TeleClinic. And having said this, TeleClinic has several tenders outstanding where we expect to get feedback rather sooner than later and which could then also basically, if they would go into the right direction, give some additional top line growth, which was not reflected in the initial guidance, which we had put out in March. I think just to add there, I think top line growth is one, and we also explained in March that in -- with TeleClinic, we always have years where with high growth, but let's say, stable profitability, margin development, which was last year because the growth was 3 digit, but the margins more or less were stable. And this year, and that deliberately, we see already in the Q1 that the growth is a little bit lower, but the margins have substantially improved, and we expect that this will continue during the year, meaning that we are not talking kind of a 3, but rather kind of a 4 as the first number in the margin profile. Urs Kunz: Okay. But all in all, you're quite confident that the growth rate in Digital Services in the next few quarters stabilize somewhere in this double-digit percentage range, mid-double-digit percentage range and then not kind of constantly going backwards? Daniel Wüest: No, no. I think we hope it will be the other way around, but let's see. But we are very confident that this 40% to 60% is for the time being that the wide range and not any -- adjustments to the downside are definitely not a topic for this year. Operator: [Operator Instructions] And the next question comes from Guillaume Galland, I hope I pronounced your name correctly, from Barclays. Guillaume Galland: See, I have one question maybe on the non-Rx and OTC side. So yes, could you give us a bit more color on what you're currently seeing in German OTC? And -- so your peers have flagged some softness in the market, which was seen in Q4. [indiscernible] in Q1. It seemed that OTC has slowed in Q1 for DocMorris. So keen to hear a bit more on the consumer demand and if you've seen any changes on the competitive intensity. Walter Hess: Thank you, Guillaume. Happy to answer that one. So obviously, the market is going on more or less the same level and pace as also the Q4. For us, it's important. We have a plan to grow mid-single digit with OTC and BPC, and this is the level where we manage growth in that part. And yes, so as you might remember, generating OTC growth would not be really difficult. So we could grow further, but it comes with a price. And our priority is very clearly on profitability. And this is why we decided also to soft guide OTC on mid-single digit, what works well in Q1 and also in Q2, the start in April. Guillaume Galland: And then regarding -- sorry, Rossmann and dm, any change here in terms of competition? Walter Hess: Sorry, I didn't understand your question. Guillaume Galland: Have you seen any switch in competition from Rossmann and dm in the market on the OTC side? Walter Hess: No, we don't feel additional competition at all. Daniel Wüest: Guillaume, so to make it very clear, I think on the OTC, we have compared from Q1 -- Q4 to Q1 this year, we have not changed anything. We have exactly the same amount of marketing spend, marketing ratio and everything. And that's the reason -- you do not have to ask us why in Q4, we all of a sudden got to a double-digit OTC growth. But I think that was somehow exceptional. But Q1 is really according to plan and budget and to guidance, which we provided this mid-single digit and this 4.6%, we are perfectly on track to -- in this respect. Walter Hess: Okay. So as there are no further questions... Operator: Yes, one more question. It just came in. I'd like to interrupt you. So the next question is from Gian-Marco Werro. The floor is yours. Yes, we can't hear you, Mr. Werro. I'm sorry. Walter Hess: But we can answer your question off the call at any time. So we are, of course, achievable -- available. Okay. So let's end this call. Thank you very much for taking part, for spending the time. I just can confirm we are really well on track. The management, the company needs stability and consistency, and we are strongly executing and fully focused on delivering the guidance that we have promised to you and to the market. I wish you a wonderful day and looking forward to seeing you and meeting you in August latest. Thanks a lot. Daniel Wüest: Thank you.
