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Unknown Executive: Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended March 31, 2026. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC. David B. Golub: Hello, everybody, and thanks for joining us today. I'm joined today by Tim Topicz, our Chief Operating Officer; Rob Tuchscherer, Senior Managing Director and Officer of GBDC; and Chris Ericson, our CFO. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended March 31, 2026, and we posted an earnings presentation on our website. We'll be referring to that presentation during the call today. We're going to change from our usual format today. I'm going to start with headlines and some commentary on what I think is happening in private credit. And then Tim, Rob and Chris are going to walk you through our operating and financial performance in detail. Following that, we'll open the line for questions. So let me start with headlines. GBDC had a small loss for the quarter, about 1% of NAV, and that was primarily because of mark-to-market fair value write-downs. Adjusted NII per share for the quarter was $0.34. That corresponds to an annualized adjusted NII return on equity of 9.5%. Nonaccruals remain low in both absolute terms and relative to BDC industry peers and performance ratings for GBDC's borrowers not only remain strong, they actually improved modestly quarter-over-quarter. Now let's drill down on that first headline. I said the loss this quarter was primarily from fair value markdowns. To remind long-time BDC investors and to educate new ones, GAAP for a BDC loan investments isn't the same as GAAP for loans made by banks. When a bank makes a $100 loan, the asset stays on the bank's balance sheet at $100 regardless of what happens to market interest rates. There's a separate impairment reserve that the bank can use to buffer potential credit losses, but bank accounting doesn't account for changes in spreads. BDC accounting does account for changes in spreads. We mark our loans to fair value every accounting period. So when spreads widen, we write down our loans even when they're paying interest on time and even when we expect them to pay off at par. So this last quarter saw meaningful spread widening and that caused us to write down fair values even on our well-performing credits. Now whenever we have a quarter with this kind of meaningful spread widening, you'll hear us talk about how there's a big difference between temporary losses and permanent losses. Realized credit losses are permanent. They don't come back. If we can avoid realized credit losses, the mark-to-market adjustments, they reverse over time as borrowers move toward payoff or as their credit attributes improve or as market spreads narrow. The good news is that we currently think that most of this quarter's fair value write-down will reverse in future quarters. Tim is going to walk you through why in a few minutes. I want to talk before handing the mic over about the bigger picture here. The spread widening that we saw this last quarter, it's part of a larger macro picture. I want to spend a few minutes talking about the forces that are causing changes in the private credit landscape, the impact of those forces and where I think we're likely to go from here. In the last several earnings calls, we've talked about headwinds facing direct lending. We've talked about how base rates have declined by about 1.5 percentage points since 2022. We've talked about how spreads have narrowed over the same period. Spreads have come down by more than 1 percentage point. So between base rates and spread reductions, that's 2.5 to 3 percentage points of return headwinds. We've also talked about elevated credit stress and how that's been reflected in higher default rates, more frequent restructurings and utilization of PIK amendments. In the last quarter, we can say we can add a new headwind, concerns about AI and software. So these 4 headwinds, lower base rates, lower spreads, elevated credit stress, AI fears, they've had a big impact. We've seen lower returns across the public BDC sector with average returns on equity falling from about 9% in 2023 and '24 to between 4% and 5% last year. We've seen a big increase in dispersion, too. The dispersion of performance between top quartile managers and bottom quartile managers has always been large in the BDC space, but it's been particularly large in the last year with top managers performance going down a little and bottom manager performance going down a lot. The third impact, shareholders have spoken. We've seen a sell-off in publicly traded BDCs, which now trade at large discounts, and we've seen a spike in redemption requests in nontraded BDCs. All of these impacts, they've contributed to a final impact. And I'd characterize that final impact as a shift in wind direction. We've moved from a market that for years was becoming more borrower-friendly to one that's now becoming more lender-friendly. Now this trend is new, but we're already seeing wider spreads and more attractive deal terms. So what does this mean? Where are we headed from here? I'm usually very cautious about making predictions. You've heard me talk many times about how challenging the prediction business has been since COVID. But I'm going to offer the following thoughts about where I think the market is headed based on what I see today. My first prediction is actually a repeat from last quarter. I think we're in a Darwinian moment for private credit. Firms that have sustainable competitive advantages, that have strong performance from a credit standpoint, that have well-diversified long-term capital bases, they're going to adapt and take share. Firms with not so good credit performance or with an overreliance on retail products, they're going to struggle. Private equity sponsors are very soon going to know which credit firms can provide them with consistent, steady access to compelling financing solutions and which credit firms can't. All this is going to lead to a pattern we called out last year, a growing separation between what we call winners and whiners. Second prediction. I expect this period of credit stress to continue for a while. We're not through this credit cycle yet. We at Golub Capital try very hard to identify and escalate problems early. So we tend to be ahead of the market in recognizing and dealing with credit issues. My observation based on what I'm seeing in industry data and to a lesser extent in our portfolio is that there remains a subset of companies that are not adapting well to current economic conditions that are ultimately going to need to restructure and that hasn't happened yet. A third prediction, I think market conditions are going to become even more lender-friendly, especially if M&A continues to rebound. Capital has left and in some respects via continuing redemptions, continues to lead direct lending. Supply and demand, it's going to drive wider spreads. These wider spreads are going to create short-term losses from the fair value adjustments that we talked about earlier, but the same wider spreads are also going to create medium- and long-term benefits from higher earnings on new loans and from reversal of prior period fair value markdowns. We're confident that Golub Capital and GBDC are going to be among the