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Operator: Greetings, and welcome to the Veeco First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. You may begin. Alex Delacroix: Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. The earnings release and slide presentation to accompany today's webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, the timing and expected benefits of the proposed transaction with Axcelis, market conditions or otherwise make statements about the future, these forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K, annual report and other SEC filings. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. Please note that we will not be addressing questions related to our pending merger with Axcelis. We urge you to read the joint proxy statement relating to the transaction with Axcelis. With that, I would now like to hand the call over to our CEO, Bill Miller. William Miller: Thank you, Alex, and thank you, everyone, for joining us today. Veeco executed well in the first quarter and believe we're strategically positioned to benefit from the evolving semiconductor landscape, driven by artificial intelligence and high-performance computing. Reviewing our first quarter results, revenue was $158 million, non-GAAP operating income was $9 million, and non-GAAP diluted earnings per share was $0.14, all within our guidance ranges. Now let me take a moment to highlight our top 5 key takeaways for the quarter. First, we're poised to benefit from the significant industry inflection driven by the global build-out of AI infrastructure. Veeco is well positioned across our portfolio with highly differentiated process equipment aligned with high-growth opportunities. Second, order activity that accelerated in the second half of 2025 continued into the first quarter of 2026, and our pipeline of new opportunities continues to expand. Third, as it pertains to the compound semiconductor market, a stronger-than-expected opportunity has emerged for Veeco to capture multiyear revenue in the production of indium phosphide lasers. This is a result of the broader transition from copper to optics within data centers over the next few years for increased speed and bandwidth to meet the scale-up needs of the AI landscape. This opportunity for Veeco spans across multiple products, particularly for epitaxy and laser facet coatings, which I will provide more details on later in the call. Fourth, from an operational standpoint, we're expanding our manufacturing footprint and capacity to support increasing customer demand and enable timely deliveries. Lastly, as a result of accelerated bookings activity and ongoing customer engagements, we've increased visibility with significant orders for delivery well into 2027. Overall, we believe Veeco is well positioned for durable multiyear growth driven by AI infrastructure and high-performance computing, and we remain focused on disciplined execution to deliver long-term value. Before I move to the next slide, as a brief reminder, we continue to make progress on our proposed merger with Axcelis. The transaction has been approved by shareholders of both companies, and all regulatory approvals have been received other than antitrust approval in China. We remain engaged with the authorities in China and continue to expect the transaction to close in the second half of 2026. Integration planning is progressing well, and we remain excited about the strategic fit and long-term potential for value creation. Moving to the next slide, I'll discuss Veeco's critical role in the semiconductor manufacturing landscape, which represents the majority of our revenue. Capital spending is being driven by AI investments and is becoming increasingly concentrated at the leading-edge areas where Veeco is differentiated in technology. In logic and foundry, Veeco has a long-standing and trusted position supporting advanced annealing applications across leading nodes. Our LSA platform continues to be production tool of record at all 3 Tier 1 logic customers, driving repeat business and strong customer engagement, pushing towards more complex device structures with low cost of ownership. At the same time, our next-generation nanosecond annealing platform is progressing through evaluations at Tier 1 logic customers, addressing critical low thermal budget applications such as contact annealing, materials modification and 3D device integration. These evaluations are advancing well, and we're anticipating an additional evaluation tool shipment to a third Tier 1 logic customer in the coming months. Expanding our penetration within our memory customers within the semiconductor market remains one of our most important strategic priorities. The transition toward AI-centric architectures, high-bandwidth memory and increasingly complex stack devices is driving new thermal and materials requirements, where we believe Veeco's technologies provide a clear advantage. During the first quarter, we continue to make solid progress with our top Tier 1 memory customers. In addition to serving as the production tool of record at a leading HBM supplier, we're advancing our LSA evaluation system at a second Tier 1 DRAM manufacturer with the potential for initial pilot line and high-volume manufacturing orders in 2027. We're also extending our memory opportunity through Ion Beam Deposition. Multiple IBD300 systems remain under evaluation at leading DRAM customers with activity extending throughout 2026. The systems enable low-resistance film deposition for advanced DRAM bit line metallization, providing an additional pathway to expand our served available market. Veeco remains a market leader in Ion Beam Deposition for EUV mask blanks, a critical enabling technology as logic and memory customers expand EUV adoption and prepare for high-NA lithography. We also have broadened our exposure to EUV pellicles, which are increasingly required to protect these critical masks as EUV usage scales. Advanced Packaging, supported by our wet processing and lithography tools continues to be a significant revenue driver from AI-related demand. As we discussed last year, our Advanced Packaging business more than doubled year-over-year, reflecting strong customer adoption and accelerating capacity investments. During the first quarter, we secured major volume orders for our wet processing systems from leading OSAT customers, supporting high-volume manufacturing of next-generation AI accelerators built on 2.5D Advanced Packaging architectures. These systems are scheduled to ship throughout the remainder of 2026 and into the first half of 2027, providing strong revenue visibility. To support this growth, we're continuing to expand our manufacturing footprint and production capacity, positioning the business to meet sustained customer demand as Advanced Packaging plays an increasingly critical role in AI infrastructure. As we turn to the next slide, we outline our forecast served available market within our semiconductor segment through 2030. This outlook continues to be driven by sustained investment in AI and high-performance computing. In annealing, we project the SAM to be $1.3 billion by 2030 as devices continue to shrink and shallower and more precise anneals are required to improve performance. These trends support long-term opportunities for both LSA and next-generation NSA platforms. Next, in Ion Beam Deposition, our IBD300 platform for low-resistance metals, together with our leadership position in IBD EUV mask blanks as well as the emerging opportunity in pellicles where we're production tool of record at a leading customer, all represent meaningful market opportunity and total a SAM projection of $500 million by 2030. As devices become more power constrained and EUV adoption broadens, the opportunities for our technologies continue to increase. Finally, in the back-end semiconductor process, our Advanced Packaging business for our wet processing and lithography tools continues to expand rapidly, and the SAM is projected to reach $1 billion by 2030. We continue to demonstrate our ability to support our customers' high-volume manufacturing ramps driven primarily by AI. Moving to the next slide. I want to spend time discussing our stronger-than-expected momentum in the compound semiconductor market. We're seeing a clear industry inflection point underscored by NVIDIA's recent investments in optical networking leaders. In silicon photonics, the industry is transitioning from copper interconnects to co-packaged optics as AI data centers require higher speeds, greater bandwidth density and improved power efficiency. Indium phosphide laser manufacturing is a critical component of this shift and a foundational technology for next-generation AI optical infrastructure. As the industry transitions towards future capacity requirements, we believe this represents a growth opportunity of approximately $2 billion over the next several years. Veeco plays a critical role across multiple steps of the indium phosphide laser manufacturing process, and we're seeing rapidly accelerating order demand across several of our product lines. Beginning with epitaxy, MOCVD is a critical step, and we're seeing increasing orders for our Lumina MOCVD indium phosphide platform as leading photonics customers expand capacity to support AI-driven data center growth. We also support downstream process steps with our WaferEtch and WaferStorm wet processing technologies for advanced etching and surface preparation. What I would like to highlight for investors is the laser facet coating and epitaxy opportunities are similar sized and significant for the manufacturing of indium phosphide lasers. Our SPECTOR Ion Beam Deposition system designed for the critical laser facet coating step is essential to the process. Veeco is a market leader in Ion Beam Deposition and is differentiated from traditional approaches such as e-beam evaporation, ion-assisted deposition or PVD. Compared to other approaches, the SPECTOR Ion Beam Deposition tool delivers low loss optical films with tight control of thickness, uniformity and reflectivity. Precision is required for anti-reflective and highly reflective facet coatings on indium phosphide lasers. We have engagements with industry leaders that will drive the growth of our SPECTOR IBD business in 2027 and beyond. As announced in today's press release, we received over $250 million in orders from multiple customers for our MOCVD, wet processing and Ion Beam Deposition tools to support the manufacturing of indium phosphide lasers with delivery starting in 2026 and significantly accelerating in 2027. A large portion of these orders is for our SPECTOR IBD system from leading suppliers of next-generation 800-gig and 1.6 terabyte optical transceivers for hyperscale customers. This significant order activity underscores the long-term value of our Ion Beam Deposition technology leadership and our expanding role in this rapidly growing market. We have long-standing partnerships with our customers spanning more than 2 decades, and we are well positioned across our multiple differentiated products to meet their growing needs in silicon photonics. Our focus remains on supporting customer production ramps, executing early deployments and expanding our footprint to meet customer demand. With that, I'll flip to the next slide to share our projected served available market within the compound semi space. In silicon photonics, specific to the manufacturing of indium phosphide lasers, we project our SAM to be $700 million in 2030. As we discussed on the previous slide, demand is accelerating across several of our products driven by AI data centers. Our Lumina MOCVD batch platform, WaferStorm and Etch and our SPECTOR Ion Beam Deposition for the laser facet coatings are gaining significant traction. Other photonics driving SAM growth include red MicroLEDs, solar cells for low earth orbit satellites and AR/VR applications. Additionally, a global optoelectronics solution provider accepted and qualified our Lumina plus MOCVD system for high-volume arsenide phosphide production, including for use in MicroLEDs. We expect these other photonics application SAM to total $550 million by 2030. In GaN Power, we project our SAM to be $250 million by 2030 as we continue to see strong long-term drivers tied to AI data center power efficiency, electrification and high-power density applications. Importantly, at a leading power IDM customer, we have an evaluation for our Propel 300 system in place, and we received a pilot line order for a multi-chamber system, which we previously announced at the end of 2025. This represents an important validation point as customers move from development to early production. Looking ahead, as this customer ramps and finalizes long-term capacity plans, there is potential for additional system orders in the second half of 2026 for delivery in 2027. In the next several years, we expect our compound semiconductor served available market opportunity to meaningfully grow as AI, power efficiency and advanced connectivity continue to reshape the industry. I would now like to hand the call over to John to walk through the financials. John Kiernan: Thank you, Bill. Revenue came in at $158 million, slightly below the midpoint of our guidance and previous quarter. Our semiconductor business reported $109 million, a decline of 1% and comprising 69% of revenue. Revenue in the semiconductor market was largely driven by laser annealing systems for leading foundry, logic and memory customers and wet processing systems for Advanced Packaging. Compound semiconductor revenue totaled $19 million, a 6% decline from the prior quarter, totaling 12% of revenue. Data storage revenue was $10 million, flat to the prior quarter, representing 6% of revenue. Scientific and other revenue declined 16% to $20 million, comprising 13% of revenue. Turning to the quarterly revenue by region. Revenue from Asia-Pacific region, excluding China, was 57%, no change from the prior quarter. Sales were driven by leading semiconductor customers in Taiwan for our laser annealing systems and wet processing systems for advanced packaging. The U.S. accounted for 20% of revenue, an increase from the previous quarter, primarily from semiconductor customers. Our China portion was 13% of revenue, a decrease from the previous quarter. EMEA and the rest of the world accounted for 10% of revenue. Turning to the first quarter non-GAAP results. First quarter gross margin came in at 36% and operating expenses totaled $49 million. Income tax expense was approximately $1 million, resulting in an effective tax rate of approximately 11%. Net income was approximately $9 million and diluted EPS was $0.14 on 62 million shares. Moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $383 million, a decline of $7 million. From a working capital perspective, our accounts receivable increased by $40 million to $151 million. Inventory increased by $7 million to $282 million and accounts payable increased by $5 million to $60 million. Customer deposits included within contract liabilities on the balance sheet increased $19 million to $69 million. Cash flow from operations totaled $8 million and CapEx totaled $5 million during the quarter. Next, I'll turn to our second quarter non-GAAP outlook. Second quarter revenue is expected to be between $170 million and $190 million. Gross margin is expected to be between 38% and 40%. We expect OpEx between $52 million and $55 million, net income between $12 million and $21 million and diluted EPS between $0.20 and $0.32 on 64 million shares. Based on our current visibility, we're reiterating our full year 2026 revenue guidance between $740 million and $800 million, with growth accelerating in the second half of the year as well as reiterating our diluted non-GAAP EPS between $1.50 and $1.85. I'll now provide additional commentary for each of our markets. Beginning with the semiconductor market, in 2026, we expect strong growth from our Tier 1 customers driven by AI and high-performance computing, more than offsetting declines in the mature node China business. Additionally, our advanced packaging wet processing systems are forecasted to contribute to revenue growth as customers increase manufacturing capacity to support AI workloads. In the compound semiconductor market, we see strong growth in silicon photonics, particularly for indium phosphide laser manufacturing driven by AI data center demand. We are also seeing emerging opportunities for low earth orbit satellites, MicroLEDs, AR/VR applications and GaN Power. We have received significant orders in the first quarter across this market, which is driving meaningful revenue growth into 2027. In data storage, we secured orders in the second half of 2025 and experienced continued order activity in 2026 for our Ion Beam equipment. We are seeing increase in AI-driven demand for higher capacity HDDs, supporting investments in capacity and new technologies such as HAMR. Customer engagements remain strong with our business fully booked in 2026 and extending into the first half of 2027. As we look ahead, we are seeing continued acceleration across several of our core markets, supported by increased customer engagement, expanding pipelines and strong order visibility. Our focus remains on disciplined execution as we support customer production ramps and deliver against the next phase of growth. I would now like to turn the call to the operator for Q&A. Operator: [Operator Instructions] As a reminder given the pending merger with Axcelis, the Veeco management will not be addressing questions related to the transaction. [Operator Instructions] Our first question comes from Denis Pyatchanin with Needham & Company. Denis Pyatchanin: So maybe we can start with this $250 million order with the orders beginning in 2026. Could you tell us maybe which quarter would you expect this to start Q3 or Q4? And then at what point in 2027 do you think this will kind of hit its revenue quarterly peak? William Miller: Denis, I would say we'll start shipping against those $250 million plus of aggregate orders in the third quarter. But I would say probably the most significant ramp will probably start in Q1 '27. Denis Pyatchanin: Great. And then for these systems for the Lumina, for the SPECTOR and for the WaferEtch, kind of what are your current lead times? And what do you think your maximum capacity is to meet demand for these systems on an annual basis? William Miller: We have plans to increase our SPECTOR IBD capacity about 10x from its kind of base level we're at today and starting to hit that kind of level in early '27. And we're looking at future capacity needs to potentially double that again. And in wet processing, we're looking to add some expansion capacity to our existing facility as well as looking to an outsourced partner contract manufacturer in Southeast Asia for further capacity expansion. Denis Pyatchanin: Great. And then my final one is about gross margins. So it looks like we came down a little bit to 36.2% from 37.7%. Is this predominantly due to mix like heavier advanced packaging? Or maybe were there some other variables contributing? John Kiernan: Yes. I think specifically to Q1, one of the factors that contributing is that we had one less system, LSA system to a China customer. We got recently informed by BIS that, that customer would require a license to ship to certain fabs for that customer. So that had about an $8 million impact on the top line for Q1 and also put us outside, as you mentioned, the gross margin guidance range. Operator: Our next question comes from David Duley with Steelhead Securities. David Duley: A few other questions on the significant order activity. I was wondering, you kind of addressed it, but it sounds like there are like 3 tools involved in the big order here. And are they equally split? Or could you just kind of talk about the volume of each tool in the $250 million order? And then as far as the ramp-up of this business, is this -- did you take this business from another competitor? And so I'm kind of curious about the competitive dynamics of this. And are you sole sourced? Or are you sharing the business? William Miller: Yes, Dave, let me give you some color here because we don't really talk -- haven't really historically talked a lot about the indium phosphide solutions that we have. So if you think about -- there's really 3 pieces that Veeco serves in indium phosphide laser manufacturing. First is the epi step, which I think is pretty well known and discussed. So Veeco and our competitor provide MOCVD equipment to make the business end of the laser, the indium phosphide epitaxy that makes the device. We also have wet processing, wet etch and wet clean steps as part of the formation of the laser. And then also a part that's probably not as well known by investors is Veeco has an Ion Beam Deposition product called the SPECTOR that deposits the antireflective and highly reflective coatings to create the laser facet coatings in the laser. And as you might guess, having followed the company, Ion Beam Deposition can deposit films much better than PVD or e-beam deposition, et cetera. And so we can deposit films with much better optical properties, very similar to the fact that we can make better IBD EUV films or better Ion Beam Deposition films for low-resistance metals. So here's another example of kind of ion beam core technology where Veeco sold over 100 tools during the dot-com boom lighting up DWDM fiber and then that business kind of went away for quite a long time. But during that time, Veeco maintained the deep technical relationships with a number of key customers where we are kind of process tool of record in their laser facet coating business. And so I think it's probably worth noting that when you look at the size of the 3 opportunities in front of us, the epitaxy market and the laser facet coating market opportunities are about the same size. They're pretty significant markets. And I would characterize our laser facet coating opportunity where we have a very strong incumbent position, not everywhere, but in a number of key companies. Whereas in the epitaxy space, as I think you know, our competitor has a decent, very good incumbent position, but Veeco has, over the past number of years, developed some products to improve our competitiveness. And in that group of $250 million plus of orders, a number -- we did receive a number of MOCVD orders in -- as part of that ramp. So I would say a large portion of that was for the IBD laser facet opportunity, but also includes some very important orders for wet processing because that's a really critical step in the device manufacturing as well as the epitaxy step. David Duley: Okay. So the epi step is the one where you've gone head-to-head, I think, with like AIXTRON and... William Miller: Correct. David Duley: I guess one part of the business here. Would you say you're a second source or a primary source? And I'm sorry to dwell on this, but it mentioned in the press release, I think, multiple customers. Could you just elaborate a little bit more about your positioning? William Miller: Yes. So I would say in laser facet coating, we have a very strong incumbent position. I would say in the epitaxy step, we are probably more the second provider there today as a second source. And I would say in the wet processing, we have a strong position there with a number of the leaders there. David Duley: Okay. Final question for me, and we'll turn it over to others is, the GaN opportunity, I think you talked about it and you've received an order in the past, I think, from a 300-millimeter GaN customer. How big of a market do you think that, that could be if you're able to penetrate and capture some of the business that I'm assuming all these things are -- all these GaN parts are going into the data center, but maybe I'm wrong, maybe you could just elaborate a little bit about that. And that's it for me. William Miller: Yes, Dave, you're right on there. I mean I'd say the adoption of 300-millimeter GaN on silicon is squarely targeted at the AI data centers. I would say we've had, as you know, a tool out with a major IDM for some time. The performance of our tool set is doing quite well. We have a pilot line tool order from the customer, and we're in the process of manufacturing that and would expect to ship that at the end of the year kind of time frame. So yes, it's definitely squarely in the AI data center applications. Operator: Our next question comes from Gus Richard with Northland Capital Markets. Auguste Richard: Congratulations on the huge order momentum. To hit the high end of the range for the full year, what are the levers to get there? Is it delivery times? John Kiernan: Yes. So thanks for the question, Gus. I think our opportunity to go to the higher end of the range right now, primarily rest in the semiconductor piece of our business. And I would say in the areas of laser annealing and lithography are probably sort of the drivers there. If I look at the other markets and I look at, like, for example, the data storage market, given our lead times and how we work with our customers on sort of build-to-order, there could be some upside in some service and aftermarket business, but the systems business is pretty much booked out for this year, and we're booking orders into next year. And in the compound semiconductor market, we're able to get some of this new business into the back half of the year, as Bill mentioned here in answering an earlier question about some tools coming into Q3 and Q4. And we were anticipating that as part of our view for the year already anyway. But the predominant increase in capacity and bringing on and meeting the customers' ship dates principally happen in 2027. Auguste Richard: Got it. And sort of the underneath question is the SPECTOR. Does that have a similar 3-quarter lead time as ion beam for HDD? John Kiernan: We'll work to -- on that sort of lead time. We've been in this business for a long period of time. Recent business is a few tools a quarter. And yes, I think the lead times are more in that sort of 9-month lead time there. As we look to ramp up this business here, we'll look to reduce lead and cycle times for that business in order to meet customer shipment requirements. But mainly, we're going to see sort of a step-up in the output for that business starting in Q1 of 2027. Auguste Richard: Okay. Got it. Got it. Makes complete sense. And then just in terms of some of the evals that are going on, the Ion Beam bit for the memory market. Do you think you can reach conclusion on those evals in the next quarter or 2? And sort of what are your prospects on getting over the finish line? William Miller: Yes. We're -- the feedback from our customers is it's not a matter of if, it's a matter of when. They're impressed with the -- very impressed with the film performance of the IBD, where we're working very closely with them is in areas such as particle performance, automation, reliability. And so they've extended their evals out through the end of 2026, and we're working on a few CIP improvements to the tool to address some of those shortcomings. So I would say it's really -- the customer is really quite excited about the opportunity, but we do have some, I would call it, engineering work left to do to demonstrate the high-volume requirements of front-end semi. Operator: [Operator Instructions] Our next question comes from David Duley with Steelhead Securities. David Duley: Could you talk a little bit more about the hard disk drive business? And what -- do you think that, that will -- what sort of second half growth profile should we expect versus the first half? And then you've talked about obviously having the order book is full and manufacturing costs are full for '26. Are you expanding capacity for 2027 at this point? Or it would seem to me like the disk drive guys are going to add a lot of capacity given what they're seeing from the AI data centers, but maybe I'm wrong. William Miller: Yes. I would say, Dave, we're looking to double that business in '26 over '25. And I would say the trajectory of it is more second half loaded. I think probably the first system shipment is planned to happen in Q2, none in Q1 and then ramping in Q3 and Q4 just based on lead times. As you know, we kind of do a build-to-order model. We're not a build to forecast model. And that kind of keeps us and the industry healthy, and that does seem to work for everybody. But what we are seeing, I would characterize year-to-date at this point that both of our major customers are continuing to place orders, not only for front-end equipment at the wafer level, but also the back end, what they call the slider fabs, which clearly means that they're increasing the number of heads that they're producing. So I would guess based on the order activity we're seeing here early in '26 that certainly the first half of 2027 will remain strong. And I would just characterize the commercial activity still remains pretty positive from an order book standpoint. John, I don't know if you'd like to add. John Kiernan: Yes. I think you covered that very well, Bill. I think that really sums up well where we are with 2026 and what visibility we have into 2027 at this time. David Duley: And then final one for me is, what would you expect kind of a rough cut of what you expect your semi revenue to grow in '26? And I'm guessing it's probably going to grow higher in '27, but maybe you could elaborate a little bit on some of the puts and takes in growth in both '26 and '27. John Kiernan: Yes. We see mostly sort of positive environment here in 2026 and estimates of a growing WFE environment in '26 and moving into 2027. So pieces of the business attached to AI and high-performance computing expected to grow. And so that's advanced foundry logic with our laser annealing product, high-bandwidth memory for our customer that we've penetrated there and continued strength in Advanced Packaging. I would say the one headwind for us in the semi business, but is more than offsetting the strength in the pieces of the business I just mentioned is declining business in China for mature node. So we expect that business to have headwind in 2026. We've been foreshadowing this for the last 2 years or so right now that we saw the business falling off in 2025. As a reminder, we have a narrow base of business there in China. It's really highly predominant for our LSA product for 40- and 28-nanometer fabs, and they just don't see that same level of investment in new fabs that we saw a couple of a couple of years ago. So taking all that into consideration, we see sort of our semi business growing this year over last year mid-teens. David Duley: I was going to say, since you're taking your Chinese lumps this year, I would guess that your growth rate would probably accelerate next year. John Kiernan: We're looking at a very positive WFE environment, and we have nice attachments to the areas that are expected to drive WFE. So yes, I think as we have this early look at 2027, 2027 looks positive. Bill did sort of mention earlier in the prepared remarks that we are increasing our capacity for Advanced Packaging. We see opportunities for that to continue to grow into 2027. So we're taking -- making some investments to increase capacity there as well. William Miller: It's probably also worth mentioning, Dave, that a lot of the WFE estimates that you see include a big -- some pieces of the silicon photonics market. And so you'll see that show up in our compound semi. So when you look at semi alone, really some of the compound semi will probably be categorized as WFE by -- more generally. And so our compound semi business is probably going to grow 50%. So when you take the kind of the mid-teens that John spoke about and the portion that's really significantly growing, we're probably growing much higher than that on a WFE basis. Operator: At this time, we have no further questions. I would now like to turn the call over to Bill Miller for closing remarks. William Miller: Thank you. As we look ahead, we believe Veeco is well positioned to meet the evolving needs of our customers as the silicon photonics industry reaches an inflection point driven by AI and high-performance computing. Our technologies across logic, memory, Advanced Packaging, compound semi and data storage are becoming increasingly critical as customers push for greater performance, scale and efficiency. With strong customer demand, expanding served available markets and disciplined execution, we see meaningful long-term growth and remain focused on delivering sustained value for our shareholders. I'd like to thank our employees for their hard work as well as our customers, partners and shareholders for their continued trust in Veeco. Have a great evening. Operator: Ladies and gentlemen, the conference call of Veeco has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Good day, ladies and gentlemen, and welcome to the Graphic Packaging Holding Company First Quarter 2026 Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. [ Mom ], the floor is yours. Melanie Skijus: Good morning. Thank you for joining Graphic Packaging's First Quarter 2026 Earnings Results Conference Call. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings. We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer. During this call, we will reference our first quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides if you are participating today through the webcast. Now let me turn the call over to Robbert. Robbert Rietbroek: Thank you, Melanie, and good morning, everyone. As many of you know, Melanie has just rejoined Graphic Packaging as Vice President, Investor Relations, and we are excited to benefit from her leadership in the role. Over the past 4 months, I've been getting to know the team visiting our facilities both domestically and abroad and meeting with many of our customers around the globe. Separately, I'm pleased to report that we have now completed our 90-day review of the business. Our review has confirmed several important conclusions. First, our foundation is strong in points that is consistently validated during by site visits and in discussions with our major customers. Second, we have talented experienced teams, including world-class operators support growth with customers. And lastly, our integrated high-quality asset base and production footprint, enhance our service capabilities, expand innovation opportunities and provide a competitive advantage. All in, we see meaningful opportunity ahead. We're taking decisive focused actions to strengthen our operations and position the business for improved profitability. In the first quarter, we delivered strong performance at the high end of our expectations. Net sales were up 2% year-over-year to $2.2 billion. Volumes were up 1% compared to last year. with volume performance improving as the quarter progressed. Adjusted EBITDA was $232 million. Adjusted EBITDA margin was 10.8% and adjusted EPS was $0.09. While adjusted cash flow was a negative $183 million in the quarter, this represents a significant year-over-year improvement from negative $442 million in the same period last year. As we look at the demand environment this quarter, scanner data across our markets continues to reflect a more selective and value-conscious consumer, our innovative packaging solutions that span the grocery store from the center of aisle to the perimeter and on-the-go foodservice items meet consumers wherever they go. As we proceed to the first half of the year, we are encouraged to see customers increasingly taking actions to store volume growth. Looking across our end markets, Food and Health & Beauty were bright spots for us during the quarter, with higher packaging volumes from value products and consumption of every essentials. Bars, refrigerated ready meals and yogurt continue to perform better due to more protein products entering the market to satisfy consumers' desire for higher protein diets. Health & Beauty, which is primarily an international business for us, delivered strong growth consistent with the trends we saw in the second half of 2025 as consumers continue to prioritize small indulgences like skin care and perfume. Our beverage business remains stable, while food service and household reflect ongoing consumer affordability trends. Now I will provide an update on the results of our 90-day review of the business. The decisive actions we have begun taking to achieve our strategic priorities and an update on our views and expectations for 2026. As I walk through each of these topics, you will note that we are focused on accelerating the pace of execution across our business. That means enhancing operational efficiency and generating free cash flow to drive shareholder value in an evolving market. While we are taking swift action and implementing tactical improvements to drive efficiency, there is still significant work ahead. Our path forward is clear. We're focused on advancing our 5 near-term strategic priorities. First, we are committed to disciplined organic growth and providing exceptional customer service. Second, we intend to drive profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, we will continue to optimize operations, footprint and portfolio mix to better focus on our core competencies. Fourth, we will generate free cash flow through inventory rationalization and reduced capital spending. And finally, free cash flow will be used to pay down debt and return capital to shareholders. Over the last 4 months, I have spent time at our Atlanta and Brussels offices, world-class mills and manufacturing facilities, met our talented teams across the globe and witnessed our technical capabilities and commitment to sustainability in action. I visited four of our five paperboard mills and several packaging facilities. Waco in Texarcana in Texas, Stone Mountain, Berry and Macon in Georgia, Elk Grove in Illinois, Kalamazoo, Michigan, Cholet, France and Bristol, England. I have met face-to-face with 6 global CPG customers in North America, Belgium, Switzerland and the Netherlands and engaged with leading QSRs and retailers who deeply value our long-standing relationships These customers have confirmed the value that Graphic Packaging brings as a trusted partner. We are one of the world's most innovative paperboard packaging companies and hold a leading position with a large addressable market, supported by sustainability trends. With the comprehensive 90-day review completed, we are taking decisive steps to optimize our operational footprint, reduce structural costs and impose discipline across capital and operating decisions. I will walk you through our key takeaways, actions and where we will continue to focus our efforts. Strategically, our review has reinforced our commitment to the core North America and European markets, and we will make selective disciplined moves to optimize our portfolio while maintaining our scale advantage. That means expanding with customers in our core markets and driving new growth opportunities through innovation. With regard to our portfolio, we have started to simplify and streamline our business and organization. We recently reached an agreement to divest our noncore assets in Croatia. We are in the final stages of the transaction which we expect to complete in the second quarter. Operationally, our transformation office is driving continued improvements in both our operations and cost structure. We are executing this transformation in real time with a focus on network optimization, disciplined capital allocation and aligning our commercial teams to highest value opportunities. To increase efficiencies and better align with the business environment, we have taken actions to streamline our global workforce and eliminated over 500 roles. The majority of these roles were salaried, including both employee separations and eliminating vacant roles. These were difficult decisions but the changes we have made are based on structural improvements and element to business needs, while maintaining vital frontline operations. Importantly, these actions will not impact our commitment to customer service and growth-focused initiatives. Reductions represent less than 3% of all global roles. Though they account for over 10% of global full-time salaried roles. We are instituting a rigorous capital spend process. One that demands every dollar of spend be justified against our highest priorities. As we continue to progress, we are confident we will deliver on our full year 2026 capital spend commitment of approximately $450 million. To further enhance productivity and operational efficiency, we are deploying AI to streamline areas of our inventory management and procurement processes. We are also utilizing remote monitoring of machine usage and performance, leveraging machine learning to generate predictive analytics and enable proactive maintenance, reducing unplanned downtime. I am confident all these actions will deliver the $60 million in cost savings announced last December and enhance our agility and decision-making, enabling us to move faster, reduce complexity and empower our teams. Continuous improvement is an ongoing effort and we are actively pursuing opportunities for additional cost savings. We will operate with fewer layers, increased focus, more accountability and clear priorities. Concentrating on what drives the greatest impact for our customers, our people and our business. Our efforts and the many actions underway Graphic Packaging, reflect a company focused on value creation. We are committed to strong financial discipline, building a more resilient cost structure and accelerating free cash flow. Chuck will elaborate on this further. I would like to focus now on the aspect of our business that I'm very passionate about, our partnership with our customers. We are focused on driving disciplined organic growth by building on our strong customer relationships and capturing new business through our commercialization efforts. In the face of changing customer growth strategies, we are strengthening our position across categories and have recently reorganized our commercial team to better align globally with customers and to support them through different ages and market conditions. Our customers continue to experience a dynamic consumer environment. While demand is relatively resilient, we recognize that consumers are continuing to prioritize value with about 47% of global shoppers now considered value seekers. Shoppers are switching to private label options, opting for value packs or sizing down to smaller pack sizes at lower price points. To appeal to this value-seeking population, consumer brands and retailers are investing in their product quality and value perception. Leveraging price pack architecture and novel pack designs while also focusing on selling through value-oriented channels. Consumer preference for store brands continues to grow creating meaningful opportunities for our retail partners to enhance their private label strategies and drive sustainable packaging solutions. Recently, we partnered with one of the world's largest retailers to produce packaging for its private label butter using our PaceSetter Rainier recycled paperboard. This is a great example of how we are helping our customers address consumer preferences for more sustainable packaging. By replacing bleached paperboard with 100% recycled alternative the large retailer is making measurable progress towards its sustainability objectives without sacrificing print quality. The private label butter is expense to reach store shelves in the coming weeks and we are proud to support that journey. Our customers are also looking to drive volume growth and gain market share. We continue to see customers selectively upgrade to our premium packaging solutions as our innovative differentiated designs, allow their products to stand out and win on the shelf. We recently partnered with Keurig Dr Pepper to create a premium package for their coffee collective take-up launch. They wanted a premium unboxing experience for consumers to match the elevated coffee blends. We created a custom 2-piece box set utilizing our unbleached paperboard for stiffness and applied mat and glass coatings and foil stamping to enhance the look of the carton and differentiate it on the shelf. This example highlights our innovation, operational capabilities, and commitments to helping customers achieve their goals. In addition to CPG customers, QSR brands are increasing promotional activity and limited time offers in an effort to drive foot traffic and bring consumers back into the restaurants. We are supporting a number of our QSR customers across multiple geographies in these initiatives. My experience leading and growing CPG companies and their brands will supplement and strengthen the team efforts to be an even stronger partner to our customers. We are supporting our customers' pursuit of meeting consumers where they are in order to grow volume and expand market share. There are many ways we partner with our customers to successfully elevate their brands. Customers rely on us to lead with innovation and accelerate their adoption to more sustainable packaging solutions preferred by consumers. A broader understanding of customer economics and their decision-making processes will enable our team to better anticipate customer needs and leverage insights to drive commercial and innovation engine. Graphic Packaging has a unique ability to partner more effectively on pack design, brand architecture and growth. And we are actively strengthening partnerships, taking a proactive commercial strategy and having conversations with top CPGs, QSRs and retailers around the globe. We continued to build on our strengths and had an exceptional quarter driving packaging innovation. We filed 13 new patents, adding to our portfolio of approximately 3,100 patents. Looking ahead, we remain committed to growth of intellectual property and extending our competitive advantage in serving customers. Our capabilities in sustainable packaging are truly differentiated and position the company for continued leadership. Graphic Packaging is seen as the premier sustainable packaging partner by the brands we serve. We are differentiated with our scale and capabilities, superior innovation and technical expertise and talented people. With a broad portfolio and a strong innovation engine, we are partnering with customers to bring even more innovative products to life. From our childproof laundry pod box to our double wall cups have retained heat and cold to our produce pack [ puts ] for fruit and vegetables. Our addressable paperboard packaging market opportunity is an estimated $15 billion with roughly 85% of it plastic to paper packaging conversion. Representing opportunities we have solutions for right now. Over time, we anticipate regulatory retailer, consumer and NGO scrutiny on the use of single-use plastics and foam packaging to increase with the continued customer focus and innovation and an evolving regulatory environment, this market opportunity is expected to grow and will be an area of differentiation for us. We recently commercialized an innovation in partnership with a health focused emerging brand. We are supporting their transition from plastic to a more sustainable paperboard multipack to better align the packaging with their environmentally conscious consumer base. We developed a custom carton solution for the 10-pack SKU and seasonal formats. The structure optimizes in-store merchandising. The plastic back to box transition is available today on shelves at leading retailers. As customers increase commitments and their desire to move to more sustainable packaging, they often evaluate solutions that move away from plastic or greatly reduce its usage. These packaging transitions to paperboard alternatives can increase brand equity without compromising product performance or shelf life. We are proud to help these advancements and for the recognition we have received for our leadership and support of customers on their sustainability journey. In January 2026, two of our solutions earned World Star Best of the Best Awards. PaperSeal Shape deployed with leading European retailers delivers roughly an 80% reduction in plastic per tray while maintaining full shelf life performance and runs on existing customer lines. Our produce Pack Pet tray was also recognized for replacing PET with renewable recyclable paperboard, eliminating more than 17 million plastic trays annually in a single retail application. In addition, Enviro [ Club Duo ] received an award of distinction at the PAC Global Awards for sustainable packaging design, reflecting our continued ability to replace plastic bile-preserving functionality and shelf appeal. This award was one of 8 PAC Global Awards we received. From an operational standpoint, this quarter was marked by a number of wins. At Waco, we continue to make meaningful progress ramping production. Commercial performance is meeting expectations, and we are ahead of plan with customer qualifications. This positions us to better penetrate new geographies and more efficiently support existing geographies while taking advantage of available recovered fiber streams in our Texas triangle. In parallel, we are completing our cogeneration plant projects, strengthening power supply assurance while helping to advance our customers' sustainability goals. We expect Waco to be a durable competitive advantage for us over time. We are excited to help prepare our customers for promotions through the 100 days of summer at large events select the upcoming World Cup. 24 brands across our food and beverage customer base are running promotions for the World Cup and our customers are planning for increased demand from spectators advance. For large global events like these, customers rely on a consistent, trusted partner who can deliver to time-sensitive deadlines can execute critical graphic changes. We are prepared to provide the excellent customer service Graphic Packaging is known for. We also took a significant step forward in our renewable energy strategy. Finalizing a virtual power purchase agreement with NextEra Energy Resources. This agreement increases renewable electricity coverage across our North American operations and supports disciplined execution against our long-term emission targets. The 250-megawatt solar energy plant in West Texas is expected to begin commercial operations at the end of 2027. This agreement better positions us to support our customers, the world's leading consumer brands and making progress towards their sustainability goals. We continue to build an award-winning culture and be recognized for our values in the way we do business. In March, we were recognized as one of the world's most ethical companies by Ethisphere. This recognition alongside our placement on the 2026 ranking of America's -- most -- just Companies by -- just Capital and Fortune World's -- most Admired Companies shows that others recognize the values our people put into action every day. Finally, as we build on our strong foundation, we are also strengthening our team with highly selective new hires to ensure that we have the right talent and leadership roles as we drive performance across our business. As I mentioned at the start of the call, I'm excited that Melanie Skijus has rejoined Graphic Packaging to lead Investor Relations. Additionally, we recently appointed Randy Miller to serve as Vice President of Treasury and Capital Finance, Randy will lead global treasury with a focus on cash flow generation and capital structure optimization. We just announced that Daniel Fishbein will join as General Counsel in June. Daniel brings more than 2 decades of legal experience having spent his career as a corporate attorney focusing on strategic transactions, corporate governance and securities law matters. He most recently served as Executive Vice President and General Counsel of Corpay, where he oversaw the company's global legal and regulatory function. These leadership appointments and talent upgrades support our priorities. Starting with our commitment to enhancing shareholder value. We aim to deliver greater returns for shareholders by harnessing the significant cash generative business we operate with our immediate priority to reduce leverage and strengthen the balance sheet while continuing to return capital to our shareholders through our established dividends. Our progress gives me confidence in our strong market position and the many expansion opportunities ahead. Our first priority is to strengthen the balance sheet. We are utilizing our strong capabilities to drive sustained growth through a robust proactive commercial strategy and commitment to innovation. You can expect future investment in growth to be more disciplined and focused on the highest return opportunities. Looking ahead, we have an opportunity to reduce our operational complexity and improve accountability by focusing on driving profitability and business excellence, including the ramp-up of Waco. We expect to reduce our capital spend to 5% of sales or less and reduce our inventory from 20.5% at the end of 2025 to between 17% to 18% of sales this year toward our long-term