Operator: Good day, everyone, and welcome to today's Flexible Solutions International's Full Year 2025 Financials Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead. Daniel O’Brien: Thank you, Jen. Good morning. This is Dan O'Brien, CEO of Flexible Solutions. The safe harbor provision of the Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Certain of the statements contained herein, which are not historical facts, are forward-looking statements with respect to events, the occurrence of which involve risks and uncertainties. These forward-looking statements may be impacted, either positively or negatively by various factors. Information concerning potential factors that could affect the company is detailed from time to time in the company's reports filed with the Securities and Exchange Commission. Welcome to the full year conference call for 2025. I'd like to discuss our company condition and our product lines first, along with what we think might occur in Q1 and Q2 2026. I'll comment on our financials in the second part of the speech. NanoChem division. NCS represents the majority of FSI's revenue. In 2022, NCS started food-grade operations. And by the end of 2026, we expect that NCS will be 100% focused on food-grade products. Growth in the NCS division will be in food and nutraceuticals only. The Panama division. This division makes polyaspartic acid, called TPA for short. It's a biodegradable polymer with many valuable uses. Panama also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. Panama is taking over production of all the legacy industrial and agricultural products historically made at NCS. This is a step-by-step process that is intended to be complete by the end of 2026. TPA is used in agriculture to significantly increase crop yields. TPA is also a biodegradable way of treating oilfield water for scale prevention. It's also sold as a biodegradable ingredient in cleaning products and as a water treatment chemical. Nearly all of our product for international sales will be made in Panama using materials sourced without the U.S. tariffs. There will also be shipping advantages. The new plant is 30 minutes from the Port. Inbound raw materials and outbound finished goods will not have to be shipped across the U.S. to and from Illinois for our international customers. Delivery times will be shortened by many days. Reduced shipping times and no exposure to U.S. tariffs on international sales would allow us to increase sales to existing customers and obtain new customers over the next 2 years. We're already engaging with potential new customers. NCS food products. Well, our Illinois plant is FDA and SQF certified. We have commercialized two food products. The first was our wine additive based on polyaspartates that was developed in-house. Last August, we announced our second major food grade contract of 2025 and our third overall. As noted in the news release, it's a 5-year contract with protection from tariffs and inflation. It has a minimum revenue of $6.5 million per year and a maximum if the customer requests it, of greater than $25 million per year. The August contract has reached full production. It's running 24 hours per day and is now our second food grade product after the wine product. We're reviewing methods of increasing production quickly if the customer requests it. Production utilizes equipment we've been buying and installing over the last 2 years, but did not have a customer for. Therefore, little CapEx will be needed to reach -- about $15 million per year in sales for this contract and mild CapEx in the $2 million to $3 million range to reach $25 million. In January 2025, we announced another larger food grade contract. Actual production at small volumes started this week and will be increased weekly until full production is achieved. Significant revenue from this contract may be visible in our Q2 financials. Growing these two food contracts to the estimated maximum revenues of greater than $50 million per year, it's our critical goal for the next 4 to 6 quarters. We hope to execute this to the customers' absolute satisfaction and obtain all their business before taking on additional major projects. It does not mean that we're not looking for more customers. We're already doing R&D work in certain areas. However, it does mean that several quarters are likely to elapse before other major customers are announced. We would also like to be clear regarding margins in the Food division. In order to obtain such large contracts from a very low base and in order to negotiate tariff and inflation protection clauses, we have lower margins than we prefer. We hope to be in the 22% to 25% range before tax. Future customers will be selected in order to increase our average margins now that we have a strong base in place. The ENP division. ENP represents most of our other revenue and is focused on sales into the greenhouse, turf and golf markets. ENP grew in 2025 and growth is expected again in 2026. Q1 is the weakest quarter for this division, followed by Q2. And growth is usually concentrated in the second half of the year for ENP. The Florida LLC investment, the LLC had a small profit for the 2025 year. It's focused on international agriculture sales into multiple countries. Its management has advised us that they estimate a return to growth in 2026, which should translate into increased revenue for FSI. However, the international agricultural markets like the U.S. market are stressed. So we expect the growth rate to be low. Agricultural products in the United States remain under extreme pressure. Crop prices are still not increasing at the rate of inflation and extreme uncertainty is present due to tariff changes, energy costs and fertilizer scarcity. Growers are facing a conflict between rising costs and low crop prices, aggravated by political actions and war. In some cases, sales are being lost for the whole season. As a result, we saw a weakness in agriculture throughout 2025 and expect 2026 to be another difficult year. Tariffs. The current tariff on all our imports of raw materials from China into the United States is between 15% and 58.5% depending on the material. We are very careful not to import materials unless destined for U.S. customers who are guaranteed to purchase from us and are aware that the tariffs will be added to their invoices. We did not manage our transition to Panama perfectly and have had to import some raw materials into the U.S. in the second half of 