winners. We're very optimistic about our medium- to long-term ability to produce premium returns for our investors, consistent with our nearly 16-year track record with GBDC since it went public. Now I'm going to pass the call over to Tim, Rob and Chris to discuss operating performance in the quarter in more detail, and I'll be back at the end for questions. Tim? Timothy Topicz: Thanks, David. Let's start on Slide 3 and discuss the drivers of GBDC's $0.34 per share of adjusted NII and negative $0.18 per share of adjusted earnings. First driver, overall credit performance remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories and investments on nonaccrual status remained very low at just 1.4% of the total investment portfolio at fair value. This level is well below the average of GBDC's listed BDC peers. Second driver, GBDC's investment income yield of 9.7% annualized was down 30 basis points sequentially. The decrease was primarily driven by the full quarter impact of lower SOFR following the interest rate cuts of late 2025. Third driver, GBDC's borrowing costs declined by 20 basis points to 5.2% annualized, one of the lowest borrowing costs in the listed BDC peer group. The decline was similarly driven by the impact of lower SOFR, an offset that highlights one of the advantages of GBDC's predominantly floating rate debt capital structure. Fourth driver, GBDC's earnings continued to benefit from a gold standard fee structure and one of the lowest operating expense loads in the listed BDC peer group. And finally, as David previewed, credit spread widening drove the majority of the $0.52 per share of net realized and unrealized losses, resulting in a $0.18 per share loss in the quarter. Regarding balance sheet changes and distributions in the quarter, NAV per share declined to $14.35 per share. We ended the quarter with net debt to equity of 1.24x, consistent with prior quarters and within our targeted range of 0.85 to 1.25, while average leverage throughout the quarter was 1.21x, a modest decrease from prior quarters. Total distributions paid in the quarter were $0.33 per share. Our Board of Directors declared a $0.33 per share distribution for the third fiscal quarter of 2026. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. The company repurchased 2.2 million shares in the quarter at a weighted average price of $12.43 per share or an approximately 16% discount to December 31, 2025, net asset value. In addition, the Golub Capital Rabbi Trust purchased approximately $19 million or 1.5 million shares of GBDC during the quarter for the purposes of awarding incentive compensation. Turning to Slide 7. You can see how the earnings drivers I just mentioned translated into GBDC's March 31, 2026, net asset value per share of $14.35. Adjusted NII of $0.34 fully covered the $0.33 per share base distribution that was paid out during the quarter. Adjusted net realized and unrealized losses were $0.52 per share. and $0.02 per share of net asset value accretion from share repurchases. Taken together, these results drove a net asset value per share decrease to $14.35. Now let's unpack the $0.51 per share of unrealized losses on Slide 8. It's important for investors to note that unrealized losses are not all created equal. When they are credit related, they often don't come back. On the other hand, when borrowers perform, the unrealized losses reverse over time as loans mature or spreads tighten. So a key question to ask when interpreting GBDC's results is how much of the unrealized loss in the March 31 quarter is likely to prove temporary. While there's no way to be sure except in hindsight, we find it informative to look at how much unrealized loss is embedded in borrowers that are performing in line or better than expectations at underwriting. In our experience, such unrealized losses are likely to reverse over time. Our preliminary analysis suggests the vast majority of unrealized losses were attributed to borrowers that are performing at least as well as we expected at the time of underwriting. You'll recall that GBDC's internal performance ratings categorize borrowers on this basis. For example, borrowers with ratings 4 or 5 are performing in line or better than expectations at underwriting, and we expect them to continue to perform as expected. Approximately 70% of the $0.51 per share of net unrealized losses this quarter or $0.35 per share came from borrowers rated 4 or 5. Because the borrowers are performing well, our view is that the fair value adjustments taken in the quarter were primarily driven by market spreads and are likely to reverse over time. Put differently, if GBDC were a bank and we didn't have to make fair value adjustments based on market spreads, the quarter would have been profitable. That said, we're not taking the expected reversal of unrealized losses for granted. We are keenly focused on avoiding permanent credit impairment and minimizing realized credit losses. Long-time GBDC investors are familiar with our playbook, careful underwriting, proactive portfolio monitoring, early detection of potential vulnerabilities and early intervention to address those vulnerabilities. The remaining 30% of net unrealized losses or $0.16 per share came from borrowers rated 3 or lower. These markdowns reflect the impact of the mix of market spreads and further credit deterioration in known troubled credits. In fact, the majority of the $0.16 per share of unrealized losses were related to borrowers on nonaccrual status as of March 31, 2026 or previously restructured portfolio companies. I will now turn the call over to Robert Tuchscherer to walk through our portfolio in more detail. Robert Tuchscherer: Thanks, Tim. I will now highlight our second fiscal quarter investment activity and provide some additional context on portfolio performance. Turning to Slide 9. In the first calendar quarter of 2026 at the Golub Capital level, our team originated over $3.3 billion of new investment commitments. GBDC participated in these new originations on a limited basis with $17.7 million in new investment commitments in the quarter, given slow repayments and our desire to focus on accretive share repurchases. We remain highly selective and conservative in our underwriting, closing on just 1.9% of deals reviewed in the quarter at a weighted average loan-to-value of approximately 42%. We leaned in on existing sponsor relationships and portfolio company incumbencies for approximately 69% of our origination volume, and we made loans to 10 new borrowers. We continue to leverage our scale to lead deals, acting as the sole or lead lender on 94% of our transactions in the quarter. We focused on the core middle market, defined as borrowers with between $10 million and $100 million of annual EBITDA, which we believe continues to offer better risk-adjusted return potential than the larger end of the market. The median portfolio company EBITDA for originations for this quarter was $76 million. About 57% of our new origination volume in the second fiscal quarter supported M&A-driven transactions such as LBOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Of GBDC's $18 million in new investment commitments in the quarter, 98% were in senior secured debt investments. New investments carried a total weighted average rate of 8.8%, which included a 4.9% weighted average spread. Turning to Slide 11. As of March 31, 2026, GBDC's $8.3 billion portfolio remains well diversified across 420 different borrowers. The number of portfolio companies in GBDC's portfolio has increased nearly 26% over the past 3 years, further enhancing our diversification. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average, and our top 10 investments comprise just 13% of the overall portfolio, which represents a concentration level that is less than half of the average of our listed BDC peers. GBDC's portfolio is also well diversified by industry subsector with 52 individual subsectors represented. Software portfolio companies represent approximately 26% of GBDC's portfolio at fair value. Before moving on to credit quality, I'd like to expand on our software portfolio in light of recent investor interest in the potential for AI disruption. But before I go into detail, I want to remind everyone of what informs our view. In short, we're specialists in software investing at Golub Capital. We have been investing in software companies for a long time, more than 20 years. We've completed over 1,000 software deals representing in excess of $90 billion in commitments over that period. We're also good at it. Over those 20 years, we've had an annualized default rate of just 0.05% or 5 basis points. We've also got a great team, including 25 dedicated investment professionals with over 230 years of combined experience through multiple credit and technology cycles. We've got a well-developed underwriting approach. It starts with a long-held view that the most creditworthy software companies are dominant players in a niche market. These winners typically provide enterprise-critical platforms with sticky and embedded workflows, long implementation cycles and high switching costs. In 2023, we began including a systematic framework for assessing AI risk at the borrower level for all new software deals and across our software portfolio. This framework assesses potential AI risk at both the product and end market levels. We continue to believe that AI risk is not the same across all software companies and subsectors and therefore needs to be evaluated at the borrower level on a case-by-case basis. Finally, 95% of our software investments are in first lien senior secured loans with significant equity cushion behind them. In many instances, we are lending at a 35% loan-to-value, which means that enterprise value of the borrower would have to decline by 65% before our senior debt position even begins to be impaired. As we look at Slide 12, you can see that within our existing software portfolio, which represents approximately 26% of GBDC's portfolio, 95% of the software investments are in internal performance ratings categories 4 and 5, our highest-rated categories. The performance ratings of our software portfolio compares favorably to the overall GBDC portfolio. During the quarter, we re-underwrote our software portfolio and established a new metric, degree of AI disruption risk. Our analysis has led us to conclude that only 8% of the software portfolio is subject to an elevated level of AI disruption risk. We plan to continue to monitor AI disruption risk over the coming quarters and plan to report back on our findings. On Slide 13, you can see that nonaccruals increased slightly quarter-over-quarter to 140 basis points of total investments at fair value, but remain at very low levels in absolute terms and relative to the broader listed BDC sector. During the quarter, the number of nonaccrual investments increased to 19 with the addition of 5 portfolio company investments. The financial health of our portfolio companies generally remains strong. Our portfolio's average interest coverage ratio of 1.8x increased quarter-over-quarter. The portfolio's average leverage level also showed strength, declining about 0.25 turns of debt to EBITDA from year-end 2024. Additionally, healthy enterprise values continue to underpin our loan positions as loan-to-value ratios remained stable at approximately 45%. Slide 14 shows the trend in internal performance ratings for the entirety of GBDC's portfolio. As Tim noted earlier, nearly 90% of the total investment portfolio remained in our top 2 internal performance ratings categories and investments rated 3 signaling a borrower may have the potential to or is expected to be performing below expectations, decreased quarter-over-quarter to 8.7%. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 2.2% of the portfolio at fair value. I'm going to turn it over to Chris now to take us through our financial results in more detail. Christopher Ericson: Thanks, Rob. I'll now cover GBDC's performance and liability profile for the second fiscal quarter of 2026. First, on performance. The economic analysis on Slide 15 highlights the drivers of GBDC's net investment spread of 4.5%. Let's walk through this slide in detail. We start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell approximately 30 basis points sequentially to 9.7% annualized, largely reflecting the full quarter impact of the rate cuts from the fourth calendar quarter of 2025. Our cost of debt, the teal line, decreased approximately 20 basis points to 5.2%, reflecting our approximately 80% floating rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined slightly. Moving to the balance sheet on Slide 18. We ended the quarter with over $8.3 billion of total portfolio investments at fair value, $4.7 billion of outstanding debt and $3.7 billion of total net assets. Net debt-to-equity leverage was 1.24x at quarter end, relatively flat compared to the prior quarter, reflecting the impact of lower average investments outstanding during the quarter, but offset by the impact of fair value markdowns and share repurchase activity. Turning to GBDC's liquidity on Slide 21. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.4 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unsecured revolver provided by our adviser. Our debt funding structure highlighted on Slide 22 remains highly diversified and flexible. Our weighted average borrowing cost of 5.2% annualized remain low and what we believe to be one of the lowest in our listed BDC peer group and is underpinned by a differentiated investment-grade ratings profile. Consistent with our asset liability matching principle, 80% of GBDC's total debt funding is floating rate or swapped to a floating rate, which positions us well to continue to modulate the impact of lower interest rates on investment income through offsetting lower interest expense on our borrowings. 