goal of 15% to 16% of sales. We will also continue to innovate and develop world-class products for our customers. We remain on track to generate $700 million to $800 million of adjusted free cash flow in 2026. Moving forward, I am encouraged by the opportunity to grow alongside our customers and partner with them to achieve their goals. We are uniquely positioned with our broad product portfolio, strong innovation engine and integrated network, we are on offense. Now I will turn it over to Chuck to provide more details on our financials. Charles Lischer: Thank you, Robbert, and good morning, everyone. I'm pleased with our performance in the first quarter, including the strengthening of packaging volumes we experienced as we progressed through the quarter. Total volumes were up 1% from the same period in 2025. Top line growth and higher packaging volumes are a direct result of the resilience of our business, the markets we serve and the execution of our team. Sales increased 2% year-over-year to $2.2 billion, driven by the volume increase and a $50 million benefit from favorable foreign exchange. Partially offsetting these gains, price experienced a decline of 2% in the quarter. The pricing decline reflects third-party index changes and bleach paperboard that occurred in the fourth quarter of 2025 along with the continuation of unusual competitive packaging pricing experienced in the last few quarters of 2025. Innovation sales growth was $42 million in the quarter, reflecting the strength of our innovation pipeline, continued strong partnerships and engagement with customers. Adjusted EBITDA in the first quarter was $232 million, including a $6 million foreign exchange benefit. This represents a $133 million decline from the first quarter of 2025. Price volume and mix combined were a $46 million headwind and again were a result of the unusual competitive price environment. Commodity input and operating cost inflation of approximately $37 million was roughly $10 million higher than we were expecting. Unfavorable net performance in the quarter of $56 million was driven by several factors. Severe weather in January across the Central and Eastern United States and the domestic disturbances in Mexico during the quarter caused an approximately $25 million impact from disruption and downtime in our facilities. In addition, heavier scheduled maintenance in the quarter and our decision to curtail production, produce inventories resulted in additional costs of $20 million each as compared to the year ago period. Robbert discussed, we are executing cost reduction and efficiency initiatives, which drove about $10 million of savings in the quarter. And though these savings were offset in the quarter by the factors mentioned, we will swing to positive overall contribution to earnings from net performance later in the year. Adjusted EPS in the first quarter was $0.09 and included a higher tax rate due to the vesting of employee equity awards during the quarter. We still expect the full year tax rate to be approximately 25%. In line with historical seasonality of cash flow and working capital, first quarter adjusted cash flow was a negative $183 million which is an improvement of $259 million from the first quarter of 2025. First quarter adjusted cash flow results included heavier capital spending than we expect for the rest of the year. Attributed to the work to complete our recycled paperboard mill in Waco, Texas. We ended the quarter with $5.6 billion of net debt and net leverage of 4.4x. As Robbert alluded to, our environment remains dynamic with geopolitical uncertainty and inflation impacting the business. During the quarter, we experienced incremental commodity cost inflation resulting from the conflict in Iran which embedded our logistics, energy and resin spend. With energy, we're about 60% hedged for both natural gas purchased in North America and electricity purchase in Europe and have commodity cost recovery mechanisms embedded in many of our contracts. However, these recovery mechanisms can experience lags due to contractual terms. We are proactively addressing the inflation and working on initiatives to offset it. On April 9, we announced a $60 per ton price increase for bleached cup stock effective May 8. While this price increase will be realized in Q2 for non-index-based paperboard sales, most of our affected contracts require price recognition by the industry's third-party index before we can pass it through our packaging business. Looking ahead to second quarter. From a volume standpoint, our expectation for Q2 is consistent with our full year range of down 1% to up 1%. We see pricing similar to Q1 and expect foreign exchange to be a slight benefit. With adjusted EBITDA, we anticipate certain commodity costs to stay elevated in Q2 before moderating towards the end of the year. Accordingly, we estimate a sequential $10 million incremental inflationary impact in the second quarter versus the first quarter totaling $30 million of incremental inflation in the first half of 2026 compared to our original expectations. Q2 adjusted EBITDA is now expected to be in the range of $230 million to $250 million. We are reaffirming 2026 guidance. Many initiatives that we laid out today in addition to the contractual recovery mechanisms to be realized in the second half of the year and our pricing actions are expected to help offset the incremental inflationary impacts throughout the remainder of the year. As a result of these efforts, we remain confident in our ability to deliver 2026 adjusted EBITDA in the range of $1.05 billion to $1.25 billion, in line with our prior guidance. Our 2026 adjusted free cash flow outlook remains unchanged in the range of $700 million to $800 million, a significant step-up from 2025. Cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures and timing of inflationary cost recovery. We intend to pay down approximately $500 million of debt in 2026 and remain committed to our dividend. We understand that our dividend is important to many of our shareholders and also reflects the confidence that we have in the future cash flows of the business Capital expenditures in 2026 are expected to be approximately $450 million. As a result of our completed 90-day review, we identified certain projects and investments that no longer align with our operational priorities, so we canceled them. One of these projects, the automated roll warehouses at Texarkana and Kalamazoo resulted in a onetime primarily noncash write-off of approximately $40 million. Importantly, this decision avoids approximately $200 million of capital spending over the next few years and is a prudent move given the project no longer yields the original return thresholds since we will be operating with less inventory. In conclusion, we are moving out of a heavy investment cycle to a cash harvesting cycle. This is an exciting and much anticipated phase. The past few years have been characterized as building years with capital investments and acquisitions made to differentiate our packaging and service offerings in the marketplace and position the company for long-term growth. Now we are focused on optimizing our footprint and operations, executing disciplined capital allocation, expanding profitability in the business and to my prior point, delivering the free cash flow we committed to. 2026 will be a foundational year for Graphic Packaging, and we are excited about what our future holds. With that, I will turn it back to Robbert. Robbert Rietbroek: Thank you, Chuck. To conclude, we see a clear line of sight to long-term value creation, supported by the value we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026. With that, operator, let's open it up for questions. Operator: [Operator Instructions] Our first question today is from Ghansham Panjabi with Baird. Ghansham Panjabi: First off, welcome back memory -- Melanie, we look forward to working with you. I guess first off, on the heat map on Slide 5, can you touch on if you're actually seeing any sort of inflection in food or just easy comparisons from several quarters of just minimal growth? Just trying to get a sense as to what you're seeing in that market, specifically to that category, which has been weak for several years at this point? And then second, as it relates to the realigned commercial teams, can you just give us a bit more insight into what's going on there? Robbert Rietbroek: Yes. Thank you, Ghansham, and thanks for welcoming Melanie back. We're very happy to have you back, Melanie. With regards to your first question on food, let me just reflect on the macro environment for a second, and I'll zoom in on food. What we're hearing from our customers continues to be a focus on growth, gaining share investing in product quality that specifically applies to food and value perception, pack size and pricing promotions and there is an increased emphasis on overall across the categories of price pack architecture as well as novel pack designs and obviously, a localized, reliable supply chain. And the consumer environment of which food is a part remains very value driven, and there is a focus on affordability. And we are seeing stable demand signals, Ghansham, with certain pockets of strength and we're seeing select growth across larger customers and key segments, particularly in what we call everyday essentials. So food is performing rather well with strength, particularly in protein-driven categories like yogurt, bars, refrigerated meals, and that really reflects underlying consumption trends. If you look at some of the other categories like Health & Beauty, that's performing well as consumers continue to prioritize small indulgences like skin care, perfume, beverages is stable, and foodservice was a little slow due to the weather and consumer affordability trends but is expected to gain momentum throughout the year. So that's how we see food as part of the broader macro environment. With regards to the realigned commercial organization, we are seeing a big need to serve our customers better both at the national level, in some cases, international level where we see more and more procurement team centralized in locations like Switzerland or the Netherlands or even Ireland, so we are organized now in a way where we can serve both the global procurement organizations of our large CPG customers as well as domestic customers with a slightly enhanced organization. And we feel very good about the leadership we put in place under Jean-Francois Roche who is really doing a great job in getting me in front of customers as well. I've met 6 global customers across different geographies in the first quarter and in the last month as well. And that's really given me a good perspective on how our commercial organization is now organized and how well we are serving customers. Ghansham Panjabi: Okay. And then just for my follow-up question. On the EBITDA reconciliation in the press release, what is the $71 million add back specific to the first quarter of '26, just quite a bit higher than the first quarter of last year. And then just to clarify, as it relates to the commodity cost comment, are you expecting a sequential moderation in commodity costs? Is that what you're assuming in that $30 million incremental impact in the first half? And what would that number be comparable in the second half? Charles Lischer: Yes. Ghansham, this is Chuck. I'll take those. So on the -- what we have in the special charges bucket, I mentioned on the prepared remarks, the $40 million from the automated roll warehouse write-off. So that was the biggest component of it. We also had severance from the actions that we took that we talked about in the quarter, that's about $20 million. And then for the Croatia business that we're divesting, we had about a $13 million write-off of assets, and that's primarily for intangibles that we had acquired with the AR Packaging acquisition. So those components are the majority of what you see in the quarter. On the inflation, so yes, what we called out is $10 million of incremental inflation in Q1 $10 million incremental to that in Q2. So for a total of $30 million versus our original expectations in the first half. And then at this point, we see about the same number, about $60 million to $65 million of incremental inflation for the full year. That environment, of course, remains very fluid and dynamic, so changes every day. But what you see us doing is pulling several levers to offset that inflation. We talked about on the call, the contractual recoveries and pass-throughs, and that will account for about 1/3 of it. I talked about the cup stock price increase, and then we're further evaluating some packaging price increases. And then as Robbert mentioned, we're looking at other cost savings, procurement initiatives to provide a further buffer. So with all of those offsets, we're confident that we can neutralize the inflationary impact that we see. Operator: Our next question is coming from Mark Weintraub with Seaport Research. Mark Weintraub: Chuck, just a point of confusion for me. So the -- I think that $71 million, that was on adjusted EBITDA. Was the warehouse and Croatia, were those not noncash write-downs primarily? Or maybe if you could just clarify for us? Charles Lischer: Yes, it's primarily noncash, but just in the add back to get to the -- effectively the number that the EBITDA is, of course, an all-in number. It does include depreciation and amortization, but it does include noncash charges before you adjust for them. Mark Weintraub: Okay. And then second, and I know you were kind of answering this in Ghansham's question as well. So basically, you have about $200 million of improvement in the second half of the year to the first half of the year. If you'd be willing, would you kind of share in terms of the way you provide those buckets, volume, price, the big drivers, where the majority of that $200 million would be shown up? Charles Lischer: Yes, happy to do that. So broadly, we see the year playing out similar to what we laid out in the original year-end call other than inflationary impact that I already talked about. But if you look at first half to second half, as you mentioned, there's a step up second half versus first half. Think about a few things. So first of all, our first half includes several unfavorable items as we talked about the January weather that caused facilities downtime that we don't expect to recur in the second half. Second, our first half has a larger unfavorable impact from several items, including scheduled higher maintenance and then also the market downtime that we're taking to lower inventory levels is higher in the first half. And then finally, the second half has a bigger impact from some of the positive items that we're seeing. For example, we mentioned the contractual cost recoveries, the packaging price initiatives and some of the procurement and other cost savings initiatives. So several moving parts. But of course, with our current expectations for inflation, we are confident that we'll be able to hit our full year EBITDA guidance. Mark Weintraub: Okay. Super. I mean any chance getting a little bit more granular? I think you talked about weather being $25 million in the first quarter. I think on the last quarter's call, you -- roughly downtime would be about $50 million -- inventory-related downtime about $50 million lower. Are those numbers about right? And then so if we're kind of left with like $125 million in the drivers you were providing kind of just round numbers to where they might come from, it's not understood, but just trying to get a bit more granular. Charles Lischer: Yes. I'll just give you a couple of more nuggets and then we can talk more offline. The phasing of the cost savings that we called out $10 million in Q1. It will pick up a little bit in Q2, but then the majority of that will be back-end loaded. You mentioned the downtime. That, of course, is something that we'll be taking more market downtime in the first half than the second half. So we can work through it more offline. Operator: Our next question is coming from Hillary Cacanando with Deutsche Bank. Hillary Cacanando: So just the breakdown that you were just -- you were talking about to get to your guidance. Last quarter, you actually had guided to $100 million incentive compensation impact for 2026, and I didn't see that in today's presentation. Is that included anywhere and maybe in like net performance in the first quarter? And like what type -- what phasing should we expect for incentive compensation through the year? Charles Lischer: Yes, that's all included within the original numbers that we had expected and all included in what we've reported, so we didn't talk about it again. It is a year-over-year factor in that performance. Hillary Cacanando: It's all included in the first quarter. So there's -- we're not -- you're not expecting any additional incentive comp this year for the remainder of the year? Charles Lischer: Of course, it will roll throughout the year. It's the Q1 impact that we had expected recorded in Q1. Hillary Cacanando: Okay. And then -- and then how much should we expect for the remainder of the year? Charles Lischer: Again, we embedded about the $100 million in our full year guide. Hillary Cacanando: Okay. Got it. And then just on pricing, I know you had asked for price increase. Does that have to go -- like is [ RISI ] involved in this? Or do you have is it pretty fast? Like is it just between you and the customer? Or is it really involved? Like is it like -- is it going to depend on what they come up with -- in terms of like what the final number will be or if there will actually be an increase? Charles Lischer: Yes, a couple of components of our price. Specifically, what I talked about in the prepared remarks was an increase in cup stock paperboard price, and that is something that will impact our open market business more quickly than it would pass through our foodservice packaging business. That will be once [ RISI ] recognizes it and then whatever the contractual period is before it starts getting reflected. And so that is on that side. Then on the other packaging price increases, those would go into effect in our, let's say, around $1 billion of revenue that we have that's not under direct pricing contract. Operator: Our next question is coming from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess maybe I can just clarify maybe the walk on free cash flow. So it looks like you have kind of harvested some amount of working capital and inventory. But does that maybe reverse as you take some downtime? And then maybe next year also, would you have to kind of rebuild those inventories? And do you expect kind of less contribution from work capital and then related to that point, just kind of curious if you still expect kind of an $80 million uplift from Waco and is that being offset by maybe some downtime at Kalamazoo? Charles Lischer: Yes. So I'll start with the last part. First of all, on Waco, what we're seeing there is the business case for Waco is indeed playing out in terms of the variable cost. What we -- the benefits we have recommitted to the specific benefits number because until we're able to cover the fixed cost with the volume that we -- then that's when you'll see the additional impact of the fixed cost. But as Robbert talked about on the call, the operations are running well. The ramp-up is going well and everything overall is going very well. And in terms of the first part of your question, inventory will not be rebuilt in next year as we talked about or as Robbert mentioned, we expect to get the 17% to of inventory -- inventory as a percentage of sales this year on our way towards our longer-term target of 15% to 16%. So we will continue to see some working capital benefit in next year from lower inventory. And then also 2027, if you think about 2027's cash flow, that will continue to benefit from lower cash taxes and then, of course, lower interest expense. So some of the items will come back. And then as we talked about at the year-end call, we still see the post 2027 free cash flow number of $700 million plus. Arun Viswanathan: And then if I could ask on supply/demand. So obviously, there's been some changes in SBS. Our understanding is, I guess, that may not necessarily have the impact as to reduce supply to tighten up that market enough to get pricing power. Would you agree with that? And are you still kind of facing some pricing headwinds in SBS? And is that weighing on CUK and CRB as well? Maybe you can just comment on kind of potential pricing in those -- across the different substrates to cover inflation. Robbert Rietbroek: Yes. Let me take that question. With regards to the paperboard grades, the 2 grades that really matter most to us, as you know, are recycled and unbleached because that's what we primarily use. And both of those markets are in good balance. With regards to the cross-category dynamics, we're not necessarily seeing a lot of impact of bleached on recycled with regards to cannibalization. So we're not seeing recycle lose volume to bleached, but it does have to respond to price competition. So switching is rare. And with our new PaceSetter Rainier grade, that matches bleached printability, but it's 100% recycled and cheaper to make. And we continue to believe that PaceSetter Rainier will take volume from bleached over time. And when it comes to the balancing of supply and demand, I just want to remind you that we closed Tama, Iowa, which was a CRB mill in '23. We decommissioned our K3 machine in Kalamazoo in '23, and we closed Middletown, Ohio, which was a CRB mill in '25. Then we closed East Angus in Quebec in '25 and '26, and we sold the Augusta mill, as you know. So bleached continues to be oversupplied, but accounts for the smallest part of our business. And we have been very proactive in our approach to supply whilst others have added capacity, as you know. So what we do here is we actively match our internal supply with our demand profile, and that's supported by our integrated system and our portfolio as a result is structurally advantaged. Operator: Our next question is coming from Anthony Pettinari with Citi. Anthony Pettinari: Just following up on, I think, Hillary's question. If you look at your total tonnage, is it possible to say what percentage is on a [ RESI ] index versus like a custom index, maybe what the lag is in terms of price increases if it's realized in RESI versus you see it in a custom index and then how much of your volumes would be covered by that cup stock price increase that you talked about earlier? Charles Lischer: Yes, this is Chuck. I'll take that. So in our bleach business, we have more of our packaging tied to [ see ] than we do in our other models. And so the majority of our packaging volume is indeed tied to [ res ] that's for the cupstock business, a couple of hundred thousand tons and generally would be recognized in price 3, 6 months after it's recognized by [ RISI ] depending on the timing during the quarter that is recognized by RESI. Robbert Rietbroek: Okay. We don't disclose exact details around the percentage of our contracts that are tied to [ RESI ], but Chuck did refer to the $1 billion of noncontractual sales, and we do have a cupstock business as well where we sell a big part of that on the external market. So that should answer your question. Anthony Pettinari: Got it. Got it. And then I guess, fiber is up, diesel is up. You've indicated that you're not seeing big cannibalization of SBS into CRB. I mean, obviously, you can't talk about forward pricing or anything like that. But can you just talk about maybe your philosophy on pricing? Do you expect graphic to be a price leader? How do you think about it? We've seen price improvement in other containerboard graphic paper grades this year. Can you just talk to us kind of how you think about pricing generally? Robbert Rietbroek: The majority of our business is converted to finished product packaging. So -- and the majority of that is either recycled or bleached. And so -- unbelieve, sorry. And so we are not necessarily spending our entire day thinking about paperboard pricing, graphic, and we continue to focus on customer service, operating excellence and taking share and growing our business by delivering better products, better finished products, which are essentially converted finished packages. That is how we think about pricing. Operator: Our next question is coming from Phil Ng with Jefferies. Philip Ng: Robbert, I appreciate the 90-day post review, volumes are up, so that's great. You got some headwinds this year that you are going to work through, but it sounds like destocking inventory could potentially still be a drag when we think about 2027. So with some of the levers that you may have a better appreciation now, is there a path where you could grow EBITDA next year with our prices going high? I just want to think through that just because, obviously, it's a big earnings reset this year. Robbert Rietbroek: Yes. Look, I just -- thank you for raising the 90-day review. I just want to give a little bit of color on that, and then I'll talk a little bit about how it's all going to impact EBITDA. We have we have concluded that review and confirmed that we have a strong foundation, an opportunity to drive better financial and operational performance as we talked. And we've taken 500 roles out of the organization. As Chuck talked about, that's going to primarily impact the second half of this year. We are advancing some of these capital efficiency initiatives where we're prioritizing higher return opportunities. We've reorganized the commercial team. We've deployed AI. So we are very confident that the work we're doing is going to allow us to deliver on the cost reduction commitment that we have, which is $60 million. Now there is some inflation, as you know, we have mitigation actions in place, which include contractual cost recovery mechanisms, those have some timing lags. There are some target price actions in the noncontractual business that we just discussed. And then we just announced a recent price increase on [ cut ] stock and primarily cost reductions and operational efficiency actions. With that and the fact that we're taking obviously an EBITDA hit this year to reduce our inventory and we are resetting the base because we're reinvesting in incentives for our associates. That's the walk that Chuck talked us through. We will continue to rely on productivity and category growth and share growth to drive top line and therefore, EBITDA Philip Ng: Okay. So it sounds like you feel like you got enough lease to grow next year from an EBITDA standpoint, Robbert? Just quickly summarize or... Robbert Rietbroek: We're not in guidance for next year at this point. It's early, we're still early days in 2026. So give us a couple of months to get a better understanding, but we're doing all the right things and the right work to set ourselves up for a great 2027. Philip Ng: Fair enough. A question for Chuck. Your guidance you reiterated, which is encouraging. Certainly, you're seeing some inflation here. Your guidance, does that embed the SBS cup stock sticking? Granted there is a lag, I don't know how impactful it's going to be. And then some of the packaging price increases that are not tied to research some of these contracts? Is it embedded that you get price? I asked just because in your prepared remarks, you mentioned you've seen some unusual price declines in packaging prices, right, not necessarily in [ SBI ], the other grades. Have you seen that component like stabilize? Like what are you seeing on some of that packaging price in the last few months? Charles Lischer: Yes. A couple of things there. So we don't embed anticipated [ RESI ] moves until they are announced. And so any impact to that on our [ track ] from our [ Cove ] would not be reflected we will embed what we see in the open market business, of course. From time to time, we would have bet packaging prices, but right now, we're still working through exactly the size of all of that. And -- and so we'll embed that as we go. So that's what we see on the price. Philip Ng: Have you seen a stabilization there, Chuck, on the packing price? What you've said that it's been unusual coming the year? Charles Lischer: What we see there is our customers, however, there's geopolitical uncertainty that the assurance of supplier becomes a bigger deal to our customers and they talked about local supply and our integrated model really sells well to them. And so it certainly gives us the opportunity to stop in negative trends or to introduce the idea of a packaging price. Operator: Our final question today will be coming from Gabe Hajde with Wells Fargo Securities. Gabe Hajde: Robbert, I'm curious if we can go back to the cup stock announcement. I find it interesting, I think, in the slide that you gave us, it's the 1 category that decelerated, it was pretty strong over the last 2 quarters. So I guess is there something unique about that supply-demand dynamic in cup stock that would afford you all to the industry to get price or maybe something unique about the input cost structure that makes it such that you can recover costs faster than maybe some of the other [ two ] grades you participate in? Robbert Rietbroek: Yes. On the -- there is a higher input cost, of course, that cup stock is barrier coded with resin. And so there's a an impact when you see [ resin ] prices increase. And so yes, a higher input cost. And then cup stock has historically been a strong grade for us and so down had a lot of excess capacity. Gabe Hajde: Okay. And then as you have conversations with your customers, I mean, you are trying to reduce inventories. Maybe they were looking around the corner at oil above 100, and we might envision some price increases. Do your sales folks in using any sort of prebuying activity that happened into the summer? And then one last one on CapEx. It sounds like the entire $200 million that you called out is specifically associated with that 1 discrete or those 2 discrete winder projects I've seen remember there were some, I guess, greenhouse gas initiatives later in the decade, and it seems pretty hard right now to get some projects still on the drawing board? Robbert Rietbroek: Yes. Let me take the one on customers, and you could talk, Chuck, about the -- how we got to the $200 million capital investment reduction and what that [ entails ], that's one project or more projects. So the question around customer stock is a good one. We haven't really seen a lot of stocking in Q1 as a result of anticipated price increases. We are having a lot of conversations with our customers regarding surety supply or assurance of supply. That's primarily related to having multiple sites producing their packaging, so that they're not relying on one side in case of a natural disaster, more so than anything related to oil and gas right now. And as Chuck said, they do really value our integrated business model. But the customers, they want value, they want to balance costs. They want to see the best performance especially in our beverage sector, you need certain properties in the packaging. They want sustainability. And most recently, there's more and more discussion on [ assurance ] of supply, as I discussed. And they are focused on cost can and are looking for ways to optimize packaging formats, reduce material usage and improve cost. So those are most of the things we're seeing, Gabe. Charles Lischer: And then, Gabe, I'll build on the I'll build on the CapEx. The $200 million that we called out, that was those two projects specifically, but that was over the next several years that, that $200 million would come out not primarily this year that the $450 million is the number that we had originally guided to for this year and clearly we've gone in and shored up our path to get there, and we'll continue to look for opportunities to even cut further. Robbert Rietbroek: So with regards to capital, we are implementing a very rigorous and disciplined capital spend review and approval process. We will be evaluating and prioritizing investments that promote safety and fulfill regulatory obligations. We will continue to consider investments that announce cost-efficient season to [ generate ] the right returns for our portfolio. So that's how we're viewing this. And there are obviously a number of projects in the future that we are currently evaluating, including the ones that you're referring to. Operator: Ladies and gentlemen, this does conclude today's Q&A session and also our call. You may disconnect your lines at this time. Have a wonderful day, and we thank you all for your participation.
Kevin Lorenz: Good afternoon, ladies and gentlemen, and welcome to WashTec's earnings call on the results of Q1 2026. My name is Kevin Lorenz. I'm Investor Relations Manager at WashTec. With me, I have today our Chief Financial Officer, Andreas Pabst, who will provide a brief update on WashTec and guide you through our quarterly results. Following his presentation, the floor will be open for questions. Also, you might have just seen a short video on our newest product, JetWash Connect during the waiting room, which we are very proud of. If you are interested, you can find this and further videos on this new product on our WashTec website or you can also just send us a short mail, and we will share it with you. But without further ado, I'm now handing over to our Chief Financial Officer, Andreas Pabst. Andreas Pabst: Thank you, Kevin. Also from my side, a very warm welcome. I really appreciate that you are in our call today. Let me first give you some brief statements about our current topics at WashTec before I shift over to the figures of the first quarter of 2026. Let's start with our new JetWash Connect. We already mentioned the planned launch of this new product during our last call on the fiscal year 2025. But now we are live. And as you can imagine, we are very proud on our product launch on April 14. Our new JetWash has some really good features for the users, for our customers, the operators as well as for us. First, the new steel structure. We own the complete construction details, and that puts us in the position that we can source the necessary steel parts locally instead of shipping them from Germany to all over Europe. Second, Wash & Pay leads to the fact that the average paid time increases by 25% to 30%. That means more revenue for our customers. And third, the new polish is a real eye catcher. You can really see the difference when you clean your car with this feature. With all these advantages, we believe that we can expand our business in this production category even further. Already with our last generation, we were able to achieve double-digit million revenue in Europe in 2025 that stands for approximately 10% of our equipment business. So we expect more to come. That brings me to my next topic. You are already aware that we are optimizing our production. This is one of the biggest levers we currently have in the company. We have made a major step in the future development of our production network. The grand opening of our new plant in Czech took place on March 26. We started with the transfer of preassembly, assembly and logistics to the new building. The state-of-the-art facilities ensures process stability and efficient material flows while enhancing preassembly capacity with clear structured process change. Currently, we have already transferred around 50% of the total jobs to be transferred. That means on the other side, we currently have planned higher costs. There are people in Augsburg who train the new colleagues in Czech. The handover is in quite good shape, and our employees are working very well together. We expect that this higher capacity need will be resolved before the end of this year, and then we will collect the full saving from this lighthouse project. Let me now briefly address the potential risks related to the conflict in the Middle East. From a revenues perspective, our direct exposure in the affected countries is limited and remains modest. However, the broader uncertainty can lead to a temporary reluctance to invest, particularly impacting equipment demand on a global level. This is something we are closely monitoring. On the recurring side of the business, our assessment remains unchanged. Based on historical data, higher fuel prices may lead to short-term adjustments in driving behavior, but we do not expect a structural impact on car wash usage. Accordingly, we see no material long-term risk to our chemicals and service revenues. On the cost side, we are paying particular attention to supply chains and commodity prices, especially energy-related inputs and selected raw materials. For metals, we are in the lucky situation that we have secured a major part of our need until end of this year already in December 2025. For other parts, we are increasing our stock level cautiously. Higher fuel prices, we counteracted with some surcharges for our customers in the field of service. Currently, we are discussing further mitigation measures and put them in place, depending on the duration of the conflict. You see we are prepared and do the utmost to keep the financial impact on WashTec manageable and to protect margins. On this slide, which you probably already know, you see our main efficiency programs, which we are currently driving. And you are, of course, aware that these are already fundamental for our company. For sure, you also can imagine that not all of those programs always run 100% as planned. I have already given an update on the optimization of production footprint, where we currently have some planned negative impact on the gross margin, but where we are fully in line with our targets. In terms of installation costs, here, we are facing some delays, which are -- influence our gross margin negatively. We somehow have underestimated the complexity of this job in some details and have intensified our efforts here. Our program for cost down of production and modularization is currently slightly behind time line, but overall, with no significant impact for the 2026 figures. On the other side, our programs for quality excellence and the Global Scope Configurator are developing extremely well. Our quality cost per units are decreasing continuously and contribute to our profitability. The Global Scope Configurator has been rolled out now to 3 European countries and further to come. This program clearly delivers what we expected, a strong complexity reduction along the whole process chain from the customer order to production. Now let's come to the figures for Q1 2026. Summing up Q1 in a statement. Revenue is good, especially in equipment in North America, improvement of profitability necessary. But first things first. Starting with our revenues for Q1 2026. We achieved a new first quarter revenue record of EUR 111 million, representing an increase of 2.3% year-on-year. This growth was primarily driven by a strong performance in North America, particularly in the equipment business, supported by higher revenues with key accounts. In Europe and Other, revenues were stable overall compared to prior year. On a business line basis, equipment revenues increased by 7%, while service remained stable. Consumable revenues declined mainly due to the weather-related lower wash volumes. However, the revenue decline was less pronounced than the drop in volumes, underlining the resilience of the underlying business. Looking at our profitability, we see an EBIT of EUR 3.8 million. This is an EBIT margin of 3.4%, whereas on -- 1 year ago, we booked 4.5%. The shortfall was on the one hand side, expected by necessary expenses caused by some programs. Remember my statements to a production shift to Czech. On the other side, we saw a cost increase in terms of installation. Our measures we started are not finished and do not show positive effects in the first quarter, but they will come. We have full focus on this cost block. Having a short view on free cash flow. The number is down by EUR 9 million to EUR 7 million. This drop doesn't make me too nervous right now as we have increased our stock due to the real good order backlog we have. Therefore, our net working capital increased to EUR 94 million and comparable number of March 2025 was EUR 82 million. So overall, Q1 was mixed in terms of financials and hard work is still in front of us. But given the strong top line as well as our current order book, we can look optimistic in the future, especially if we look at the development in equipment, what brings me to the next page. In the first quarter, we see a clear differentiation across our business lines. Equipment was the key growth driver with revenues up 7% year-on-year. This growth was primarily driven by North America, supported by higher revenues with key accounts, while Europe and Others also showed a slight increase. Service revenues were stable compared to the prior year, once again underlying the resilience of our recurring revenue base. This stability is a key strength of our business model, particularly in a more volatile macro environment. Consumable revenues were below the prior year level, mainly due to weather-related lower wash volumes. Importantly, the decline in revenue was less pronounced than the decline in volumes, which demonstrates the fundamentally sound operational development of our washing chemical business. Overall, we are confident with the growth of our top line. Now let's put eyes on our segments. In Europe and Other, revenue remained broadly stable year-on-year. Earnings in the segment were impacted by planned temporarily higher costs, mainly related to the expansion to our Czech site as well as delays in the execution of certain efficiency initiatives, particularly in installation and logistics. I already gave some insights here. In addition, earnings were affected by weather-related lower activity in consumable business. In North America, we saw a clear improvement in both revenue and earnings, driven primarily by higher equipment revenues with key accounts. The segment benefited from improved execution and more favorable product mix. Looking at the EBIT number, we see an increase in this KPI by EUR 1.4 million to now breakeven. This is the best EBIT in the first quarter in North America since 2017. Yes, that's remarkable. Coming now to our EBIT bridge, showing the development of Q1 '25 to Q1 '26. The increase in group revenue in the first quarter generated a positive gross profit contribution, while at the same time, the gross margin declined year-on-year, coming from 29.3% last year to now 28.4%. This was mainly driven by a less favorable product and regional mix, including a lower share of consumables and a higher share of equipment business in North America. In addition, gross profit was impacted by planned temporarily higher costs, primarily related to the expansion of the Czech site and delays in selected efficiency programs, as already mentioned. Selling expenses increased in line with revenue growth and remained broadly stable as a percentage of revenue. Administrative expenses are slightly higher compared to last year, mainly to ongoing IT projects. On this slide, you see some more financial KPIs. Net income and earnings per share follow mainly our EBIT development. Our net financial debt is still in a very good shape despite the outstanding amount is higher compared to the same time 1 year ago. Reason for this is besides higher dividend payment and the share buyback program, we already mentioned higher net working capital. On the following slide, you see our equity ratio and our fixed asset ratio. Both in a reasonable shape. In terms of employees, it is remarkable that we have increased our workforce by 94 year-on-year. Most of our new colleagues have been hired in the business line service followed by sales department. Now to the equipment order backlog, as always, indexed basis this time is the year 2022. Equipment orders received was significantly higher in the first 3 months of the year than in the prior year quarter. This cut across both segments and was primarily due to the positive trend in North American segment, where the increase was even well into the double-digit percentage range. Therefore, as already mentioned, we have a very strong order backlog, plus 10% compared year-on-year, plus 16% compared to end of 2025. And by the way, the increase in North America is even stronger. This gives us a good view on the top line in the coming months. Let's now turn to our guidance for 2026. In general, WashTec confirms its guidance for 2026 and expects that the delays in the efficiency projects will be made good over the course of the year. That is where we, the management and the complete team, need to focus on. We expect revenue growth in the mid-single-digit percentage range and an increase in EBIT that is disproportionately higher than revenue growth. The forecast does not make allowance for any further significant worsening of the economic situation due to the developments in the Middle East or other global disturbances due to some political statements and actions. However, in addition to high volatility in raw material markets, we are currently seeing a significant increase in uncertainty regarding the future course of the conflict in Middle East and the resulting indirect economic impact. That doesn't help too much for stable guidance. So this time, it is even more important to state that this guidance is subject to uncertainties and all these figures reflect our expectations based on our current knowledge and significant deviations in either directions are not factored in here. This concludes my remarks. On the following page, you will find our 2026 financial calendar. Thank you very much for your interest so far. Kevin and I are now available to answer your questions you might have. Kevin Lorenz: [Operator Instructions] We have the first question from Stefan Augustin from Warburg Research. Mr. Augustin, we can hear you. Stefan Augustin: Great. I hope so. I have a couple of questions. So the first one is actually, can you elaborate a little bit more again on the headwinds? So when do you think which one of the headwinds is going to start to decline? I mean, Czech Republic is probably second half of the year, so not Q2 yet. When is the element of the installation efficiencies going to kick in? And can you remind us on the SAP integration costs in Q1 '26 compared to the ones you might have had in Q1 '25? So that would be the first block. Andreas Pabst: Okay. So yes, you are right, the profitability or the increasing profitability for the transfer to Czech Republic will kick in more, end of this year, and we will see full effect according to the actual plans. And we are in the current time line, we are fully on track. We will see that in 2027. In terms of installation costs, we are currently really a little bit behind. We detected some, let's call it, difficulties, yes, where we need to dig further and we need to create other solutions to come back here. So that means, I would say we are here now 1 quarter behind, but we will manage to come up with this one during the year. And then you asked about the cost for the implementation of SAP. So if you look to the EBIT bridge, which is in the presentation, the deviation in administrative cost is more or less coming from this cost for the introduction of S/4HANA. So it's around about EUR 200,000. Stefan Augustin: Okay. The next one is the -- you mentioned that the orders that you received in Q1 are largely also on the U.S. side, but we should also expect growth and a positive book-to-bill in the quarter on the European side. Is that okay? Andreas Pabst: So if I look at the order income, I'm positive in Europe as well as North America for the first quarter. Both showed an increase compared to prior year. That is good. The increase was even -- just what I said was, the increase was even higher in North America. So yes, you're right with your statement. Stefan Augustin: And probably the weather, especially in Germany has been quite good in the second quarter or in April. So it would not be wrong to expect a better chemicals business in the second quarter. Is that a fair assumption? Andreas Pabst: Let me think about -- so currently, we have May 5, I guess. So the second quarter is not completely done yet. But looking at April was good washing weather, especially in Europe in one of our key markets. That's some headwind we have -- or tailwind, sorry. Stefan Augustin: Okay. And then maybe just switching back a little bit. The -- say, the headwind on the installation efficiencies, is that more in Europe or respectively, if we have in the second quarter, stronger volumes to expect from North America, would we still see a very or a sizable drop-through in operating leverage as the installation part is quite okay in North America? Andreas Pabst: That's really a good question. Thank you for that one. So the topic what we see in installation cost is mainly related to Europe. So the installation costs in North America are on a reasonable level if we compare it over the year and compare it to the targets we have. Kevin Lorenz: And we have another question from Wolfgang Specht from Berenberg. Mr. Specht, can you hear us? We can't hear you. Sorry, okay, I see the question was actually in written form. So the question is, connection is a mess still would have several questions. Okay. And so Mr. Specht, our provider in EQS has now also included an option that you can dial in via phone. Currently, many analysts have the problems that their banks are very restrictive with their IT and so if you can -- if it's possible for you, then you can also dial in via phone and there should be -- the procedure should be described. There should be a number that you have to call and then -- so let's maybe give him a little bit more time to -- if there's a question coming or not. Else -- I don't see any other questions right now. So I don't know, should we give him another minute or should we. Andreas Pabst: Let's wait for 30 seconds and see if it works, if not yes. And that's also. Kevin Lorenz: There should also be an option to write down questions in text form, also for everyone else who might still have questions. Andreas Pabst: So Mr. Specht, we really like to answer your question. So if it doesn't work right now, yes, probably then we can do it later on. That is for all the audience. But then I would say no further questions right now. So then ladies and gentlemen, on behalf of the whole Management Board, we really would like to thank you for your interest in WashTec and wish you a pleasant day. Thank you. Bye-bye.