2025. Some of this tariff costs will be passed on to customers, some will qualify for the rebate program and some reduced our 2025 margins. Moving most agriculture and polymer production to Panama has freed space in the Illinois plant so that food grade production in the U.S. can be optimized and expanded substantially as more U.S. customers are found. Shipping and inventory. Shipping prices are not stable. Shipping times are longer than usual on the routes we use. These issues are caused by the Iran war and are expected to subside if the war does. Raw materials prices are unstable and increasing to account for the oil prices caused by the Iran war. We have significant inventory of most raw materials, but we estimate that we will have to raise prices to our customers in third quarter unless there's a significant -- reduction in the price of oil that also reduces our raw material costs. The highlights of the financial results. Sales for the year were unchanged compared to 2024, $38.51 million versus $38.23 million. Profits. 2025 reported a gain of $787,000 or $0.06 a share compared to a gain of $3 million or $0.24 a share in 2024. Many costs incurred to prepare for the potential new revenue from the food grade contracts announced in January and August, negatively affected 2025 profits because they were expensed as they occurred. Substantial costs for the Panama factory were also expensed quarter-by-quarter. This will continue in first half 2026 for Panama and for food products in Illinois, but at much lower levels. We anticipate some profits in Q1 and Q2 2026, followed by rapidly increasing profits in the second half of the year. We've done our best to maintain profitability as we built the new factory and repurposed the existing one for the new revenue streams in food products. For 2025, we achieved these goals. We did so while reducing net debt and avoiding any equity financing. This should be considered very significant for shareholder value. Operating cash flow, this non-GAAP number is useful to show our progress, especially with noncash items removed for clarity. For 2025, it was $5.54 million or $0.44 a share, down from $7.08 million or $0.57 a share in 2024. Cash flow has been reduced by the same cost as noted for profits, and it's expected to rebound similarly in 2026. Long-term debt. We continue to pay down our long-term debt according to the loan terms. The loan we used to buy our ENP division was paid in full in June 2025. Our 3-year note for equipment was fully paid in December 2025. This has freed up more than $2 million in cash flow per year for other purposes. Only one small term loan and the mortgage on our Illinois factory remain. Working capital is adequate for all our purposes. We have lines of credit with Stock Yards Bank for ENP and NCS subsidiaries. We're confident that we can execute our plans with our existing capital and without resorting to any equity actions. The text of this speech will be available as an 8-K filing on www.sec.gov by Monday, April 20, and e-mail copies can be requested from Jason Bloom, jason@flexiblesolutions.com. Thank you. The floor is open for questions. Jen, will you set that up for us, please? Operator: [Operator Instructions] And our first question will come from [ Ron Richards ]. Unknown Attendee: I was just wondering on that $800,000 payment due from the Florida LLC. Do you expect them to pay that this year? Daniel O’Brien: We are negotiating the payment, and we don't know which way it will go. So that one, I can't answer you explicitly other than to say that we are doing our best to obtain that cash. Unknown Attendee: Okay. And that second nutraceutical contract, when do you think it will be at full production? Daniel O’Brien: We're hoping for end of second quarter or the very earliest part of third quarter. So -- that's what appears to be feasible at this point, but without a guarantee, of course. Operator: And our next question will come from Tim Clarkson with Van Clemens. Timothy Clarkson: Dan, nice to meet you a month or so ago. Just wanted to ask what would be a reasonable after-tax net margin by -- forget about third quarter, even, let's say, by fourth quarter. I mean, are we looking at a company that can at 10% net or 5% net or 15% net? What would be a reasonable net margin once those new revenues start coming in? Daniel O’Brien: I would suggest -- and I got a calculator open because that was an unexpected question, Tim. It was good to meet you, too. I think we're looking at [ '22 ] -- yes, probably a 15% net margin after tax. Timothy Clarkson: Okay. Great. And then this is sort of a nerdy agricultural question, but it seems to me that with the price of nitrogen fertilizer exploding some of your products that add value and allows the nitrogen fertilizer to stay in the soil longer. I mean those should be really valuable products and benefit the fertilizer situation. Daniel O’Brien: Yes. In theory, you're correct. On the ground, it's not quite as clear. Remember that if the grower isn't expecting to make a profit from his land, he not only cuts back on our products, but he cuts back on his nitrogen as well. And in the farm industry, it's known as fertilizer mining. They -- in order to cut their costs, they actually -- especially with phosphates, but to a certain extent with nitrogen as well, they cut back their usage of everything and accept a lower crop yield per acre because it's one of the ways to keep their doors open. So -- my analysis of this is that it's not going to affect us this year. But if nitrogen prices continue to be high and crop prices rebound, then we will do very well. Timothy Clarkson: Right. Right. Well, great. And yes, I'm excited, and it doesn't sound like you need to be raising any additional money from stock issues or anything like that. Daniel O’Brien: No, definitely not. It's -- as everyone knows, who's been paying attention, we have a shelf registration in place, but that is not for use at today's prices. Timothy Clarkson: Okay. Okay. Well, I know one cynical observer was commenting on that, but I know that you're a large shareholder -- the largest shareholder, so you're not interested in diluting yourself. So with that, I'll pass. Operator: And our next question will come from William Gregozeski with Greenridge Global. William Gregozeski: Dan, on ENP, with the sales down in the fourth quarter relative to the third, should we be looking at ENP more as a first half against first half, second half against second half kind of