51% of our debt funding is in the form of unsecured notes across a well-laddered maturity profile. Our next unsecured note maturity is in August 2026, and we continue to evaluate new issue pricing levels in the unsecured debt market. Importantly, we have the requisite liquidity available under our revolving credit facility and balance sheet flexibility to mitigate refinancing risk associated with these maturing bonds. With that, operator, could you please open the line for questions? Operator: [Operator Instructions] Your first question comes from Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just one on the software loan side of the portfolio. And you talked about the new AI risk framework, and I think it's about 8% of the investments being at risk there. Wonder if you could just talk a little bit more about the -- some of the characteristics that underlie some of those investments, commonalities there? And what sorts of mitigation could you see being performed over time on those types of investments? David B. Golub: Sure. Thanks, Ken. I'll start, and Rob, maybe you can add to what I'm going to say when I'm done. So for some context, we started investing in software at a time when almost no other lenders did. So the idea of being a lender to this space at a time that's contrarian is, for us, not uncomfortable. In some ways, all of the noise that you're hearing right now about risks in software is good for us because we understand the difference between good software credits and bad software credits, and it means less competition. What we're seeing in the marketplace right now is many pure lenders who had started to get into software lending in the last few years want to be able to report to their shareholders how they're reducing their software exposure. So they're literally not participating in marketplace opportunities for new loans. So that's just some context for you. The exercise that Rob talked about involved looking at our portfolio from the standpoint of degree of AI disruption risk. And he correctly said that 8% of the roughly 25% of our portfolio that's in software. So it's roughly 2% of our overall portfolio is in a category of elevated AI risk. That doesn't mean we think we're going to lose money on these loans. They could be low leverage, they could be near maturity. There are a lot of other factors that go into whether we're going to see elevated risk of credit loss in these loans. But this is a very important rating system from the standpoint of both evaluating new loans and helping us figure out from a monitoring perspective, what should be our goals with those borrowers. So for example, it would be reasonable to conclude that if we see elevated risk of AI disruption, we're going to want to reduce exposure or we're going to want to get paid for the exposure that we're taking. We may want to increase pricing. We may want to increase equity cushions. We may want to take other steps that reduce risk. So what kinds of companies fall in this category. The most significant element of the category are companies that are involved in providing tools that enable others who are writing code to do so more effectively. This has historically been a significant category of software companies. It's not a category that we've historically been attracted to, but we do have a couple of exposures that fall in this category. I'd say that's the largest component of the group. Rob, if you want to add more color, please do. Robert Tuchscherer: Yes. Thanks, David. Yes, building on what David is talking about in terms of the different attributes. As I mentioned in my remarks, we look at it at 2 levels. One would be on the product side and then the second would be at the end user level. So if you look at the handful of businesses that are falling into what we would categorize as potential for higher AI disruption risk. David mentioned one category of products, which we develop in tools. The other would be something that is more reliant on content creation. So a business such as Pluralsight, which we're all well aware of. And then on the end market side, you would have businesses that serve end markets that maybe are not seeing headcount reductions today, but could see them in the future. So for example, contact center or call center type businesses are ones that we will be monitoring more closely. But again, this is really a forward-looking metric given that the performance of the portfolio has remained really strong. But I think from our perspective, as I mentioned, we're going to continue to monitor for AI disruption risk and roll this analysis forward and report back on our results in the coming quarters. Kenneth Lee: Great. Very helpful there. And just one follow-up, if I may, just on capital allocation. I saw that you repurchased some stock in the quarter. Looking out, is the preference to lean more towards repurchases versus new investments? David B. Golub: I think we're going to continue to evaluate the best ways in which to allocate our capital. So it's hard to answer your question in an absolute sense. We've got to look at the opportunities in front of us and that includes share repurchases that includes new investment opportunities, that includes working within our target leverage framework. So there are many factors that go into that. Operator: Your next question comes from Ethan Kaye with Lucid Capital Markets. Ethan Kaye: Kenneth covered a couple of my questions, but just maybe one for David. In your introductory remarks, you kind of mentioned based on some industry data you're seeing, there's perhaps a subset of companies across the industry that -- portfolio companies across the industry, borrowers that are really not adapting well to these economic conditions. I guess just kind of curious like what's your diagnosis as to why these companies either have not adapted or have not been able to adapt? And is it something that -- is the capital structure related? Is it something related to the fundamental business, the sector they're in? Just any kind of through lines you can draw regarding those companies would be helpful. David B. Golub: Sure. So first off, let's talk about some of the indicia that we're seeing of elevated credit stress. So you can see it in Fitch default data. You can see it in the degree of business of restructuring advisers and restructuring lawyers. You can see it in the quantum of PIK amendments that are coming through. You can see it in the broadly syndicated market and the proportion of the market that's trading below 85. There are a whole variety of data points that I think are visible that illustrate that we're in a period of some elevated credit stress. In some prior periods like this, that elevated credit stress has been concentrated in a single industry. So think about the fiber telecom crisis of the early 2000s. We don't really see that right now. It's not all in one industry. There are though some red threads that are common themes. So one common theme, people talk about the K-shaped recovery are companies that are focused on the lower end consumer. The lower-end consumer is stretched right now. You can see it in subprime auto data, subprime credit card data. And so with the recent increases in gas prices, my expectation is that's going to get worse. A second red thread is companies that are beneficiaries of moving of people selling their house and moving to a new house. The rate of moving is very low right now because of people locked in by low interest rate mortgages that they put in place before interest rates went up. So if you're in the furniture business or the home decor business or the HVAC business, these are all linked to a significant degree to moves. And so those have been under some pressure. A third red thread is some areas where we've seen changes in consumer behavior. During COVID, there was a very significant increase in interest in purchasing in virtually all outdoor sports, hiking, fishing, hunting, boating, many of bicycling. Many of those areas have seen decreased spending levels in