Takeshi Horikoshi: So this is Horikoshi, CFO. I'd like to share with you the financial results for the third quarter of FY 2025. So Page -- Slide 4, this is a summary of the 3-months period of the third quarter FY 2025. The FX rate were JPY 152.8 per U.S. dollar, JPY 177.5 per euro, and JPY 100.2 per Aussie dollar. Compared to this year-on-year, the yen depreciated from the previous year. And also the sales increased and the OP increased by -- net sales increased 3.5% to JPY 1.02 trillion. OP decreased by 12.7% to JPY 142 billion. Operating income ratio declined by 2.5 points to 13.9%. Net income decreased by 13.1% year-on-year to JPY 94.1 billion. Slide 5 shows sales and profit by segment for the third quarter. Sales in the Construction, Mining & Utility Equipment business increased by 3% year-on-year to JPY 945.8 billion. Segment profit decreased by 17.9% to JPY 120.7 billion. The segment profit ratio declined by 3.2 points to 12.8%. In Retail Finance, revenues increased by 6.2% year-on-year to JPY 32.1 billion and segment profit increased by 29.9% to JPY 9.1 billion. Sales in the Industrial Machinery & Others business increased by 11.8% year-on-year to JPY 55.8 billion, and segment profit increased by 47.7% to JPY 10.7 billion. I will explain the factors behind these changes later. Slide 6 shows sales by region for the Construction, Mining & Utility Equipment business for the 3 months period. Sales in this segment increased by 3% year-on-year to JPY 943.2 billion. While sales decreased in Asia, mainly due to sluggish demand for both mining and general construction equipment in Indonesia, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales remained flat year-on-year. Slide 7 provides a summary for the 9 months period of FY 2025. The FX rates were JPY 148.5 to the dollar, JPY 170.4 to the euro and JPY 96.3 for the Australian dollar. Compared to the same period last year, the yen appreciated against the U.S. dollar and the Australian dollar, however, depreciated against the euro. Net sales decreased by 1.4% year-on-year to JPY 2.915 trillion. Operating income decreased by 10.1% to JPY 419 billion. The operating income ratio declined by 1.4 points to 14.4%. Net income decreased by 13% year-on-year to JPY 269.8 billion. Slide 8 shows sales and profit by segment for the 9 months period. Sales in the Construction, Mining & Utility Equipment business decreased by 2.2% year-on-year to JPY 2.688 trillion. Segment profit decreased by 14.7% to JPY 362.6 billion. The segment profit ratio declined by 2 percentage points to 13.5%. In Retail Finance, revenues increased by 1.1% year-on-year to JPY 93.1 billion. Segment profit increased by 19.1% to JPY 26 billion. Sales in the Industrial Machinery & Others business increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% to JPY 27.3 billion. I will explain the factors behind these changes later. Slide 9 shows sales by region for the Construction, Mining & Utility Equipment business for the 9 months period. Sales in this segment decreased by 2.2% year-on-year to JPY 2.6805 trillion. Although sales decreased in Asia, North America and Japan, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales decreased by 0.6% year-on-year. Slide 10 details the factors affecting sales and segment profit in the Construction, Mining & Utility Equipment business for the 9 months period. Regarding sales, the positive impact of improved selling prices was outweighed by the negative impacts of the yen's appreciation and reduced volume, resulting in a decrease of JPY 60.4 billion year-on-year. As for segment profit, despite the positive impact of improved selling prices, it was outweighed by the negative impact of the yen's appreciation and reduced volume and increased costs, resulting in a decrease of JPY 62.3 billion year-on-year. Slide 11 shows the result of Retail Finance for the 9 months period. Assets increased compared to the previous fiscal year-end, driven by increase in new contracts and the depreciation of the yen at the end of the period. New contracts increased year-on-year, mainly due to increased finance penetration. Revenues increased by JPY 1 billion year-on-year, primarily due to the increase in outstanding receivables. Segment profit increased by JPY 4.2 billion year-on-year, mainly due to lower funding costs. Slide 12 shows sales and segment profit for the Industrial Machinery & Others segment for the 9 months period. Sales increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% year-on-year to JPY 27.3 billion. The segment profit ratio rose by 6.5 points to 16.8%. Sales and profits increased due to higher sales of larger press for the automotive industry and increased maintenance sales for high-margin excimer lasers for the semiconductor industry. Slide 13 shows the consolidated balance sheet. Total assets stood at JPY 6.3079 trillion, an increase of JPY 534.4 billion from the previous fiscal year-end, mainly due to the yen's depreciation at the end of the period. Inventories were JPY 1.6896 trillion, an increase of JPY 282.9 billion from the previous fiscal year-end due to the impact of the yen's depreciation as well as U.S. tariffs. The shareholders' equity ratio decreased by 1.7 points from the previous fiscal year-end to 53.3%. The net debt-to-equity ratio was 0.30. Regarding the share buyback result, at the Board of Directors meeting on April 28, 2025, we completed the acquisition of the maximum amount of JPY 100 billion by November 28, 2025. We canceled all of the 20,612,500 shares acquired this time on December 29, 2025. This corresponds to 2.2% of the total outstanding shares before cancellation. Free cash flow for the 9 months period of FY 2025 was a positive JPY 115.7 billion. This concludes my presentation. Next, the projection for fiscal '25 will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, GM of the Business Coordination Department. From here, I'll explain the projection for fiscal '25 business results and the conditions in the major markets. Page 15 shows an overview of the projection for fiscal '25 business results. The full year outlook remains unchanged from the October projection. From Page 16, I'll explain the demand trends and projection for the 7 major products. Demand for the 7 major products includes mining equipment. The figures for the fiscal '25 Q3 are preliminary estimates by the company. Demand in fiscal '25 Q3 appears to have increased by 3% year-on-year. The full year demand outlook for fiscal '25 is set at 0% to minus 5% year-on-year, which is unchanged from the October projection. Page 17 shows the demand trends and outlook for the North American market. Demand in the fiscal -- demand in fiscal '25 appears to have increased by 1% year-on-year. Demand for infrastructure and energy remained steady. The demand projection for fiscal 2025 is 0% to minus 5% year-on-year, which is unchanged from the October projection. As in the first half, there was no downward pressure on demand from tariffs during the third quarter apparently. However, as cost increase due to tariffs gradually progress, we will closely monitor its impact on demand. Page 18 shows the demand trends and projections for the European market. Demand in fiscal '25 Q3 appears to have increased by 7% year-on-year. The projection for fiscal 2025 is at the same level as the previous year, unchanged from the October projections. In Europe, an improvement in the business climate has been observed, including upward revisions to GDP growth rates. And with infrastructure investment plans in various countries, demand has remained firm. However, we will continue to closely watch market future conditions. Page 19 shows the demand trends and outlook for the Southeast Asian market. Demand in fiscal '25 Q3 appears to have decreased by 6% year-on-year. As the decline in demand through the third quarter was smaller than expected as of October, the demand projection for fiscal 2025 has been revised to 0% to minus 5%. In Indonesia, demand for mining equipment declined significantly from the second quarter onward due to falling coal prices. In addition, reductions in public works budgets have continued and demand for construction equipment remains sluggish. Uncertainty remains high. And while distributor inventory adjustments are underway, a recovery in demand is not yet in sight. Page 20 shows the demand trends and outlook for the Japanese market. Demand in fiscal ' 25 Q3 appears to have decreased by 14% year-on-year. The projection for demand in fiscal '25 is minus 10% to minus 15%, unchanged from the October projections. Low utilization of rental equipment, labor shortages and rising material prices continue and no signs of demand recovery are being observed. Page 21 shows trends and projections for major mineral prices related to demand for mining equipment. We expect prices for low-grade coal in Indonesia to remain depressed, while prices for other minerals are remaining high or moving steadily. Page 22 shows demand trends for mining equipment. Demand in fiscal '25 Q3 appears to have decreased by 21% year-on-year. Coal prices declined in Indonesia, leading to a significant decrease in demand for equipment. The demand projection for fiscal 2025 is minus 10% to minus 15%, unchanged from the October projections. Coal prices in Indonesia have not recovered and demand has not rebounded. However, demand for equipment in other regions and for other minerals is expected to remain generally at high levels towards the fiscal year-end. Page 23 shows sales of mining equipment. Sales in fiscal '25 Q3 increased by 4.9% year-on-year to JPY 475.1 billion. Excluding FX impact, sales increased by 2%. Although sales declined in Asia, mainly Indonesia and in North America, increases in Latin America and Africa resulted in overall year-on-year growth. Page 24 shows the projected sales of equipment, parts and services and related items in the Construction, Mining & Utility Equipment segment. Parts sales in Q3 of fiscal '25 increased by 6.1% year-on-year to JPY 265.5 billion. Including services and others, the aftermarket accounted for 54%. And excluding FX impact, total aftermarket sales increased by 3.8% year-on-year. This concludes my explanation. Thank you. Unknown Executive: We would now like to receive questions from you. [Operator Instructions] The first question, please. UBS Securities, Sasaki-san. Tsubasa Sasaki: So this is Sasaki from UBS Securities. I have 2 questions. First question relates to the Q3 results. So I'd like you to do a recap on the Q3. So it has been progressing well vis-a-vis plan, especially in terms of sales and operating income, in terms of volume and also the selling price and FX inclusive. So what has been positive? And what were not as expected vis-a-vis plan? If you can give us a recap, that would be helpful. Takeshi Horikoshi: So this is Horikoshi. In terms of sales, JPY 145 was the expectation, but in actual JPY 153. So about JPY 71 billion or so of an excess that we have seen because of FX. In terms of volume, it's about JPY 5 billion short vis-a-vis plan. Also for the price differential, it's about JPY 3 billion short of our plan. So about JPY 63 billion in comparison to October PA, we have exceeded the initial expectation in comparison to October. So we mentioned in terms of volume that was short by JPY 5 billion. So in the construction, that was short by JPY 7 billion. And in terms of mining, JPY 2 billion of excess. So that is the breakdown. So in terms of construction, the breakdown for what was short. So in North America, JPY 5 billion is the shortage in North America. This relates to repair. So because of the constraints of the customers' budget, it has been pushed out. So that is why the number is short in North America. Also, the competitors have been quite aggressive, especially in the month of December. So this was prior to the price increase. So they have been quite aggressive. So that is why we had seen a negative impact. Also in terms of Indonesia and Asia, so actually, it was better than our initial plan. So where we have seen shortage, that was Japan. So in comparison to October announcement, it was worse. So if you were to net out all these factors, it's JPY 7 billion of short in terms of the construction equipment. Moving on to mining business. North America, we have seen a similar number in North America that was short vis-a-vis plan. This is specifically related to oil sand in Canada because of the constraints in budget, therefore, the service provision was pushed out. So that was one of the factors. Where was it positive, favorable, was Indonesia. It was better than our initial anticipation. The reasons why Indonesia was performing better than expected. First of all, in Sumatra, the island, there has been a huge -- the torrential rain, and there were some demand related to restoration. And because of that, there was a demand for construction equipment. Also, the coal prices, and that is the thermal, the coal, that is, the pricing wasn't as bad as initially expected. Therefore, Indonesia, it was actually excess in comparison to our plan. Oceania and also South Africa has been quite solid. So on a net basis, the mining business was in excess about JPY 2 billion or so. Now moving on to the PL. In terms of profit, so in terms of FX, the profit was a push up by JPY 20 billion. Also in terms of the volume, so vis-a-vis sales of JPY 5 billion in terms of profit was short by JPY 2 billion. Also, in terms of the selling price, that was a negative factor. And also for fixed cost, we have some excess in the fixed costs and others. So all in all, so we mentioned about FX differential was JPY 20 billion, and that amount in entirety, we were able to see an excess. So we were able to offset that. Did I answer your question? Tsubasa Sasaki: Thank you very much. So in terms of fixed cost, that was a positive of JPY 5 billion. So FX was JPY 20 billion then. Is my understanding correct? So of course, the production cost was a negative. Why do you see an excess in the fixed cost? Takeshi Horikoshi: So the budget execution was pushed out to Q4. Tsubasa Sasaki: Understood. So based on that, my second question, you mentioned about the situation in Indonesia. So I was able to understand why it was better than expected. When it relates to construction equipment and mining equipment, what is the expectation? And what is the current state of Indonesia? If you can also share with us your outlook for Indonesia. Kiyoshi Hishinuma: So this is Hishinuma. From the perspective of demand, the situation has not dramatically changed. However, after Q2 is over, in comparison to the demand outlook, it was somewhat better than our forecast at the end of Q2. And the reason is just as we have explained. So at the end of Q2, mining was expected to be not so favorable because the coal prices weren't faring. But Q2, it was about $42 to $43 or so. And in Q3, it was back to $45 or $46. So we have seen a push up because of that. And that is why Q4, we expect this positive trend to continue. And for construction equipment, for the public spending, the budget constraints hasn't changed. And therefore, the situation had not really changed from before. Now the expectations from Q4, it may actually deteriorate from the previous year. That was our initial forecast. But in terms of the holidays, it was end of March last year. But this year, it's about a week or 10 days more holidays in comparison to last year. So we have incorporated the maximum risk. But overall, we do not expect the situation to change so much. Tsubasa Sasaki: I was able to fully understand. Sorry, this is an additional question. I fully understand the situation in Indonesia. So already, the situation is not so favorable, but it appears as if it is stabilizing. Are there any risks that Indonesia may deteriorate further? So it was pretty, I know, not-so-good situation, but what are the risks that actually further deteriorate? Unknown Executive: That relates to next fiscal term then. So we are trying to revisit these plans. But as for next fiscal term, construction equipment shouldn't be so bad because in the recent months, it is somewhat getting stronger. So Indonesia is the area that we may see some decline. Given the current coke price, chances are we may see a decline in Indonesia for next fiscal term as well. Tsubasa Sasaki: So this fiscal term, it is pretty bad then. So the deterioration in Indonesia, could we expect the impact will be smaller from Indonesia? Apologies for going on. Unknown Executive: I don't know. We don't know. Unknown Executive: Let's move on to the next question. Maekawa-san from Nomura Securities, please. Kentaro Maekawa: This is Maekawa from Nomura Securities. I also have 2 questions. I have a question about overall mining. Regarding our demand outlook, we haven't really changed the overall picture. But for parts and services, have you been seeing demand pick up? And for equipment demand, there may be a chance that it's going to pick up due to investment plans. So based off the current market, can you share with us how you view mining equipment demand going forward? And I think this will cover next fiscal year as well, presumably. Unknown Executive: Well, regarding that question, actually, we are right in the middle of formulating our business plan for next fiscal year. So that -- it may be subject to change, but just to give you a feel of what we are thinking about right now. First of all, regarding minerals or commodities, for nickel and thermal coal, it is in a situation of excess supply. Due to a decline of demand in China, the prices are weak. And also for nickel, the greatest producer is Indonesia and production has been in excess. For mining equipment, since 2021, it has been expanding, but it has been reaching peak this year. And for next fiscal year, demand is expected to be flat. And we believe it's going to be shifting from greenfield to brownfield when it comes to investments. Our customer financials are sound, but due to inflation, costs have been increasing and mineral grade has been going down as well as the way to mine has become more complicated. Therefore, I think we have to be cautious in investments. So we believe the demand for rebuilds will become higher in aftermarket. For Africa, Middle East, Central Asia and emerging mining regions, we do believe mining developments will proceed. And like we announced Reko Diq in Pakistan have been new opportunities that have been presented to us. And for Indonesia, I talked about it earlier. Kentaro Maekawa: How about coal -- copper? I think the demand is high in Latin America. So how should we expect future activity? Unknown Executive: Next fiscal year, as of now, our thinking is demand is expected to decline in Australia this year. It was a peak year for replacement demand. That's what we thought. So demand is likely to decline next year. And we also expect Indonesia to go down as well, but we believe it will be brisk conditions in other regions. Kentaro Maekawa: Another question I have for you is regarding tariffs and increases in selling prices as well as its impact and if there are any changes there. Just wanted to check with you. The 9-month basis, Q3 results, JPY 25.1 billion was the tariff impact. I think that was in line with plan. And for this fiscal year, you haven't changed your outlook, but you're expecting JPY 55 billion. And for next fiscal year, 30 times 4 is JPY 120 billion. Has that expectation changed? And regarding selling prices, I think you're already working on it. But are you thinking about additional price increases? And are you expecting any impact on demand? Or have you been seeing any impact on demand? So those are the 3 things I would like to know. Takeshi Horikoshi: This is Horikoshi again. Regarding tariff-related costs, including mitigation measures, we said JPY 55 billion as of October, but we do believe our projections were quite accurate. So far, things have been developing in line with our expectations, and we follow the numbers on a monthly basis as to how it's hitting our P&L. For next fiscal year, we said as of October that it's going to be Q4 times 4x. That should be the expectation, which is around JPY 120 billion. For selling price increases, in August, we did a selling price increase or starting from August orders, that is. And we also have been increasing prices from January orders as well. For our U.S. peers, starting from January, we have been hearing that they also have been raising prices. So the environment for raising prices is now becoming quite established, and we do believe we will be able to do further increases next fiscal year. Kentaro Maekawa: So because of that, are you expecting any last-minute demand? Do you think there's going to be some prebuys or any risk that it's going to drop off after you raise your prices? Takeshi Horikoshi: In the case of our company, we did a campaign in October and in November, it went down, but it went up again in December. So no, we are not feeling such trends. Unknown Executive: We would now like to move on to the next question from Goldman Sachs Securities. Adachi-san, please. Takeru Adachi: This is Adachi from Goldman Sachs. So I also have 2 questions. First question, which is somewhat related to the previous ones relates to mining and the exposure to the metals and the precious metals. So I think Latin America and Africa, I believe it was better than expected. So the exposure to the copper and gold is quite high in those regions. So you had the backlog and it was realized as planned. Was that the case? Or were there more of a short-term aftermarket rebuild demand has increased. So what is the current state in terms of Africa and Latin America? So how has the demand changed in terms of exposure to gold and others? Unknown Executive: Within the analysis, we talked about the comparison with the October announcement. Africa was favorable. Last year, Anglo had conducted the business restructuring. So they have restrained from the investment. So it could be a reactionary the response to that. So South Africa was positive from the previous year and also in comparison to the October announcement. Also another point, the gold prices continues to rise. So we have large projects such as in Ghana. So we hear that a number of new projects are underway. Takeru Adachi: So in terms of the Q3 order intake, perhaps you haven't disclosed much, but how was the situation of order intake? Unknown Executive: It has been quite positive, very brisk. Takeru Adachi: My second question relates to cost. So the cost was higher than initially expected, but tariffs was in line. So I would imagine that the non-tariff-related cost was higher than initially expected. So if you can give us more details on the production cost, please. Unknown Executive: In terms of the steel prices in comparison to last year, it has come down. So we have seen some gains from that. But in terms of the production guarantee basis, there was some one-off cost. Also tires and power lines. So nonferrous metals. So these are non-steel, the parts, actually, the prices have risen from the previous year. So we have actually incurred some loss related to those nonferrous metals. Takeru Adachi: So excluding those one-off factors then, is inflation pretty much in line with your expectation? Or even excluding those, was the price increase not in line with your expectation? Unknown Executive: If you were to exclude the one-off, we have seen the gains as expected. Unknown Executive: Let's move on to the next one. From Nikkei, Mr. Otake -- Ms. Otake, excuse me. Unknown Analyst: This is Otake from Nikkei. Earlier, there was a question asked and my question may overlap somewhat. But the first question is about the circumstances in North America. Can you talk about now and your projection related to construction equipment and mining equipment? Can you talk about each, respectively? Kiyoshi Hishinuma: This is Hishinuma speaking. So first, regarding North America, relatively brisk conditions are continuing. When we were setting forth this fiscal year's projection, we were saying minus 5% to minus 10%. But since Q2 onwards, we've revised it up to 0% to minus 5%. And it was plus 1% for Q3. And therefore, we do believe that it has been quite steady. And we are aligning with the local people to capture the numbers, but we are not seeing any factors that will make our numbers change dramatically. So that's for construction equipment. For mining equipment, last year was quite good. So this year, we're guiding negatively, but it's not because the economy is bad, so we are not that worried. Unknown Analyst: You talked about Canada earlier. For mining, in next fiscal year, are you expecting further decline? Or are you not feeling such risks? Kiyoshi Hishinuma: Correct. We are not expecting such risks. Unknown Analyst: And secondly, my question is about price increases. You said that competition has been raising prices from January and the market is accepting higher prices. According to -- regarding that point, for selling price increases that are going to probably be ongoing, how much do you believe that will boost your profits? Can you give us some direction or a feel of how much that's going to look like? Kiyoshi Hishinuma: Well, at our October results briefing, I mentioned this in an interview, but the magnitude that we are experiencing now is what we are striving for next fiscal year as well. Unknown Analyst: That means around JPY 83 billion is the positive impact on profits, no? Kiyoshi Hishinuma: Well, JPY 3 billion might be a little extra, but we are striving for similar levels at this fiscal year, which means around JPY 80 billion. I am not definitively saying JPY 80 billion, but I have been saying that about the same level as this fiscal year. Unknown Analyst: My third question is, as you mentioned in the beginning, for Q3 compared to your plan, it has been exceeding and trending positively, and there has been some areas where you've been beating your profit expectations. When you look at the FX rates for the second half of the year, we are seeing the yen weaken. So I think there is sufficient opportunity for you to exceed your expectations for the full year. But what are the chances of that happening? What is your feel? Kiyoshi Hishinuma: For Q3, we talked about JPY 20 billion of positive impact coming from FX. And for -- when you net it out, it's 0. But I was saying we can exceed JPY 20 billion. But for Q4, due to fixed costs, there have been some pushouts or that's what we're expecting at least. Therefore, on a full year basis, we expect we're going to be under our expectation by JPY 10 billion. JPY 10 billion, meaning excluding FX impact. But FX-wise, we expect similar numbers to come through in Q4 as well. Unknown Executive: I'd like to move on to the next question from Citigroup Securities, McDonald-san, please. Graeme McDonald: Slide 13, please. About free cash flow. There wasn't much comment on free cash flow today. So we've seen the yen depreciated and also the pushout in terms of mining. You've talked about those factors and also their impact from the tariffs. So working capital appears to be somewhat deteriorating. So JPY 240 billion, the cash flow, that has been revised downwards in Q2, but it may be difficult to achieve on a full year basis. So what are your thoughts right now? Unknown Executive: Last year, we had -- so about JPY 306 billion or so for last year. So cumulative last year was about JPY 150 billion cumulative up until Q3 for last year. So Q4 in 3 months, we had JPY 150 billion of free cash flow, leading to JPY 300 billion and JPY 157 billion for this year up until Q3. So if you see the similar -- the free cash flows within Q4, we could possibly reach that JPY 240 billion. Chances are we may actually reach that number. So I think it's the FX. Graeme McDonald: If yen continues to be so weak, it may be challenging to achieve this number, isn't it? Unknown Executive: It doesn't necessarily relate. Graeme McDonald: Oh, it doesn't relate? Unknown Executive: No. Graeme McDonald: So right now then, it was in the course of 3 years, the SGP on the cumulative basis, JPY 1 trillion, you should be able to achieve this? Unknown Executive: We don't know yet. We don't know yet. Of course, we'll make the effort. But what we can say at this moment, if you look at the free cash flow numbers, so back in 2023, there's been a lot of fluctuation on the free cash flow. So I think 2023 was about JPY 240 billion or maybe I might be wrong, but that was the number. Last year was JPY 300 billion, and this year is JPY 240 billion for this year. So in comparison to the previous period, it has become more stable in terms of generation of free cash flows. So we still have 2 years to go until the end of the SGP. So we'd like to work hard to achieve that number. So of course, shareholders' return. So you have JPY 100 billion of share buybacks has been completed and you have retired the other shares. Of course, I fully understand nothing is decided for next fiscal year, but institutional investors see that there's a lot of cash piling up. And perhaps there is not much need of CapEx, for instance, construction of new plants. We do appreciate there is a demand in investment related to replacement of renewal. But unless there is a large-scale M&A, can we expect to see similar amount of shareholders' return? Graeme McDonald: That's a comment? Unknown Executive: Yes, that is a comment. Graeme McDonald: Horikoshi-san, I'm pretty sure it is hard for you to say that. Yes, we heard your comment. Also to a different note. So you mentioned the profit was slightly better than the plan. So my impressions are -- so industrial machinery and retail finance was positive. That was my impression. But there's a discussion related to best owner. But aside from that, in terms of industrial machinery, that is Gigaphoton continues to be in good shape. And the profitability as well as the top line is improving. So chances are this situation may continue for some time. What are your thoughts, Horikoshi-san? Takeshi Horikoshi: As you know, the semiconductor demand continues to be on the rise, and that is expected. Also, the Komatsu, the NTC, Komatsu Industries continues to be quite solid. So fortunately, on a total basis, the profitability is higher than the construction equipment. And Gigaphoton, we expect growth next year onwards. So we do expect that to happen for next year. So the sales on a cumulative basis, about JPY 50 billion or so. Graeme McDonald: So there are some comments related to maintenance. So how much does that actually account for within the sales right now? Takeshi Horikoshi: We don't have the number at hand. But as far as this fiscal term is concerned, about half relates to maintenance and the half is related to the equipment. Graeme McDonald: So just to confirm then, Gigaphoton's profitability is far superior to average. So I have this image that it's over 20%. Is that correct? Takeshi Horikoshi: Yes, your impressions are correct. Unknown Executive: Moving on to the next question. Taninaka-san from SMBC Nikko. Satoshi Taninaka: This is Taninaka from SMBC Nikko. I have 2 questions. The first one is about increasing selling prices, passing on the cost. The ones you have announced regarding the ones that are effective from January, inclusive of that, you didn't say JPY 80 billion definitively, but there was some conversation around increasing prices by the same magnitude next fiscal year. I think the cost increase expected for next year is about JPY 65 billion. But how much of the profit decline are you expecting to offset next fiscal year? Can you give us some food for thought? Unknown Executive: Regarding tariff impact, it's actually the difference between JPY 120 billion and JPY 55 billion. So yes, you are correct. But selling price increases, like mentioned earlier, is what we are striving to do. So you will be able to come up with the percentage if you do your math. Satoshi Taninaka: Secondly, for precious metals, prices are going up. And after service for the mining business, how has that been changing? Because copper prices are increasing, are there any situations where people are not able to develop new mines? Or is production stopping at any copper mines because of this backdrop? So is utilization -- I guess utilization is not really picking up. But due to higher precious metal prices, is that directly affecting your aftermarket business? Or is it because precious metal prices are going up due to a variety of factors, there's no direct relationship. Can you give us some perspective on this? Unknown Executive: Well, please look at Page 38 in the disclosed presentation. It breaks down the sales of equipment and parts and services. For FX, if you exclude FX impact, for the third quarter as well on a cumulative basis, too, for equipment compared to last year, the difference was quite negative and it went down. However, for parts and services, actually, we've been exceeding. So on a net-net basis, compared to last year, we have been seeing a decline in sales or that's what we're expecting projection-wise. So the aftermarket business compared to last year has been steadily rising, and the ratios are shown at the top. But for this fiscal year, we expect the aftermarket ratio for mining is going to reach around 65%. So yes, we perceive that the business is doing well. And even for precious metals, the same thing applies. Unknown Executive: The next question, please. From Nikkei, Kugai-san, please. Unknown Analyst: This is Kugai from Nikkei. I'd like to pose 2 questions. First relates to rare earth. So the export control by China is in place. So what are the impacts right now? And what are the expectations? So in terms of export control, what is the current state of inventory? And what is the procurement strategy going forward? If you can share with us your thoughts, that would be helpful. Kiyoshi Hishinuma: So this is Hishinuma. Internally, we are definitely investigating the details. So we're looking at the suppliers' inventory level. And if there is a shortage, we're trying to source from elsewhere. So those are definitely activities underway. So of course, if there is a complete suspension, the impact will be quite huge. So we are cautiously involved in the discussion and the investigation. Unknown Analyst: Also, I have another question. So weaker yen is prolonging. So that is posing some positive impact in terms of the performance. But of course, if this is prolonged, that may impact the investment overseas. So with the yen depreciation, how do you perceive the current state? Also, what is the optimal, the FX level for you? If you can share with us your thoughts on what is the optimal level, that would be helpful as well. Unknown Executive: So just to do a recap. It's been over 2 years, actually, we're trending about JPY 150 or so. So the yen depreciation started back in Q1 of 2022. And since then, there has been gradually rise or depreciated. And since 2 years back, it's been hovering around JPY 150 or so. So I think back in 2017 to 2021, it was JPY 120 to JPY 115 or so. That was the past trend. So for 2 years, we've had JPY 150. It is almost becoming a de facto as we consider the future investment. So if we -- so it is not possible for us to invest more, expecting that the yen would appreciate going forward. So basically, the basic stance is, wherever needed, we will make such investment. Unknown Executive: Thank you. We are running out of time. But there are no people who have raised their hands. So if there are no additional questions, we would like to conclude today's meeting. Any additional questions? McDonald-san, you have one more question? Graeme McDonald: Yes, it's a short one. Regarding your P&L analysis for the volume, product mix, et cetera, can you give me -- give us pure volume, product mix, area mix and so forth and the details of that? Unknown Executive: Are you talking about Page 10 on a 3-month basis, right? Out of volume, product mix, it's JPY 520.1 billion. The pure volume negative is JPY 27.6 billion. For product and area mix, it's JPY 21.2 billion in total, combining the two. And the third item is a one-off item, which is related to product guarantee, which was worth JPY 3.3 billion. For area and product mix, JPY 21.2 billion of a loss. For area mix, Indonesia compared to last year has been going down and therefore, has been deteriorating. And for Europe, it has been increasing. But year-over-year, it is contributing negatively. For product mix, due to mining, and this applies to construction equipment as well. Due to the mix between equipment and parts, it has led to a negative impact for this period. Unknown Executive: As we reached the time given, we would like to end Komatsu's fiscal '25 Q3 results briefing. Thank you very much, everyone, for joining today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, welcome to the Novonesis Q1 2026 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tobias Cornelius Bjorklund. Please go ahead. Tobias Björklund: Thank you very much, operator, and welcome, everyone, to Novonesis' conference call for the first quarter of 2026. As mentioned, my name is Tobias Bjorklund, and I'm heading up Investor Relations here at Novonesis. In this call, our CEO, Ester Baiget; and our CFO, Rainer Lehmann, will review our performance as well as the outlook for 2026. Also attending today's call, we have Tina Fano, EVP of Planetary Health Biosolutions. We have Henrik Joerck Nielsen, EVP of Human Health Biosolutions; Andrew Taylor, EVP of Food & Beverages Biosolutions; and Claus Crone Fuglsang, Chief Scientific Officer. The conference call will take about 50 minutes, including Q&A. Let's change to the next slide. As usual, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs, and they involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements. With that, I will now hand you over to our CEO, Ester Baiget. Ester, please. Ester Baiget: Thank you. Thank you, Tobias, and welcome, everyone. Thank you for joining us this morning. The year started strong with 7% organic sales growth against a high comparable, including around 1.5 percentage point effect from exiting certain countries and a good 1 percentage point from inventory buildup in animal. We delivered growth across all sales areas in both developed and emerging markets while achieving an adjusted EBITDA margin of 37.8%. Developed markets grew 8% with solid performance in both Europe and North America. Emerging markets grew 4%. We continue to drive growth through innovation and a stronger market presence with tailored solutions. We launched 5 new biosolutions in the first quarter, and we are well on track for our full year expectation. These launches are responding to an increasing consumer and societal needs from higher yields in food to replacing fertilizers in agriculture. Ten months into the Feed Enzyme Alliance acquisition, we're delivering in line with our initial expectations. And more importantly, we are continuously seeing increased traction with our customers through a broader and integrated offering of enzymes and probiotics. As a complement to our global footprint, we acquired an attractive production facility in Thailand in early April, and it's expected to be operational in 2027. The facility holds optionality to produce different biosolutions, including the scaling of HMO production, which would require additional investments. Such investments are already included in our communicated CapEx plans towards 2030. We are operating in a world with increasing global uncertainty, with rising pressure on economies in many different ways. Countries are seeking for homegrown solutions to strengthen energy and food security supply. Biosolutions are increasingly becoming central answers to resilience and productivity agendas, reducing exposure to global disruptions while enabling the creation of local jobs. In our dialogues with customers and policymakers, particularly in the energy area in Southeast Asia and in India, we see this momentum accelerating and Novonesis is uniquely positioned to support this shift. With a strong start to the year, we feel very confident about our full year outlook. Growth is expected to be mainly volume-driven, supported also by pricing. The outlook includes a close to 1 percentage point effect from exiting certain countries. For the adjusted EBITDA margin, we maintain the outlook at 37% to 38% with an expected margin expansion compared to 2025, more than absorbing currency headwinds and increasing raw material costs. With that, let us now look at the divisional performance in more detail, starting with Food & Health Biosolutions. Please turn to Slide #4. Thank you. Food & Health Biosolutions delivered a strong organic sales growth of 9% in the first quarter. The adjusted EBITDA margin was 35.7%, 130 basis points lower compared to last year, mainly driven by the ramp-up in commercial resources we did over the course of 2025, product mix effects from stronger growth in HMO and strong currency headwinds. These were partially offset by cost synergies and economies of scale. During the quarter, we launched 3 new products in Food & Health, including a new yogurt culture solution that improves taste and texture while also delivering higher yields and productivity benefits. For 2026, we expect the division to deliver organic sales growth in line with the group, primarily driven by Food and Beverages and supported by growth in Human Health. Food & Beverages deliver -- please turn to the Slide #5. Thank you. Food & Beverages delivered a strong organic sales growth of 11% in the quarter. Growth was mainly volume-driven, with pricing contributing a good 1 percentage point. Synergies contributed to growth and in line with expectations, supported by cross-selling and increased commercial scale. Growth was well anchored across geographies and industries. Performance was driven by increased market penetration, a strong adoption of innovation and positive market development. Despite muted consumer sentiment, we continue to see high demand for higher protein for clean label products and healthier solutions, supporting an increasing demand for biosolutions. Momentum in dairy continued to be strong and was led by North America and emerging markets. In fresh dairy, demand for efficiency, higher yields and high protein continues to drive strong demand, including bioprotection and probiotics. In cheese, customer conversion to high-yield solutions remains a key growth driver. Growth across the remaining industries was driven by innovation and increased penetration, led by plant-based solutions and beverages with solid performance from recent launches. Solid growth in baking and meat also contributed to growth. For 2026, growth in Food & Beverages is expected to be broad-based, supported by both synergies and pricing. Human Health delivered organic sales growth of 5% in the first quarter. Growth was primarily volume driven, while pricing and synergies contributed positively. Performance was driven by strong growth in Advanced Health & Nutrition, supported by both early life nutrition and advanced protein solutions. Early life nutrition was led by HMO with growth across regions, including cross-border trade into China. Advanced protein solutions grew alongside the anchor customer. Dietary supplements was impacted by a softening North American market, where our sales to women's health category continued to be strong. For 2026, growth in Human Health is expected to be supported by dietary supplements as well as Advanced Health & Nutrition led by HMO. Pricing is expected to contribute positively and deferred revenue is expected to add around 1 percentage point to growth. Please turn to Slide #6. Thank you. Planetary Health Biosolutions delivered organic sales growth of 5% in the first quarter against a high comparable. The anticipated inventory buildup at a key customer in Animal contributed a good 2 percentage points to growth. The adjusted EBITDA margin was 39.5%, up 10 basis points year-on-year, driven by the Feed Enzyme Alliance acquisition and cost synergies, including the ramp-up in commercial resources we did over the course of 2025 as well as currency headwinds. We launched 2 new products in Planetary Health in the first quarter. In Animal, we introduced the Bovacillus probiotic for cattle, benefiting from a faster route to market following the formation of Novonesis. These solutions enhances digestion and strengthens cattle immune system, resulting in an increase of up to 1 kilo of milk per cow per day, while also improving the feed efficiency. In plant, we launched the first product based on our new enzyme platform, ActiPhy, that enhances nutrition uptake in soil, improving the yield from agri of corn by around 3%. The solution initially targets corn in North America and is supported by several years of strong field trial data. For 2026, we expect the division to deliver organic sales growth in line with the group with relative stronger contribution from agricultural, energy and tech. Please turn to Slide #7. Thank you. Household Care delivered organic sales growth of 4% against a high comparable. Growth was mainly volume-driven, supported by positive pricing. Performance was driven by increased market penetration and adoption of new innovations across laundry, dish and other cleaning categories in both developed and emerging markets with particularly strong traction among local and regional customers. For 2026, we expect solid performance in Household Care in a market that carries some uncertainty related to weaker consumer sentiment. Growth will be driven by continued innovation, increased penetration in both developed and emerging markets and continued support from pricing. Agriculture, Energy & Tech delivered organic sales growth of 5% in the first quarter, driven by energy and agriculture, while tech declined due to order timing in biopharma, processing aids and high comparable. Strong growth in energy was driven by Latin America and Asia Pacific, particularly India, reflecting continued growth in corn ethanol production. North America also supported growth through increased adoption of innovation and higher ethanol production volumes, supported by growing exports. Additionally, increased penetration of biodiesel solutions and the ramp-up of second-generation ethanol production contributed to the strong growth. Following the increasing need for energy security and supply as countries are seeking further diversification from fossil fuels, we see an increasing strategic global interest for higher biofuel blending. Strong growth in agriculture was mainly driven by inventory buildup at a key customer in animal, contributing by around 4% to the organic sales growth for Agriculture, Energy & Tech. As mentioned, integration of the Feed Enzyme acquisition continues to progress in line with expectations with synergy milestones materializing as planned. Our plant business declined during the quarter due to timing and high comparable. For 2026, growth in Agriculture, Energy & Tech is expected across all industries, led by energy and supported by synergies and pricing. And now let me hand over to Rainer for a review of the financials and the outlook for 2026. Rainer, please? Rainer Lehmann: Thank you, Ester, and also good morning, everyone, and welcome to today's call from my side. Let's turn to Slide #8. In the first quarter, sales grew a strong 7% organically and 4% in reported euro, including around 1.5 percentage points effect from exiting certain countries. Sales synergies across both divisions and pricing each contributed around 1 percentage point, while the inventory buildup in Animal contributed a good 1 percentage point. Currencies provided 6 percentage point headwind, while M&A contributed positively with 3%, reflecting the Feed Enzyme Alliance acquisition. The adjusted gross margin improved by 120 basis points to 60.1% versus Q1 of last year. Pricing and productivity improvements as well as the Feed Enzyme Alliance acquisition supported the development, while currency and product mix had a negative impact. Total operating expenses adjusted for PPA-related depreciation and amortization were 29.1% of sales compared to 27.3% in Q1 last year. This development mainly reflects the planned increase in commercial resources over the course of 2025, driven by both organic expansion and the Feed Enzyme Alliance acquisition. The adjusted EBITDA margin for the quarter was 37.8% compared to 38.3% in Q1 2025. The margin benefited from the higher gross margin, cost synergies and around 50 basis points from the Feed Enzyme Alliance acquisition, in line with our expectations. This was offset by higher operating expenses and currency headwinds. Let's keep in mind that -- let's keep in mind also that last year's operating expenses were quite low in the first quarter. Adjusted earnings per share, excluding PPA amortization, were EUR 0.57, corresponding to an 8% increase compared to last year. Operating cash flow amounted to EUR 167.1 million in the first quarter, an increase of EUR 60.7 million year-on-year. It was mainly driven by improved net profit and a more favorable working capital development compared to Q1 last year. CapEx in the quarter amounted to EUR 93.1 million, equal to 8.3% of sales. Despite higher investment levels, free cash flow before acquisitions increased by 9% to EUR 74 million. On March 12, we successfully issued EUR 1.7 billion of senior unsecured notes to refinance the existing bridge loan related to the Feed Enzyme Alliance acquisition. Relating to this, I'm also very happy that S&P Global Ratings issued an A- stable outlook rating for Novonesis. With this, let us now turn to Slide #9 to talk about the outlook. Please note that the outlook presented today is based on the current level of global trade tariffs and the prevailing foreign exchange environment. As Ester mentioned earlier, we are very confident in the full year outlook and confirm our guidance for both organic sales growth and profitability on the back of a strong start to the year. The outlook for organic sales growth is maintained at 5% to 7% and includes close to 1 percentage point effect from exiting certain countries. Growth is expected to be mainly volume-driven, supported by around 1 percentage point from sales synergies and a good percentage point contribution from pricing across both divisions. The outlook also reflects some uncertainty related to consumer sentiment for the year. The recent situation in the Middle East and its broader implications to global market dynamics is difficult to fully assess and leads to increased uncertainty. However, based on our diversified end market exposure and flexible regional production footprint, including our pricing capabilities, we currently do not expect a material impact on our adjusted EBITDA margin. We continue to monitor the development closely. We expect a smaller positive timing impact also in the second quarter from the Animal business related to inventory buildup at a key customer. I want to reiterate, though, that for the full year, this effect is expected to be neutral. We continue to expect the adjusted EBITDA margin to be in the range of 37% to 38%, reflecting continued margin expansion compared to 2025. This improvement is expected to be driven by a stronger gross margin, the Feed Enzyme Alliance acquisition and synergies, partly offset by currency headwinds of around 0.5 percentage point and including somewhat higher input costs. As previously communicated, we'll see a temporary step-up in CapEx as part of our strategy to enable growth through 2030 and beyond. This includes continued expansion of our resilient global enzyme production footprint, completion of the doubling of our U.S. dairy culture capacities here in 2026 and investments related to the recently acquired facility in Thailand. In addition, we continue to invest in the implementation of our new ERP system, which will impact CapEx by around 1 percentage point annually over the next few years. As a result, CapEx is expected to be 12% to 14% of sales for 2026. Finally, Net debt-to-EBITDA is expected to be around 1.7x at year-end, supported by strong cash generation and continued deleveraging despite the increased CapEx level. We had a strong start to the year and remain very confident in the 2026 outlook. With that, I will hand back to Ester. Ester Baiget: Thank you very much, Rainer. Could you please turn to Slide #10? Thank you. In the current macroeconomic environment, demand for our biosolutions continues to be strong across all fronts, from customer needs for higher yield and efficiency, consumers' increasing demands for healthy nutrition and to growing needs to decouple from fossil fuels as countries seek greater energy diversification and security of supply. Quarter after quarter, we demonstrate the strength and the resilience of our business model, supported by strong innovation, a resilient global footprint and diverse end market reach. As the world continues to evolve, the relevance and the need for biosolution only continues to increase. And even with increasing global uncertainty, we are confident in our 2026 outlook as well as the 2030 targets, including the 6% to 9% organic sales growth CAGR. And with that, we're now ready to open the call for Q&A. Operator, please? Operator: [Operator Instructions] The first question comes from the line of Thomas Wrigglesworth from Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Could you just elaborate a little deeper as to how you see the Middle Eastern conflict playing out both within your business and within your customers? I guess there's -- the message that we hear is that Southeast Asia will be more impacted by cost inflation. And clearly, that then leads to a question about your emerging market exposure. So anything that you can share in terms of recent order pattern changes or freight rate constraints that are limiting or enabling your business would be very useful? Secondly, just in light of that, just on the bioenergy side, you've touched on seeing an uptick in interest in obviously, bioenergy solutions. Is that to say that this is going to be something that will happen in a couple of years? Or is there going to be a more immediate impact through 2026 as you see it? Ester Baiget: Excellent question, Thomas. And let me start answering to them and then also let Tina build up on each of them. So first, regarding Middle East conflict, important to mention that our direct exposure to Middle East and the sales in Middle East, they are small. So the impact effect of that, it's marginal to none on our overall revenue. Then building on your comments on what we see these changing dynamics in our -- in the world that we live in. We see from one side increased level of cost from raw materials that we have very good conversations with our customers, also including pricing, and we're confident that it will lead to a marginal neutral non-impact into the EBITDA. And then we see increasing continued interest from our customers around the globe. That was there. But now with this crisis in Middle East, if anything, we see it as a catalyzer of further momentum. We see a catalyzer of further momentum for diversification. And that's true across all segments. We see it on Food, the eagerness for healthier and cleaner and replacing stabilizers and texturizers and seeking for solutions that will continue to fulfill the consumer dynamics. We see it in Household Care. We see it in Energy. We see an increasing need, particularly in Energy. And then maybe tipping in your second question, particularly in countries that they had already in the past, taken decisions towards biofuels. We see Brazil, North America, Malaysia, Indonesia, the countries that they had already included biofuels into their diversification, benefiting from those decisions of the past. And then seeing a broader resilience and being able to absorb the constraints on supply and also access to competitive raw materials. And we see that momentum doubling up across the whole globe, but particularly with a strong pull here in Southeast Asia. These efforts are there. They are reflected -- maybe it's not so much on the sales year-to-date. We see in U.S. an increasing level of exports. But the big impact, it's for the long term, as you mentioned. Do we see the growing direction of increasing pull from mandates that will lead to continuous investment. And in any case, it gives us stronger comfort on the drivers of growth. So long answer, indicating that what we're doing with our customers, what we're doing on price. But then at the same time, the catalyzer of this crisis of momentum that was there for solutions leading to higher yields and high efficiencies and also decoupling from energy. Tina Fanø: Yes. And only adding a bit because I think Ester covered most of it. Short term, I would say, yes, you'll see it as a pickup in exports from the U.S. mostly. However, you will also see it elsewhere longer term. I am just coming back from Southeast Asia, in fact, here over the weekend. And there is a significant interest in, for example, biodiesel expansion. We talked about Indonesia going from B30 B40 to even B50. So I would say that diversification journey we have been on with feedstock diversification, with end market diversification and geographical diversification is serving us well here. But most impact, you should expect in the longer term, given the mandates are ramping up. So it's a good underlying growth driver for the energy segment. Shorter term, it is mostly from exports, but not only from exports. And in the quarter, you hardly see anything. Exports has been growing over the last year. So that is part of our numbers as well. Operator: The next question comes from the line of Thomas Lind Petersen from Nordea. Thomas Lind Petersen: Two questions also from my side. Both regarding the guidance for this year. So Ester, back in February, you said that you expect a sort of deterioration in the consumer sentiment. And I think perhaps you were alluding to North America. So I was just wondering if you could give us a bit of color on that. Is that still what you expect for the year? Or are you beginning to see a deterioration in the consumer sentiment? And perhaps also if you could comment a bit on the pricing and your ability to raise prices given the higher raw materials. So one question here regarding the revenue for this year. And then the second one is about the adjusted EBITDA margin. You end up here at 37.8% in the first quarter. And just wondering if how we can extrapolate from -- for the rest of the year. Also given I believe that your FX headwind, at least the large part of the FX headwind that you've seen has sort of been cycled now. So is there anything that speaks for a lower adjusted EBITDA margin going forward? Or how should we think about this? Ester Baiget: Excellent. Thank you, Thomas, for your questions. I'll answer the first one, and then I'll pass it to Rainer on EBITDA. Regarding the comments we made at the beginning of the year, as you so nicely indicated, we included in our guidance some softness on consumer behavior. We could foresee that coming, and that was included in our guidance, and it's already happening. We continue to include it in our guidance for the -- and it's included in our guidance for the full year. It's true that the strong start of the year gives us comfort, and it reduces the risk from the volatility and uncertainty of the market that we're living in. We continue to see, as I mentioned before, a strong underlying demand from our solutions, but we see some cases of that softening demand. Maybe particularly not reflected in Q1, but in the Q1 figures, but particularly in Human Health, this is a segment where we see consumers and in North America when they are sitting and choosing the -- where they're allocating their pocket money, decreasing the demand of probiotics. And we see some indications there of softer consumer demand in North America in probiotics, which, as I mentioned, included in our guidance and also coupled with a strong start of the year gives us full comfort of deliver of the full year guidance. And then I'll pass it to Rainer on EBITDA. Rainer Lehmann: Yes. Thomas, you're absolutely right. Of course, the biggest, let's say, spread between the FX side was in Q1, where we actually had last year, even tied to USD 1.06 and now we're running at USD 1.17, USD 1.18. Nevertheless, let's keep in mind that it's a gradual impact. So for the year, we still see the around 0.5 percentage point impact on the EBITDA margin. And then the -- of course, the strong margin in Q1, please look at the sales, right? There's quite some sales leverage in there. That was the highest sales quarter ever. That, of course, will come down a little bit. But therefore, we feel comfortable that this margin is going to be between 37% and 38%. Ester Baiget: Thank you, Rainer. And building on also on your comment on pricing, we have really good conversations with our customers, and we feel comfortable on the momentum there on bringing in the prices and then leaving, as Rainer mentioned, of no impact to the EBITDA margin for the year. Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: I was just curious on your announcement to buy this facility in Thailand. You are spending a lot of your own CapEx and then on top, you're buying this facility. I'm just curious from a timing perspective, why now? Because there is so much CapEx going on. Is this an indication of you thinking about yourself more capacity constrained? Or is this more a unique opportunity? Because I think this is much more an HMO type facility. So maybe it can speed up your go-to-market on HMO side? And the second question and maybe this is just a reminder because you are growing very, very strongly in dairy, but I was at DSM-Firmenich Capital Markets Day earlier this year, and they were actually indicating that they are at #1 in dairy enzymes from what I remember. And I was just curious how are you growing in dairy across both your cultures and enzymes? And is there a limitation from the Chr. Hansen merger that you had in place because of regulatory consideration that is probably limiting to some extent, your growth? Or can that be even better at some point once that limitation is taken away? Ester Baiget: Thank you, Chetan. I will let Andrew answer the question on dairy and enlight you on why now we are stronger and even more equipped to be the partner of growth for our customers with a bolder portfolio. But then bringing -- building on your first question on Thailand, we have investment -- we have announced announcement of increased CapEx of 12% to 14% to support growth, aiming also for the high end of our guidance. And this facility in Thailand is a good add to that path. It is bringing optionality for growth, including further investments that they are already included into the 12% to 14% and also comes with some capacity already today to produce HMO that supports the growth trajectory of this business. But then opportunistic acquisition that puts us in a good place in a region that we're growing, well embedded in our overall CapEx, included in our strategy and then with further investments to capture the potential of this optionality embedded already in the 12% to 14%. Andrew Taylor: Yes. And maybe taking on the second part of the question around dairy. So I'd begin with -- we have very strong customer relationships across the world in dairy, and we're seeing good growth in both cheese and fresh dairy and all its related subcategories. And when you think about cultures and enzymes, we're very strong in both of those and actively innovating. I think the thing that's probably most interesting for us right now is the combination of those pieces. So post the combination of the 2 companies, we're now able to do things in the combination of cultures and enzymes that help both the production of the cheese as an example, as well as the aging, oftentimes in one bag. And so a lot of what we're trying to do is expand those solutions that are both driving productivity for our customers, which is an ongoing demand, but then also new value, how can you create better tasting cheeses, how can you taste -- quicker ripening cheeses. So we're very comfortable in our position and the growth that we're seeing around the world supports that. Operator: The next question comes from the line of Lars Topholm from DNB Carnegie. Lars Topholm: I also have 2 questions. One is actually related. So let me start with that. So in Thailand, there's a lot of focus on production of ethanol from cassava, which requires enzymes. So I just wonder, maybe, Tina, if you can put some words to the significance of this for you guys? And are these enzymes some you can produce on your new Thai assets? And then my second question goes to Ag, Energy and Tech, which grows 5% organically. There's a 4% contribution from inventory buildup in Animal Health. And I assume bioenergy grows double digits. So it seems to me something is going terribly wrong with plant and with tech. I just wonder if you can put some words and maybe some growth rates on the 4 different components of this division and maybe also the reasons behind, what should we say, the less flamboyant growth in parts of that business. Ester Baiget: Thank you, Lars, and I'll pass it to Tina, who will also guide you on the optionality of the plant on Thailand with further investments. And remind us that we now look in our business on a quarterly level here for the long run, and we are confident on the full year guidance. Lars Topholm: I know, Ester, but you said the same after Q4. And now we have 2 soft quarters in a row. So the long term starts with a weak quarter. That's how it is. Ester Baiget: Every quarter is a quarter. And then I repeat myself, we were confident on the full year guidance, but I'll pass it to Tina, Lars. Tina Fanø: Yes, Lars. So let's start with Thailand. And yes, Thailand is one of the places in Southeast Asia where we operate in our bioenergy space as well. The plant which we have there gives us optionality also for producing the enzymes there. So this is good. In terms of Agriculture, Energy & Tech, and you're right, we saw a strong growth in bioenergy and the math then brings that tech and plant is in decline. I don't -- you said terribly wrong. I don't at all agree to that point. I would say I think sales is progressing according to plan. Yes, it's a declining quarter. And yes, it is a double-digit decline. But we remain confident for the full year. Agriculture, Energy & Tech is going to grow stronger than Household Care and all of Planetary Health is going to grow in line with group. So I feel quite good about where we are, including in plant and tech. Tech is, as you know, quite lumpy, especially given biopharma processing. And you could say we knew that we wouldn't get any orders here beginning of the year. We expect that to ramp up, and we see that ramping up for the full year. And that's why also tech is going to contribute to the growth of AT. Plant is super small. So -- and you know there is timing on when it's exactly planting. And then you have to remember also the tough comp, which there are in both plant and tech from 2025. Lars Topholm: Tina, I would just mention it didn't grow in Q1 '24. So the tough comp from '25 was a very easy comp, I guess, in '24. Ester Baiget: But what about '23 then? Lars, let's hold that question for end of the year. Then when we see the growth coming in, then we remind ourselves about the volatility of 2 small segments that they are by intrinsic nature, volatile, and they contribute consistently to growth for the company. Operator: The next question comes from the line of Alex Sloane from Barclays. Alexander Sloane: Two from me, please. First one, just on household. Obviously, with oil prices much higher and petrochemical-based surfactants under renewed cost pressure, are you seeing any acceleration in demand from your customers for enzyme substitution? And if so, when would you expect that to translate into your volumes? And the second one was just a follow-up on the food biosolutions. Obviously, the growth rate there, excluding the Russia exit, really strong, I think, close to 15%. Dairy, obviously, the standout. Could you maybe help us just disentangle what is you see as kind of structural growth within that from penetration and new customer capacity opening versus maybe any temporary customer behavior, if there was any maybe pull forward of orders, customer restocking, et cetera. I guess should we be expecting that food growth to slow and normalize in the second half, please? Ester Baiget: Excellent. Thank you, Alex. Tina will answer your question regarding the underlying drivers of the growing demand in Household Care and then Andrew, on Food & Beverages. Tina Fanø: Yes. So on Household Care, you could say, increased oil prices is increasing the discussions on substitution of surfactants. However, this is not something you do overnight. So this is something which we are going to see as time progresses. So this is an underlying good driver for our Household Care business. But I would more think of it in a more longer-term perspective, Alex. So we have, over many years, invested in emerging markets because there is a significant growth opportunity for us there. And this is a market where we have low single-digit growth when you look at both emerging as well as developed market when you combine it. So it's not a high-growth area. But we have been able to outgrow that given the investment, given our strong footprint in emerging markets. And as we also have talked about many times, the inclusion of enzymes in emerging market is less. So there is a significant opportunity for us to go for. Short term, you could say there's increased interest for surfactant replacement, but not only surfactants. It's also other oil-derived components. However, there is also the risk of taking out, for example, enzymes short term given the cost pressure they are under. This is not something we are seeing. We remain, you could say, confident in the full year outlook of solid growth in Household Care. Andrew Taylor: Yes. And then following up on the question with regards to food and dairy. So first off, the base most structural momentum continues to be very positive. We've talked the last couple of quarters about things such as the drive for productivity, the drive for high-protein yogurts for new texture experiences. So if you look across the world, those underlying structural drivers remain and actually are strengthening in some parts of the world. We do have some benefits from the annualization of some of the larger projects that have been queuing up in dairy, which we've noted before in the past. So the opportunity pipeline looks solid, but we wouldn't expect that to continue at the same rate. The thing that's also important is we're seeing good growth in food as well, so not just dairy. So if you think about the balanced portfolio, we are continuing to see acceleration. We talked a little bit last quarter, but we continue to see beverages as an example, back in the growth mode through some of the investments we've made. So we think it's very balanced across the 2 pieces. Operator: The next question comes from the line of Matthew Yates from Bank of America. Matthew Yates: A couple of follow-ups really from what we've discussed already. The first one for Rainer, just around the operating expenses. It looks like it was up about 13% on a reported basis, I guess, probably closer to 10% at constant scope. You mentioned, I guess, some annualization effect given spending ramped up through the course of last year. Just wondering when you think about the full year guidance for 2026, is the expectation that OpEx grows in line with sales or slightly faster? And then the second question, sorry to just circle back on Tina. I think it was Lars was asking about the animal performance. I mean it looks to me over the last 3 years, the animal business hasn't grown. I apologize if that's wrong, you're welcome to correct me. So it has been quite some time now. So can we just talk a little bit more about how that business is doing and where the confidence would come from just thinking that growth may pick up over the coming quarters? Ester Baiget: Thank you, Matthew. I will let Rainer answer your first question and then Tina build -- and your question was on animal or on plant then? Matthew Yates: On animal. Ester Baiget: Okay, perfect. Rainer Lehmann: So let me answer first on the OpEx side, absolutely right, we saw a step-up in Q1, exactly what you said, the rolling effect of annualization. But even on top of that, there's always a little bit of timing. So I do not expect actually to increase OpEx for the next quarters relatively to the Q1 number. We are here really going to see more flattish development. Tina Fanø: Yes. And on the Animal business, we feel quite comfortable with where we are on the animal side. We have seen growth over the last years. And it is a business where we see in the customer discussions, increased focus on the full biosolutions, which we are offering. Matthew Yates: But you can't share anything more specific about market conditions or product launches? Tina Fanø: Yes. So one of the things we're also calling it out this quarter is the launch of Bovacillus. Also, we have earlier years launched a number of new enzymes. Hiphorious is, for example, a new launch, which is coming. So it is, as you know, in the animal space, and you need to do trials in order to prove the benefits of it. And we feel, I would say, quite good at where we are. It is -- when we look at what we have, the combo solutions is something which there is quite some interest in both from enzymes as well as probiotics. We see, you can say, good pickup on our silent solutions. So overall, I would say we are, in fact, in a good place in the animal space. It is a bit more difficult on the numbers given the acquisition. So you'll have to look at both organic and the acquired and so forth. But overall, we believe we are in a good place there. But let's go into details on the discussion later on, if needed. Operator: The next question comes from the line of Soren Samsoe from SEB. Soren Samsoe: So I have 2 questions. One is more in dairy in China. Just if you could update us on growth in yogurt and also cheese. I understand, cheese is growing quite well, although from a low level still. And then my second question is on the human health weakness. I understand, of course, driven a bit by the weak consumer in North America. But are there any other dynamics we should be aware of here or changes to the dynamics? And how is the growth looking in Europe and Asia? Ester Baiget: Thank you, Soren. I love it when the question comes implied with the answer on -- particularly in human health on the isolation on North America on the softness, but I'll let Henrik build on that. And first, Andrew, shine you up with the efforts we're doing in China and that we continue to grow in the segment on any degree. Andrew Taylor: Yes, very good question. So as we all know, the fundamental dairy market in China has been challenged for a few years. What's exciting is we're continuing to see growth. So we saw growth last year. We're seeing growth again this year. That is both in fresh dairy as well as in cheese. On the drivers of that growth are different. So on the fresh dairy side, a lot of it ends up being around innovation and new products and new solutions that we're driving to help reinvigorate the category. And on cheese, that's where we're helping build that market over a long period of time. So we've been investing in the cheese team in China as a way to actually be the reference point as that market develops. So the drivers are different, but both positive. Henrik Nielsen: Thank you for the question, Soren. So yes, in human health, one theme is for sure, the U.S. market. Long-term underlying drivers are still healthy. Short term, we are seeing some signs of a weakening U.S. consumer. There is, of course, the consumer sentiment out. We see fewer searches on online platforms for probiotics. And we have yet to see that potentially become an effect, but this is something we are definitely keen on watching out for. Then you asked about Europe and Asia. Overall, the quarter was in line with our expectations. Europe also, it's a growth market, but at a more moderate pace as well as in APAC, where maybe I highlight the -- we're seeing some very nice growth in dietary supplements in China. That's still coming for Novonesis from a small base, but an area where we have high expectations. Operator: The next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: I have 2, please. One is on the Plant Health segment. So I'm trying to work out if the absence of growth here is a deliberate decision on Novonesis part or a result of market share loss that is not wanted. And I look at the Planetary Health segment margin, and I think to myself that maybe there is some removal of lower-margin products here that have either commoditized or were not quite what Novonesis was looking for. What intentions, what program has Novonesis been implementing in this segment? And what is the end goal? My second question is on the bioenergy segment. If you were to rank in order of importance, increase in ethanol production, change in market share and growth in 2G, what would have been the biggest drivers of the growth in Q1? Ester Baiget: Thank you, Sebastian. Regarding the question about Bioenergy, I mean growth in Q1 for 2G... Tina Fanø: Okay. So on plant health, yes, we talked about -- we had some restructuring of part of our planned activities last -- end of last year. And that was simply because we have a number of launches we want to get out. So you could say more securing that we get benefit from the things which we have developed. We are happy with the launch we have done just this quarter on ActiPhy. So you could say an example of what it is we want to get out and do some work for us. Overall, I would say, in plant, remember, plant is a very small part of Agriculture, Energy & Tech. It's 5-ish percent. So it's quite small. So it's not influencing in any significant way the margin. But it is -- Planetary Health is a good -- you could say it's big industries efficient with a nice profitability. In terms of Bioenergy, I would say, well, when you look at the ranking where you say increased production, change of market share and whether it's 2G growing, well, 2G is still very, very small. It is less than 5% of the energy segment. So although the growth rate is nice, it is still a small part of the growth. So if I were to rank them, the biggest one, which is driving our growth is the increased -- I wouldn't say penetration, but the increased production of ethanol. That is the main driver for our growth. Operator: The next question comes from the line of Nicola Tang from BNP Paribas. Ming Tang: Coming back on Household Care or actually coming back on the comments around cautious consumer behavior that you had flagged earlier in the year. I think today, you're referring to the probiotics business, but I think you've historically mentioned Household Care, particularly risks or the potential risk in North America. I was wondering if you've seen any deterioration at all in Household Care, specific to North America or generally? And conversely, I was wondering if perhaps there could have been any prebuying by some of your -- or safety stock build by some of your customers, either in Household Care or elsewhere, just in light of the kind of Middle East uncertainty. And then the second question, I was wondering if you could give a little bit more detail on your outlook for inputs. Is it fair to assume that the main potential impact from the Middle East conflict might be more around energy cost, where I know you have hedging. Could you talk a little bit about what you're seeing in terms of raw materials? Because as I understand, it's mainly naturals, where there's less inflation than on the synthetic side. So could you talk about the magnitude of input inflation that you expect for this year? And any commentary around specific inputs or availability of inputs? Ester Baiget: Thank you, Nicola. I'll comment on both questions, and then I'll pass it to both Tina and Rainer. The first one, important to mention that the 7% growth, it's underlying growth across all segments, robust growth, volume growth mainly, also a little bit of growth from pricing. And it is driven by continuous increasing demand of our solutions. We don't see changes on the consumers' buying behavior. This is underlying driving demand growth, where biosolutions continue to be the answer of our customers. We don't see the softness in North America on Household Care. Tina is going to further comment on that. And we see continued penetration of the -- collecting the fruits of the investment we've made in the past. Last year, we put 400 more people boots on the ground, sellers in the regions. And we see the benefits there. We see the closeness of the customers, the proximity where the growth is and then translating it on what it is the top line growth that also with the strong start of the year gives us full confidence for the year-end guidance. And then regarding the costs, Rainer will talk about this. But as I mentioned, we bring in pricing and conversations with our customers, and we're aiming and forecasting nonimpact to the EBITDA for the year. Tina Fanø: Yes. So as Ester said, I mean, when you look at, a, the Michigan Institute on consumer sentiment in the U.S. That is something which for sure we are watching. Also, if you watch the Nielsen data, then you will see, you could say, flattish/declining volumes in the U.S. in detergent volumes after a good 2025. So this is something we are watching, you could say, in the market. But when we look at our data, we don't see any impact. And in fact, I also want to highlight that given our broad base with different players in different segments, if people move between, you could say, private label and branded goods -- for example, in Europe, we have a broad exposure. If they move down in tier to less enzyme containing enzymes, then we are not immune to that. But that outlook of our sentiment and how we look at the world is included in our outlook for the full year. And as we have said, we expect solid growth in Household Care. Rainer Lehmann: And Nicola, regarding the input cost of the Middle East, as Ester basically said, this is mainly impacting us on the supply chain side. So meaning our basically transportation and packaging cost is affected by that, which we're basically recovering on the pricing side. So that is really the driver for it, not the other components on the COGS side. Ester Baiget: One more question, operator, please, last question. Operator: The next question comes from the line of Charles Eden from UBS. Charles Eden: I'll limit myself to 2 quick ones, if that's okay. Firstly, probably for Tina, can we just come back on the plant and tech? Obviously, you mentioned double-digit decline in tech in the quarter, but I think you obviously mentioned order timing. So is the expectation that reverses in Q2 or at least in the balance of '26? And if possible, could you quantify the magnitude of that order timing headwind in Q1? And then secondly, just to come back on Food & Beverage. Obviously, a lot of time focused on Ag, Energy & Tech, but Food & Beverage, in particular, sort of 11% organic, but 15% underlying, if you exclude the Russia exit, quite an incredible performance. Can you just sort of help us understand maybe that's well ahead of the end market growth. What is driving that? What's the success in your offering, which is allowing you to grow probably 4, 5x the underlying market? Ester Baiget: Thank you, Charles. I love that question. What is the driver of -- that we continue to outgrow the markets that we're present. And it's consistently across all areas, a single pattern, customer proximity and bringing answers that lead to value generation for our customers. And that's true for food. That's true for dairy. That's true for Household Care. That's true for Bioenergy. And in the environment that we live in today, we see that pool continue to grow. I'm going to tip toe on your first question and then pass it to Andrew. We saw a decline, double-digit decline in Ag and in plant and in tech this quarter mainly from timing. Both are going to contribute to growth through the year. That means implicitly that there's going to be growth on the remaining of the year to overcome the decline that we saw on a segment in AAT that contributed to growth with a strong growth from Bioenergy and also growth in Animal that we see good momentum and conversations with our customers. And with that, Andrew, I'm passing it to you. Andrew Taylor: Yes. Thank you. And so if you take a step back and think about what's driving Food & Beverage, I think there's a few things. One, we all see the same data on the underlying market growth. I would say that there are pockets of the underlying market that we are differentially exposed to. We always talk about the high protein trends around the world. That's clearly a piece. But the biggest piece is the increasing use of our biosolutions. It's actually driving penetration around substituting, in particular, for synthetics. And what's exciting is that is a continuing trend in many of the things that we see, for example, Maha, and other things actually are helping with that. So as an example, a culture can substitute for multiple things in the yogurt that are potentially at risk. So we do see that across Food and Food & Beverage. The third piece is really around how you share that value. So if we're helping our customers create productivity, if we're helping them get better end consumer and customer demand, we also work to share that value through the pricing. So we are excited about the progress. It's a very choppy market around the world, but we keep investing in that part of the business. And in particular, the capital investments we're making are very important because it signals to our customers, we're willing to grow with them for the long term. Ester Baiget: Thank you very much. And with that, we're closing the session of the day. Looking forward to continuing the conversations with all of you during the forthcoming days. Thank you so much. Bye.
William Lundin: Okay. So welcome, everybody, to IPC's 2026 First Quarter Results Update Presentation. I'm William Lundin, the President and CEO. I'm joined today by Christophe Nerguararian, our CFO; as well as Rebecca Gordon, our SVP of Corporate Planning and Investor Relations. So I'll start with the highlights and give an operational update, then Christophe will touch on the financial highlights for the quarter. Following the presentation, we'll take questions, which can be submitted through conference call or via the web online. Jumping into the highlights. We're very pleased to report another solid quarter of operational performance. Production for Q1 was at the top end of the quarterly forecast at 43,000 barrels of oil equivalent per day, and we're retaining our full year production guidance range of 44,000 to 47,000 boes per day. We had good cost discipline with Q1 operating expenditure coming in at sub USD 18 per barrel of oil equivalent, and we are maintaining guidance for OpEx at USD 18 to USD 20 per barrel. Entering 2026, we set a lean work program and budget as we were assuming a base case price estimate of $65 per barrel Brent. And in response to the improved pricing environment, we're taking advantage of our operatorship and increasing our capital program from USD 122 million to USD 163 million, predominantly to accommodate short-cycle investments across some of our producing assets. The Q1 capital spend was USD 71 million. Operating cash flow generation for Q1 was $68 million, and we revised our full year OCF guidance to USD 220 million to USD 340 million assuming $70 to $90 per barrel Brent for the remainder of 2026. Free cash flow was minus USD 17 million. And we are entering really an inflection point here for the company and there shouldn't be too many more quarters of negative free cash flow going forward with Blackrod first oil expected in the near horizon. Full year free cash flow is expected to be between 0 to USD 120 million positive between $70 to $90 Brent for the rest of 2026. Net debt stands at $513 million, and we expanded our Canadian credit facility during the quarter to USD 250 million. We also extended the maturity of that to 2028. So that gives us an increased headroom and overall flexibility. Our benchmark hedges for WTI and Brent for approximately 40% of our production exposure rolls off in June, leaving us fully exposed to benchmark oil prices from July onwards. We have some WTI/WCS differential hedges and transport/quality-related hedges tied to our Canadian heavy oil exposure as well at attractive levels and some natural gas hedges in place that are currently in the money as well. No material incidents took place during the quarter, we're very pleased to report on. So on to the following slide. As shown on the production graph on Slide 3 here, IPC delivered flat production, really at the high end of our guidance in the first quarter, with overall strong performance across all the assets in the portfolio. So I'll touch on more detail on each of the assets' performance later on in the presentation. Moving on, we're very strongly positioned to deliver within our CMD production forecast range of 44,000 to 47,000 barrels of oil equivalent per day. Drawing your eyes to the bottom of the production chart on this slide. 2026 is really a story of two tales here with forecast production volumes expected to rise materially at the back end of the year with Blackrod Phase 1 oil production set to come online. In addition to some of the incremental capital adds, fast payback projects we've also added in, this will be contributing more so at the back end of this year for production rates. Our production mix is weighted 60% towards Canadian crude, which is tied to WCS pricing, 10% to Brent-linked production coming from Malaysia and France and the remaining balance of 30% being natural gas from Southern Alberta. And I'd also like to reiterate here that the 44,000 to 47,000 barrels of oil equivalent per day guidance is an annual average, very much an annual average rather than a quarterly average as can be seen on the high and low guidance bands on that bottom left-hand chart. OpEx, so we are maintaining that original Capital Markets Day forecast as we set out in February of $18 to $20 a barrel. First quarter operating cash flow was USD 68 million. The differentials from Brent to WTI, can be seen in the brackets there, was $9 and from WTI to WCS was $14 a barrel. So the Brent to WTI differential was notably high on the back end of the geopolitical conflict in the Middle East, which our Brent-linked production benefits from, of course. Our operating cash flow full year forecast for 2026 is updated to USD 220 million to USD 340 million based on $70 to $90 Brent, and that assumes a $5 differential between Brent and WTI and a $14 differential between WTI and WCS. So a material improvement compared to our CMD forecast and notably more than funding our incremental capital spend program this year with the revised updated operating cash flow generation outlook. Moving on to our CapEx program inclusive of decommissioning, which now stands at a forecast of $163 million. So that's roughly $40 million higher than the original CMD CapEx guidance. The increase is mainly due to accelerated fast payback drilling activity at our Southern Suffield assets in Alberta and in the Paris Basin in France, which I will expand on following asset-specific slides. So we continue to see great progress at Blackrod, and we've updated our 2026 budget outlook for the forecast spend at that asset. Big picture, the multiyear budget for Blackrod Phase 1 growth capital, the first oil is USD 850 million. There has been some minor cost pressure with total costs expected to be approximately USD 857 million, which is less than 1% overall of that original sanction CapEx guidance for the growth capital to first oil. And we're still expecting the project to be delivered in terms of first oil in Q3 of 2026, which is ahead of the original timeline given at the time of sanction back in 2023. Because of this continued acceleration and positive progress, there are some sustaining completion costs as well being pulled forward, which is a positive outcome overall. The free cash flow outlook, we're projecting to generate between 0 to $120 million of positive free cash flow between $70 and $90 Brent for the remainder of 2026. Very exciting to be returning into a positive free cash flow generating position this year with a major boost in free cash flow levels anticipated in 2027 and beyond as Blackrod Phase 1 ramps up and comes onstream. Moving to the share repurchases slide. IPC, of course, has a very strong track record of share repurchases in our brief history as a company. So 77 million shares have been bought back at an average price of SEK 79 or CAD 11 per share, respectively. And that represents around $1.4 billion of value created from the share repurchases when comparing the average share price that those shares were bought back at to our current share price. Notably on the antidilution waterfall, the only time shares were issued in a transaction was for the BlackPearl acquisition back in 2018. All of those shares have been bought back. And our current shares outstanding is just shy of 113 million shares, which is less than the original starting amount of 113.5 million shares. And we've transformed the company to where we are today compared to at inception in 2017. Now we see a 4.5x increase in production levels, 18x increase on our 2P reserves in excess of 20 years, added to our 2P reserve life index in excess of 1 billion barrels of contingent resources, added an overall 4x increase to our NAV compared to that of when the company was formed at the beginning of 2017. So Blackrod. This is a 20-year journey in the making to bring this vision into reality by unlocking a Phase 1 commercial development. I had the privilege of being at site at the end of April. This is a world-class SAGD plant with a best-in-class operational staff. It's a compact site with a small footprint for the CPF and nearby well pad facility tie-ins. This asset is going to propel the company to new levels, and it's been a fantastic journey going from sanction through to development and on to startup now with rotating equipment well in service at this point in time. Original guidance for this project, again, back in 2023 when it was sanctioned, called for first oil in late 2026 and growth capital up into that point of USD 850 million. We achieved first steam ahead of our original forecast, resulting in a schedule improvement which was announced at the beginning of this year, with first oil expected in Q3 2026. So operations continue to progress well, and we're strongly positioned to deliver within this accelerated timeline. Cumulative spend as at the end of Q1 from the beginning of 2023 on the growth capital is USD 842 million with some minor works remaining on the final boiler tie-in as well as well pad facilities as we expect to deliver this project overall in line with the original growth capital guidance to first oil. I really couldn't be more proud of our multidisciplinary IPC teams as well as the vendors utilized in this major undertaking, and we're especially pleased that there has been no material safety incidents under IPC's supervision as prime contractor of the site. Excellent delivery overall and stewardship of this project to date. So Blackrod valuation. Again, this is a true game-changing asset for IPC. We have regulatory approval up to 80,000 barrels of oil per day with over 1.45 billion barrels of recoverable resource. Phase 1 targets 30,000 barrels per day and 311 million barrels of 2P reserves. And the economics as at the beginning of this year, based on our conservative reserve auditor price deck, is USD 1.4 billion of net present value using a 10% discount rate and approximately a $47 WTI breakeven. As you can see on the figure on the right-hand side of the slide, this is a massive uniform sandstone reservoir. It's contiguous and homogeneous, lending to a very much predictable and scalable product potential that's validated through the 15 years that it's been under pilot operation testing. In the lower graph here, the dark wedge on the bar chart reflects what is booked in 2P reserves and carried within our valuation. The light blue component of that bar chart is the contingent resources and represents upside to our business. Moving on to our producing assets. Our current flagship oil-producing asset at Onion Lake Thermal delivered stable production through Q1. We also did some 4D seismic work at the beginning of the year and are reviewing that data to hone in on some additional potential infill targets on existing producing drainage patterns. And also to note on that schematic on the right, H Pad is the next main drainage pattern to be developed in the sequence. Moving on to the Suffield area assets. So very much predictable and low decline production, the Suffield area assets, which delivered around 23,000 barrels of oil equivalent per day through Q1. We're very excited to be redeploying some capital into these assets, where we've sanctioned a 4-well production drilling campaign within the Basal Quartz area, just west of the Suffield block. Production from France and Malaysia for Q1 was in excess of 5,000 barrels of oil per day. We had some incremental activity that's also been sanctioned now in France. We look to drill 3 sidetracks in the FAB field and 1 sidetrack in the Villeperdue field. So very exciting to be drilling again in France. And in Malaysia, we also plan to do an operational activity of workover using a hydraulic workover unit later this year on our A13 well. So with that, I will hand it over to Christophe to go through the financial highlights. Thank you. Christophe Nerguararian: Thank you very much, Will. Good morning, everyone. So indeed, a good quarter with production at the high end of our Q1 guidance at 43,000 barrels of oil equivalent per day. And of course, during this first quarter, when the situation happened between Iran, the U.S. and Israel, the oil prices increased massively from the beginning of March. And so you really have a relatively high average Dated Brent oil price for the whole quarter, in excess of $81 per barrel, but that was really two sides of the story with lower oil prices in January and February and much higher in March. So overall, that really helped generate on that basis strong operating cash flows and EBITDA for the quarter at USD 68 million and USD 64 million. As we guided before and as most of our investors know, the capital expenditure in 2026 was always expected to be much front-loaded, and so you can see a disproportionate portion of the CapEx spent during this quarter translating into a free cash flow of negative USD 17 million. And it depends where oil prices will be on average for Q2, but it's fair to assume that the free cash flow may be negative again in Q2. But from that point onwards, we're expecting to turn the corner and to be again back into free cash flow territory for the second half, depending on where first oil kicks in at Blackrod. So USD 13 million of net profit for this quarter. The net debt increased during this first quarter by USD 30 million. Again, it's fair to assume that this net debt would increase again in the second quarter and from that point on progressively. Depending on where oil prices stand, we should see some deleverage from Q3 or from Q4. But certainly this year, we should start to see some accelerated deleveraging as the Blackrod production ramps up over time. Realized prices, so I mentioned, were strong. And I think it's interesting, a bit sad at the same time, but interesting to see that the physical market is quite dislocated. And so the Dated Brent has been trading at between $5 up to $30 premium on top of the future or the financial Brent, if you wish. And when we lifted our cargo in Malaysia, the last one in March, we had a good premium. And for the future June cargo, which we're going to lift in Malaysia, we can see that the physical market is very tight because the premium we can realize there are very, very high. So you can see we sold in March a cargo in Malaysia at USD 110 per barrel, while on average for the quarter, Dated Brent was USD 81. The Brent-WTI differential widened a bit at $9 and the WTI/WCS differential stood at negative $14 for the quarter. We're continuing in Canada to sell our heavy oil on parity or very close to the WCS. Gas prices were actually okay during this first quarter. But overall, the market again is quite disconnected between the U.S., and the Canadian market has been a new reality for the Canadian gas prices over the last 18 months now for the lack of infrastructure and communicating infrastructure between the Canadian gas pipeline network and the U.S. market. So you can see that we realized CAD 2.5 per Mcf during this first quarter. But the forecast is showing for the summer months lower gas prices, which is still a negative to IPC given that we are producing more gas than we're consuming at Onion Lake or that we will consume in the following quarters at Blackrod. Now the positive in the long run is that because we are consuming gas at Blackrod, it will be a relatively cheap feedstock gas going forward. In terms of financial results, it's interesting to compare '25 and '26. We had during this first quarter '26 similar production and overall revenues between the first quarter '26 and '25. Some of the difference between the 2 quarters in '26 and '25 was coming from the fact that we lost $10 million of hedges -- hedged losses in this first quarter because we had hedged around 40% of our WTI and Brent exposure at between $62 and $68 per barrel. And of course, we've been losing in the month of March mainly. And given that we are still hedged until the end of June at those around 40% level at current prices, we can expect to make a hedging loss of around USD 30 million during the second quarter. But I think it's important to flag as well that beyond the end of June, we no longer have any benchmark hedged. So we are totally exposed to the Brent and the WTI prices going forward into the second half of 2026. Looking at the operating costs. So we were below during this first quarter as a result of strong production level and relatively low electricity and gas prices. We can expect higher operating cost per barrel going into the second quarter with a bit of a slightly lower production in the second quarter. In the third quarter, when we're going to move progressively into commercial production at Blackrod, we're going to register some OpEx which will be a bit higher in the first months of operation. But you can see that as soon as the Blackrod production ramps up in the fourth quarter, the OpEx per barrel will progressively reduce, and we would expect that trend to continue into 2027. You can see the netback on the following graph with gross margin of close to $18 per barrel and operating cash flow at $17.5 and EBITDA at $16.5 per barrel of oil equivalent of netback. Looking at the evolution of our net debt. So we increased our net debt this quarter by USD 30 million given the reasonably high CapEx of $71 million we spent during the year. So we spent more CapEx than the level of operating cash flow. This is going to reverse in Q2 and even more so in the second half of this year. In terms of financial items, it's sort of a steady state now in the second half. Last year when we refinanced our bonds, we had some exceptional and one-off fees that we paid as part of that bond refinancing. From now on, it's going to be much more stable. And just to mention that the foreign exchange loss you can see here of $6.5 million during this quarter is a noncash item. Otherwise, the G&A remains reasonably stable and flat at around USD 4 million per quarter. So looking at the financial results. We generated net revenues of $173 million, netting a cash margin of $68 million and gross profit of USD 37 million, which net of the financial items, tax and tax elements yielded a net profit of USD 13 million for the quarter. The balance sheet has continued to evolve since we sanctioned the Blackrod project. As you expect, our level of cash has reduced and our level of net debt increased over the last 3 years. But again, we are almost touching distance from reversing this trend certainly going into 2027 but as well going into the second half of this year. And I will let Will conclude this presentation. William Lundin: Thank you very much, Christophe. So in summary, very exciting to be ramping up activity really across all regions of operations. Q1 capital came in at USD 71 million and the full year outlook is $163 million now, really leveraging our operatorship and increasing our production exposure to the high commodity pricing environment that we're seeing. We're well positioned to deliver within our production guidance, and our operating costs remain under control. Operating cash flow generation was robust for Q1 at USD 68 million. And the outlook for the full year is $220 million to $340 million. We have in excess of USD 150 million of undrawn liquidity headroom. There are no material environmental or safety incidents that took place in the first quarter. And with that, I'm happy to pass it over to the operator to begin questions, and you can also submit your questions online via the web. Thank you. Operator: [Operator Instructions] We'll now take our first question from Teodor Nilsen of SB1 Markets. Teodor Nilsen: Will and Christophe, first question there is around the small CapEx increase you announced. I just wanted to know what is driven by cost increases and what is driven by higher activity. And second part of that question is related to the activity increase. By how much should we assume that the exit rate production this year increases as a result of the accelerated investments? So that's the first two questions. And third question, that is on share repurchases. You've, of course, been very successful doing that for the past 2 years as you discussed. But you haven't been doing any repurchase. You have not done any material repurchases the past few months. So I just wanted a background for that. Do you think the share price approached a reasonable level? Or are there other reasons for why you have reduced the buybacks? William Lundin: Thanks very much, Teodor, for the questions. I'll head those off. First one being the small CapEx increase. So we had an adjustment of $122 million to $163 million for capital expenditure for 2026. So that $40 million some-odd increase, the lion's share of that is for capital activity in France and Canada. So we're going to be doing 4 sidetracks drilling program in France for approximately $15 million and also in Southern Alberta at our Suffield area assets, more on the more recently acquired in 2023 Core 4 property. We're also going to be drilling 4 wells there. So the total combined amount is around $23 million when you add the France plus the Brooks-related activity that we're undertaking. I also touched on the slight cost increase at Blackrod there as well, which was expanded on throughout the presentation. But really the vast majority of the cost increases are deliberate cost increases here to increase the activity for production contributing projects. And so that production increase for those 2 projects that I had noted, which will be more back-end weighted this year in terms of the production contribution, we expect to see in excess of 1,000 barrels per day on average delivered for 2027 from those 2 programs. So very attractive cost per flowing barrel metrics to undertake those capital activities and really a part of our whole strategy as well over the past couple of years while we've been accommodating the growth capital for Blackrod as well as buying back our shares at very cheap levels. Some of the capital activity that's been ripe and ready to go across our existing producing assets, we've elected to wait until more constructive oil prices present themselves. And here we are now. And that is the reason for why we've kind of prioritized the incremental capital going towards production contributing activity right now as opposed to share buybacks. We do have the flexibility to restart share buybacks, where we have the NCIB activated up until December of this year. We are steadfast on focusing on getting Blackrod on to production here. We continue to monitor market conditions and overall liquidity headroom. Safe to say we are very strongly positioned, and it's something that we're going to continue to monitor as the year progresses here in terms of restarting shareholder returns. Operator: [Operator Instructions] We will now move on to our next question from Mark Wilson of Jefferies. Mark Wilson: Excellent progress as ever and good look with the final steps in Blackrod, obviously. I thought the most interesting area now is the gas side of things in Canada. You mentioned that your hedges are rolling off for WTI. Just remind us where that stands for the gas, particularly as that is looking weaker in terms of infrastructure. And whether you think there's any longer-term impact from the M&A we've seen into Canadian gas, Shell coming in for ARC and further phases of Canada LNG. Just be interested to hear that. Christophe Nerguararian: Yes. Thank you, Mark, and very good questions. So I skipped the table on hedging as Will touched on it already in the opening slide. But you're absolutely right. It was very interesting to see Shell going after ARC, which is a large gas producer, and so this is just speculation at this stage, but probably paves the way or at least increases the chances and the odds that Shell would go and try to expand the LNG facility on the West Coast of Canada, North of Vancouver. And that's a fairly obvious move when you look at the massive arbitrage you can see between local domestic gas prices and international gas prices. So I think the projection in the very short term is to probably still have reasonably low gas prices onshore Western Canada, but the prospects of having more demand from that LNG Canada plant going forward has probably increased over the last few weeks. In terms of hedging, we have 50,000 GJ a day of gas hedged at CAD 2.7 per GJ or CAD 2.8 per McF. So unfortunately, that's probably going to be in the money. And so you know us. We remain very opportunistic. If we see any gas prices hike in the forward curve, you should fairly expect us to seize that kind of opportunities. And so that was your main question, around gas prices. No, you're absolutely right, that in terms of WTI or Brent exposure, the hedges are rolling off at the end of this quarter, at the end of June. And so we'll be fully exposed going forward to what looks to be reasonably constructive oil prices going forward. William Lundin: Sorry, just to add to that in terms of being a great signal in terms of Shell increasing its exposure in Canada just for the upstream overall Canadian landscape there. And now with that acquisition, Shell has secured roughly 3/4 of its feed gas requirements for both Phase 1 and Phase 2 of LNG Canada. So it certainly bodes well and signaling for an FID of Phase 2, but we're still yet to see that for that LNG project on the West Coast of B.C. there. Mark Wilson: Got it. Okay. And is it worth mentioning on the broader Canada side of things, what was it I heard recently, is it a sovereign wealth fund? Or is it an infrastructure fund? And any implications? William Lundin: Yes. That was Mark Carney, and he said a sovereign wealth fund. The extent of the details are yet to be understood in terms of where the funding is going to come from to be able to do that. But that is the headline that Mark Carney announced, was a sovereign wealth fund. Mark Wilson: Okay, okay. And then just one last point. I might have missed it in Teodor's question. But the short cycle in Suffield, that's obviously targeting liquids, I imagine. William Lundin: Yes, oil. Mark Wilson: Okay. Very good. Congratulations again. Looking forward to reading the rest of the news in the year as it ramps up. Christophe Nerguararian: Exactly, thank you. William Lundin: Much appreciate it. Thanks, Mark. Operator: Thank you. We have no further questions in the queue. I'll now hand it over to the company for online questions. Rebecca Gordon: Okay. Thanks, operator. So we've got a couple of questions here. Maybe we can just start with a bit of information on the short cycle, Will. Just a couple of questions on Ferguson and whether we have opportunity there to put some rigs in or maybe look at additional drilling there. William Lundin: Yes, for sure. So Ferguson, there's quite a few opportunities in terms of drilling as well as recompletion, refracking-related activity as well that we are looking into. Some of the activity is likely to be an operating expenditure-related item. So that is something that we do plan to do in terms of a few wells and recompletions on a few wellbores there. So look to see some minor production boost coming from the asset towards the tail end of the year. Rebecca Gordon: Okay. Very good. And then another question here. I mean, obviously, there's a lot of interest on Phase 2. Is there any intention to bring that forward now? Or how are we feeling about the timing given the oil price? William Lundin: Yes. I think the liquidity position as we've stated for quite some time now is going to change quite rapidly as Blackrod Phase 1 sets to come onstream in the back half of this year, and we look to generate significant free cash flow in the year of 2027 even at more modest oil prices. And if these pricing levels are to hold through 2027, it's going to put us in a very, very good place to look to continue pursuing our key capital allocation strategic pillars in terms of organic growth, shareholder returns and also staying opportunistic towards M&A. But for Phase 2 specifically, our future expansion potential at Blackrod behind the scenes is definitely something that's being worked up. But of course, we remain very, very much focused on successfully completing and bringing Phase 1 online from an oil-producing standpoint. Rebecca Gordon: Great. Thanks. And then just a quick question on capital structure, Christophe. Could you explain the increase in the RCF, why you went for that? Christophe Nerguararian: Yes. Well, if you look back at what IPC has been doing as a corporate, we try to raise and improve liquidity when we don't need it. So it's been a constant discussion with our banking partners and banking friends. We enjoy very good support from Canadian banks these days. There was the opportunity to increase the Canadian revolving credit facility from CAD 250 million to USD 250 million, which we just did and extended the maturity up to May 2028 as we do every year. So it's all positive for no other specific purpose than having ample liquidity. Rebecca Gordon: Fantastic. Thanks. Will, just a question on regulatory framework, so in Canada, the U.S. and our other operating jurisdictions. Have we seen any changes post the Iran war in those sort of regulatory frameworks or anticipate anything to come? William Lundin: No, there hasn't been any changes regulatory-wise in the stable jurisdictions where we operate and we have production operations taking place. And specifically in Canada also, they have a sliding framework based on oil prices for the royalties. So no changes expected there or elsewhere within the portfolio at this time. Rebecca Gordon: Okay. Fantastic. And then maybe one final question here. What would be your priority post Blackrod complete in terms of organic growth or shareholder returns or buybacks? William Lundin: Yes. The infamous question, I think. The punch line here is that we have the ability to do it all, and we look to strike the right cadence in terms of pulling forward organic growth and continuing to screen opportunities in the M&A landscape and balancing shareholder returns as well. And so I think we're going to be really strongly positioned to deliver on all three of those fronts. And the main lens, of course, will be to maximize shareholder value in our pursuit of that capital allocation strategy. Rebecca Gordon: Okay. Fantastic. That's what we have time for today. That's all our questions. So I leave it to you to close, Will. William Lundin: Excellent. Thanks very much, Rebecca, and thanks, everyone, for tuning in to our first quarter results update presentation. We're very, very strongly positioned, and It's a super exciting time for the company with the next major catalyst being Blackrod first oil. So that will come in due course very soon here. So thanks, everyone, and take care. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to loanDepot's First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to hand the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Please go ahead. Gerhard Erdelji: Good afternoon, everyone, and thank you for joining our First Quarter 2026 Earnings Call. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued earlier today, which is available on our website at investors.loandepot.com. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into analyzing and benchmarking the performance and value of our business and facilitating company-to-company operating performance comparisons. For more details on these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measures, please refer to today's earnings release. A webcast and transcript of this call will be posted on our website after the conclusion of this call. On today's call, we have loanDepot's Founder and Chief Executive Officer, Anthony Hsieh; and Chief Financial Officer, David Hayes. They will provide an overview of our quarter, a review of our operating results and our outlook. We're also joined by Chief Investment Officer, Jeff DerGurahian; and Chief Digital Officer, Dominick Marchetti, to help answer your questions after our prepared remarks. And with that, I'll turn things over to Anthony to get us started. Anthony? Anthony Hsieh: Thank you, Gerhard. I appreciate everyone joining us on the call today. We are now 3 quarters into the rebuild of our company. And I believe that all of our hard work will soon be reflected in our financial performance. We spent the most recent quarter focused on a series of long-term growth initiatives that we expect will accelerate our momentum in coming months, including the addition of over 100 new loan officers, the reimagining and relaunch of our wholesale business and the completion of our game-changing partnership agreement with Figure. I'll talk about each of these initiatives in more detail in a moment, but I'm pleased to share they are delivering promising early results. Since my return as CEO, I have been laser-focused on our digital transformation as a key enabler of our return to a market-leading position. We have focused on fully leveraging our unique assets and strategy, including one of the most differentiated customer acquisition and retention business models in the marketplace today. This included rebuilding our management team with members that have deep mortgage technology and marketing IQ. With this team now largely in place, we have spent the past several quarters hiring and training more loan officers with the goal of growing market share and positioning ourselves for accelerated growth when demand increases. This growth is broad-based and consists of newly trained loan officers graduating from our proprietary ACES program in our direct channel and experienced loan officers with established businesses in our retail channel. We also recently reopened our wholesale channel as part of our strategy to offer more products to our customers and leverage our existing infrastructure while limiting incremental expenses. Response from the broker community has been very positive, with many directly reaching out seeking to partner with loanDepot. Despite a volatile market environment, these initiatives helped us increase market share during the quarter, which I consider vital to our goal of achieving consistent profitability in the current market. Behind the scenes, we remain focused on reducing unit costs through operating leverage and automation. As demonstrated this quarter, we sharpened our marketing strategies to drive more lot volume to the top of the funnel while reducing marketing costs, increasing our return on marketing. Looking forward, I believe the digital migration of the customer will continue to accelerate, and we plan to be there to meet the customer. Led by our digital team, we are hard at work introducing cutting-edge technology and AI capabilities to our repeatable and scalable functions across each aspect of the origination and servicing life cycle, including lead acquisition and conversion, loan officer and servicing CRM management and underwriting process. Our recently announced partnership with Figure Technology Solutions is expected to meaningfully accelerate our work and is delivering promising early results. As part of this partnership, we integrated Figure's proprietary credit and loan underwriting engine into our own proprietary mello technology platform. enabling us to seamlessly offer a variety of innovative home loan products to our customers. Importantly, our partnership also positions us to introduce new and innovative products that expand the way we serve borrowers in the future and capitalize on market improvements. The 5x5 HomeLoan, which delivers approval in as little as 5 minutes and funding in as few as 5 days brings real value to those seeking speed and convenience in their financial transaction. As we integrate this platform across our channels, we expect to lower our cost of production, improve the customer experience, close more loans quickly and advance our long-term objective of profitable market share growth. We also believe that this product will be a consistent contributor to the earnings power of the company as customers with record levels of home equity and historically low interest rates on their First Trustees should remain a reliable source of demand even as interest rates fall. As we look ahead with expectations of a larger market, our top of the funnel customer acquisition advantage uniquely positions us to outperform our competition in a rapidly evolving and consolidating marketplace. I'm proud of the work that has been accomplished since my return to a full-time operating role. We plan to continue investing in growing our top of the funnel customer acquisition and origination capabilities, leveraging our brand and marketing muscle, along with introducing contemporary technology, including AI, which should lower our costs and increase our operating efficiency. Ultimately, our goal are to deliver profitable market share growth, improve the borrower experience, drive customer retention and deliver long-term shareholder value. This is our mission and what we are working towards every day. Regardless of interest rate movements, we are focused on delivering consistent profitability. We believe we are well on our way towards that goal. And as rates fall, that time line will be shortened. With that, I will now turn the call over to Dave, who will take us through our financial results in more detail. Dave? David Hayes: Thanks, Anthony, and good afternoon, everyone. The quarter reflected continued progress towards sustainable profitability, offset by geopolitically driven market volatility. We reported an adjusted net loss of $34 million in the first quarter compared to an adjusted net loss of $21 million in the fourth quarter of 2025 due primarily to lower pull-through weighted gain on sale margin, offset somewhat by lower expenses. During the first quarter, pull-through weighted rate lock volume was $8.3 billion, which represented a 14% increase from the prior quarter volume of $7.3 billion. Pull-through weighted rate lock volume came in within the guidance we issued last quarter of $7.75 billion to $8.75 billion and contributed to adjusted total revenue of $299 million, which compared to $316 million in the fourth quarter of 2025. As Anthony mentioned, the growth in rate lock volume was achieved while reducing marketing expenses by 12% during the quarter. This positive operating leverage reflected improved strategies for mid-funnel lead conversion and our sharpened marketing strategies. Our pull-through weighted gain on sale margin for the fourth quarter came in at 271 basis points at the low end of our guidance range of 270 basis points to 300 basis points and down compared to 324 basis points to the prior quarter. Our lower gain on sale margin primarily reflected interest rate volatility and product mix shift. The geopolitical environment created a sharp increase in interest rates during the first quarter, and we originated fewer higher-margin FHA, VA and HELOC loans and originated more conventional loans, both effects compressing our margin. Higher interest rates during the quarter also generated wider negative fair value marks on our mortgage servicing and trading securities, contributing to lower revenue. Our loan origination volume was $7.7 billion for the quarter, a decrease of 5% from the prior quarter's volume of $8 billion. This was at the high end of our guidance we issued last quarter of between $6.75 billion and $7.75 billion. Closed loan volume also represented a market share increase, demonstrating the success in investing in increasing our loan officers. Servicing fee income decreased from $113 million in the fourth quarter of 2025 to $109 million in the first quarter and primarily due to lower interest earnings from lower custodial balances, along with fewer days in the quarter. Despite the lower servicing revenue, we're able to increase our market-leading recapture rate to 73% from the prior quarter's 71%. We hedge our servicing portfolio, so we do not record the full impact of the changes in fair value and the results of our operations. We believe this strategy helps protect against volatility in our earnings and liquidity. Our strategy for hedging the servicing portfolio is dynamic, and we adjust our hedge positions in reaction to the changing interest rate environment. Our total expenses for the first quarter decreased by $565,000 from the prior quarter. We guided to higher expenses during the quarter, but ended up delivering a decrease. The primary drivers of the decrease were lower commissions due to the impact of implementing a more efficient commission strategies and lower marketing expenses, as I previously discussed. Salary-related expenses increased due to higher headcount as we build capacity and the impact from seasonal employment tax resets. We also experienced higher direct origination expenses as vendors increased the cost of credit reporting services. We believe that process and workflow improvements underway should mitigate some of the increased credit reporting costs going forward. Looking ahead to the second quarter. We expect pull-through weighted lock volume of between $5.75 billion and $7.75 billion, and origination volume of between $7.25 billion and $9.25 billion. These ranges reflect a shift in mix as our 5x5 HomeLoan product ramps up, which has a very fast funding profile and which volume is not reflected in the lock volume, but is reflected in the closed loan volume. We expect our second quarter pull-through weighted gain on sale margin to be between 330 basis points and 360 basis points. When evaluating our margin guidance, keep in mind that HELOC products are originated without an interest rate lock. Therefore, our guidance reflects the expected revenue contribution of those products in the numerator, but expected volume is not included in the denominator. They also generally carry a higher gain on sale margin, but lower average loan balances and combined with leveraging the Figure underwriting platform, have a lower cost structure. Taken together, we believe the partnership will have a positive impact on our bottom line and a meaningful contributor to growth going forward. Our total expenses are expected to increase in the second quarter, primarily driven by higher volume-related costs, reflecting higher expected originations quarter-over-quarter. We ended the quarter with $277 million in cash, decreasing by $60 million from the fourth quarter, reflecting our net loss, the investment in servicing rights and timing differences related to our MSR secured borrowings. Anthony stated this earlier, but it bears repeating. Our goals are to continue investing in driving top line and market share growth, reducing our costs and increasing operating leverage and applying automation and technology across the origination and servicing business to achieve consistent profitability in any environment. With that, we're ready to turn it back over to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: I wanted to start maybe with just the gain on sale margin guide. You have a reasonable step-up in the guide between -- from the first quarter's 271 bps level. Can you just talk about some of the factors that are driving that? David Hayes: Yes. Sure. It's David Hayes. It's really reflective of a couple of things. But first and foremost, it's the introduction of our 5x5 loan product, which is a HELOC product. That carries a much stronger gain on sale margin with it. And with the recent partnership with Figure, we've really started to ramp that production. So, we're seeing a higher percentage mix of volume coming from that product, which is averaging up our gain on sale margin. Additionally, on the First Trustee side of the house, we saw a product mix shift that diluted our margin in the first quarter, and we're starting to see that shift back towards FHA, VA and overall higher home equity volumes, which is also contributing to a higher gain on sale margin. Mihir Bhatia: Okay. Got it. And then just on the volume and pull-through dynamics. I think there's weighted locks, I think, in 1Q were $8 billion. You're obviously guiding to some funded originations here in 2Q, but the locks for 1Q is like $5.75 billion to $7.7 billion, like a little bit smaller than first quarter. Are you making changes in your pull-through fallout or assumptions, or something else happening there? Or is this just every year seasonality from 1Q to 2Q? David Hayes: No. This is kind of a pretty significant shift I commented in the prepared remarks, where with the ramping of this new 5x5 product, it's a HELOC and there's no lock associated with it. So instead, when you look at our lock guidance, that volume is not represented there. It is represented in our funded volume. And so you'll see where our lock volume came down is because all that volume is showing up in funded volume. It's a very quick turn time on that. So the time from app to fund is very quick. But there is no lock associated with it. Mihir Bhatia: So, there's no major change quarter-over-quarter in the base mortgage business. The changes are happening in the home equity business. Is that the right understanding? David Hayes: Correct. We view... Mihir Bhatia: The changes are happening... David Hayes: To be clear, it's the product mix shift between a higher percentage of -- an expectation of higher percentage of HELOCs versus First Trustees. Anthony Hsieh: Yes. And this is Anthony Hsieh. I just want to chime in and add my two cents to what David described. It's not only a difference in how we measure revenue because the HELOC loan is not locked. However, the bigger difference is that a locked loan, the normal cycle is around 25 days to 33 days until you recognize the funding of that loan. Our 5x5 product is funding in 5 to 7 calendar days. So, it's a very fast process because it utilizes technology to fund loans and process loans. So ultimately, it's going to drive down our cost to produce, but it does change the pull-through as you look at it from the traditional way because we're not publishing the origination on these HELOC 5x5 loans. Mihir Bhatia: Got it. Sorry, can I squeeze one more in just on the recapture rate and refinance volume? Obviously, a pretty volatile quarter from interest rates. Wondering what you saw happen, -- was there differences between what recapture rate and competitive intensity look like in Jan, February versus maybe March, April? Any comments just quarter-to-date also on that? Anthony Hsieh: I didn't understand that question. I'm sorry. Mihir Bhatia: Sorry. I was just wondering if there was any differences? Yes, just intra-quarter dynamics between both recapture rate -- between competitive intensity and recaptures just given the movement in interest rates. David Hayes: No, we didn't see anything really different in recapture behavior and performance. Operator: Our next question comes from Mikhail Goberman with Citizens JMP. Mikhail Goberman: If I could get some color on how you guys see the mix between origination income and servicing fee income going forward? And also separately, to what extent do you guys think or not that a substantial decline in mortgage interest rates is needed to get a sort of a run rate of earnings that starts to trend in the right direction? Anthony Hsieh: So, I'll take the second question and perhaps, David, you can take the first question, the blend between servicing income and origination income. So it's been a solid 3 quarters since we have redirected and started to rebuild the organization. And of course, if yield was at 4.0% today on the 10-year, the environment here would be substantially different. However, understanding that we're at 4.4% to 4.5%, we are still quite bullish based on all of the hard work that we have done. We have shown tremendous progress in market share, top line revenue growth and more meaningfully is our efficiency and marketing. As we drive top of the funnel leads, our ability to convert mid-funnel and conversion to originations, that has changed in a meaningful way over the last 3 quarters. So as long as we continue and we have every reason to believe that we will continue to drive that positive momentum, and that really is the roots of this organization. And that is producing lead flow at the top of the funnel and converting it in a best-in-class within the industry for us to scale and have profitable market share growth. That's exactly what we did from 2010 to 2022. So, we are resuming a playbook that has worked for decades. It just is going to take some time in order for us to build all the mechanics, the tools, the measuring, monitoring as well as personnel management, and we're well on our way in doing that. David Hayes: Yes. And I'll just add from sort of the mix question around servicing revenue relative to mortgage revenue. I would say, obviously, the servicing revenue will be a function of rates and run-off. But generally speaking, I would expect that to grow quarter-over-quarter by a couple of percentage points. We really think that the opportunity lies on the mortgage revenue side. We're heavily investing in loan officer additions across both the direct and retail side of the house. And by virtue of that, we think that we should be able to grow mortgage revenue quarter-to-quarter from where we sit today, coupled with sort of the seasonality of the business for second and third quarters. Mikhail Goberman: Great. Fantastic color. If I could just squeeze in one more as well. Just curious about the liability side of your balance sheet, your thoughts on addressing upcoming debt maturities. David Hayes: Sure. Yes, popular question. That is something that the management team and the Board is very actively engaged in and with the discussions with bankers. So, we are looking at strategies to address that in a pretty comprehensive way. The markets are quite turbulent as you well know, right now. And so we are trying to be very thoughtful about how we approach that, but we were hoping to have a resolution on that in the coming months. Operator: There are no further questions at this time. Anthony Hsieh, I turn the call back over to you. Anthony Hsieh: Thank you. On behalf of Dave, Jeff, Dom and the rest of our team, I want to thank you for joining us today. The pieces are in place. We are executing on our strategy to compete at the highest levels by returning to our core strength. Our strategy rests on 4 objectives: one, investing in the business through growth, operational efficiency and infrastructure; two, becoming a best-in-class mortgage banker or in other words, find another loan, close it faster, produce it cheaper and maintain superior loan quality. Three, growing profitable market share by hiring and training sales professionals in each of our channels and by increasing our channel and distribution capabilities. We plan to grow our origination capacity to capture profitable market share growth across refinance, resale and new home loans. And finally, four, returning to profitability by investing in our origination and new customer acquisition capabilities, growing our servicing portfolio, improving our recapture rates, growing our brand and marketing and increasing our operating leverage. We believe we can return to consistent profitability. This is how we win. Executing these objectives positions us to create sustainable value for our shareholders while accelerating growth in a competitive landscape. So thanks again, everybody, and I appreciate your support. Operator? Operator: This concludes today's conference call. You may now disconnect.
Operator: Good afternoon. My name is Ludy, I will be your conference operator today. I would like to welcome everyone to Thinkific's First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on May 4, 2026. I would now like to turn the conference over to Joo-Hun Kim, Head of Investor Relations. Please go ahead. Joo-Hun Kim: Thank you, and good afternoon, everyone. Welcome to Thinkific's First Quarter Fiscal 2026 Financial Results Earnings Call. Joining me today are Greg Smith, CEO and Co-Founder of Thinkific; and Kevin Wilson, Interim CFO. After the prepared remarks, we will open up the call to questions. During the call today, we will discuss our business outlook and make forward-looking statements that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. These comments are based on our predictions and expectations as of today. We undertake no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our regulatory filings that were filed earlier today. Our commentary today will include adjusted financial measures, which are non-IFRS measures. They should be considered as a supplement to and not a substitute for IFRS measures. Reconciliations between the two can be found in our regulatory documents, which are available on our website. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify key trends affecting our business, formulate business plans and make similar strategic decisions. Such key performance indicators may be calculated in a manner different to similar key performance indicators used by other companies. I should also note, we have a slide deck that supports our remarks available to download on the webcast interface or on our website. And finally, all dollar amounts discussed today are in U.S. dollars, unless otherwise indicated. I will now turn the call over to Greg Smith, CEO and Co-Founder of Thinkific. Greg Smith: Thank you, Joo-Hun. Good evening, and thank you for joining us. I'm pleased to report we delivered a solid first quarter while continuing to execute on the transformation across Thinkific. I want to take a moment to welcome Leigh Ramsden, our new CFO, to Thinkific. Leigh will be joining us effective June 1, 2026. He brings great experience to the team, and I'm very much looking forward to working with Leigh on our leadership team. Kevin Wilson joining us on the call today has been serving as an exceptional interim CFO for us. I'm very grateful to Kevin and his team for the amazing work they've been doing. I also want to acknowledge that we're currently undergoing a couple of significant changes at Thinkific. The first is our shift upmarket. And as much as I remain confident in this choice and the eventual results it will bring, like most changes of this nature, the path to success is rarely a straight line. We're in the midst of that journey now. I continue to see an excellent opportunity for us to perform better having chosen this path. The rapid evolution of AI and its effects on our industry and SaaS are no less than the single greatest change we've experienced since inception. and probably in the history of technological advancements. While AI is a massive rising tide, it won't lift all boats. Some will sink. I am positioning Thinkific to be one of those that rises and potentially significantly so. We are all in on AI at Thinkific. Our entire team is now leveraging it in every role. From sales and support to go-to-market motions, I'm seeing teams adopt and evangelize the power of AI to help us go faster and deliver more value for our customers. Most importantly, in R&D, we're moving faster than ever. In this area, I have seen teams deliver in days what once took months to build. This opens a world of opportunities for value we can create for our customers and ultimately, revenue growth opportunities. But we are still in the midst of this change as well, and we still have work to do here. My specific intents for the use of AI focus around the accelerated achievement of actual outcomes, specifically prioritizing revenue growth, while EBITDA improvements are also an opportunity here. I've taken a personal role in driving this forward across the company with specific focus on R&D, where I think we can see the biggest gains. Evangelical AI adoption and use, combined with an intense focus on velocity are now absolute requirements at Thinkific. Similar to our shift upmarket, we are now in the midst of this change, and I hope to be generating improved results from both later this year. I see these two vectors of change as very complementary. I've spoken before about the need to accelerate our product road map to better serve our larger customers. AI empowers us to do exactly that. Additionally, as the AI era evolves, moving to larger customers positions Thinkific to capitalize on this evolution. Larger customers have both larger revenue opportunities and larger expense buckets. Both are areas that Thinkific can leverage AI to help them with making us inherently more valuable. I think there's fear out there about the effects of AI on software, and I'm very aware of this. At Thinkific, we are constantly asking ourselves what our moats are and what significant value we bring in a world where software is significantly easier to develop. We have identified some key areas where we'll be deepening these strengths, focusing on value we can provide that others cannot build on their own. I believe there's opportunity here for us not just to survive but ride the wave that AI is bringing to our industry to set ourselves up so that as each new model drops, we get exponentially better. Q1 marked the release of our new AI product, Thinker. As a reminder, Thinker is Thinkific's agentic product that allows any customer to create their own custom agents based on their own proprietary data and content and to deliver those agents to their customers. Thinker agents differentiate from others, and they are focused on teaching and learning. They specialize in specific topics offered by our customers, and they're customizable and are highly reliable and accurate. This accuracy is increasingly important, both to our larger customers and as learners come to expect accuracy from their agents. Unlike generalized models, Thinkific agents are trained on our customers' data and further refined by Thinkific's own large data sets. Customer feedback has been very positive, reinforcing our conviction in the direction we're taking. While the benefits of Thinker are clear, its adoption raises new considerations for our customers. Pricing is primarily outcome-based and as AI consumption scales, so do associated costs. While this means initial usage is muted, it also represents one opportunity for us to scale alongside the wave of AI advancements. We are working with our customers to design the right commercial models to ensure that token billing ties directly to financial outcomes of revenue or cost savings in order to ensure customers are happy to scale their Thinker usage to any level. Thinker is also just one product area where we're leveraging AI. There are a number of others. We continue to make steady progress in executing against our new ideal customer profiles. We continue to see larger customers at the top of the funnel and improve our ability to close those larger names that have significant expansion potential in the future. One example from Q1 is a large online real estate marketplace that selected Thinkific to support continuous learning for its broker network while maintaining a strong sense of community. The initial rollout will focus on a subset of brokers with significant room to expand over time given that their broader community is orders of magnitude larger. Notably, this opportunity came to us through word of mouth within the real estate ecosystem. Word-of-mouth referrals like this represent a strong signal for the strength of our offering. In Q1, at a customer's request, we advanced our work to ensure Thinkific aligns with HIPAA requirements. This work landed us a new and rapidly expanding customer, and it also strengthens our ability to expand in health care and adjacent segments where trust, privacy and reliability are essential. As I shared at the start, we're in the midst of two critical changes, our upmarket focus and the opportunities that AI represents. What excites me is the urgency I see in the team. We've accelerated our execution and will continue to do so. This energy and mindset shift, combined with the powerful AI tools we're leveraging present real opportunity for growth. I'm confident that Thinkific has the ability to not only capitalize on these changes, but set ourselves up to be competitive in the AI era. With that, I'll turn the call over to Kevin to walk through the financials. Kevin Wilson: Thanks, Greg, and good afternoon, everyone. Our financial performance for Q1 '26 was in line with our guided range. Our Plus segment contributed -- continued to deliver double-digit growth and commerce revenue passed over the $3.5 million mark for the first time. Adjusted EBITDA came in just ahead of the midpoint of our guided range. Overall, while we are impatient for our efforts to be reflected in stronger top line growth, we are pleased by the way Thinkific is managing through this period of strategic change and are excited by the potential of AI to create meaningful advantages for us and our customers over the coming quarters. For the first quarter of fiscal '26, revenue totaled $18.7 million, a 5% increase year-over-year. The largest driver of growth is our Plus segment, where we are seeing strong upmarket interest along with improved traction on upgrades and retention. Plus grew 12%, totaling $5.1 million for the quarter. Crossing the $5 million mark for the first time is an important milestone as we work to shift the bulk of our revenue to this larger and more durable segment. As expected, our self-serve segment continued to slow with growth coming in at 2% -- the continued slowdown of self-service is both a product of our own shift in marketing investment, along with the inherent challenges at the low end of the segment. This slowdown reaffirms we are making the right strategic decision to focus on larger and more established customers. As much of our commerce revenue is tied to self-service customer base, we are also seeing a corresponding slowdown on that front. That being said, total revenue earned from our commerce portfolio crossed the $3.5 million mark for the first time. Our depth in commerce is a key differentiator for us in the Plus space and allows us to attract a broader array of customers compared to others in our field. Gross margin was 72%, down 2 points year-over-year, but consistent with the prior quarter. The year-over-year decline was primarily driven by a shift in revenue mix, reflecting stronger growth in commerce revenue relative to total subscription. ARPU was $175, up 4% year-over-year and flat sequentially compared to the prior quarter. Subscription growth was subdued as we continue to execute on our strategic pivot upmarket. This reflects a deliberate reduction in customer acquisition spending in our traditional lower-tier creator segment, while we continue to make progress upscaling our sales team to sell larger and more complicated deals. These factors resulted in a total ARR of $61.3 million, up 2% year-over-year and up $300,000 sequentially. Commerce revenue growth was primarily driven by increased penetration of our commerce solution into our customer base as measured by GPV as a percentage of GMV, which rose to 64% from 56% a year ago. As noted in prior earnings calls, at the current levels and with our existing feature set, we believe penetration rates are approaching a plateau around the mid- to high 60% range and is expected to remain relatively stable in the near term. Take rate of 4.3% was down from 4.5% in Q1 of last year, but consistent with the prior quarter and within our anticipated range. Note that take rate will fluctuate depending on the types of commerce features being used by our customers in any given quarter. GPV of $75.7 million was up 16% year-over-year and 3% sequentially. The year-over-year growth in GPV is due primarily due to the increased penetration of our commerce solution. GMV of $117.5 million was up 1% year-over-year and largely flat sequentially. Turning to operating expenses. Total OpEx was $15.3 million, up approximately $2 million both sequentially and year-over-year. As we discussed last quarter, the increase was driven largely by a surge in AI-related investments, coupled with an increase in the depth and talent of our R&D team. As a result, R&D expenses increased to $7.1 million, up from $4.9 million in the prior year and $5.8 million in the prior quarter. We also incurred additional nonrecurring costs in G&A, primarily related to the CFO transition. Sales and marketing was flat sequentially and down almost $400,000 over last year as we continue to refine our go-to-market approach and find savings and efficiencies across the board. Adjusted EBITDA was a loss of approximately $500,000. This was driven primarily by the largely onetime investments in our engineering organization to accelerate the adoption of AI tools and workflows. These investments will drive productivity gains and support a faster pace of product innovation, allowing us to accelerate our product road map. On the balance sheet, cash and cash equivalents as of March 31 were $49.4 million, down from $50.7 million in Q4 of last year. The decrease of $1.3 million was primarily a result of the usage of $152,000 in cash flow from ops, $900,000 in cash used in the NCIB and tax remittances of approximately $115,000. I'll end with a few comments on guidance. Q2 2026, we're expecting revenue of $18.2 million to $18.5 million, representing approximately 1% year-over-year growth at the midpoint. Our revenue range represents continued stable gains in Plus subscriptions, offset by anticipated seasonal slowdown in commerce revenue. From an EBITDA standpoint, we expect similar results to Q1 with a range of minus 2% to minus 5% of revenue. While Q1 included some onetime costs related to AI investments, Q2 includes a company-wide gathering along with costs related to our CPTO transition. In closing, between shifting towards being an AI-centric organization and our transition to serve more upmarket customers, the next 12 months are going to be pivotal for Thinkific. We are not being patient and are pushing the pace of change faster every day. On a personal note, I'd like to welcome Leigh to the finance team and the broader Thinkific community. As Greg mentioned, Leigh will be a great asset to the team, and we are pleased to have him here with us. With that, we can open the floor to questions. Operator: [Operator Instructions] With that, your first question comes from the line of Stephen Machielsen with BMO Capital Markets. Stephen Machielsen: So Greg, it wasn't lost on us that you're stepping into more of a product role. Is that going to be a full-time thing? And I guess, if so, like what sort of developments or specific things do you want to see that just weren't being achieved with the previous leadership? Greg Smith: Yes, I appreciate the question, Stephen. So I don't intend to add more to the senior team here. So yes, this change is permanent for the at least foreseeable future. I do have a strong engineering leader and product leader in VP roles. And for a company of our size, it's pretty typical to have VP Product, VP Engineering and as well in some of the other -- in the other R&D design and data as well, have VPs reporting into me. So that's going to work for the foreseeable future, and this allows me to just get a lot closer to the R&D team. Part of it is just removing layers so that I can dive in and ensure we're on the right path here. Part of it is really the injection of more velocity. We're doing a really good job with AI adoption, but I think there's a huge step change I'd like to create here in terms of the process and decision-making and how we move forward at pace to really take advantage of it because AI can take us reasonably far, but there's a bunch more we can do culturally, I think, to accelerate the delivery of value for our customers. And then, yes, I'm looking at the whole road map. I think there's a lot of good in what we had planned and we're planning to do and a lot of value for customers coming and intend to complete the majority of that. There are some adjustments I'm making in part to -- between the acceleration of output and some of the adjustments to the road map, I anticipate making more room for more AI-specific value that we can deliver to customers, which the intent there, obviously, is to drive some cost savings for customers and some revenue driving for Thinkific as well. Stephen Machielsen: Very good to hear. Second question, just based on some simple ARPU math, it looks like the customer count has actually been holding up quarter-over-quarter, which is not really what we would have expected given the -- like the higher priority given to the Plus customers. I wonder if you can speak to any of the dynamics going on there? Like are you just adding more self-service customers than you expected? Or is churn lower than you expected? Any color would be great. Greg Smith: Yes. I think we've seen -- certainly, when we initially made some of those changes around the go-to-market and reducing the spend, as Kevin highlighted on the prepared remarks around the creator and bottom end of the market, we were surprised by how we did continue to add a number of customers there. I wouldn't say we're sort of through this whole journey yet. So we may still see some fluctuations there. And you're right, as we move to larger customers, it may be that the customer count comes down and we see -- but we see larger dollar value customers. And to some extent, we are seeing sort of a shift. To date, it's remained, as you said, relatively stable with not a lot of change where we're kind of shedding some of the old, bringing in the new at higher price points. Over time, we may see that number come down, though. But moving to the right type of customers. Operator: And your next question comes from the line of Gavin Fairweather with ATB Cormark. Gavin Fairweather: Maybe just to build off that last discussion, just on the Q2 guidance, it does look like there's a modest kind of top line decline sequentially. I know you talked about a bit of seasonality around commerce. But have you seen any kind of change in self-serve retention or anything on that front in the current quarter that would maybe speak to that decline? Greg Smith: I think that is more, as we said, on the commerce related. And then we're being -- we are quite optimistic here about what we can create with AI to start to unlock this, but Q2 is still in the midst of this transition and really specifically unlocking more with AI. So my hope is that we can do significantly better than this in the future, but being cautious on what we put out there in the near term. Kevin Wilson: Just to add to Greg's point. So on commerce going from Q1 to Q2, we've got obviously inherent seasonality, but the other thing that comes with the self-serve customer base, which is the majority of our commerce revenue, we get a fair bit of volatility quarter-to-quarter. And just what we're seeing thus far in the quarter leads us to be a little bit more cautious to Greg's point on Q2 as it stands right now. Gavin Fairweather: Understood. That's helpful. And then just on R&D costs, hoping you can help us out a little bit. So there are $6.6 million in Q1, $4.5 million year-over-year, $5.2 million in Q3. Kind of hard from the outside looking in to quantify how much of that was tied to the third-party kind of surge and consultants coming in versus maybe token usage and kind of driving AI into the organization. Maybe you can just help us understand what a future baseline might look like and how we should think about the timing to getting back to that baseline? Greg Smith: Yes. Maybe I can give some color and then, Kevin, you can talk more -- a little bit of baseline, and then we may make some adjustments from there as well. So the majority of that was the more onetime in Q1 there. We do have on an OpEx generally some more onetime expenses in Q2 and that we are currently actually at the offsite for the whole team. But yes, so on the R&D front, it wasn't a huge acceleration of, say, token expenditures there. I do expect us to increase the amount of token usage going forward, but a lot of that was more onetime in Q1 there. Gavin Fairweather: Appreciate it. And then just lastly for me, just on Plus, can you kind of discuss any product milestones that are coming up over the course of kind of Q2 or later bit of 2026 that you think are really going to unlock some further growth for that business? Greg Smith: One of the bigger ones is what we have actually coming out next month in May is a whole new learner hub. And so this allows our customers to bring together their Thinker AI agents, their communities and their courses and other learning experiences into one more cohesive experience. It's going to look and feel a lot different than what others have on the market. A lot of learning experiences right now are a little bit homogenized. And so this breaks us apart and put something that certainly when we've been putting in front of customers for the last few months has gotten rave reviews. So I think it creates a lot of opportunity. It also is a re-architecting of the underlying code to allow us to move faster on top of it with AI. So that's a big one I'm excited about. There's a bunch of -- we've made some big recent improvements in our mobile app and our communities experience that have gotten good reviews from customers and is actually starting to move metrics in a positive way there. And then there's more on the front of specifically what we can do for larger customers that's coming that are just a laundry list of asks that they have, whether it's to close more deals or stay with us longer. And then the piece I'm looking to inject more into the road map is how we introduce additional product to drive up ARPU and revenue opportunity with those customers because I think there's a big opportunity to do that certainly with the use of agents. Operator: And the next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: A couple of questions. First one, keep extending some of the other questions, but the ARR growth implied in the guidance, if you could help me understand the moving parts there. I was trying to parse your comments and it sounds as though a lot of the decline, I guess, it's $3 million decline quarter-over-quarter at the midpoint thereabouts. Is that mostly driven by commerce that seems like that's a larger amount than would only be driven by commerce. And so how much of that would be Plus decline and how much would be self-serve decline? Can you just maybe lay out those pieces, that would be really helpful. Greg Smith: And just to be clear, you're talking ARR? Robert Young: Yes. So I'm talking about revenue, but I'm just simplifying towards, ARR. Greg Smith: I'm just trying to understand -- so first question would be ARR looks like it's going to decline in Q2 overall. And so the decline in the revenue guidance suggests that it would be larger than just a decline in commerce. I think that's what you said earlier on in the call. Is that correct? Or is the self-serve or Plus declining would ARR from those pieces decline? Does that make sense? Kevin Wilson: Yes. I can jump in there. So the seasonality that you're seeing in the change from Q1 to Q2 this year is a little bit different from Q1 to Q2 last year. So Q2 last year, Q3 last year, we had a few customers in commerce having outsized success. As I mentioned, volatility in self-serve means that sometimes customers come on, have outsized success and then retire from the business, change their business model, change something in their business that doesn't show up in the same way. And that's, to some extent, what we're seeing this year going from Q1 to Q2. So the vast majority of the decline from Q1 to Q2 is commerce, and that is larger than what we saw last year simply because last year, we had some customers having outsized success that we're not necessarily expecting to repeat this year. ARR should be in line with trends for Q2. Robert Young: Okay. So that would mean that the incremental or the added ARR in Q2 from both Plus and self-serve would be positive? Kevin Wilson: Yes. I'd say in line with trend, which has been... Robert Young: Yes. Understood. Okay. Okay. My next question would be around the token usage that you mentioned. We're trying to understand where that shows up, the cost shows up in the income statement. Does it fall into gross margins? Because I think you said that gross margin