thing? Daniel O’Brien: Yes, that would be fair, Bill. What's happening in the turf and ornamental market appears to be a general movement towards early buy programs. And the best value on the early buy programs typically are in third quarter because that's when the people we sell to are trying to book next year's sale. They drift into fourth quarter, and we don't really control this process. So my feeling would be lump Q4 and Q3 together and lump Q1 and Q2 together to give you a better analysis whether we're doing a good job or not. William Gregozeski: Okay. And then are you guys -- what kind of growth are you expecting from ENP this year just year-over-year for the full year? Daniel O’Brien: Very much in line with historical numbers, low double digits, 10%, 12%, certainly not greater than that. It's not a great environment in America right now. William Gregozeski: Okay. With the Florida LLC, their -- it looks like their margins were up quite a bit in the quarter. Is there anything going on there where they're somehow getting better margins from customers? Or was that more of a onetime thing? Daniel O’Brien: I would say that's a onetime thing. And in relation to earlier question from Ron, we are working with the Florida LLC to get them better organized and receive our payment tranche. I think that you should treat Q4 as an aberration. And let's look at that company going forward more than going backward. And as I get clarity on that particular topic, we'll probably be making actual news release announcements to keep the transparency going. William Gregozeski: Okay. On the January food contract, the big one that you mentioned is kind of going up slow. Should we be looking at kind of lower than the margins you disclosed what you expect for this as it ramps up just because of the low base and just starting it up? Daniel O’Brien: It's -- let me explain that further for everybody. We're carrying a substantial number of employees who are drawing nice salaries and installing equipment and testing equipment and learning how to run the equipment, that's where all the pressure on our profits and EBITDA is coming from is people and large numbers of small value purchases that don't qualify as CapEx and end up on the expenses. So this is slowing down. And as the production ramps up, the amount of employee and operational expenses that are covered by the sale of the product increases. So throughout this quarter, as we ramp up we will go from making a loss on every employee that's working on this project to breakeven and then onwards to making a profit on each of them. The margin is not going to ever exceed the 22% to 23% level because that is contractually limited. So where we are aiming for is full production in Q3 at full margin because each of the employees is properly utilized. Is that a useful explanation? William Gregozeski: Yes. Yes, absolutely. Last question was on Panama. You mentioned it's not -- the shift hasn't gone as well as you planned. I mean, are you -- are we going to see lower margins as that shift happens over the course of this year from where you initially thought? Or how should we look at that? Daniel O’Brien: It's going to be similar margins to our legacy products in the past. We're not going to increase our margins. But what is happening there is identical to the food grade plant. We are employing people and building out a factory where the volume of sales doesn't match the cost of expenses and people at this time. And as the sales increase, the employees will be properly utilized for making stuff and selling it instead of building the factory, learning their jobs and doing and putting things in place. So it's happening at the same -- roughly the same rate. We're expecting that by third quarter, most of the legacy business will be coming out of Panama. There will still be some until the end of the year coming out of Illinois. But again, margins in Panama will creep upwards as we utilize the factory properly and the employees properly. They will creep up to historical margin levels for our legacy products. Operator: [Operator Instructions] And Mr. O'Brien, it appears there are no further questions at this time. Daniel O’Brien: Well, thank you, Jen. Everybody, thanks very much. Sorry, we were delayed for audit and [Audio Gap] Operator: And Mr. O'Brien has disconnected. This will conclude today's conference call. Thank you for attending.
The Iran war's timeline followed the typical market reaction to major geopolitical events in history.
"Bloomberg Real Yield" highlights the market-moving news you need to know. Today's guests: BoFA Securities Senior US Rates Strategist Meghan Swiber, Neuberger CIO & Global Head of Fixed Income Ashok Bhatia, Goldman Sachs Asset Management Head of Multi Sector Fixed Income Investing Lindsay Rosner, and Corbin Capital Partners Deputy CIO, Credit John Cocke.
A rally that has already catapulted stocks higher with a velocity rarely seen before continued to pick up speed on Friday.
The list includes Tesla, Ford Motor, Carvana, DraftKings, Norwegian Cruise Line, GameStop, and Starbucks.
Saudi Arabia's finance minister warned that normalizing energy and commodity flows will take time because of the logistics involved.
The “end” of the Iran war spurred a market celebration this week, even if the conflict is nowhere near officially over.
U.S. stocks rallied to fresh highs as hopes for a U.S.-Iran truce pushed oil prices lower and boosted investor sentiment.
Concurrent Technologies Plc (COTGF) Q4 2025 Earnings Call Transcript
"High inflation and a weak labor market would be very complicated for a policymaker," the central banker said for a speech in Alabama. "If I face this situation, I'll have to balance the risks to the two sides of the Fed's dual mandate to determine the appropriate path of policy, and that may mean maintaining the policy rate at the current target range if the risks to inflation outweigh those to the labor market," Waller added.
At the end of last year, Nasdaq retail data suggests retail trading reached $70 billion a day as markets rotated out of crypto and software stocks and into value stocks. But in the past few weeks, as the conflict in Iran started, data shows retail trading has fallen significantly.
Federal Reserve Governor Chris Waller said the surge in oil prices tied to the Iran war and lingering effects from U.S. tariffs could “lead to a more lasting increase in inflation,” potentially forcing the central bank to eschew further interest-rate cuts.