the period since, and it didn't kind of go back to previous normal. It's gone lower than previous normal. So those are some examples. And then there are some that I'd say are more specific to the private equity ecosystem. There are some companies that were overleveraged, bought at very high multiples and overleveraged in the peak LBO boom of 2021 and early 2022. And in some cases, those companies weren't designed from a capital structure standpoint to be able to tolerate plus 5% on interest rates. I don't think it's a one factor, Ethan. I think there are a bunch of different themes that you see in the market today. And I think that's one of the reasons that this credit cycle is unusually elongated. It's not like there's just one industry that needs to go through a restructuring process. There are a large number of companies in a variety of industries that need to do so. Operator: [Operator Instructions] Your next question comes from Robert Dodd with Raymond James. Robert Dodd: I don't want to go back to software, but I'm going to anyway. Can you give us any color on kind of growth dynamics like net revenue, revenue retention, which is recurring revenue or same-store sales concepts. I mean when I look at the Altman data that you published, which is obviously, I think, a platform-wide set of data, there has been a noticeable slowdown in software growth. I mean everything is still growing over the last several quarters. I mean, how relevant is that to the assets that are in the BDC? And can you give us any color on kind of like -- any metrics about how they're doing versus, again, the Altman numbers paint a certain picture? David B. Golub: So thank you, Robert. So for those who are not familiar with what Robert is alluding to, we publish a quarterly index called the Golub Capital Altman Index and it looks at the growth in both revenues and EBITDA for the first 2 months of each quarter. And we're able to show those numbers by some industry sectors where we have a sufficient -- and a sufficient number of companies to make the numbers meaningful. And Robert is correct that if you look at the data over the last, I'd say, half dozen quarters, the good news is we're continuing to see growth across the U.S. economy generally and across the software sector, both growth in revenues and growth in earnings, and we're seeing a slowdown in growth in revenues and earnings. Interestingly, that slowdown is not just in software. That slowdown is broad-based. It's across industries. Among the stronger industry segments that we've seen is software. So there isn't a selectivity, Robert, where the software companies that are included in the index are meaningfully different from the software companies that are in the GBDC portfolio. Wherever we have data, we're showing the data. I think what the data says is that the software industry remains healthy, that you're not seeing -- as of now, you're not seeing AI eat the software industry. But -- but you are seeing across the entirety of the U.S. economy, you are seeing a bit of a slowdown in growth. Robert Dodd: Got it. Moving on to kind of the outlook for active -- kind of market is somewhat slower Q1, beginning of Q2 has started to see a pickup, but not a rocket ship exactly. What's your view on how you think -- I mean, all the things were pent-up exits, et cetera, those all still stands, but it doesn't mean they happen this year. I mean what's your view on kind of how that could trend? We've gone through a period of volatility. Sometimes that takes a period to recover from spreads are wider, et cetera. I mean what's kind of your view on how and it is a crystal ball moment, how the rest of the year could play out in terms of activity and general market trends. David B. Golub: Yes. We haven't yet talked today about an elephant in the room, which is the oil markets and the situation in the Strait of Hormuz. I think that's a very large factor in respect of your question. So predicting the future of M&A trends almost requires an assumption about the straits. In one scenario, we get near-term resolution, oil prices come down, there's reasonable predictability about energy prices going forward. I think that scenario points to significant momentum and recovery in M&A. The alternative scenario, which is continued uncertainty, not lack of clarity, higher oil prices, increasing shortages in parts of the world of jet fuel and fertilizer and petrochemicals, I think that scenario points to an extended period of relatively impaired M&A activity because uncertainty is not the friend of deals. You can have bad news and still have deals, but uncertainty is very challenging for deals. So I'm not sure, Robert, as to which of those 2 paths we're going to see. I'm hopeful that we'll see some resolution and that we'll be in the first of those 2 scenarios. But I don't think anybody can be certain right now which of those is going to transpire. Operator: Your next question comes from Derek Hewett with Bank of America. Derek Hewett: Could you talk about the sustainability of the dividend following the reset last year? Dividend coverage is lower versus kind of -- kind of the pro forma number last quarter and relative to where it is today, especially when we're in an environment where you have the uncertainty in the Middle East, plus you have normalized -- you have credit normalization that could be a drag on earnings in the coming quarters. David B. Golub: So great question. You provide context again. We did a dividend reset recently, and it was challenging to figure out what the right level is because of uncertainty about base rates, uncertainty about spreads, uncertainty about credit. There are many different factors that impact earnings power. I think where we came out was a good place. I think if you look at our NII per share this last quarter, it's an illustration of the earnings power of the company today. And I think we talked in the call about several different paths to increasing that earnings power, including higher spreads and including gains, realized and unrealized gains. So this is something we're going to need to continue to watch and study and make sure that we continue to put our dividend in the right place as a floating rate loan fund, we need to be responsive to market. Derek Hewett: Okay. And then I might have missed this in the opening comments, but could you provide a little bit more color on what caused the increase in PIK? And then of the total, like what percentage of PIK was just like your typical PIK by design versus amendment PIK? David B. Golub: I don't think we disclosed that in our comments today. And to be honest, I don't remember what exactly is in the queue on that. So I'm going to ask to come back to you after we've reviewed what we've disclosed, and we can share that with you. Timothy Topicz: Derek, it's Tim. I might just jump in there and just say, generally speaking, the vast majority of our PIK interest is associated with borrowers that we've structured a PIK toggle into the credit agreement at the time. of underwriting as opposed to PIK amendments to support portfolio companies from a liquidity perspective. So that's the vast majority. We did see an uptick in PIK interest income for the quarter versus the prior quarter, but that was largely driven by one portfolio company that elected to