is going higher due to mix. Could you dig into that just a little bit? Kevin Wilson: Yes. I don't think you [indiscernible] if you could identify where... Go ahead. Greg Smith: Kevin can confirm if I'm wrong here, but I don't think you would see a significant impact from token usage in Q1. Q2 going forward, we'll see more. But although we have been using tokage, it's not a huge line item at this point. We are doing a pretty good job of both leveraging the best of the models and the best models to managing the spend there as well. And then where you would see that, Kevin, I'm not actually sure, is that primarily R&D or we split it entirely across OpEx based on team usage? Kevin Wilson: It's based off team usage, but obviously, the majority of it we currently expect in R&D, but I think we're learning as we go in terms of how the usage is going to differ from team to team. Robert Young: Okay. And then what elements of the pricing model are consumption based? Is it just Thinker at this point? And are you thinking that, that might expand over time? Kevin Wilson: It is Thinker, and I do think we could expand that as well. So we do have some usage-based pricing, but not on a token-by-token basis. And then with Thinker, we do, which is -- the product itself is getting really positive response from customers, very excited about using it. And we're just in the process of adjusting the pricing and the controls that customers have on the pricing, so they have some ability to either moderate what they spend on it over time or ideally pass that cost on to the end user so that they're not as at all gun-shy about turning it on to full board because most of our customers we're talking are really excited to roll it out and expand it as broadly as they can, but they want to have some confidence about an ROI, and that's something we can give them if we allow them to flow through the cost to the final user. Robert Young: Okay. The gross margin expansion due to mix, I think what is the driver of that? Is that a shift towards plus with less commerce contribution or some other driver? Kevin Wilson: Gross margin, I'll just confirm here, I think, is usually, that is a shift in mix between subscription revenue and commerce revenue. And I believe that was the case here as well, which meant a slightly lower gross margin, less than 1% lower, but a slightly lower gross margin based on that mix, if I've got that right. Greg Smith: Yes. Robert Young: Okay. So nothing to do with pricing or anything else like that. And then... Kevin Wilson: No. Robert Young: Last question for me, and then I'll pass the line. Maybe just give us a sense of the drivers behind the Plus deceleration. I know the target a few quarters ago was 30% growth, and now it's somewhere around 12%, I think it's 12%. Like what are the headwinds there given all of the effort to sort of push that piece of the business? Is it just a retooling that's also impacting the Plus growth? Or are you still aiming for 30% and think that's possible in the short run? And I'll pass the line. Greg Smith: Yes. So this -- I think this is -- I've talked about it a bit on this call and a bit on the last call, and it really kind of comes down to we've entered a new market with a different ideal customer profile. We had many of these customers before, but now that we're going heavy into it, we have realized there's some product gaps to fill. And so we're in the process of doing that with AI. I think we can fill them pretty quickly. That's largely what the road map currently is for this year is closing those gaps so that we're more competitive in that space with the larger customers while opening some new revenue opportunities. But largely, it's things we need to do to amp up the product. I've seen some really good success on our CSM account management team, support teams working with customers to do more there as well as launch and onboarding. So we're actually seeing some gains on the operations and more hands-on work that we're doing with these customers to win more deals, get them up and running, see them through success and keep them longer. The last gap we really need to fill there is on the R&D side. Operator: And the next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: I had a longer-term question, Greg. I'm just wondering if you could frame out whether it's 1-year, 3-year, 5-year, what does success look like in a transition model for Thinkific? What's the ideal customer look like? How are they using the products that you can imagine? Can you just talk us through what that may look like or what you think it could look like at this point in time? Greg Smith: Definitely, yes. And so as we look forward and we see through these transitions, good looks like to me that it is not exclusively Plus. I think that's sort of one misconception out there. Plus is a huge part of it because it's a higher price point, but I see self-serve and Plus as plans, not customers. And so there's still an opportunity of bringing in people at the self-serve price point, and we see this consistently and then moving their way through price points and many of them making their way to Plus. The ideal customer for us is generally has a team. If they're coming in at a low price point, maybe five people or more, if they're coming in at the higher price points, often 25 and up and sometimes in the thousands. They are delivering training to their customers. and often as a revenue stream for them, which can be a real differentiator because that's something that we do extremely well. And so it's really focusing on them and making sure we're meeting their needs. So it's businesses that have teams that are delivering training to customers and ideally doing it, at least in part as a revenue stream, and that sets us up well to set ourselves apart. And then how we help them is there's -- over the next few years, there's a lot we can do on the Agentic side to just roll out agents to both help with their actual OpEx while creating revenue opportunities for us. So things that may cost them currently hundreds of thousands or millions that with the tooling we have could potentially do it for significantly less for them. Thomas Ingham: Okay. And have you thought through your pricing model with, I guess, a group of agents that you're offering to your customers versus a subscription model? Greg Smith: Yes. And so Thinker being the first step in that where it is more usage and outcome-based. What's really outcome-based is what we're trying to move towards is so that as they're getting outcomes through the use of agents that it's more pay based on outcome and success. And I think that's -- it's an obvious trend in software and one we see a lot of opportunity. And if we can do more to provide better outcomes for customers that either have a revenue-driving outcome, a customer-facing outcome or in many cases, an OpEx outcome for them, there's a lot -- they're a lot more amenable to the outcome or usage-based pricing. And so I think you'll see us and more and more software move in that direction. Thomas Ingham: And then sort of last thing for me. You say you're first mover from your group of peers. But are you seeing Agentic-based competitors show up already? And if so, who are they? And what types of products are they already demoing to the market? Kevin Wilson: Yes. I mean I wouldn't name -- I don't want to throw a bunch of competitors on the call, but I would say that I do -- I think every software company out there is looking at this. And if they're not, they're already dinosaurs is we do need to be looking at agentic solutions. And so it's a huge part of the stack now that I think any software company needs to be incorporating. And so I do see it all over the place. We were pretty quick to market with Thinker with the specific functionality that it has, and I think it's still something that it can stand out on. But I think there's a lot more we can do in terms of custom agents for customers or customizable agents for customers that go well beyond what Thinker is doing today. And I think you're going to continue to see this from most of our competitors that they are offering more agentic solutions for sure. Operator: And I'm showing no further questions at this time. I would like to turn it back to Greg Smith for closing remarks. Greg Smith: Thank you all. I appreciate the wonderful questions and insight and time you take to spend with our company. As I highlighted on the call, I think we're in the midst of a couple of exciting changes where I see a lot of opportunity. And in particular, with the use of AI rolling out to the customers that we're best suited to serve, I think there's -- I'm very optimistic here that we can move a lot faster and deliver a lot more value and create more value for all of you as shareholders, us as Thinkific and of course, for our customers, which is the base of it all. Thank you. Operator: Thank you, presenters. And ladies and gentlemen, this now concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Afternoon. My name is Trevor, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Corporation 2026 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would like to hand the conference over to your host today, Chad Bennett, senior vice president of investor relations and corporate development. You may begin your conference, sir. Good afternoon, and welcome to Teradata Corporation's first quarter 2026 earnings call. Chad Bennett: Steve McMillan, Teradata Corporation's President and Chief Executive Officer, will lead our call today, followed by John Ederer, Teradata Corporation's Chief Financial Officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings. Please note that Teradata Corporation intends to file the Form 10-Q for the quarter ended March 31, 2026 within the next few days. These forward-looking statements are made as of today and we undertake no duty or obligation to update them. On today's call, we will be discussing certain non-GAAP financial measures which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, adjusted free cash flow, and constant currency comparisons. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website. And now, I will turn the call over to Steve. Steve McMillan: Thanks, Chad, and thanks to everyone for joining us today. I am very pleased to report that Teradata Corporation is off to a strong start in 2026. With solid execution globally and our pivot to AI-led value, we outperformed against expectations in a number of key metrics. Recurring revenue grew 12% as reported year-over-year. Total revenue grew 6% as reported year-over-year. And non-GAAP earnings per share was $0.88, an increase of over 30% versus Q1 2025. We continued to see solid retention in the quarter, and customer interest in our hybrid capabilities drove a healthy growth rate in both total ARR and cloud ARR. We see that security-driven demand for sovereign AI is accelerating. For example, financial services and health care customers are increasingly concerned about shared infrastructure for AI workloads, and this is driving traction with our AI Factory offer. The most demanding regulatory workloads in the world run on Teradata Corporation. These are workloads that are least susceptible to disruption. The trend we see is AI moving closer to the data, not data moving to AI, and that plays directly to our architecture. Every organization is grappling with the same challenge: putting AI to work for them and becoming truly autonomous enterprises. One thing is clear. To win with AI, organizations need to operate at speed and scale that was once unattainable. This is a core competence of Teradata Corporation. Our customers have governed data estates with years or even decades of data in their Teradata Corporation environment, including codified industry knowledge, entity models, and business rules specific to financial services, health care, telecommunications, and beyond. This is their institutional memory. The analytics and reporting workflows built on top of that data have been refined over decades. The value of those workflows vastly exceeds the cost of the platform. AI multiplies the value of that institutional knowledge, and our platform is designed to execute at the speed AI requires. Our product organization is relentlessly focused on providing the strongest execution engine—reliable, high performance, and always on. Agents never sleep, and mission-critical automation requires a platform that never slows down. In 2026, we are executing against an aggressive product roadmap and are already taking new innovations to customers. We are seeing market interest in our MCP Server. It is an on-ramp to enterprise AI, providing semantic access to the enterprise data and context that can activate real business outcomes. It eliminates friction through a natural language interface that leverages AI agents. Together, the MCP Server and our agentic framework are designed to enable querying, analysis, and management of data with full context. To address the challenge organizations face of moving from isolated pilots to production-grade agents, we are making it easy for customers to build, deploy, and manage AI agents with our Agent Stack announced earlier this year. This new comprehensive platform is designed to simplify the life cycle of enterprise AI agents. Our Teradata Corporation Agent Stack can help customers reduce the complexity of finding and integrating trusted data and applying enterprise knowledge and context. It can also aid in enforcing governance and maintaining compliance across hybrid environments. In March, we added new capabilities to our enterprise vector store. We added multimodal data spanning text, images, and audio from our partnership with Unstructured, and we added more agentic features powered by LangChain integration. These announcements demonstrate another significant evolution in our enterprise AI infrastructure, unifying structured and unstructured data within a single governed platform capable of supporting billions of vectors and thousands of concurrent queries from AI agents. In April, we announced the availability of our enterprise-grade Teradata Corporation Analyst Agent on Microsoft Marketplace. This brings AI-assisted conversational analytics directly into customers' existing Azure environments. We also recently participated in the Google Distributed Cloud Air Gap Center launch. Our platform runs natively on GDC, enabling organizations to operationalize Google's AI capabilities and our own analytics entirely within the air gap perimeter. No data leaves, no sovereignty is compromised. This capability is designed to be a real value for defense, intelligence, and public sector organizations that require air-gapped sovereign AI. One of our differentiating capabilities is helping customers leverage and get value out of their environments, and that is even more important as they work to get business value from their AI investment. Here is where our AI services shine. Our AI services momentum is growing as we see customers looking to take advantage of the depth of experience that our forward-deployed teams have gained from the successful early AI engagements we have executed. We recently issued a press release outlining how our AI services helped a sample of customers from the travel and transportation industry. Every enterprise has data, and that data is the basis of their institutional memory, yet few can turn that institutional memory into action compliantly across varied environments and efficiently at scale. Here, our expertise is driving successful engagements to help customers move from experimentation to production quickly. Third-party validation this quarter reinforces our leadership position. Nucleus Research ranked us as a leader in their 2026 Data Science and Machine Learning Platform Technology Value Matrix, ahead of platforms that have built their reputation on data science. Our hybrid capabilities are also getting noticed. Constellation Research named us to their 2026 ShortList for Hybrid and Multicloud Analytical Data Platforms. We were one of only three vendors selected from a field of more than three dozen, reflecting a breadth that competitors structurally cannot match. More broadly, ISG recognised us as Exemplary, their highest designation, across seven categories in their 2026 AI and Data Platforms Buyer’s Guides. That breadth reflects that we are meeting enterprises wherever they are in their AI journey. This recognition reflects something that takes decades to build: the trust of the world's largest enterprises running workloads that simply cannot fail. Now I will walk through a few examples of the outcomes we are already helping customers achieve. One of the largest pan-European banks renewed and expanded its Teradata Corporation relationship. The goal was to address business-critical workloads like financial reporting and regulatory data model convergence, underscoring Teradata Corporation's crucial role in the bank's operations. It also launched a customer journey transformation leveraging Teradata Corporation AI capabilities, including augmented agent work, enterprise LLM integration, and AI Studio. This positions Teradata Corporation as its emerging enterprise AI platform. The engagement reflects how large financial institutions increasingly rely on Teradata Corporation as a long-term strategic platform for both regulated analytics and AI. A leading global retailer based in EMEA—a win-back for us—selected our platform to replace its existing on-prem platform. After evaluating competitors, the customer concluded that Teradata Corporation delivered the best price-performance for its analytic workloads. This reflects the durability of our value proposition for mission-critical retail analytics at scale. A leading Latin American financial institution added our AI services to encompass its enterprise AI operations. The customer recognizes they will now get continuous oversight, governance transparency, and life cycle management of AI models and agentic applications in a regulated environment. The engagement positions Teradata Corporation as this bank's long-term operational partner across the full AI life cycle. A large government agency in India committed to Teradata Corporation as it enters a new phase of digital transformation. We help unify structured and unstructured data at massive scale to deliver real-time comprehensive profiles through its online portal. Our native object store capability was chosen to simultaneously bridge structured block storage and unstructured object storage at scale—a requirement no competing platform could meet. This example underscores our differentiated position in mission-critical, high-concurrency government analytics environments. Market data reinforces what we are seeing and hearing directly from customers. In a third-party research survey of 1 thousand senior technology and data leaders sponsored by Teradata Corporation, every single organization—100%—is actively pursuing AI; 17% have deployed it beyond pilots; and 99% have already had infrastructure scaling challenges in the attempt to move from pilot to production. The barriers are not abstract: performance at scale, cost predictability, always-on agent demands, running new workloads along with existing production systems, and deploying across cloud, on premises, and regulated environments. Enterprises are not facing one infrastructure problem; they are facing all of them, all at once. That gap between ambition and execution is something we believe we are uniquely positioned to solve. On Thursday, we will be announcing a significant and broad set of innovations that address these challenges, helping our customers move into the next phase of enterprise intelligence while bringing autonomous AI and knowledge to organizations globally. We invite you to join our livestream on May 7 at 10:30 AM Eastern time. You can join directly from our teradata.com website. We are confident that our new unified platform and integrated AI workspace will help enterprises rapidly move into production AI. We are quite excited about what is coming on Thursday and hope you can attend. As I pass the call to John, I will reinforce that we are very pleased with our Q1 results. Even with the current global uncertainties, our business model is robust, demand continues for our capabilities, and we see tremendous opportunity to create incremental value for our shareholders. We have sales momentum, customer interest, and an engaged partner ecosystem. And we have a great start to our product innovation pipeline and more coming very soon. We remain focused on driving execution, increasing our differentiation, and delivering products and services that lead customers to rapidly deploy agentic AI into production. Now, John, over to you. John Ederer: Thank you, Steve, and good afternoon, everyone. We were expecting Q1 to be a strong start to the year, and it proved to be even better than we anticipated, with total revenue, recurring revenue, and non-GAAP earnings per share all exceeding the top end of our guidance ranges for the quarter. Additionally, we got off to a fast start with strong free cash flow in the first quarter. The revenue upside was driven primarily by recurring revenue and, more specifically, the upfront portion of our on-premise subscription term license business, reflecting continued interest in our hybrid platform. Non-GAAP operating margin also improved significantly by more than 500 basis points year-over-year, driven by higher recurring revenue and a continued focus on operating leverage to deliver profitable growth. During Q1, Teradata Corporation entered into a settlement agreement with SAP. From the settlement, Teradata Corporation received a gross payment of $480 million in late March. After accounting for legal fees and other expenses related to the SAP litigation and resulting settlement, the pretax net amount was $359 million, which benefited both operations and free cash flow. On an after-tax net basis, this is expected to provide a $302 million benefit to free cash flow in FY 2026. The settlement also positively impacted GAAP diluted earnings per share by $2.90. Tax payments related to the settlement totaling $57 million are expected to be paid from Q2 through Q4 2026, with approximately half expected to be paid in Q2 and the remaining half expected to be split between Q3 and Q4. For the remainder of the year, we will also refer to adjusted free cash flow to provide a normalized free cash flow measure for the business. Adjusted free cash flow will reflect adjustments for the impact from the SAP settlement by excluding gross proceeds, legal and other expenses, and taxes specific to the settlement. In terms of our detailed financial results for the first quarter, total ARR grew 3% as reported and 2% in constant currency, while cloud ARR grew 13% as reported and 12% in constant currency. First quarter total revenue was $444 million, up 6% year-over-year as reported and 4% in constant currency, which was three points above the high end of our outlook due to higher recurring revenue. First quarter recurring revenue was $400 million, up 12% year-over-year as reported and 9% in constant currency, which was four points above the high end of our outlook. The outperformance was primarily due to higher upfront revenue from term license subscriptions, which contributed five points to the year-over-year growth rate. First quarter consulting services revenue was $43 million, down 14% year-over-year as reported and 15% in constant currency. Looking at profitability and cash flow, please note that I will be referencing non-GAAP numbers for expenses and margins, and a full reconciliation to GAAP results is provided in our press release. For the first quarter, total gross margin was 63.7%, which was up 340 basis points year-over-year, driven by a higher mix of recurring revenue and improvement in consulting gross margin. Recurring revenue gross margin was 70%, which was flat with Q1 last year, but up sequentially from Q4 FY 2025. The sequential improvement was driven by the incremental upfront recurring revenue, but we are also continuing to make progress improving our cloud gross margins. In Q2, we expect lower upfront revenue to be a headwind to our recurring gross margin. Consulting services gross margin was 4.7%. This was down from a recent high point in Q4 FY 2025, but it did improve by over 600 basis points on a year-over-year basis. Operating margin improved significantly on a year-over-year basis, coming in at 27.3% versus 21.8% in Q1 last year. The margin expansion was driven from recurring revenue outperformance and favorable gross margin benefit from upfront revenue. For 2026, we continue to anticipate approximately 100 basis points of operating margin expansion. Non-GAAP diluted earnings per share were $0.88, exceeding the top end of our outlook range by $0.09. The outperformance was largely driven by higher recurring revenue and total gross margin. We generated $390 million of free cash flow in the first quarter. This amount includes a $359 million benefit due to the pretax net proceeds from the SAP settlement. On an adjusted free cash flow basis, we generated $31 million. We now have $816 million of cash and cash equivalents at the end of Q1, up from $368 million in the prior-year period. This also returns the company to a positive net cash position of $269 million for the first time since Q4 FY 2021. Finally, we continue to return value to shareholders, repurchasing approximately $34 million, or about 1.2 million shares, in the first quarter. We continue to target using 50% of our adjusted free cash flow for share repurchases, which excludes the benefit from the SAP settlement. Before turning to our financial outlook, I would like to provide some additional context regarding the use of the net proceeds from the SAP settlement. We plan to strengthen our balance sheet by deleveraging. This will maximize our optionality to make future strategic investments in AI, as well as continuing our stock buyback program. On total ARR, we continue to expect our typical seasonality, with total ARR stabilizing in Q2 and expanding over the course of the year, showing modest sequential dollar growth from Q1 to Q2. For recurring revenue, we expect upfront recurring revenue and currency to be headwinds to the growth rate in Q2. We anticipate over a 10-point impact to the recurring revenue growth rate on a sequential basis from Q1 to Q2 due to upfront revenue. And based on the foreign exchange rates at the end of March, currency is anticipated to be approximately a three-point headwind to recurring revenue growth. Now turning to our annual outlook for 2026, we reaffirm our ranges for total ARR, total revenue, recurring revenue, and non-GAAP earnings per share. For the non-GAAP earnings per share range of $2.55 to $2.65, we anticipate being at the higher end of that range. For adjusted free cash flow, given the strength of Q1, we are increasing our outlook and now anticipate being in the range of $320 million to $340 million. And to reiterate, our adjusted free cash flow range excludes the after-tax benefit from the SAP settlement of $302 million. For 2026, recurring revenue is expected to be in the range of minus 2% to flat year-over-year, total revenue is expected to be in the range of minus 4% to minus 2% year-over-year, and non-GAAP diluted earnings per share is expected to be in the range of $2.53 to $2.57. In terms of some other modeling assumptions, for the second quarter, we expect the non-GAAP tax rate to be approximately 24% and the weighted average shares outstanding to be 96.3 million. Using the currency rates at the end of March 2026, we now expect minimal impact to the full-year revenue growth rate. Also, we now anticipate FY 2026 other expenses to be approximately $22 million. In summary, we were very pleased with the start of the year and believe that we are tracking well towards our full-year targets. We significantly improved our balance sheet and generated strong free cash flow, and we are continuing to pursue our profitable growth strategy by finding margin improvement opportunities across the business while at the same time preserving investments in R&D to support future growth. Thank you all very much for your time today. We will now open the call for questions. Operator: At this time, I would like to remind everyone that in order to ask a question, press star and then the number one on your telephone keypad. In the interest of giving everyone an opportunity, we appreciate if you would limit yourself to one question and one follow-up. Your first question comes from Radi Khalid Sultan with UBS. Your line is open. Radi Khalid Sultan: Awesome. Thanks so much. First for Steve, just now that the business is skewing more heavily towards expansions versus cloud migrations, can you walk through how you position the business, both product and go-to-market, to reflect that? And maybe just how do you expect that to impact overall sales productivity throughout 2026? Steve McMillan: Yeah. Thanks for the question. We are seeing really strong interest in terms of the AI that we launched last year and also the AI capabilities that we are going to talk a little bit more about at our product launch on Thursday this week on May 7. And that is certainly driving expansion for us. I think last year, we saw the trend in terms of a headlong rush to the cloud really starting to decline as an indicator in the market for us. What we have started to see is a real interest in expansion. We focused our sales force on total ARR growth, and they can get that growth from either on-prem or from the cloud. Our strength in a hybrid environment is a real differentiator for us and is providing a growth lever when we combine that with some of our AI capabilities and the ability to operate and execute AI workloads on-premise. And that is what really some of the examples in the prepared remarks were pointing to. As we execute against that, we see sales productivity continuing to improve as well, as the sales teams have more and more things to sell and an increased value proposition to take to our customers. Thanks for the question. Radi Khalid Sultan: Awesome. And maybe just a follow-up for John. I know it is early with AI services and the forward-deployed engineering practice. Just as you think about the P&L impact from both a top line and margin perspective, in both the near and long term from that growing services practice on the AI side, thank you. John Ederer: Yeah. Sure. No, thanks for the question. You know, in terms of the AI services and the P&L impact for 2026, I would say it is pretty minimal. This is a new offering for us and something that we are ramping up this year. Longer term, I could see it contributing more to the P&L, but still, ultimately, it is going to be a services component. It is going to be complementary to what we are trying to do on the software side. I would say that I see it as a critical connection point, though, and it helps us further develop our proofs of concept that we have been doing with customers, move them into production, and then ultimately drive AI-related ARR. Radi Khalid Sultan: Awesome. Thank you. Operator: Your next question comes from Yitchuin Wong with Citibank. Your line is open. Yitchuin Wong: Hi. Good evening. Thanks for taking the question. Great to hear the team navigate the quarter across a variety of crosswinds that we saw over the past couple of months. Historically, this kind of uncertainty elongated enterprise IT cycles, as we heard from a couple of the larger customers that reported last week. However, the enthusiasm that we are seeing with agentic AI and with your recent GA vector product, agentic, and tons of new AI product announcements with autonomous event Thursday—excited for that. Are you finding the strategic urgency to deploy AI capabilities is overriding the localized macro caution, and what are you seeing around those cost screens and on your deal cycle in the quarter? Steve McMillan: Yeah. Thanks for the question, YC. I think AI is in every strategic conversation that I and my team have with customers. And we can see that with some meaningful data points. If we look at our pipeline, we see a growing proportion of our pipeline today has AI attached to it. And so that reflects that every strategic conversation has that AI or analytics edge to it. Second thing is, as we look at customers, they are having a real challenge deploying AI in production, and they see the Teradata Corporation platform, along with the announcements we have already made and the roadmap that we are going to deliver, as a platform that can deliver AI into production for them. And then third, as John was just talking about, even though we are always going to be a technology company primarily, we do have a capability in our services organization, and the set of AI services that we have launched is enabling customers to move from those pilots into production. I am not going to pivot the company towards services. It will just be a part of enabling our technology value proposition in the marketplace, but we are certainly seeing that pivot. Everybody wants to get the business outcomes from AI, absolutely focused on doing that as quickly as possible. We intend to capitalize on that. Yitchuin Wong: That is good to hear. I have a follow-up for John. The quarter sounded like hybrid continued to be a bigger driver, especially with sovereign AI—sets of things that could be driving higher demand for hardware—and we have a refresh cycle upcoming in 2H. I just want to touch on that. In Q4, we talked about you being able to stop the memory pricing impact given the long-dated contracts. Memory prices have continued to ramp significantly over the last few months. Could you walk us through any incremental impact that you are expecting, especially going into next year as well? Are you seeing customers respond to this memory crunch differently? Thank you. John Ederer: Yeah. Thanks for the question. I would say that this is definitely a dynamic that we are watching very closely and evaluating near daily, and it is becoming quite pervasive in the marketplace. I would say that for us, from a financial standpoint, it is probably more of an FY 2027 challenge and opportunity as opposed to FY 2026. We will talk a little bit more later this week about some of the new products that are coming out, including the hardware refresh. Those will become available this year, but we would really expect more financial impact to occur in FY 2027. Having said all that, from a pricing standpoint, that is the piece that we are looking at the closest. And the thing that we will focus on is to make sure that we protect ourselves from a margin standpoint as we go to market with that. Yitchuin Wong: Thank you. Look forward to seeing everyone out there. Thanks. Operator: Your next question comes from Erik Woodring with Morgan Stanley. Your line is open. Ralph Firaoli: Hi. This is Ralph Firaoli on behalf of Erik. Good evening, and thank you for taking my question. I just wanted to ask: Are we at the start of an improving recurring revenue gross margin trajectory, given you just posted 70% for the first time in a year and the strongest quarter-over-quarter recurring revenue gross margin improvement in years? Steve McMillan: Thanks for your question. I will start, and then I will hand over to John. Certainly, from an ARR perspective, we returned the company to ARR growth in 2025, and we set the expectation that we would continue and accelerate that percentage of ARR growth into 2026. We see a good path and opportunity for that to continue, based both on the expansions that we generate inside the customer base and the incredible interest that we have gotten using the platform for AI-type workloads. And then from an operating margin perspective, we have a number of initiatives in the business that we are looking at to improve operating margins as we continue forward. John. John Ederer: Yeah. Thanks for the question. So gross margins are a little complicated on the recurring side for us. You have got different dynamics at play with both the cloud side of our business as well as the on-prem. In Q1, we did see a nice spike up in gross margin at least relative to the last couple of quarters, at 70% for the recurring, and that was largely driven by the upfront revenue that we also saw in Q1. And so this was a factor of revenue recognition and ASC 606 and getting more upfront revenue related to the on-premise piece of the business. So that had a spike in margins for this quarter. As we look out over the remainder of the year, we would expect them to be a little bit more consistent with recent quarters that we saw in 2025. Now, underneath that, we are seeing improvement in our cloud gross margin, and that is a critical factor for us. I know we do not disclose that publicly, but we have been making good, steady progress on that, and we saw some nice improvement in Q1 on cloud gross margins as well. Ralph Firaoli: Great. Thanks. And if I could just ask a follow-up. Could you help us better understand demand and sales linearity in the quarter, and maybe how the Middle East conflict is impacting sales cycles versus what you are hearing at the micro level as it relates to demand for data prep, unstructured data, etc.? Just any sense of how these factors are impacting your business? Thank you. Steve McMillan: I think we are still seeing a very solid demand environment. The challenges in the Middle East have not substantially impacted our business at all, really. And the demand patterns that we are seeing really reinforce the value that organizations want to get out of the investment they are making. As I mentioned in the prepared remarks, the survey that we did showed that despite 100% of the customers that we spoke to in that survey wanting to deploy AI and get the benefit from AI, the vast majority—99%—are having their problem getting from pilot to production. So that really is altering the conversation that we are having with customers as they look at Teradata Corporation as a platform and a knowledge platform that can deliver the agentic AI workloads that they need. So that is resulting in an environment where we can deliver on the expansions that we need to deliver to make our outlooks and actually take advantage of the market opportunity that is in front of us. Ralph Firaoli: Great. Thank you. Very helpful. Operator: Your next question comes from Matthew George Hedberg with RBC Capital Markets. Your line is open. Matthew George Hedberg: Steve, as a follow-up to that earlier question, it really does seem like there is a lot of momentum in AI, and I think we will hear more about that later this week. The MCP Server interest is high. I guess I am curious: Is there a way for you to determine what the actual ARR benefit you are seeing is from these increases in AI workloads within your base? Steve McMillan: Yeah. I think what we are seeing is that helping those customers cross the chasm from pilot to production is certainly driving usage and capacity usage of the Teradata Corporation platform. One of the benefits that we have in terms of the Teradata Corporation platform is that agentic AI workloads with always-on agents are driving a tremendous volume of queries, driving a huge concurrency of queries, and complexity of queries into the respective data platforms. That is Teradata Corporation’s sweet spot in terms of how we execute and the technology that we have got. And I think we are seeing customers really take advantage of that, and there is a little bit of a shift from standard BI workloads towards more agentic-type workloads, but we also see the opportunity opening up to serve both in the cloud and on-premise those agentic workloads. And we see it as an opportunity for us to drive incremental ARR growth, especially with the new products that we will be announcing on Thursday of this week. Matthew George Hedberg: That is great. And then maybe for John, it was great to hear that retention was solid in the quarter. I guess I am curious, is there anything we should keep in mind regarding large renewals for the balance of this year? John Ederer: No. I do not think there is anything particular on that front. In general, we are seeing improved retention rates. We actually started to see that in fiscal 2025, and we are carrying that through here in 2026, and started off on a good note in Q1. So I think in general, we have done a nice job of getting closer to the customers, understanding that process better around key renewals, and making sure that we are in a good position to do that. Matthew George Hedberg: Got it. Thanks. Operator: Your next question comes from Raimo Lenschow with Barclays. Your line is open. Joe McMinn: Hi, this is Joe McMinn on for Raimo. Thanks for taking our question. During the prepared remarks, you talked about the strong start to the year. You definitely have some tailwinds—security-driven demand, accelerating sovereign AI. AI interest seems to be healthy, and I completely understand we are operating in a very dynamic environment, but could you help us understand the puts and takes and maybe any balancing factors that motivated you to maintain the full-year ARR guide? John Ederer: Well, I think that if you look at the total ARR number for Q1, on a reported basis, 3%, that is right in line with what we had guided for the full year of 2% to 4%. So I guess I view Q1 as being very consistent with our outlook for the year. And then in general, we are seeing decent demand across the product lines, and we are optimistic about some of the things that we will start to introduce later this week. Now, those will not have a material impact on FY 2026, but in general, we are seeing better demand. Joe McMinn: Understood. Congrats on a solid quarter. John Ederer: Thanks. Operator: Your next question comes from Patrick Walravens with Citizens. Your line is open. Patrick Walravens: Oh, great. Thank you very much. Could I start by asking—your comments about the trouble that clients have getting from pilot to production—can you drill down on that a little bit? Specifically, what gets in the way of moving to production? Steve McMillan: Yeah. Pat, I think it goes to the characteristics of the workload and the data platforms that organizations are using. I have used the term before that our competitors solve complexity with incremental compute. We solve complexity with great software. And that enables us to address some of these challenges that our customers are having in terms of spiraling compute costs for their data platform. They have regulatory challenges in terms of making sure that data is well governed. And across all of these different types of data problems, we have been solving them for customers for years, as they have built out some of the most comprehensive enterprise data warehouses, and then making sure that those solutions have the right context. And context is built on industry knowledge, industry data models, the codification of business rules, and we have helped customers and organizations span those challenges for years now. It is just another reinvention of that from an AI perspective to ensure that these AI agents have the right context to get the reliable answers in a production context to really solve business problems today. And that is what our whole new series of offerings and capabilities over the past few months, and including what we are planning to launch over the next couple of weeks, really brings together in terms of delivering that context to our customer organizations. Patrick Walravens: Okay. Great. And can I ask, Steve—or maybe John, I do not know who wants to pitch in on this—so other than the financial aspect of the SAP settlement, can you remind us what this whole thing was about? And is there any fundamental benefit in having resolved this dispute? Steve McMillan: Look, I think, Pat, it is always good to clear the deck from a legal perspective and make sure that we are looking forward and looking forward to what we are actually going to do strategically with that cash. It certainly is on the balance sheet now, and it gives us a lot of strategic optionality as we move forward in terms of how we deploy that. Certainly, it solidified the balance sheet, as John pointed to, but it gives us strategic options moving forward. And we certainly see it as a vehicle that is going to enable us to increase our return to shareholders as we move forward. So we are pretty excited about it and glad to put it behind us. Patrick Walravens: Okay. Thank you, guys. Operator: Your next question comes from TD Cowen. Your line is open. Analyst: Hi. This is Jared on for Derrick. Thanks for taking my questions. First, could you comment on domestic and international revenue in the quarter and maybe pick apart some of the drivers for each of those markets? John Ederer: Yeah. So in general, if I look back over the last few years, we have seen some differences in domestic versus international. And if you go back a couple of years, the impact of some of the churn was really more felt in the United States as opposed to the international markets. We have also seen some improving trends, even from a new logo standpoint, in some of the international markets. And so I think that that is one area where the hybrid story resonates even more so than perhaps in the United States. Analyst: Awesome. Appreciate that color. And off of that regulated industry commentary, can you just talk to some of the different trends you have been seeing in your regulated base versus nonregulated base? Steve McMillan: Yeah. I think—and it reflects as well in some of the workloads that we have been winning—certainly governments, financial services organizations, and health care organizations are highly regulated. We see that as a great competitive moat for us. We are uniquely differentiated to enable those organizations to run agentic AI workloads against that data, and they can do it in the cloud or they can do it from an on-premise perspective or in a hybrid environment. You know, more than 50% of our customers in the cloud also operate on-prem Teradata Corporation systems. So being able to span data across those environments, not move data into different types of solutions, has given those regulatory workloads some real benefit in terms of how they can leverage AI and agentic AI against those datasets. Analyst: Thanks for taking my questions. Operator: That concludes today’s Q&A session. I will now turn the call back over to Steve McMillan for his final remarks. Steve McMillan: Thank you very much, operator. Thanks for joining us today. We are really proud of our strong start to the year and the value we are creating for shareholders. We have the technology, the expertise, and a really strong partner ecosystem. And we believe we are bringing real differentiation to the market with our autonomous knowledge platform. We intend to keep that momentum up as we help organizations build for their edge future, moving decisively from AI ambition to sustained business impact. We look forward to updating you again next quarter. Operator: That concludes today’s conference call. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Westlake Corporation First Quarter 2026 Earnings Conference Call. As a reminder, ladies and gentlemen, this conference is being recorded today, May 5, 2026. I would like to turn over the call to today's host, Jeff Holy, Westlake's Vice President and Chief Accounting Officer. Sir, you may begin. Jeff Holy: Thank you, Crystal. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our first quarter 2026 results. I'm joined today by Albert Chao, our Executive Chairman; Jean-Marc Gilson, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During the call, we will refer to our 2 reporting segments: Performance and Essential Materials, which we refer to as PEM or Materials; and Housing and Infrastructure Products, which we refer to as HIP or Products. Today's conference call will begin with Jean-Marc, who will open with a few comments regarding Westlake's first quarter performance. Steve will then discuss our financial and operating results, after which Jean-Marc will add a few concluding comments, and we will open the call up to questions. During the first quarter of 2026, we agreed to pay $67 million to settle certain legal claims in our pipe and fittings business. We also incurred expenses of $18 million related to the shutdown of facilities undertaken last year. We refer to these expense items, which in aggregate were $85 million as the identified items in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call all exclude the financial impact of the identified items. As such, comments made on this call will be in regard to our underlying business results using non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to GAAP financial measures is provided in our earnings release, which is available in the Investor Relations section of our website. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10-K for the year ended December 31, 2025, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our first quarter results. This document is available in the Press Release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section on our website. A replay of today's call will be available beginning today, approximately 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, May 5, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com. Now I would like to turn the call over to Jean-Marc Hilson. Jean-Marc? Jean-Marc Gilson: Thank you, Jeff, and good morning, everyone. We appreciate you joining us to discuss our first quarter 2026 results. During the first quarter, we delivered $2.7 billion in net sales and EBITDA of $235 million by supporting our customers' supply needs, managing our costs, executing our 3-pillar profitability improvement plan and driving long-term value creation. While the first 2 months of the quarter saw PEM sales reflect lower sales prices and continued soft global industrial and manufacturing activity, Sales improved significantly in March as the conflict in the Middle East brought about a significant disruption to global supplies of oil, chemical feedstocks and polymers from the Persian gas. Commercial conditions for Westlake and our industry changed dramatically with the outbreak of the Middle East conflict. Industry consultants estimate that this conflict has disrupted approximately 10% to 15% of global polyethylene supply and approximately 5% of global PVC resin supply. Furthermore, up to 20% of global oil supply is disrupted, which has reduced the availability of chemical feedstocks such as NAFTA for much of the global chemical industry. creating further declines in the global supply of polyethylene and PVC. The associated sharp increase in global oil and chemical fixed stock prices has significantly steepened the global cost curve for many of the material that PAM cells, which is supporting higher selling prices and margins for cost-advantaged producers in North America, such as Westlake. In response to the reduction in global chemical and polymer production created by the Middle East conflict and significantly higher feedstock cost in much of Asia and Europe, customers around the world thought supply from producers and affected by the production disruptions caused by the conflict, which drove increased demand for our polyethylene, PVC and epoxy resin and increased prices for our products. Our advantaged asset footprint in North America using gas-based feedstocks positions Westlake to benefit from the pricing momentum and expected associated margin expansion since the contract began. The evolving situation in the Middle East drove a significant improvement in PEM sales volume and earnings towards the end of the first quarter. PEM delivered net sales of $1.7 billion and EBITDA of $36 million and 3% sequential volume growth, excluding the impact to volumes from our 2025 plant shutdowns. While the conflict in the Middle East remains fluid, and we hope for a peaceful resolution, we expect the supply disruptions could persist throughout 2026. Turning to our hip segment. Sales volume and EBITDA were impacted by the unusually cold weather conditions in the first 2 months of the quarter. However, performance improved in March as the homebuilding season began along with the onset of milder weather. Excluding the impact of the SCI acquisition, HIP delivered 10% sequential sales volume growth, which drove net sales of $1 billion and EBITDA of $186 million. Hip sales and EBITDA in the first quarter were driven by continued solid infrastructure-related growth and seasonally stronger residential housing demand. as compared to the fourth quarter of 2025. In addition to the intra quarter earnings improvement from supply disruption in the Middle East and weather normalization, our first quarter results benefited from our 3-pillar profitability improvement plan, including delivering approximately $150 million of EBITDA uplift from footprint optimization and cost savings actions. While we still have some work to do to get our plant reliability, all the way to where I would like it, I'm pleased with the progress that we have made to date and the trajectory of our reliability initiatives. Overall, we remain confident that our 3-pillar profitability improvement plan will deliver. the targeted $600 million EBITDA uplift in 2026. Before I turn the call over to Steve, I want to provide some thoughts on our CFO transition. As you may have read on April 20, we announced that on June 15, John Baksht will join Westlake Corporation and Westlake Partners LP as Senior Vice President and Chief Financial Officer. John brings experience from the oil and gas, packaging and building products industries as well as investment banking to Westlake, and we look forward to him joining the company. On June 15, Steve Bender will transition to the role of special adviser and will continue to report to me as it supports the transition. We anticipate that Steve will participate in the second quarter earnings call in August. And with that, I would now like to turn our call over to Steve to provide more detail on our financial results for the first quarter of 2026. Steve? M. Bender: Thank you. Thank you very much, Jean-Marc, and good morning, everyone. In the first quarter of 2026, Westlake reported sales of $2.7 billion and a net loss of $100 million or $0.77 per share. which compares to a net loss of $33 million in the first quarter of 2025. Before I discuss the details of our segment results, I want to provide some high-level thoughts on the quarter. The decisive actions we took last year to improve our profitability begin to meaningfully deliver results in the first quarter of 2026. Our footprint optimization actions significantly reduced PEMs fixed cost and returned our Epoxy business to profitability for the first time since 2023. As a reminder, prior to these actions, the Epoxy business was generating EBITDA losses of more than $100 million annually. In addition, we achieved substantial structural cost savings in the first quarter while also taking action to improve plant reliability. Taken together, our 3-pillared profitability improvement plan benefited first quarter earnings by approximately $150 million. That said, we did face several headwinds during the first quarter, most of which we view as transitory. Despite a favorable mix shift away from export volumes, our average PVC resin sales price declined sequentially from the fourth quarter of 2025 due to price resets that occurred late in 2025. In addition, North American natural gas prices spiked in January and remained elevated through February as a result of unusually cold weather across much of the United States, creating an approximately $45 million EBITDA headwind for PIM compared to the first quarter of 2025. That same weather also delayed the start of the homebuilding season contributing to a year-over-year sales volume decline in our hip business. Moving to the specifics of our segment performance. HIP did see the effect of solar start to a homebuilding season with net sales in our housing and Infrastructure Products segment of $1 billion, which were in line with the first quarter of 2025 as the January acquisition of ACI offset a 2% decline in average sales price and a 2% decline in sales volume, excluding the acquisition. Pipe and fittings continue to see strong sales volume driven by the infrastructure sector that was more than offset by declines in our exterior building products businesses and global compounds. HIP EBITDA of $186 million decreased $17 million from the first quarter of 2025 due to a slight decline in EBITDA margin largely due to lower average sales prices. When compared to the fourth quarter of 2025, HIP segment sales of $1 billion rose 10% by a 15% sequential increase in sales volume, including the ACI acquisition. that more than offset a 5% decrease in average sales prices. The sequential sales volume growth was driven by seasonal higher demand for exterior building products and solid growth in global compounds. Housing product sales of $788 million in the first quarter increased $21 million due to seasonal sales volume growth, particularly for Siding and Trim and roofing. Infrastructure products sales of $205 million in the first quarter of 2026, increased $71 million from the fourth quarter of 2025, primarily due to solid growth in global compounds, and the ACI acquisition. Moving to our PIMS segment. First quarter EBITDA of $36 million decreased by $9 million from the fourth quarter of 2025, largely as a result of a 34% higher natural gas price due to the impact of cold weather early in the quarter. Compared to the fourth quarter of 2025, PIM average sales price increased 3%, reflecting improved price realization for olefins, polyethylene, caustic soda toward the end of the quarter, while sales volumes increased 3%, excluding volumes associated with the 2025 plant shutdowns, while higher North American natural gas costs impacted the early months of the first quarter, by the end of March, natural gas prices declined to their lowest levels since 2024, where they remained during April. As a result, we don't expect the transitory impact to PIMS first quarter sales -- first quarter margins from higher natural gas prices to impact second quarter earnings. For the first quarter of 2026, our utilization of the FIFO method of accounting resulted in a favorable pretax impact of $37 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Now turning to the balance sheet and cash flow statements. We continue to maintain financial flexibility with a strong balance sheet as well as our long-standing commitment to a solid investment-grade credit rating. As of March 31, 2026, cash and investments were $2.5 billion and total debt was $5.6 billion with a staggered long-term fixed rate debt maturity schedule. In April, we provided a notice to call the remaining $500 million of debt in the second quarter of 2026 that otherwise was scheduled to mature later this year. For the first quarter of 2026, net cash used for operating activities of $94 million includes approximately $50 million of cash outlays associated with the footprint optimization actions that we announced in 2025. Our strong balance sheet provides us the financial flexibility to invest in growth initiatives such as ACI, and we have entered into a nonbinding letter of intent to acquire a PVC and VCM plant in Billman Germany. This facility, which is located on the North Sea Coast benefits from its advantageous logistical infrastructure. We remain focused on pursuing additional opportunities to strategically deploy our balance sheet in order to create long-term value. Now let me provide guidance for your models. Given the slower-than-expected start to the homebuilding season and the significant increases in transportation and raw material costs, particularly for PVC resin. We now expect 2026 revenue and EBITDA margin are HIP segment to be towards the lower end of our previously communicated range of $4.4 billion to $4.6 billion of revenue with EBITDA margin between 19% and 21%, excluding identified items. While we expect to pass these cost increases through the timing of changes in cost and sales prices could create a headwind in the near term. Expected 2026 total capital expenditures for the company are still expected to be $900 million, which is approximately $100 million lower than last year and in line with our annual depreciation. We continue to expect cash interest expense to be approximately $215 million. Now with that, I'll turn the call over to Jean-Marc to provide a current outlook for the business. Jean-Marc? Jean-Marc Gilson: Thank you, Steve. The impact of the conflict in the Middle East and global feedstock and energy cost serves as a powerful reminder of 1 of Westlake's foundational strength. Our globally advantaged feedstock and energy position in North America, where approximately 85% of our products are manufactured. The strategic value of our North American production capacity and globally advantaged cost position has arguably never been greater. In addition, the combination of investments, major turnarounds and restructuring actions that we made are now positioning us to benefit from more reliable production to capture the current upturn in PAM profitability and better serve our customers. While the commercial environment for PEM has improved significantly since our last earnings call in February, we remain laser-focused on achieving the full benefits from our profitability improvement plan. We are pleased with the progress that we have made to date, improving our profitability, but we recognize that we must remain disciplined with respect to cost in an increasingly inflationary environment. Turning to our outlook for sales volume and pricing. We have a constructive view on near-term trends. As I discussed earlier, global supply chain disruptions and elevated global energy prices are driving meaningful price increases for polyethylene, PVC resin and other products in our PEM segment. Concurrently, supply concerns are prompting global customers to source more material from North America in response to the conflict, which is supporting higher PAM sales volume and improved plant operating rates. Shifting to HIP, mortgage rates and increased building costs could place additional pressure on housing affordability. While it is too early to fully assess how this dynamic will impact HIPs building product sales volume, forward-looking indicators such as single-family housing permits and start add to the uncertainty. In this housing market, our Building Products business continues to benefit from a diversified product offering and broad national distribution. which provides builders with the products they need, when and where they need them. In Global compounds, we are pleased with the performance of the recently acquired ACI business. which has strengthened our position in the fast-growing high-voltage wire and cable market. This market is seeing significant demand growth driven by electric vehicles and data centers. Meanwhile, HIPs pipe and fittings business continues to deliver double-digit sales volume growth, supported by sustained strength in infrastructure spending. Beyond traditional municipal infrastructure demand, we are seeing increasing contribution to sales volume growth, driven by cooling what a need from the data center build-out underway across North America. We expect this trend to continue through the rest of the year as an offset to uncertainty in the North American new residential construction market. On the cost front, we are aggressively working to pass through the increases in costs being driven by Middle East supply disruption and elevated fuel prices. Longer term, continued infrastructure investment combined with over a decade of housing and the building continues to support a compelling growth outlook for HIP. Taken together, our outlook for the company's 2026 earnings has improved meaningfully since our last earnings call. While the conflict in the Middle East could result in global supply change disruptions extending to the end of the year or beyond, we will remain focused on controlling what we can control. including delivering the full $600 million of EBITDA uplift from our 3 pillar profitability improvement plan. And we will maintain our disciplined approach to capital allocation, while preserving our investment-grade rated balance sheet. Thank you very much for listening to our first quarter earnings call. I will now turn the call back over to Jeff. Jeff? Jeff Holy: Thank you, Jean-Marc. Before we begin taking questions, I'd like to remind listeners that our earnings presentation, which provides additional clarity into our results is available on our website. and that a replay of this teleconference will be available approximately 2 hours after the call has ended. We will now take questions. Operator: [Operator Instructions] Our first question comes from the line of Patrick Cunningham from Citi. Patrick Cunningham: Can you help us unpack a little bit more the PEM results down sequentially? You had material benefits from the profitability improvement plan, PE and caustic prices were up. I guess, first, can you help size the headwind from PVC price margin declines and whether or not there was anything else going on with operating reliability or any stranded costs from some of the closures? M. Bender: Yes. Patrick. And I would say that certainly, the price resets that we saw at the end of the year were certainly impactful across the product stream. And so I would say, and particularly, the increase that we've seen in PVC resin have not been fully catching up with some of the increases that we've seen in associated costs, especially, I would note the elevated natural gas cost that we saw in January and February. So while we've seen price increases in polyethylene epoxy and PVC, I would say certainly looking to continue to capture the value that we think that PVC represents and we certainly have not had the chance to fully recognize that throughout the entire quarter. But I would say that we've seen improved reliability and operability of the business. And so I'm improved. We're not to where we'd like to be at this stage, but we're making good progress as we move forward. Patrick Cunningham: Understood. And then just on the underlying outlook for the hip business, what are your expectations for pure price this year given some of the higher-priced PVC you're going to be pulling through -- have you gone out with additional pricing ahead of the construction season? And is any of that baked into your outlook? M. Bender: Yes. So good question. We have announced price increases to not only offset the increase in PVC resin, but also transportation costs. Certainly, fuel costs have also risen. So our price increases that we have already announced in the HIP segment have already reflected the cost that we expect to incur for PVC resin as it works its way through the manufacturing process and also to reflect elevated transportation costs driven by higher fuel prices. But nevertheless, that will take a little while, a few months, let's say, to work its way fully through each of the various material product streams. Operator: Our next question comes from the line of Bhavesh Lodaya from BMO. Bhavesh Lodaya: Just back to the PEM segment, you called out transitory impacts that happened in the first quarter. If you look at, again, the fourth quarter and the first quarter difference, there was a $150 million benefit which you saw from your actions, which did not show up -- would you say that transitory impacts are roughly equal to that $150 million. And in other words, is the base level of earnings for 2Q, is the starting point closer to, call it, like a $200 million level from which you will see additional benefits from margin improvements? M. Bender: Yes. So I guess what I would say is certainly recognizing with the elevated cost that we had in natural gas in the first quarter of a $45 million headwind was significant, but transitory. And I would say the price increase that we've seen in all of our products from be it polyethylene, PVC and Epoxy should have significant benefits as those have been announced in the first quarter, but the full effect of those really translate into real value in the second quarter. As I mentioned earlier, we've seen improved reliability as we've made progress on our 3-pillar strategy. the $150 million benefit that we achieved in the first quarter. Certainly, it was largely attributable to PEM, but not exclusively so. So we've made cost reductions, of course, that affect both segments of the business. Certainly, the optimization of our footprint certainly is directly attributable to the PEM segment. And certainly, some of the improvements we've seen in operability also are attributable to the PIM segment. But I would say we do see significant benefits accruing as a result of these price nominations and realizations that we expect in the second quarter. Bhavesh Lodaya: Got it. And then particularly on your PVC outlook, you have leveraged both from higher operating rates as well as pricing from PVC here. Could you share an outlook on these 2 metrics? How much could weights move higher in 2Q or 3Q? And what are your expectations for PVC pricing from here? M. Bender: Yes. As a result of some of the optimization actions that we took last year, we certainly have elevated the operating rates of our plants. Certainly, we had some planned maintenance at 1 of our units in the first quarter. But I would say operating rates throughout the first quarter were in the mid-80s, and we expect that as the construction season begins to start now with better weather, and I do expect that we'll see elevated demand levels for PVC and construction activities. that in the context of recognizing that housing starts have been somewhat lower than had been earlier forecast by the consultants. But we do expect that with the price initiatives that we've taken in PVC and the increase in construction and repair and modeling activities that we do expect to see improvements across only the core Vinyls chain but across the entire FM segment. Operator: Our next question comes from the line of Vincent Andrews from Morgan Stanley. Vincent Andrews: Wondering if you could just give us a little bit of direction on HIP for 2Q, just sounds like there's going to be a little bit of a lag between the higher PVC and so forth costs coming through versus your ability to price. So if you could just give us a sense on what that's going to do on the margin side. And then maybe also help us understand there was a mention about the season getting off to a slow start. So how did April go? And how does the order book look so far for the second quarter so that we can hopefully get our numbers in a good place for 2Q. M. Bender: Yes. So good question, Vincent. And I would say that the order book looks very good as we see the second quarter begin to start from a volumes perspective. But to your point, with the elevated PVC pricing we see coming through the channel and while we've announced price increases in our HIP segment to address those higher PVC resin prices as well as transportation costs, there could be a month or 2 lag between the realization of those price nominations that we've made in the market and the roll forward of PVC resin prices. So there could be some headwind in that second quarter as we see the price that we've announced in PVC in the first quarter worked their way through into the PIMS segment before they get full traction of their price announcements made in the first quarter, but them fully worked in, in the second quarter. Vincent Andrews: So is it fair to say then that we'll see the lowest margin in 2Q? And then by 4Q, you'll be high enough to get yourself back to the low end of the margin guidance for the full year. Is that the right way to think about it? M. Bender: I would say the fourth quarter seasonally is typically a slower season, but I would say that the front half of the second quarter will see the full impact of some of the lag in the back half of the second quarter, we'll see the benefit of some of the benefits of the price increase that the HIP segment have announced. I think we get the full benefit of all that in the third quarter, but the fourth quarter typically has a seasonal slowdown just because of the weather dynamics and is typically 1 of our lower margin and volume quarters. Operator: Our next question comes from the line of David Begleiter from Deutsche Bank. David Begleiter: Jean-Marc and Steve. Just on polyethylene, you got the $0.30 in April. What's your confidence level in getting some portion of all of the announced $0.20 per pound increase for me? Jean-Marc Gilson: Well, I'd say that, David, that we certainly have been able to achieve that $0.30, as you noted in April, and it's still early days in May. If you think back, the market has been able to absorb very, very significant price increases going back to the beginning of this year. And I would say it's still a little bit early days in May to call the May increase. But if you think about where the price levels are today relative to recent history going back to '21 or so, we're still below those price increases we had in 2021. And the market was able to absorb those prices in '21. So what we're looking for is to see where demand levels are. But I would say we're watching the market, but we're still pushing forward with price increases that we see that are reflective in the marketplace. David Begleiter: Very good. And just on PVC, are you increasing your export activity levels to take advantage of some of the spot opportunities we've seen in the marketplace? Jean-Marc Gilson: Yes, good question. The -- you are right. Price increase in PVC, I mean, we've seen a steady increase in PVC export prices. they kind of went to a peak a few weeks ago. They're now coming down a little bit, but still much higher than what they were last year. So you are correct. I mean we are with increased operational -- operating rates. And we are now increasing as much as we can PVC supply to take opportunities and to sell our volume in export markets where there is some good deal to be made. Operator: Our next question comes from the line of Frank Mitsch from Premium Research Eros. Frank Mitsch: Thanks Steve, let me offer you some early birthday wishes. And perhaps the second quarter starting out as a very nice birthday present for your last quarter as CFO. And again, thanks for all your help in that regard. I was wondering if you could offer some qualitative commentary with respect to the operating rates that you were able to realize in the PEM business in the first quarter and how your facilities are operating so far here in the second quarter? M. Bender: Yes. So Frank, thank you very much for those comments. I would say that in the polyethylene business, we're running full rates, as you would guess, demand levels seem to be very good. And even though we've seen significant price increases, operating rates are operating at full rates. In the PVC space, PVC rates are beginning to raise simply because we've optimize the operating rates having shuttered a number of sites last year and moved that production opportunity over to other existing sites. So operating rates in the PVC space were in the mid-80s. And I expect that to begin to kind of elevate as we work our way through into second quarter and third quarter, which is more peak wide construction season and some of our operating rates in our caustic and chlorine operations to support PVC. Frank Mitsch: Terrific. And as you think about higher pricing levels having an impact on working capital, what's your -- what are you working at capital expectations and impacts on free cash flow in 2026? M. Bender: Yes. Well, certainly, I do expect some of these higher prices, we'll see an increase in the receivables side. But when you recognize that gas and ethane remain very moderate and frankly, at pretty low levels. I do expect the second quarter to generate free cash flow as a result. Operator: Our next question comes from the line of Josh Spector from UBS. Joshua Spector: Two things I want to just clarify here is first, just on the cost savings points. I think the $150 million you're characterizing that as year-over-year -- can you talk about what that is sequentially? And does that build sequentially? Or are we at the full run rate today? M. Bender: Yes. That $150 million is a year-over-year result. And certainly, when we think about the contribution that we've seen, they're coming from all 3 of those respective pillars. So if you recall, we generated a significant amount of savings in the fourth quarter. So the $150 million full year result is well over $100 million above and beyond what we generated in the fourth quarter. Joshua Spector: Okay. But does that sequentially improve then into 2Q? Or are we just saying $150 million times 4, that's the $600 million that you're at -- and I did want to ask a follow-up just related with the pricing side on PVC. I mean, considering we're talking about pretty decent lags in pricing, I assume now in early May, you have a pretty good idea of the PVC price you're going to realize in 2Q. Can you give us some guidance about what that increase would be since there seems to be a pretty stark disconnect with some of the indexes that we're watching. M. Bender: Yes. Back to your earlier portion of your question on the cost savings initiatives in our 3 forward strategy, we do expect that we'll be able to achieve a relative portion over the course of the remaining 3 quarters of the year and fully achieve that $600 million savings. As it relates to the pricing initiatives, you're right, we announced a series of price increases, both in PVC as well as in polyethylene. And as I say, we expect that those will be very impactful in the second quarter. So in the first quarter, we achieved in PVC, a total of $0.01 in January, $0.02 in February, $0.03 in March. We've announced and achieved $0.05 in April, and we have $0.04 nominated out from May, still looking to achieve the full $0.10 that we had earlier nominated, $0.05 achieved in April and $0.04 right now, but looking with customers to achieve that full $0.10 that we announced earlier in the month of March for April and May. Operator: Our next question comes from the line of John Roberts from Mizuho. John Ezekiel Roberts: Are you seeing any shift in the destinations for U.S. export caustic and export vinyls? And do you think the pushback in pricing that you're seeing is some demand destruction going on? M. Bender: I'd say that what we've seen, John, is actually reasonably good demand levels for caustic just to remind you, we announced 2 price increases, 1 in December last year. 1 in January of this year, totaling $140 million -- $140. And so I'd say that to date, I'd say we've achieved the greater portion of that first announcement that we announced in December. And the indices that we track seem to indicate we'll get a greater -- a pretty good portion of that second price increase. So I'd say that demand continues to be reasonably good at this stage of the quarter. And as I say, demand fundamentally is stable. And I would say, ramping up. From a destination perspective, as you would imagine, logistics have been jocking around as a result of the conflict in the Gulf and many of our customers are being well served, but I can't speak specifically to all those individual customers. Operator: Our next question comes from the line of Kevin McCarthy from Vertical Research Partners. Kevin McCarthy: Can you elaborate on your letter of intent to acquire Vyova's vinyls plant in Germany? Maybe you could just talk a little bit about potential cost timing and the fit with your existing assets, including the legacy Vinnolit assets? M. Bender: Yes. Well, good question, Kevin. And we've entered into this nonbinding letter intent with the insolvency administrator in Germany, and we think it fits very well potentially. As I say, it's still nonbinding and so subject to a lot of contingencies, of course. But it does have access to a deep sea dock, which allows us access to low-cost potential feedstocks, which could be a significant advantage in servicing the European markets. In terms of talking about value, it's still preliminary at this stage, and so it's too early to get into evaluation at this stage. Kevin McCarthy: Understood. Then as a second question, was your PEM segment EBIT positive in the month of March. I wouldn't normally ask you about monthly trends, but I imagine March was night and day versus the prior month. So perhaps you can give us some sense for the exit velocity of earnings, so to speak, as you move through the quarter? M. Bender: Yes. It was, as you would guess, very positive. And given the pricing initiatives that we've got out in Epoxy, PVC and polyethylene, I expect the improvements to continue to be quite strong as we enter into the second quarter. with, again, the ability to recognize and realize those price announcements that we announced during the first quarter. Operator: Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Arun Viswanathan: I guess I wanted to try and maybe have a rough idea on if you could help us frame out Q2. So it looks like you'll get maybe some incremental extra cost reductions if you're expecting maybe $600 million for the year. I'm not sure if that actually does go up in Q2. Would it be kind of $20 million or $30 million higher in Q2 versus Q1? And then secondly, the PE, I think you have 2.5 billion pounds of capacity. So can we just apply that on the $0.30 for maybe $150 million to $200 million uplift there. And then PVC also on your [ 5.5 ] billion pounds, I'm getting maybe like a $75 million uplift. So HIP, I think, would be down maybe on higher costs as you flow through those items and that maybe cancel out the PVC increase. So maybe we're up sequentially on the order of $200 million to $300 million. Is that -- am I somewhere in the ballpark? Or how should we think about framing out the difference between Q1 and Q2? M. Bender: Yes. I think directionally, as you think about the price combinations and the volumes of production that we have and the demand levels that we're seeing that directionally, you're in the -- you're moving directionally in the right direction. I would say that the headwind we do expect with hip to be reflective of some of the higher PVC pricing moving through in the first portion of the second quarter. But I do think we'll get price realization in the back half of that second quarter as we've already made those announcements to deal with resin costs and transportation costs. But recognizing that we've got a number of price announcements, including PVC, polyethylene and epoxy, we should see significant traction in the second quarter. And so I think directionally, the way you're thinking about it is correct. Arun Viswanathan: Okay. And then if I could just ask, as you look into the second half, what is the durability of this pricing? Have you seen any larger-scale closures -- do you expect any -- maybe -- the chlorine chain was not necessarily impacted as much because of coal-based production in China. So -- do you expect conditions to kind of revert back to normal shortly after the straight reopens? Or what's kind of the outlook in the chlor alkali space with regards to some of these constraints? Was it just not affected as much. M. Bender: Yes, you can see from our comments that we expect the impact of this conflict in the Gulf that could persist all the way through the end of the year. And so it's unclear exactly what kind of price direction we may see as the conflict takes whatever path it chooses to take, but I would say that the PVC core vinyls chain was lesser impacted by this conflict than the polyolefins chain has been. And so we do expect to see some meaningful improvement in those chains that have been more directly impacted. Jean-Marc Gilson: Yes. I mean 1 additional thing is if you look into the chloralkali and specifically on the PVC side, and as you remember, the price was pretty much set by China last year. And it continues to be so, but in a different way, about 25% to 30% of the Chinese capacity as far as PVC is concerned, it's coming from using naphtha and the rest is a carbide base. So all the naphtha are uncompetitive now and have really reduced production level. The carbide side, on the other hand, has increased operating rates and that has put another now ceiling in terms of price increase. So that's why you saw a price ramp up very fast in China and then a little bit of a decline since probably early April, but it's stabilizing at a higher level than where it was last year, and we've seen stabilization around $900 -- $850, $900 per metric ton. So overall, we think that the price for PVC export will stay elevated. It could come down gradually over the year, but it's going to stay elevated for an extended period of time. Operator: Our next question comes from the line of Peter Osterland from Truist Securities. Peter Osterland: First, just wanted to ask on HIP. You highlighted data centers as a growth driver for pipe and fittings. Can you quantify the revenue contribution or the backlog growth that's tied to the data center market? And how does the margin profile for sales into this market compared to HIP overall? M. Bender: Yes, it's a good question. I would say in the first half, sales and orders in the first half represent mid-teens percent of our volume. and it's a growing market, as you know well. So we expect it to continue to be a nice contribution to the infrastructure side of our pipe infinians businesses. But I'd say -- as I say, the first half, both orders and the order book and sales for the first half of the year, it's mid-teens and growing. So we expect it to be a continued contribution to the pipe and fittings piece of HIP. Peter Osterland: Great. And then just as a follow-up, on the $67 million PVC pipe settlement, does this settlement resolve the entirety of your exposure to litigation related to this? Or is there a potential for any further onetime charges? M. Bender: Yes. This is tied really to the direct purchasers component of the litigation. And so there are 2 other categories of claimants that we're in conversation with. So we've got a reserve of $10 million for that second category, but there are further obviously, discussions to be had. Operator: Our next question comes from the line of Duffy Fisher from Goldman Sachs. Patrick Fischer: I was wondering, can you help me -- I'm having a hard time triangulating your hip numbers on revenue? So if you assume that PVC prices are up, you talked at least $0.10, so that's like a third and you said that you're going to get priced by the back half to offset that. So that would be pretty significant price increases rolling through HIP, but yet you're guiding us to the low end of your revenue guide, which would mean that volume must be down significantly in the double digits versus what you expected. So can you just kind of tie those together, the inflation rolling through into hip, the price that you're going to get and then how that changed your revenue outlook vis-a-vis volume? M. Bender: Yes. And Duffy, good question. We're seeing kind of mixed signals right now in the markets. You've seen housing starts, the latest report show that housing starts at 1.5 million housing starts, which is meaningfully higher, but I would say permits were only 1.3%, which is trending lower. So you see mixed signals right now in the marketplace. And as we start in robustness now, the construction season now that we're in May going forward. We're just being cautious in terms of what housing starts are likely to be. Remember, half our businesses, housing starts, the other half is repair and remodeling, but those are smaller volumes. And so housing starts tend to be higher volumes. So we're just really being cautious about kind of volume we could see with the potential slowdown in housing starts in this year. Patrick Fischer: Great. And then just 1 housekeeping. How much cash do you have left to spend on your expense cost-cutting program from last year? M. Bender: You're talking about the 3-pillar strategy that when you say your cost-cutting initiatives. Patrick Fischer: Yes, exactly. How you spent cash this quarter that was already expensed, I believe, as I read through it. Is that fair? And is there more cash yet to be spent on that? M. Bender: There is. And so -- I would say in the neighborhood of $50 million remaining in '26. Operator: Our next question comes from the line of Hassan Amed from Alembic Global Advisors. Hassan Ahmed: Earlier in the call, you talked a little bit about PVC export opportunities opening up. So just curious to sort of find out where you're seeing those opportunities, particularly in light of a bunch of countries, be it India, the EU and the like already having antidumping duties in place. Jean-Marc Gilson: Yes. I mean we are continuing to see the -- you are correct. I mean the demand from India and the rest has decreased a little bit. But overall, the supply is also -- even though over -- I would say, probably February, March, you saw an uptick in supply from China. Since then, we've seen still a steady demand for export, and we are pretty much selling everything we can to the export market at pretty good prices right now. M. Bender: I would say we continue to support the Latin America, South American markets as well. Hassan Ahmed: Understood. And just carrying on with that. I've read some recent reports about the Chinese removing their VAT export drawback on PVC. Are you hearing similar things? And if that is true, what does that do to the cost curve? What does that do to Chinese exports going forward? Jean-Marc Gilson: You're talking about the fact that they removed and that it was sometime after a question whether they were removing it. M. Bender: Yes, they were -- we're moving it really in April. And I would say that we did see some increase in exports just in advance of the April date. But certainly, that creates even a higher hurdle for those who are exporting because those that do have a higher cost, especially those that are ethylene-based certainly have now had an additional higher hurdle. As Jon Mark noted earlier in his comments, those that are acetylene-based certainly are on a lower end of the curve and not seeing the challenges of higher cost from the naphtha they're coming through. But I would say that revision or that recision, I should say, of that VAT is certainly an additional headwind that all exporters out of China are now facing. Hassan Ahmed: And Steve, just for me to get the numbers right, I mean, is it fair to assume that, that headwind would be maybe like $75 a ton to maybe like $100 a ton somewhere in that ballpark? Jean-Marc Gilson: [indiscernible] Operator: Our next question comes from the line of Matthew Blair from TPH. Matthew Blair: Could we circle back to these higher natural gas costs in PEM in the first quarter? It looks like -- if I just look at a Gulf Coast indicator like Henry Hub, it did spec over $7 at certain points in January. But overall, it looks lower quarter-over-quarter in Q1 versus Q4 as do most other Gulf Coast indicators. I do see higher natural gas indicators in Europe quarter-over-quarter. So maybe could you just help us understand your headwinds in natural gas? Were there any derivative impacts like maybe rolling out hedges from last year or any other sort of onetime issues there? M. Bender: Yes, Matthew. No, we had -- I'm just looking at some of the indices here and you're right, gas in late January and through much of February was north of $7 we're a buyer on large well on a spot basis from a pricing perspective. And so it was really that $45 million headwind that I mentioned that drove -- was a headwind that drove an impact on results in the first quarter. But with the poll on natural gas globally given what's happening in the Persian Gulf, you really have seen gas prices come down significantly. And we're probably just in the $280 to $290 range today. there is somewhat of a contango curve on gas, but what we continue to see is that gas curve continues to get pushed out. And month-on-month, we've seen low prices persist in this just under $3 range. Matthew Blair: Sounds good. And then for the FIFO impact, I think you said it was $37 million. Do you have a split between PAM and HIP for that impact in Q1? M. Bender: Yes. That was all PIM related, but it was $37 million. Operator: Our next question comes from the line of Abigail Ebers from Wells Fargo. Abigail Eberts: I'm curious about your expectations for caustic soda later in the year. Obviously, you're expecting prices to increase near term in line with consultants. But I'm seeing in their forecast pricing coming down around October, which they're saying is due to demand destruction from ongoing inflation and elevated interest rates. I'm just curious about your volume and pricing outlook for caustic soda in the back half of the year? M. Bender: Yes. Good question. As I mentioned earlier, we've had 2 price announcements, and we've realized the great majority of that first price announcement already. I'd say demand right now is stable. And as we look forward into kind of the second and third quarters, I actually see because of that stability, a pretty stable price and the consultants do have some small price increases between May and July -- that represent about $30 a ton. But I'd say demand really looks pretty stable at this stage. Abigail Eberts: Okay. Got it. And then just a question on hip and PVC -- how do you size the weather impact on the construction -- beginning of the construction season this year, where would things be if the weather had been more cooperative, do you think? M. Bender: It's a little bit hard to say, but I would say, given the very cold weather we had in January and persisted at least through much of February, it certainly slowed down a lot of the early order intake. And as a consequence, we did not get the full benefit of that in the first quarter. And so certainly, we'll wait and see kind of how the second quarter really translates as we get further into construction season now that the weather is much more milder throughout most of the country. Second quarter is usually when we see a real pickup. But I would say, as I mentioned earlier, housing start numbers that we've seen published are certainly elevated, but permits are looking more softer. And so that's really the cautiousness that we're looking as we look at our order books. Operator: Our next question comes from the line of Jeff Zekauskas from JPMorgan. Jeffrey Zekauskas: I think early in the call, you were talking about domestic PVC price increases as being $0.06 a pound for the first quarter, $0.01 than $0.02 and $0.03, but you also talked about discounts that were given -- in general, did PVC prices net of discounts rise in the first quarter? M. Bender: So I think your discount, you're referring to the price resets that took place at the end of the year, Jeff, I believe. Jeffrey Zekauskas: Yes, that's exciting. M. Bender: Yes, because certainly those -- as we think about the price domination that we had in January and February, I would say that beginning to kind of pick up traction from where we were at the end of December. And so when you think about the March increase, most of that is going to be reflected in the second quarter and not really in first quarter results. Jeffrey Zekauskas: Okay. And then if I can ask a naive question. Chinese PVC exports year-to-date, maybe they're up 45% of being up 45% for all of 2025. And there's really no PVC materially that's made in the Mid East. And so for me, why is it that PVC prices should be up at all? Does it have to do with European ethylene inflation because there doesn't seem really to be any disruption to Asian production and there's no disruption to U.S. production. And what we're seeing, of course, is we're seeing PVC prices begin to move down pretty sharply in Asia. But what's the source of the sharp move up in PVC. It's very clear what it is in polyethylene. But can you give us an idea of what pushed previously up? M. Bender: Yes. There is -- if you look into the situation in China, as I said, about 25% of the capacity is not carbide based. And so it's really sensitive to naphtha prices. So they've been hit pretty hard with the increase in naphtha prices, and they are economically, it's really impossible for them to export. And they barely at breakeven point when you look at current prices. So -- and quite a few of them have actually dramatically reduce their operating rate. If you look at the carbide, they are mostly in China, they're not really on the coast. So all the effect of transport cost increase and everything has put an increase on to the PVC prices -- you add on top of that, the duty go back removal of about 15%, and you get support for PVC price increase. And that's why right now after a spike I went over $1,000 per ton in China early on. It's stabilizing in the 850, 950 metric ton -- per metric ton when if you look back last year, PAUSE they were down to the 500, 550 million range. So that's still a significant increase. Operator: Our next question comes from the line of Matthew Deo from Bank of America. Matthew DeYoe: So if I square off the $45 million headwind from gas quarter-over-quarter for PEM and then I back out $100 million of EBITDA from the cost cuts sequentially. I don't know, maybe the PEM was down $60 million quarter-over-quarter, all else equal from like an operational perspective. Prices moved up over the quarter, but we just kind of talked through some of the PVC role discounting that was maybe unique to Westlake versus peers. But that doesn't feel like that fully explains the whole differential to me versus what your peers explained or put up in the quarter. And so is there any reason why the calendar role would have been more punitive to you in polyethylene or with some epoxy additional headwinds that maybe we're not catching -- because it still feels like there is some idiosyncratic drag that maybe wasn't so amply felt on your peers? M. Bender: I can't -- Matt, I can't -- I guess I'm struggling with your math here because we certainly have recognized the same price nominations that I think we've seen announced by Westlake throughout the quarter, both in Epoxy and in PVC and polyethylene -- maybe part of the equation is we also did planned maintenance in 1 of our sites earlier this year in the first quarter at Placement. And so that may be part of the equation that you did not have in your individual model. And so that was impactful in terms of opportunities, but it was a planned outage that we had taken. But I think when you walk through the and walk through the model or price nominations and price realizations, I think, are the same that we that we've nominated that I think many of the others have spoken to that I've read. Matthew DeYoe: Okay. And then if I look at I don't know, maybe this during 2022, right. European electricity costs are not up nearly as much, but European caustic profitability is pretty bad right now, maybe down $20 million, sorry, $200 sorry. But it's down $200 a ton. It seems like caustic rolling in Europe. Do you see an opportunity for export window on caustic to Europe to open up, maybe not a way it in 2022, but -- is that an area for kind of upside as we look through the course of the next quarter or so when this continues? And then can you modify how much of the plaque outage was now that we just mentioned that. M. Bender: Yes, I would say it's in the $20 million range. Jean-Marc Gilson: And in terms of caustic, you are correct. I mean caustic price might indicate that there is an opportunity to ship there. But when you look at the price for transport and everything, it completely offsets the spread that there is between the U.S. and Europe. So right now, there is really no good opportunities to export caustic to Europe. Operator: Thank you. This ends our question-and-answer session. Let me turn it over to Jeff Holy for closing remarks. Jeff Holy: Thank you. Thanks for participating in today's call. We hope you'll join us again for our next conference call to discuss our second quarter results. Operator: Thank you for participating in today's Westlake Corporation First Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed by Westlake website. Goodbye.