toggle more PIK interest in this quarter than it did in the prior quarter. Hopefully, that gives you more context. Operator: Your next question comes from Paul Johnson with KBW. Paul Johnson: Just going back to software, 1 or 2 questions there. I'm just curious how do you, I guess, approach any sort of software restructuring or discussions around the topic with the software company in this environment. And I'm just thinking most of those companies probably would prefer to avoid any sort of insolvency or any sort of indication of a potential restructuring, certainly any sort of bankruptcy for any sort of concerns around obviously, retainment of clients. So I would imagine maybe you would be getting involved there a little bit earlier on than normally you would. But I'm curious kind of is it just more of a recurring check-in with most of these companies? Or do you look to take potentially be a little bit more aggressive in taking action sooner in the current environment? David B. Golub: So again, I'll start with some comments on that, and then I'm going to ask Rob, who's been leading our software underwriting efforts for years to comment as well. Our approach is always the same. You want to identify problems early. When you identify problems early, there are more options that we, as lenders, as sponsors, that management teams can undertake to resolve them. So we're big believers in not sweeping things under the rug and instead in escalating issues and having discussions about them early. That's true in software. That's true in other areas as well. In software, we also maintain very close dialogue with both our sponsor clients and our management teams. Again, we view ourselves as having 2 sets of partners when it comes to portfolio companies, both the sponsor and the management team. And sometimes one is more important, sometimes the other is more important. This is not an asset class where you make a loan, put the document in the drawer and pray. That's not an effective strategy for running a direct lending program. It's -- our approach is the polar opposite of that. We really work very hard to engage with our sponsor clients and our portfolio companies to help them during both good times and in bad times. Rob? Robert Tuchscherer: Yes, I don't have much to add. I would agree that we have a pretty methodical portfolio management process that spans all 4 of our industry verticals. So I don't think there's much of a difference in terms of our process or approach. I think the other point that I think is important in these situations is that although it's always a balancing act, given the fact that 95% of our software portfolio is in first lien senior secured loans and well diversified, I think that when we come into these discussions, we feel pretty good about where we sit in the capital structure and our position. So I think that helps when we're having these discussions with sponsors if there is an ask on an amendment or there's some degree of underperformance. Paul Johnson: Got it. Appreciate it. That's all very helpful. One just higher-level question. I mean in terms of just market activity, where is that kind of gravitated to in this environment? I mean is the market still available in terms of kind of the large buyouts, the more of the large unit tranche, $1 billion-plus type of financing acquisitions in the market? Or is it, at this point, a little bit more averse to the larger transaction size and you're seeing potentially more activity kind of further down the market? That's all for me. David B. Golub: I think we're seeing activity across the size range. So I don't think it's restricted to just small or just big. I think that it's -- in terms of putting together a larger group of lenders interested in a particular transaction, it's harder in software right now. And in some respects, it's harder for very large deals because some of the bite sizes of some players in the market who are interested in the large market, those bite sizes have come down in the context of slower subscriptions and redemptions in the nontraded space. Paul Johnson: Got it. And then I guess one more further -- just one more on that point, if you don't mind me putting one more in here. But have you seen that the pressure from redemptions and the subs you just mentioned, has that impacted the market in any way from some of your more kind of usual competitors, as you mentioned here, commitment sizes or pricing by any means. David B. Golub: Look, I think we all live in a world of supply and demand. So there's a lower degree of capital that's looking for new investments right now. That's part of the -- that may be the biggest factor contributing to what I referred to in my prepared remarks is this shift in wind direction that's caused the market to go from blowing toward more borrower-friendly to now where it's blowing more lender-friendly. Operator: This concludes the question-and-answer session. I'll turn the call to David Gallop for closing remarks. David B. Golub: Thank you. So just wanted to thank everybody for listening this morning and for your questions. As always, if there's a topic that you're interested in that we did not cover or did not cover in the depth you want, please feel free to reach out. Look forward to talking to you all next quarter. Timothy Topicz: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Jazz Pharmaceuticals plc 2026 first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, John Bluth, Head of Investor Relations. Please go ahead. Thank you, and good afternoon, everyone. John Bluth: Today, Jazz Pharmaceuticals plc reported its first quarter 2026 financial results. The slide presentation accompanying this webcast is available on the Investors section of our website along with the press release and quarterly report on Form 10-Q for the first quarter ended 03/31/2026. On the call today are Renée Galá, President and Chief Executive Officer, Samantha Pearce, Chief Commercial Officer, Robert Iannone, Global Head of R&D and Chief Medical Officer, and Philip L. Johnson, Chief Financial Officer. On slide two, I would like to remind you that today's webcast includes forward-looking statements, such as those related to our future financial and operating results, growth potential, and anticipated development, regulatory and commercial milestones, which involve risks and uncertainties that could cause actual events, performance, and results to differ materially from those contained in these forward-looking statements. We encourage you to review these risks and uncertainties described in today's press release and under the caption Risk Factors in our annual report on Form 10-K for the fiscal year ended 12/31/2025. We undertake no duty or obligation to update our forward-looking statements. As noted on slide three, we will discuss non-GAAP financial measures on this webcast. Descriptions of these non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial measures are included in today's press release and the slide presentation available on the Investors section of our website. I will now turn the call over to Renée. Renée Galá: Thanks, John. Good afternoon, everyone, and thank you for joining today's conference call, led by commercial execution across our highly differentiated products for sleep, epilepsies, and cancers. This resulted in