Hiroshi Hosotani: I am Hiroshi Hosotani, CFO. I will now provide an overview of the business results for the fiscal year 2025. Page 4 shows the highlights of business results for fiscal '25. Foreign exchange rates were JPY 150.5 to the U.S. dollar, JPY 173.8 to the euro and JPY 99.2 to the Australian dollar. Compared to the previous fiscal year, the Japanese yen appreciated against the U.S. dollar and Australian dollar, but depreciated against the euro. Net sales increased by 0.7% to JPY 4,132.8 billion. Operating income decreased by 13.7% to JPY 567.3 billion. The operating income ratio was 13.7%, down 2.3 points. Net income attributable to Komatsu decreased by 14.4% to JPY 376.4 billion. Net sales reached a record high for the fifth consecutive year. ROE was 11.3%, down 2.9 points from the previous year. We plan to pay an annual cash dividend of JPY 190 per share, the same as the previous year, resulting in a consolidated payout ratio of 45.9%. Page 5 shows segment sales and profits for fiscal '25. Net sales in the Construction, Mining & Utility Equipment segment increased by 0.2% to JPY 3,806 billion. Sales exceeded the projection announced in October, as demand was higher than expected. Segment profit decreased by 18% to JPY 491.1 billion. The segment profit ratio was 12.9%, down 2.9 points. Retail finance sales increased by 2.4% to JPY 126.1 billion. Segment profit increased by 24.4% to JPY 36.6 billion. Industrial Machinery and Others sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. I will explain the factors behind the changes in each segment later. Page 6 shows the sales by region for the Construction, Mining & Utility Equipment segment for fiscal '25. Sales to outside customers for the segment increased by 0.2% to JPY 3,796.1 billion. Details of regional changes will be explained by Mining and Construction Equipment, respectively, on the following pages. Page 7 shows the sales by region for mining equipment within the segment for fiscal '25. Mining equipment sales decreased by 0.6% to JPY 1,904.4 billion. In Asia, sales decreased due to a decline in demand following low coal prices in Indonesia and demand decline. However, sales increased in Africa and Latin America, where demand for copper mines remained strong, keeping overall sales flat. Page 8 shows the sales by region for Construction Equipment within the segment for fiscal '25. Construction Equipment sales increased by 1.1% to JPY 1,891.7 billion. In real terms, excluding FX impact, sales increased by 0.2%. In Asia, sales decreased as it took time to adjust distributor inventories in Indonesia. Sales increased in North America, driven by demand for infrastructure, rental and energy and in Europe, where infrastructure investment is on a recovery trend. Page 9 shows the causes of difference in sales and segment profit for the Construction, Mining and Utility Equipment segment for fiscal '25. Sales increased by JPY 7.8 billion as price improvement effects outweighed the negative impact of decreased volume. Although we focused on improving selling prices, segment profit decreased. The negative effects of decreased volume, product mix and higher costs due to U.S. tariffs and production costs outweighed the price improvements, resulting in a JPY 107.8 billion decrease in profits. The segment profit ratio was 12.9%, down 2.9 points from the previous year. The impact of tariffs in fiscal '25 amounted to JPY 64.2 billion. Page 10 shows the performance of the Retail Finance segment for fiscal '25. Assets increased by JPY 238.3 billion from the previous fiscal year-end due to an increase in new contracts and the depreciation of the yen. New contracts increased by JPY 75.8 billion, mainly due to higher finance penetration in North America and Europe. Revenues increased by JPY 2.9 billion, mainly due to an increase in outstanding receivables. Segment profit increased by JPY 7.2 billion, mainly due to lower funding costs. Page 11 shows the sales and segment profit for the Industrial Machinery & Others segment for fiscal '25. Sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. The segment profit ratio was 15.9%, up 3.6 points. For the automotive industry, sales of large presses increased. For the semiconductor industry, sales and profits increased due to higher maintenance sales of excimer lasers with high profit margins. Page 12 shows the consolidated balance sheet and free cash flow. Total assets reached JPY 6,423.9 billion, an increase of JPY 650.4 billion, primarily due to the impact of the yen's depreciation. Inventories increased by JPY 195.2 billion to JPY 1,601.9 billion, affected by both the weak yen and U.S. tariffs. The shareholders' equity ratio was 54.7%, down 0.3 points and the net D/E ratio was 0.26x. Free cash flow for fiscal '25 was an inflow of JPY 249.7 billion, a decrease of JPY 56.8 billion from the previous year. From Page 13, I will explain the progress of the strategic growth plan. The current strategic growth plan, driving value with ambition, which started in fiscal ' 25, set 3 pillars of growth strategy, create customer value through innovation, drive growth and profitability and transform our business foundation. Under create customer value through innovation, we began operating a power agnostics truck at a copper mine in Sweden as part of our efforts to address various power sources. We also conducted a POC test of a hydrogen fuel cell powered hydraulic excavator at a highway construction site in Japan. As part of our efforts for advanced automation and remote control, we are advancing the development of SPVs for next-generation mining equipment in collaboration with applied intuition. We are also promoting the practical use of autonomous driving technology for Construction Equipment through collaboration with Tier 4. Next, under drive growth and profitability, we received the first major mining equipment order in the Middle East for the Reko Diq Copper Gold Project in Pakistan. We began deploying AHS in the U.S. and delivered the 1,000th unit globally. We will also strengthen our remanufacturing business through the acquisition of SRC of Lexington in the U.S. We have initiated the establishment of a training center in Côte d'Ivoire, and we'll work to strengthen our marketing and service capabilities in the Africa region. Lastly, regarding transformer business foundation, in addition to embedding risk management through ERM and strengthening our supply chain through cross-sourcing and multi-sourcing, we accelerated human resource development for innovation and business transformation through the utilization of AI and digital transformation. We succeeded in improving scores in our employee engagement survey. Also, our global brand campaign led to high recognition at international creative awards. Page 14 shows achievement of management targets in the strategic growth plan. Net sales for fiscal '25 increased by 0.7% year-on-year as improvement in selling prices offset the decline in sales volume. On the other hand, profit decreased year-on-year as the negative impacts of volume reduction and cost increases outweighed the effects of price improvements. Regarding management targets, in terms of profitability, the operating income ratio for fiscal '25 was 13.7%, a 2.3 point decrease from the previous year. Despite efforts to improve selling prices, the results were significantly impacted by volume decline, inflation-related cost increases and higher costs due to U.S. tariffs. In terms of efficiency, ROE was 11.3%, achieving our target of 10% or higher. For the retail finance business, we achieved our targets for both ROA as well as the net D/E ratio. Regarding shareholder returns, we expect to maintain a consolidated payout ratio of 40% or higher. Also, we executed the repurchase of JPY 100 billion of our own shares. Regarding the resolution of social issues, we have set 30 KPIs, and progress in fiscal '25 has been broadly in line. Among these, for the reduction of environmental impact, we achieved our target for CO2 reduction from production ahead of schedule. Reduction of CO2 emissions during product operation and the renewable energy usage ratio are also progressing largely as planned. That concludes my presentation. Operator: With that, fiscal year 2026 forecast of the business, and that will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, the GM from Business Coordination Department. I'd like to walk you through our forecast for fiscal year '26 in our primary markets. Page 16 summarizes the impact of the situation in the Middle East and the U.S. tariffs as well as the underlying assumptions that have been factored into the fiscal year 2026 earnings forecast. And then the fiscal 2026 forecast incorporates items for which estimates can be made based on information available at this time. Regarding the situation in the Middle East, assuming the turmoil in the Middle Eastern countries and soaring oil prices and supply chain disruptions will continue throughout the year. We have factored in a decrease in sales of JPY 90.1 billion and an increase in cost of JPY 18.8 billion. However, regarding the impact on production due to shortages of crude-oil-derived materials, while there is a risk, the situation is unclear at this time. Therefore, it has not been factored into the fiscal 2026 outlook. Now on to U.S. tariffs. Based on assumptions of Section 122, additional tariffs will apply throughout the year and the revised steel and aluminum tariffs will apply from April 6 throughout the year. We have factored in additional costs of JPY 67.8 billion. However, we have also factored in JPY 30 billion in refunds, resulting in a net cost increase of JPY 37.8 billion. Page 17 provides an overview of the outlook for fiscal year 2026. We anticipate exchange rates of JPY 150 to the U.S. dollar, JPY 170 to the euro and JPY 106 to the Australian dollar. We project net sales of the JPY 4,118 billion, a 0.4% year-on-year decrease and operating income of the JPY 508 billion, a 10.5% year-on-year decrease. Net income is projected to be JPY 318 billion, a decrease of 15.5% year-on-year. Furthermore, at the Board of Directors meeting held today, a resolution was passed to repurchase treasury stock up to a maximum of JPY 100 billion or 25 million shares and to cancel all repurchase shares during fiscal year 2026. ROE for fiscal '26 is projected to be 9.1%. The dividend per share is planned to be JPY 190, the same as previous year, and consolidated dividend payout ratio is projected to be 53.8%. In addition, when the JPY 100 billion share buyback announced today is included, the total payout ratio is projected to be 85.4%. Page 18 presents the revenue and profit forecast for each segment. Revenue for the Construction Machinery and Mining Equipment and Utilities segment is expected to decrease by 0.4% year-on-year to JPY 3.79 trillion, while segment profit is expected to decrease by 10.4% to JPY 440 billion. Revenue for Retail Finance is expected to increase by 1.1% year-on-year to JPY 127.5 billion, while segment profit is expected to decrease by 1.6% to JPY 36 billion. Revenue for Industrial Machinery and Others is expected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% to JPY 37 billion. We'll explain the factors behind the change in each segment later. Page 19 presents the regional sales forecast for the Construction Equipment and Utilities sector for fiscal '26. Sales of this segment are projected to decline by 0.5% year-on-year to JPY 3,778.2 billion. Details of the year changes by region are provided on the following pages, broken down by Mining Machinery and General Construction Machinery. Page 20 presents the regional sales forecast for Mining Machinery within the Construction Equipment and Utilities segment for fiscal '26. Sales of mining equipment are expected to decline by 2.4% year-on-year to JPY 1,858.5 billion. Sales are expected to decline in Asia and Middle East due to sluggish demand for coal and impact of situation in the Middle East. In North America and Oceania, demand is expected to decrease as mining companies complete their equipment renewal cycles, leading to a decline in sales. Page 21 shows regional sales forecast for general Construction Equipment within the Construction Equipment and Mining Equipment Utilities segment for fiscal '26. Sales of general Construction Equipment are forecast to increase by 1.5% year-on-year to JPY 1,919.7 billion, while sales expected to decline in Middle East and Asia due to regional situation. Overall sales of general Construction Equipment are projected to increase year-over-year, driven by growth in North America, where demand for infrastructure energy project remains strong and in Latin America, where public investment is robust. This page outlines the factors contributing to the projected changes in sales and segment profit for this segment. Although we are striving to improve selling prices, sales are expected to decrease by JPY 16 billion year-on-year due to negative impact of lower sales volume caused by situation in the Middle East. Segment profit is expected to decrease by JPY 51.1 billion year-on-year, although we will strive to improve selling prices. This is due to the negative impact of lower sales volume, the expanding impact of tariffs and rising procurement cost. The segment profit margin is expected to decline by 1.3 percentage points year-on-year to 11.6%. Page 23 presents the outlook for retail finance. Assets are expected to increase by JPY 23.6 billion compared to the end of the previous fiscal year as new lending exceeds collections. New lending volume is expected to increase by JPY 5 billion year-on-year as we anticipate a high utilization rate continuing from the previous year. Revenue is expected to increase by JPY 1.4 billion year-on-year, primarily due to an expansion in outstanding loan balance. Segment profit is expected to decrease by JPY 0.6 billion year-on-year, primarily due to higher costs. ROA is expected to decline by 0.1 percentage points year-on-year to 2.3%. Page 24 presents the sales and segment profit outlook for Industrial Machinery and Others. Sales are projected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% year-on-year to JPY 37 billion. In the Semiconductor Industry segment, sales are expected to increase due to customers ramping up production amid the market recovery. However, for the automotive industry application, revenue is expected to rise, while segment profit is expected to decline due to factors, such as decreased sales of large presses and automotive battery manufacturing equipment as well as rising procurement costs resulting from the situation in the Middle East. The segment profit margin is expected to decline by 0.4 percentage points year-on-year to 15.5%. Starting on Page 25, we will explain the demand trends and outlook for the 7 major Construction Equipment categories. The demand figures for the 7 major Construction Equipment categories include the mining equipment. The figures for the fiscal year '25 are preliminary estimates based on our projections. Demand for fiscal '25 appears to have increased by 5% year-on-year. For fiscal year '26, we anticipate a year-on-year decline in demand ranging from 0% to negative 5%. In addition to decline in demand in Indonesia, we expect a decrease in demand in Middle East and neighboring countries due to the deteriorating situation in the region. Page 26 outlines the demand trends and forecast for the North American markets. Demand for the 2025 fiscal year appears to have increased by 3% year-over-year. Demand remains strong in sectors, such as data centers and other infrastructure, rentals and energy. The demand forecast for '26 fiscal year is expected to remain on par with the previous year. We anticipate the infrastructure and energy sectors will continue to drive demand as we go forward. Page 27 shows the demand outlook and demand for European markets. The demand units for 2025 fiscal year is expected -- was expected to increase by 4% previous year. And the demand outlook for '26 is expected to be 0% to positive plus percent -- positive 5%. And Germany and the U.K. public investment demand is expected to lead overall demand, and we are expecting to see the robust demand. Page 28 covers demand trends and outlook for the Asia market. Demand for '25 fiscal year appears to have increased by 5% year-on-year. In Indonesia, although the demand for mining machinery declined due to sluggish coal prices, overall demand increased due to rising demand for general construction machinery, such as food estate projects. In India as well, demand increased driven by aggressive infrastructure investment. The demand outlook for fiscal '26 is projected to be a decrease of 5% to 10%. While demand in India is expected to remain robust, demand in Indonesia is forecast to decline significantly due to the government's policy to reduce coal production and the impact of the introduction of the B50, which is biodiesel fuel regulations. Page 29 outlines the trends and outlook for demand in the Japanese market. It appears that demand for the 2025 fiscal year declined by 13% compared to the previous year. We expect demand for '26 to remain at the same level as the previous year. Although nominal construction investment is increasing due to inflation, real-time growth -- real-term growth is stagnant due to soaring material and labor costs, and there are currently no signs of recovery in demand. Page 30 presents trends and outlooks for the prices of key minerals related to demand for mining machinery. We expect copper and gold prices to remain at high levels going forward. While both low grade and high-grade thermal coal are currently trending upward, we will continue to monitor future developments closely. Page 31 shows the trend in demand for mining machinery. It appears that the number of units in demand for fiscal '25 decreased by 10% year-on-year. Overall demand declined due to a significant drop in demand for coal-related machinery in Indonesia. The demand forecast for fiscal '26 is expected to be a 10% to 15% decline. Although demand for copper and gold mining equipment is expected to remain at a high level, overall demand is projected to decline due to weak coal-related demand and the completion of the replacement cycle in North America and Oceania and the impact of the situation in the Middle East. Page 32 presents the sales outlook for the construction machinery, mining equipment and Utilities segment, including equipment, parts and services. In fiscal '25, parts sales increased by 0.4% year-on-year to JPY 1,055.2 billion. The aftermarket segment as a whole, including services accounted for 52% of total sales. Excluding the impact of ForEx, total aftermarket sales increased by 1% year-on-year. For fiscal '26, parts sales are projected to increase by 2.2% year-on-year to JPY 1,078.5 billion. The aftermarket overall sales ratio, including services, is projected to be 53% and aftermarket sales, excluding ForEx effects are projected to increase by 3.1% year-on-year. The Page 33 presents outlook for capital expenditures and other investments for fiscal year '26. Excluding investments in rental assets on the left, capital expenditures are expected to increase year-on-year due to investments in production and sales facilities as well as the reconstruction of the head office. Research and development centers shown in the center are expected to increase year-over-year due to focused investment in adapting diverse power sources and automation. Fixed costs shown on the right incorporate the effects of the structural reforms. However, they are expected to increase year-over-year due to wage increases and higher R&D expenses. Next, I'll explain the main topics. Page 51 now. Komatsu has acquired a remanufacturing business for construction and mining machinery components and parts from SRC of Lexington through its wholly owned subsidiary, Komatsu North America, Komatsu America Corp. In 2009, Komatsu transferred its North American remanufacturing business to SRC Lexington, and since then, has continued to do business with the company as one of its most important suppliers for Komatsu's North American remanufacturing operations. With this acquisition of SRC of Lexington's remanufacturing business, Komatsu will further expand this operation by establishing a new dedicated manufacturing facility in North America, one of the largest markets for construction and mining equipment. Page 52. In December 2025, Obayashi Corporation, Iwatani Corporation and Komatsu conducted demonstration test of hydrogen fuel cell power hydraulic excavator during rockfall prevention work on the Joshin-Etsu Expressway. The test confirmed several benefits, including operational performance equivalent to that of conventional diesel-powered models and reduced operator fatigue due to the absence of vibration. At the same time, we reaffirm the challenges facing practical implementation, such as the need for higher capacity and the faster hydrogen supply and refueling systems. The three companies will continue to conduct the studies and verification tests aimed at practical implementation. Page 53. Komatsu exhibited at CONEXPO International Construction Machinery Trade Show held in Las Vegas, U.S.A. from March 3 to 7. The company showcased a new generation of vehicles, including bulldozers and hydraulic excavators equipped with the latest features, such as intelligent machine control as well as articulated dump trucks designed to further improve operational efficiency. Komatsu highlighted its initiatives to leverage data from vehicles and digital solutions to enhance customer productivity and safety while reducing total cost of ownership. Page 54. Komatsu has acquired Malwa Forest, a forestry machinery manufacturer through its wholly owned subsidiary, Komatsu Forest. By acquiring technological capabilities and product lineup for lightweight compact cut-to-length forestry machinery, specifically designed for thinning operations, a segment in which Komatsu previously had no presence, the company will contribute to value creation across the entire circular forestry process. Page 55. We have reached a cumulative total of the 1,000 units for our ultra-large autonomous dumb truck equipped with autonomous haul system, AHS, for mining operations. Since introducing AHS for the first time in the world in 2008, the cumulative total haulage volume has exceeded 11.5 billion tons. That concludes my presentation. Operator: Now we would like to move on to the Q&A session. So first, we would like to take any questions from the people here. Maekawa-san from Nomura, please. Kentaro Maekawa: This is Maekawa from Nomura. I have 2 questions. First, regarding tariff impact and price increases. Hosotani-san, you mentioned this in your presentation, but last fiscal year, JPY 64.2 billion was the cost impact. I think originally, you were expecting JPY 55 billion and about JPY 120 billion, which is 4 quarters -- a quarter multiplied by 4, what's going to be your expectation for fiscal '26? So what kind of changes did you experience in reaching your results for fiscal '25? Can you confirm that first? And what have you accounted for, for this fiscal year? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding U.S. tariffs, there are no major changes on a dollar basis. While we were converting it at JPY 140 before, but now it's at JPY 150 against the dollar or to be more exact, JPY 150.5 against the dollar. Therefore, on a U.S. dollar basis, it's not different. It hasn't changed. It's just because of the FX impact. For fiscal '26, the impact will materialize on a full year basis. So it was about around JPY 600 million before, but it should reach around JPY 900 million. Other than that, we have accounted for refunds as well, which is equivalent to the reciprocal tariffs that are likely to be refunded. So that's what we have accounted for. Kentaro Maekawa: So if it's $900 million, it's about JPY 135 billion. For steel and aluminum, how much of an increase? How much of a decrease are you expecting from reciprocal? And the JPY 30 billion refunds are also included in the JPY 135 billion. So when you look out at March '28, is it going to become JPY 165 billion? So can you break down the JPY 135 billion? What has been going up, what has been coming down? Or can you talk about how it's going to rise from the JPY 64.2 billion? Kiyoshi Hishinuma: Well, regarding the period, before, it was from the middle of the year. So at the beginning of the year, we did have inventory from the previous year. So we started paying the tariffs at a later timing from a payment point of view. From a P&L impact, we had year-end inventories. So it was relatively low. But in fiscal '26, from the beginning of the fiscal year, we are making payments. So there is a period difference. And regarding the details, reciprocal tariffs may be gone. But for steel and aluminum, we used to calculate the content in order to reduce the level of tariffs paid. But now it's at 25%. So the impact is greater. So that is one reason why it's greater than before. From that point of view, for the refunds, that's about last fiscal year's portion. So for fiscal '27, we won't have deferrals from the previous fiscal year. Therefore, we will see full impact. So if nothing changes, it's likely to be JPY 165 billion. Next year, of course, that 10% or Article 122, when that's going to end is a question mark. But well, if we're working off the assumption that the same thing is going to materialize for the next year, that's what we're accounting for, but we are not sure. In that case, it's JPY 135 billion, for next year, the following year, if sales and production is not going to change, it should be about JPY 130 billion for fiscal '27 as well. And this year, it's JPY 30 billion less, or excuse me, for the results for fiscal '25, we already said that it was JPY 64.2 billion. And for fiscal '26, originally, we were guiding JPY 130.7 billion or JPY 130.8 billion. But because of the refunds that we were explaining, which is worth USD 200 million, which we view as JPY 30 billion in terms. So when you account for that, it should be a little bit over JPY 100 billion of an impact on our P&L. Kentaro Maekawa: Got it. For price increases, and on Page 22, when you look at the projections for selling prices, it's plus JPY 68.9 billion. So hypothetically, even if you don't get the refunds at JPY 130 billion, you should be able to make up for it through price increases. Are you making progress? And have you gained visibility already? Can you also speak to that? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding pricing, we did a bottom-up approach looking at the business plans of our subsidiaries, but price increases are also accounted for, for the U.S. But Caterpillar is not raising prices, and those are the circumstances. So there may be a risk. However, for the tariff increases in the U.S., we won't be able to absorb it completely just with the U.S. So global price increases need to happen. So that's what we're accounting for. Kentaro Maekawa: Understood. My second question is for this fiscal year and your view on volume. Also going back to Page 16, in light of the Middle Eastern conflict, you have reduced sales by JPY 90.1 billion. And last year, when there were some tentative assumptions for GDP as much as you can see, what can you see, what can you not see? So what are the assumptions that led you to JPY 90.1 billion? Because in mining, when energy prices are high, I think that may also serve as a positive. So I was wondering how you view this situation. Kiyoshi Hishinuma: This is Hishinuma. First, regarding demand for the Middle East, a 60% decline is expected. So that has been accounted for, 6-0 percent. And also due to the impact from the Strait of Hormuz, we believe that costs are likely to increase and especially negative impact on countries in Asia. So we are expecting sales to decline. But when it comes to higher coal prices, there is a chance that they may stimulate demand. But when you look at countries like Indonesia, it's true that what originally used to be $40, $50 a ton are now reaching $60 a ton. But even so, we are seeing a higher idle standby rate of equipment, and we're not sure if this is going to continue or not in the future. So demand has not really picked up. So currently, people are still on the sidelines waiting and seeing. There may be an opportunity, but so far, we have not accounted for that in our expectations. Takuya Imayoshi: Just to add a comment to that. Last year, U.S. tariffs just started. So it was hard to account for it in our guidance. But based off IMF predictions and so forth, we have viewed how much GDP is likely to decline and what's going to happen to demand. And that is why we accounted for JPY 50 billion decline in sales. But the global economies have not yet fallen, but we try to account for risk as much as possible to the extent that we can calculate. And also the Middle Eastern crisis, we don't really know its impact clearly yet, but our way of thinking is the impact from the Strait of Hormuz is likely to continue. That's the assumption we have. But then because we are dependent on crude oil as well as LPG, like -- in regions like Africa as well as Asia are likely to be affected. So like Hishinuma-san explained, we are expecting a demand decline in Asia as well as in the Middle East, leading to a sales decline in turn. And also accounting for our gut feeling that we have experienced from the past, we have accounted for a JPY 90 billion impact. And also due to higher crude oil prices, we are already seeing material prices increase that are crude-oil-derived, and that impact is JPY 18.8 billion. So this is purely looked at as a cost increase. So JPY 90 billion of volume decline and JPY 18.8 billion of a cost increase SVM-wise is what we've assumed due to what I've just explained. On the other hand, of course, the impact may be greater than our assumptions or the crude-oil-derived goods may fall to a shortage, which may affect our production, but that is still not known. So we have not accounted for that negative impact. Operator: I would like to move on to the next one, Sasaki-san from UBS. Tsubasa Sasaki: This is Sasaki from UBS Securities. I've got several ones, but the first question is the figures I always ask you. Page 22, this waterfall chart and volume product mix and also the cost variance. Looking at the Page 9 and Page 22, the plan and actual performance, and there have been some figures related to tariffs, but could you please give us the details around those factors? And this volume mix has been negatively contributed to your performance. So the negative JPY 32.2 billion, that's in your plan, but what gets you to that number? Hiroshi Hosotani: This is Hosotani speaking. First, Page 9. Page 24 and Page 25 variance. First in segment profit, JPY 72.6 billion of the volume mix and product mix difference, just hold on a moment. I'm sorry on this one. First, JPY 25.8 billion for the volume difference, and that was a negative. And also product mix, JPY 25.1 billion, that's included. Now factors for this, is that as we explained, electric dump truck, as we explained those up until the last fiscal year, and it's not that they were able to enjoy the higher profitability, but the mix increased for this electrical dump truck. And also Chile contract business margin declined slightly. And also regional mix had negatives here. And among the region, the highest profitability comes from Indonesia. And sales volume significantly decreased in Indonesia market. And that's why regional mix has seen the impact from that and JPY 19.6 billion approximately. Now moving on to the right and production cost, JPY 81.6 billion negative. Let me give you the breakdown for that, which includes the U.S. tariff cost increase, JPY 64.2 billion. This is only applicable to the Construction Equipment of the JPY 64.2 billion and other ones, like the variance coming from industry others, Industrial Machinery and Others. And also cost variance, let me give you the breakdown for that. From third party, we purchased components, the major components, and those costs started to inflate. So that's why there is the major variance of cost of goods. And fixed cost variance, fiscal '24 to '25, the labor cost significantly increased. Apology, you talked about the volume variance, apology, hold on a moment. For fixed cost, JPY 20 billion comes from the labor cost and the SGP projects were underway. And also the variance in comparison between '25 and '26, JPY 31.8 billion of the volume that's been included here, and of which the volume mix amounts to JPY 40 billion. JPY 40 billion, the big chunk comes from Indonesia. Hold on a moment. Other than volume mix, the regional mix and product mix are written here. Fiscal '25, the losses we have to make were all gone for '26. So JPY 31.8 billion included volume mix and that amount to JPY 40 billion. That's all from me. Tsubasa Sasaki: What about the variance of cost of goods? Because I guess the cost increases comes from the conflict in the Middle East. Hiroshi Hosotani: Yes. Fiscal '25 and '26, JPY 49.6 billion for production. The U.S. tariff's impact is included here in this number. About JPY 67 billion is included here, but at the same time, the JPY 30 billion of the refund is included. So the net it all out, the JPY 37 billion of cost increase is included here. And also other cost of goods variance, JPY 10 billion-some is also included. Tsubasa Sasaki: My second question, let me take this opportunity to ask this question of Hosotani-san. You took office as CFO. Give us your commitment as a CFO as we look ahead. For example, as a Komatsu, the capital efficiency improvement and the better margin, I mean, there could be a number of the lists that you want to attain, but you're succeeding Horikoshi-san and took office as CFO. And as one of the members of the top management team, what are the things would you like to achieve? I mean this is your first time to be here in a financial briefing. Do you have any commitment would you like to make? That's my second question. Hiroshi Hosotani: Well, you set the high bar for me actually, but let me try to answer. My predecessor, Horikoshi-san, mentioned this too. But basically, we always have to be mindful of the shareholders in running the business. And I would like to be contributing to the way we run the business. So shareholder returns and balance sheet and ROE, those indicators are the things I always look. For example, in comparison '25 to '26, the net income -- I mean, volume declined because of the conflicts in the Middle East. So net income declined. Business size and the revenue size need to expand from our perspective. And to that end, we are engaged in various activities. As we expand the business size, I would like to be of a support for the better decision on the management level so that we are able to have a better top line. I'd like to engage in those activities as CFO. Tsubasa Sasaki: Is it more like a better top line? Is it one of the things, which you like to commit? That's what I get from your message. What made you think that way? Hiroshi Hosotani: Well, for example, as we look at the current status, the conflicts in the Middle East and there are impacts from that. It takes time until the situation will go back to where it has been. So in the longer term, this is the one-off factor. But the U.S. tariff is concerned, some say this is a one-off factor, but at the end of the day, this is about the balance of the export-import of the United States and other countries and try to correct this imbalance. So these costs are permanently are subjected to occur. So that's why we need to continue to contribute to the cost, but net profit size need to be secured to an extent, which means that we are able to -- we need to have a better top line. Operator: Let's take the next question from SMBC Nikko, Taninaka-san. Satoshi Taninaka: This is Taninaka from SMBC Nikko. Regarding mining equipment, mainly, I have 2 questions. For metal prices, including coal prices, they are rising lately. And in the new fiscal year, when you add up the after services, you're only accounting for about 3% growth year-over-year. I think you're being conservative when you think about the underlying trends. And when you look at the underground mining equipment manufacturers' results, their growth rates look stronger. So can you talk about the backdrop to how you derive these assumptions? Kiyoshi Hishinuma: This is Hishinuma speaking. For mining equipment, as you rightly said, prices have been going up for, obviously, copper and gold and so forth. But on the other hand, for equipment and the way we look at demand, the replacement cycle is pretty long. So there's ups and downs. And also when you look at it by region, there are regions where we're expecting higher demand and other regions where we're expecting lower demand. That's for equipment. And the growth we're expecting for the aftermarket business may look small. However, we did see drop-offs that were quite significant in Indonesia and also in the Middle East, including reman, we have been growing the business, but all in all, the numbers may not look as dynamic as you were expecting. Satoshi Taninaka: My second question is with respect to the replacement cycle and you talked that it has run its course. From 2011 through 2013, demand for mining equipment grew quite substantially. And then you have a replacement cycle. And are you trying to say that the message was that the replacement cycle is over? Or are you saying that over the short term, there are ups and downs and replacements are at a standstill at this moment? So for March '28, are you trying to imply that demand is going to go down even more? Kiyoshi Hishinuma: Well, the cycle we're referring to is not about the 2011 cycle. It's more about whether we have big deals or not in recent years. For example, in North America, in '24, '25, in North America, there were some big deals. And we have been explaining that some big deals have been absent in 2025 because there were more in 2024. So they were less in 2025. And in 2026, we are expecting at this moment less of large deals. But regarding the share volume of general deals, we are actually seeing an increase. So it's just a matter of whether or not we are carrying large deals or not. For example, in the case of Australia, in fiscal '26, we're not expecting that much of big deals, so to say. That's what we were referring to. But for super large dump trucks that we manufacture in North America, when you look at our production plans and compare '25 with '26, production volume is not going to change that substantially. Even if the sales may not be recognized in 2026, there is a possibility that it's going to go into 2027 sales. And rope shovels are being produced at 100% capacity. And we are also working on fiscal '27 already. And because copper is doing well, we're not really expecting that much a decline. However, we need to monitor closely the trends in Indonesia. Operator: I would like to take a question from Adachi-san from Goldman Sachs. Takeru Adachi: This is Adachi from Goldman Sachs. I have 2 questions, too. The first one, the mining equipment. As Hishinuma-san shared, Asian market, usually coal prices are on the rise, which is positive, but diesel prices and operating costs have been boosted, which is negative and negative outweighed the positive and the dormant that populated the vehicles is increasing. And what are the changes that you have seen for dormant and idle vehicles? And I think up until Q1 last fiscal year, there was a last minute demand was very strong and that sub demand in Q2. But as you look ahead, Q1, you see the sales can drop from the fiscal year, but do you think that, that will be flattish after Q2? Or do you think that Q2 and beyond, do you think the moderate decline continues, especially for the Indonesia mining equipment market? Kiyoshi Hishinuma: For Indonesia, as you raised a number of the points, the idle vehicles ratio and what are the historical trends? For example, 2024, the end, 5%, they used to be 5%. Then fiscal '25 in June, 8.5%. And then that was up to 9.6% in January and 10% afterwards and 17% in January. So the coal prices goes up and even the workload increases, and they are able to handle the increase in volume with the coal prices with the current volume. So B40 and now start in July, it starts B50 and production volume, 800 million tonnes, 600 tonnes -- 600 million tonnes. And there are some talks of increasing the volume. Throughout the year, we are not 100% confident that there are bound to increase. So fiscal '26, I believe that we are seeing this as a cautious note. Takeru Adachi: As Tanigawa-san and yourself discussed a bit, Indonesian coal and precious metal have been pretty strong in prices and the production plan is at full, as you said. In order to accelerate it, would you like to accelerate further on that point? Kiyoshi Hishinuma: In North America production capacity ramp-up, rope shovel might be at full. The electric dump truck production plan for fiscal '26 and '25 will be equivalent, I said. But versus what it has been in the past, there are some time where we produce more. So at the full capacity, if we produce them, and there could be some more availability. So in North American market, we are not -- we haven't gone to the point where we are dealing CapEx. Takeru Adachi: Okay. Next one is cash flow and the buyback is announced. And the previous year and two years ago, like those 2 years, you have announced JPY 100 billion. What are the decision-making process like? And behind that, free cash flow assumption were -- would have been calculated. How much free cash flow you're expecting, JPY 160 billion is expecting, I guess. So how much of the operating cash flow and the working capital level? And what are the production assumption to the working capital? Maybe you can have a breakdown approximately. Do you have any up and down of your planning for production? Hiroshi Hosotani: This is Hosotani speaking. For free cash flow, fiscal '24, free cash flow, JPY 300 billion-or-some. That's fiscal '24. And it's been a few years, the JPY 250 billion to JPY 300 billion of the free cash flow. That's our track record of the free cash flow. Now with this amount, dividend and buyback of the JPY 100 billion, we have enough excess capacity to do that with this amount because it amounts to JPY 300 billion. Now for fiscal '26, free cash flow or as planned of the JPY 250 billion plus and deposits and others, I mean, sales were not growing and profits declined, but the working capital is expected to improve. So as a result, so we are able to generate equivalent level. JPY 300 billion plus of the free cash flow are our commitment. So that will continue for 3 years. And M&A portion excluded, then JPY 1 trillion. And that's a commitment and goal we set ourselves. Operator: There are people raising their hands on Zoom. So we would like to take that question from [ Otake-san ], please. Unknown Analyst: Can you hear me? This is Otake speaking. Operator: Yes, we can. Unknown Analyst: Just wanted to confirm again. First question is regarding the impact from U.S. tariffs, please let me sort it out. For the year ended in March 2026, the impact was JPY 64.2 billion on your P&L. Is that correct? Hiroshi Hosotani: That is correct. JPY 64.2 billion for Construction Equipment. That's for Construction Equipment. But for Industrial Machinery, there are -- there is a bit of tariff's impact as well that has been incurred. Unknown Analyst: Up until the previous results, according to the materials, you were saying JPY 55 billion of impact from tariffs. So does this include Industrial Machinery as well on top of Construction Equipment? Kiyoshi Hishinuma: It's only several hundreds of millions of yen attributed to Industrial Machinery. So the level doesn't really change. There was about JPY 400 million of an impact from Industrial Machineries and Others. Unknown Analyst: Got it. And for -- from the assumption of JPY 55 billion, the reason why it increased to JPY 64.2 billion is due to FX impact, right? Kiyoshi Hishinuma: Yes, exactly. Unknown Analyst: No differences on the U.S. dollar basis, broadly speaking. It's just due to the differences in conversion FX rates. So for this fiscal year, for the year ending March '27, excluding refunds, you're expecting JPY 130.8 billion. Is that correct? Hiroshi Hosotani: That is correct. Unknown Analyst: Got it. And the impact amount, the reason why it's higher, you were saying that the content calculation has been abolished and that has had an impact. Can you walk me through what that means and entails? Kiyoshi Hishinuma: Regarding content, for steel and aluminum content, you calculate how much is included for -- as part of your product prices or cost. And that is subject to steel and aluminum tariffs and the rest to reciprocal tariffs. So by calculating the content, we have been able to reduce its cost. And even for derivatives, it is 25% now. So when we were calculating the content, it was less than 25% basically. Unknown Analyst: Or by doing a precise calculation of content, you have been explaining from before that you are able to reduce the cost. But I guess that is not possible anymore. Then in order to reduce tariff impact going forward, such as reviewing our supply chain or logistics, I think that will be key, but with respect to these measures, in order to reduce the negative impact, what are you focusing on? Or what would you like to focus on going forward? Takuya Imayoshi: Well, last year, in April, we shared with you various types of countermeasures we were planning for. For the products that used to go through North America that went to ultimately Canada or Latin America, by shifting to direct shipments instead and shipping out to Canada directly, we will be able to alleviate the impact, and that is fully contributing already. And there are some parts that are going through the U.S. as well. But by directly shipping and also creating warehouses in Panama, we are trying as much as possible to reduce the impact. And for countermeasures, for steel and aluminum tariffs, not by simply just paying for it, but by calculating the content, we had been trying to minimize the tariff impact. However, now it's going to be 25% across the board. So that countermeasure is no longer viable. However, reciprocal tariffs are now gone. So on a net-net basis, the actual amount of payments are slightly up. You referred to the P&L, but the impact on '25 and the impact on '26 because of more inventory impact, it's going to become a greater impact. And the difference in tariff rates have also been impact -- are expected to impact us as well. Unknown Analyst: I see. So you are working on various initiatives. But in order to mitigate tariff impact even more, one kinds of feels that it may be challenging. But what would you like to do additionally? Or do you feel that you will be able to reduce its impact? Takuya Imayoshi: Of course, increasing production in the U.S. is something we are considering. But from a cost point of view, it is also challenging, which is preventing us from doing so. So I think it's more of a buildup of various improvements. And hopefully, we could raise prices to make up for it globally or reduce costs globally as well so that we can ensure that we are profitable. And sorry for going on, but for price increases, you were talking about Caterpillar and that they are not raising prices recently, but currently, in the U.S. as well as in other regions. Unknown Analyst: When you look across the competitive landscape, how are the price increase trends from your point of view? How do you view the market? Takuya Imayoshi: Well, we have been communicating this from before. But from several years ago, in accordance with higher steel prices, we have been increasing prices, but our competitors have been more bullish in raising prices. So we were a little bit behind. But in order to catch up, we have continued to steadily raise prices. But now steel prices have calmed down and price increases just limited to higher tariffs is not really happening, and that is why we are seeing difficulty here. Unknown Analyst: My final question is about the Middle East and its impact. JPY 18.8 billion of a cost increase is what you're expecting. Can you break it down? How would it look like? Can you share it with us as much as possible the breakdown? Kiyoshi Hishinuma: It's -- costs are rising and parts are rising due to oil-derived products and also logistics, transportation costs because of higher fuel costs, that has been accounted for as well. The majority is because of higher parts prices and cost increases. Takuya Imayoshi: Meaning fuel, oils, paint, gas that are oil-derived, material prices have already been going up quite a lot. So that has been accounted for as a cost increase. Unknown Analyst: I see. So procurement cost increases is about maybe 80% of the cost increase and maybe 20% to 30% associated with seaborne transportation. Takuya Imayoshi: Maybe it's like a 70-30 split. Operator: I would like to take questions from anyone joining us online. BofA, Hotta-san. Kenjin Hotta: This is Hotta from Bank of America. I have 2 questions, too. First, with the conflicts of the Middle East and that has impacts on volume and other mix. On the production front, you have uncertainties, so you haven't incorporated them into the guidance, as you said. But if possible, on production front, how much impact do you think that there is? You said there is nothing for now, but given the current situation, how much potential impacts you might have to suffer from? Or are you saying that you have enough inventory, so you are able to have the muted impacts from that on the production front? Give us the details around production areas, if there's anything you can share with us. Kiyoshi Hishinuma: Well, first on production area or production front. First, we try to sustain production work, and we try to work with suppliers. We try to secure enough works and components. And how far we are able to secure them? It's not to say that we are able to secure them for 6 months and 1 year ahead. So we always have to cement where we are, and we try to secure production. To the worst-case scenario, naphtha and other materials could have issues in the future. And if and when, if we can secure some of the materials from plants for any of the one single supplier and the production itself could be impacted. But when would that happen? We're still not sure. That's why we haven't incorporated the potential factors into the guidance this time. Kenjin Hotta: Okay. My second question is the mining equipment. You said replacement cycle. And you said that there is a completed replacement cycle now, but fuel is on the rise. So a little bit outdated equipments. Needs to have -- needs to be a newer ones so that, that uses less oil or less fuel. Is that kind of the replacement demand that you're seeing? Kiyoshi Hishinuma: Well, it's not going to be a replacement cycle you're going to see in the passenger cars. Kenjin Hotta: Okay. But to stay on the same topic of the fuel prices, if you look at the Australian market, diesel shortages is very dire and SMEs mining companies started decide the shortage of diesel and they need to compromise the utilization ratio recently. And BHP has no issue whatsoever because they are big enough. But Australian market is primarily a market where the utilization ratio for the machine is declining. Is that something you're saying? Or isn't there any impact on your operation whatsoever in terms of the diesel shortage? Takuya Imayoshi: Well, we haven't witnessed any of the specifics, be it suspension of the operation itself, but there are risks, yes. Operator: There's another question from online, McDonald-san from Citigroup Securities. Graeme McDonald: Can you hear me? Operator: Yes, we can. Graeme McDonald: This is McDonald speaking. I have a question about Page 26 in North America. Looking at the right-hand side for Q4, for the 7PLs, it was plus 7%. And going back, I think for the first time in several occasions, it was a good number, maybe several years, where you're seeing an uptrend even so for this fiscal year. For volume, you're expecting flattish demand compared to fiscal '25. The non-housing space, when you look at the segments like mining, energy, road construction and data centers and so forth, for this fiscal year, I kind of think that you're conservative in your projections for North America this year. Of course, I'm sure you have a lot of concerns in your heads. But why are you guiding flattish demand? Shouldn't you be guiding having an assumption that is more positive? That's my first question. Kiyoshi Hishinuma: Thank you for the question. For North America, as you said, what we show in the material for Page 26, at the bottom right, we show the breakdown of demand by segment, divided into rental, energy, infrastructure that are performing positively across the board. It was only housing as well as government-related that was negatively contributing. So all in all, the trends are positive. And after completing fiscal '25, we saw plus 3% growth in demand. So when you listen to what customers are saying even, they have about order backlog of 6 months to 2.5 years. Therefore, we do believe the market is quite strong. So our assumptions are flattish, but we're not really anticipating any major negatives. Therefore, yes, you can say that we are being conservative. Graeme McDonald: Well, from a regional point of view, Indonesia apparently had the highest profitability in the past, but if you're so bearish about Indonesia, the highest profitability as a market, I guess, is coming from North America in the non-housing segments. Do you think that's true that it has the highest margins? Kiyoshi Hishinuma: If you just look at SVM, excluding fixed costs, the procurement cost inclusive of tariffs is quite big. So no, the margins are not the highest in North America. Graeme McDonald: Okay. So it will continue to be challenging. So I just wanted to confirm another thing about Page 9, I think. In your comments, Hosotani-san, for last fiscal year and the negatives from product mix was EDTs. Is this one-off? Or for electric dump trucks and its profitability, is it relatively low? I just wanted to confirm that point you made. Hiroshi Hosotani: This is Hosotani speaking. Our dump trucks is because of our dump truck mix. Globally, we sell -- the regions where dump truck margins were high was Indonesia. For Indonesia, we have been selling rigid dump trucks mainly. And for electric dump trucks are being made in the U.S. on the other hand, compared to rigid dump trucks, the costs are greater due to its structure. And sales in Indonesia, especially for mining has been dropping off. So product mix-wise, rigid went down, whilst EDT composition has increased. So from a product mix point of view, because of more electric dump trucks, average margins have come down slightly. Graeme McDonald: I see. So we shouldn't be that concerned, I guess. Hiroshi Hosotani: Correct. Graeme McDonald: Finally, I have a quick question on topics on Page 50, you talked about AHSs and reaching 1,000 units in volume. I think that's great. Going forward, do you have any numerical targets as to how to grow the business even more? That's my final question. Kiyoshi Hishinuma: Well, in the strategic growth plan and our targets, it was 1,000 units in fiscal '27. That was our original target, but we have been able to reach it beforehand. So we have been -- we are thinking about raising the target up to 1,200 units instead. So compared to the pace we saw back in fiscal '25, it looks like it's going to decelerate. However, new customer implementation is likely to increase. And in that case, the rate of increases is going to look like it's decelerating, but we will continue to work on its implementation. Graeme McDonald: How about margins? Compared to rigid dump trucks, is it lower? Kiyoshi Hishinuma: Well, we talked about electric dump trucks earlier. So that in itself is not that high, but this is an AHS system, and we receive income from subscriptions as well. So that is a positive. Operator: We are counting down some time. Anyone who has questions here? Okay. I'd like to take a final question from the floor. Issei Narita: Narita from Mizuho Securities. Sorry, I'm repeating myself, but Page 28, here in Indonesia, mining equipment demand doesn't look like it's declining so much. And yes, I do understand that there is a declining market, but the Chinese manufacturers try to make inroads into mining equipment more and more. And against the hard work in Latin America, the Indonesia and those smaller kinds of smaller dumps were utilized in those Indonesia. So other than the market, there have been anything that you can share other than the competitive landscape? And also, you said Indonesia, it has the highest margin, whereas coal prices will give you the headwind. And that might be changing in the future, but with your self-effort, do you see any capacity to increase further overall performance in Indonesia? Takuya Imayoshi: Well, as you see the bottom right, Page 28, you see the demand trend, and that might be misleading, but you see by sector here. So in terms of the size, the smaller equipment for mining are included here. And then fiscal year '25, we are shipping a lot of those smaller ones and 100 tons demand is on a decline. So that sounds like that doesn't add up. But the demand for 100 tons, the customer try to hold back the purchase. That's why we are struggling. And fiscal year '26, the coal production volume is going to be struggling, but we work with the distributors to secure enough volume here. Operator: So finally, Tai-san from Daiwa Securities, we would like to take your question remotely. Hirosuke Tai: Yes, I'll keep my question brief. I have a question for Imayoshi-san. With respect to the Middle East and tariffs, that was the main topic for today's call. Even if you add back those numbers into your guidance, profitability is expected to be about the same as last year or a little bit down, whether it be on a company-wide basis or for the C&ME segment. And I think it all comes down to inflation, maybe. But how about striving to raise profitability by making up for it? Do you have that intention? Or are you fine with this kind of margin? And would you like to instead raise top line? Because you have just started a new fiscal year. So Imayoshi-san, of course, can you talk about some themes that you're considering as a company? Of course, countermeasures for the Middle Eastern conflict may be one, but I was hoping that you could share 1 or 2 things on your mind. Takuya Imayoshi: Well, as stated in the strategic growth plan, we want to have profitability and growth rates that exceed industry levels. So it's not just about growing top line, but also profitability as well. Overall, demand-wise, we are at a juncture where it's broadly flat. It's not just tariffs impact, but Indonesia's drop-off is also a negative when it comes to profitability, but we will steadily implement the measures that we're stating in the strategic growth plan. We will work on product development as well as we'll think about ways to grow the aftermarket business. So we would like to ensure that we're able to generate results so that we can also enhance profitability. Operator: Thank you very much. This concludes the Q&A session.