our highest-ever first quarter total revenues of $1.1 billion, reflecting more than 19% year-over-year growth driven by the outstanding performance of Xywav, Epidiolex, Midevo, and Zepzelca. Our commercial teams generated double-digit growth across all our promoted brands, and saw strong contributions from our ongoing launches. This performance reflects the disciplined and consistent efforts of our team, working with clarity and purpose to support the physicians and patients we serve. In addition to our impressive commercial performance to start the year, we are urgently advancing the development of zanidatumab for patients with HER2-positive first-line locally advanced or metastatic GEA where the unmet medical need remains significant. The FDA recently accepted our sBLA for ZYHERA under Real-Time Oncology Review, and granted priority review with a PDUFA date of 08/25/2026. We are ready to launch ZYHERA in GEA as soon as we receive FDA approval, and we expect ZYHERA will become the HER2-targeted therapy of choice for HER2-positive first-line GEA patients given the magnitude of benefits seen across both experimental arms when compared to the trastuzumab control arm. In R&D, we continue to make progress across our pipeline, with multiple ongoing registrational zanidatumab trials, early-stage trials evaluating oncology assets, and the early development of neuroscience and epilepsy assets. The year is also off to an excellent operational start with cash flow of over $400 million in the first quarter, and non-GAAP adjusted EPS of $6.34. Our financial strength and disciplined capital allocation enable us to invest in the continued growth of our commercial portfolio and pipeline, while also positioning us to execute on business development opportunities that fit our strategic focus in rare disease. With that, I will turn the call over to Sam to share more details on commercial performance. Samantha Pearce: Thank you, Renée. Our commercial team delivered strong results across Jazz Pharmaceuticals plc's portfolio, with momentum from our 2025 launches and coordinated execution continuing into 2026. I will begin on slide seven with sleep. Xywav's net product sales increased 18% to $408 million in 2026, compared to the same period in 2025. As expected, HCPs and patients continue to drive demand for safer, low-sodium Xywav. And we saw strong new patient growth with approximately 425 net patient adds. There are now approximately 16,600 patients taking Xywav, which remains the number one branded treatment for narcolepsy based on product revenues and the only FDA-approved treatment for idiopathic hypersomnia. Our field teams continue to expand both the IH and narcolepsy markets by educating HCPs on the importance of addressing the full spectrum of daytime and nighttime symptoms. These efforts are complemented by digital and media campaigns to increase disease awareness and support patient education. Our JazzCares support services, including field-based nurse educators, support patients from initiation, through titration, and across the long-term treatment journey. These services remain important differentiators for Jazz Pharmaceuticals plc. Moving to slide eight and Epidiolex. Epidiolex net product sales increased 15% to $250 million in 2026, driven by strong underlying demand and 16% volume growth during the quarter. Expanding our reach in the adult patient population, and specifically in the long-term care setting remains a key focus and an important near-term growth opportunity. Our nurse navigator program continues to have a meaningful impact on improving patient persistency, and expanding utilization of this resource remains a priority for 2026. Finally, as part of our commitment to bring Epidiolex to appropriate patients in Japan, we have partnered with Nippon Zoki, a Japanese company with deep expertise in CNS disorders. Jazz Pharmaceuticals plc remains the sponsor of the clinical trial, and Nippon Zoki will lead regulatory, distribution, and commercial activities in Japan. Turning to our oncology portfolio, starting with ZYHERA on slide nine. In 2026, ZYHERA generated net product sales of $13 million. Feedback from biliary tract cancer physicians continues to be positive with real-world experience consistent with the clinical profile observed in our trial. We are also continuing to expand into new community-based accounts beyond academic centers, increasing awareness of ZYHERA in BTC, and building readiness ahead of a potential launch in GEA. As a reminder, there is a substantial customer overlap across our solid tumor footprint, including approximately 90% overlap between BTC and GEA accounts. We believe this positions us well to accelerate uptake in GEA following its anticipated approval and launch on or before the August 25 PDUFA date. Once approved, our existing cross-functional team will be positioned to reach target customers and support rapid adoption of this practice-changing regimen for GEA patients. Turning to slide 10 and our GEA launch preparations. Physicians are expressing excitement and interest in the potential use of ZYHERA in GEA. It has been more than fifteen years since a new first-line HER2-targeted agent became available for patients with metastatic gastric cancer. Given the unprecedented median overall survival data, of more than two years, we believe ZYHERA has the potential to become the preferred HER2-directed therapy and foundational backbone for treating HER2-positive first-line metastatic GEA. The addition of tislelizumab further improved survival outcomes in both PD-L1 positive and PD-L1 negative patients, consistent with ZYHERA's unique mechanism of action that generates an innate immune response in the tumor. ZYHERA already benefits from an established permanent J-code through its FDA approval in second-line HER2-positive BTC, which we expect will simplify reimbursement in GEA and reduce the administrative burden for providers. In addition, the compelling outcomes from the Horizon GEA trial support our expectations for favorable payer access. Finally, our comprehensive JazzCares support services, together with ZYHERA's established availability across customers' preferred distribution channels, position us to enable seamless patient access at launch. Turning to slide 11 and Midevo. Midevo generated $41 million in net product sales in 2026. This strong early performance following its launch in August 2025 reflects the significant unmet need in H3K27M mutant diffuse midline glioma, high awareness driven by advocacy groups, and the value physicians see for patients. Approximately 500 patients have been treated with Midevo since launch through the end of the first quarter. Our highly experienced neuro-oncology field teams, including medical and access colleagues, continue to support the launch. The teams remain focused on expanding reach in community settings, whilst maintaining a well-supported presence in academic centers of excellence. Robust patient-centric support services and payer coverage continue to underpin launch momentum and support appropriate access for patients. Moving to slide twelve and Zepzelca. In 2026, Zepzelca net product sales increased 60% to $101 million compared to the same period in 2025. Growth in the first quarter was primarily driven by strong uptake in the frontline maintenance setting, following FDA approval of Zepzelca in combination with Tecentriq in October. Given the strength of the AMPHORA clinical data and the opportunity to improve both progression-free survival and overall survival for patients with extensive-stage small cell lung cancer, health care providers are rapidly adopting the Zepzelca combination in the first-line maintenance setting. As a result, this new indication is driving the product's strong performance. Our commercial initiatives will continue to be focused on first-line maintenance, reflecting our ongoing commitment to this priority. For the rest of 2026, first-line maintenance adoption is expected to grow, with second-line use decreasing due to competition and fewer Zepzelca-naive patients available for treatment. Overall, we are satisfied with the impressive commercial performance achieved across our portfolio in the first quarter and remain focused on maintaining this momentum throughout the year. With that, I will now turn the call over to Rob to provide an update on our pipeline. Robert Iannone: Thanks, Sam. I will start on slide 14. This is an exciting time at Jazz. In addition to our outstanding commercial execution, we are also preparing to bring zanidatumab to HER2-positive first-line metastatic GEA patients. The data from the Horizon GEA trial definitively demonstrated that zanidatumab offers improved outcomes on all efficacy measures compared to trastuzumab, and should be the new HER2-targeted agent of choice. The data also showed tislelizumab further improved survival outcomes in both PD-L1 positive and PD-L1 negative patients. The benefit regardless of PD-L1 status may be driven by zanidatumab's unique mechanism of action, known as biparatopic binding. This enables zanidatumab to cross-link neighboring HER2 receptors, leading to receptor clustering which blocks HER2 growth signaling and also triggers the complement cascade. Zanidatumab's ability to uniquely and broadly activate the innate immune system may in part explain the additional efficacy observed when tislelizumab was added to zanidatumab, even in PD-L1 negative tumors. The triplet arm of zanidatumab, tislelizumab, and chemotherapy demonstrated improved overall survival, with a remarkable median OS of 26.4 months, representing a meaningful improvement of more than six months median OS compared to prior studies in HER2-positive patients who have a poor prognosis in the metastatic setting. Among patients who had an objective response, the median duration of response was 20.7 months. Again, this benefit was observed irrespective of tumor PD-L1 status. To put this into context, in the KEYNOTE-811 trial, the duration of response for trastuzumab and pembrolizumab plus chemotherapy was 11.3 months. We are moving quickly to bring zanidatumab to HER2-positive first-line metastatic GEA patients. Following the oral presentation at ASCO GI in January, we submitted the data for potential inclusion in NCCN guidelines. We are pleased that the manuscript has been accepted for publication by a top-tier medical journal and plan to submit the peer-reviewed manuscript to NCCN once it has been published. Our supplemental BLA for zanidatumab has received priority review, with a PDUFA date of 08/25/2026. We are actively engaged with the FDA in the review process, and we expect potential approval and launch of zanidatumab in GEA on or before the PDUFA date. Turning to slide 15 and our pipeline. We have multiple clinical trials across our pipeline from early-stage to registrational trials. We look forward to sharing data from some of these ongoing trials at the upcoming ASCO presentations on lurbinectedin and zanidatumab. The second planned interim analysis for overall survival of the zanidatumab and chemotherapy arm of the Horizon GEA trial is still expected midyear. At the time of top-line readout, this arm showed a clinically meaningful effect on overall survival with a strong trend towards statistical significance compared to the control arm. The next pivotal Phase III trial for zanidatumab is in metastatic breast cancer patients who have progressed on or are intolerant to ENHERTU. Trial enrollment is progressing well. We continue to expect to complete enrollment in the EMPOWUR trial in 2027, with top-line data anticipated in late 2027 or early 2028. Other earlier-stage trials continue to progress across new indications, including a potentially registrational pan-tumor basket trial and a neoadjuvant/adjuvant breast cancer trial. Looking ahead to later this year or early 2027, we anticipate the ongoing Phase III ACTION trial will have an interim overall survival readout. This trial is designed to confirm the benefit of Midevo and support regulatory approval as frontline therapy directly following radiation instead of waiting for signs of tumor progression before treating with Midevo. We are working with dedicated focus to both realize the full potential of our near-term opportunities and to rapidly progress our pipeline. Our in-house research and development efforts are underway, and we look forward to sharing updates on those and further pipeline progress in the future. Now I will turn the call over to Phil for a financial update. Philip L. Johnson: Thanks, Rob. I will start with high-level comments on our non-GAAP adjusted P&L as shown on slide 17. Please note that our full financial results are available in today's press release and 10-Q. The outstanding execution of our field-based teams was reflected in record first quarter revenue of $1.07 billion, driven by 45% growth in our oncology portfolio, 18% growth in Xywav, and 15% growth in Epidiolex. Strong underlying performance drove the vast majority of our revenue growth. I do want to point out two smaller items that also contributed to growth this quarter. First, we had the normal thirteen shipping weeks for our U.S. oncology products this quarter; last year's quarter had twelve shipping weeks. This contributed about two percentage points to our worldwide revenue growth rate. Second, the significant devaluation of the U.S. Dollar led foreign exchange to contribute about one and a half percentage points to our worldwide revenue growth. Moving down the P&L, our non-GAAP adjusted gross margin declined slightly year-on-year, primarily due to higher sales of products carrying royalties, namely Zepzelca and Midevo. Non-GAAP adjusted SG&A expense decreased about $164 million. You may recall that in last year's quarter, we recognized litigation settlement expenses of $172 million. Excluding these expenses, SG&A increased by $8 million driven by the inclusion of Midevo expenses. Non-GAAP adjusted R&D expenses increased by $13 million primarily due to the inclusion of Midevo clinical trial expenses and higher compensation-related expenses. Non-GAAP adjusted effective tax rate this quarter was slightly lower than our full-year 2026 guidance due to excess tax benefits from share-based compensation, while our shares outstanding for the quarter reflect the accounting effect of our higher share price on our convertible notes and employee stock plans. At the bottom line, we posted very robust non-GAAP adjusted EPS of $6.34. Supported by our strong start to the year, we are reaffirming our full-year 2026 revenue and expense guidance, including total revenue guidance of $4.25 billion to $4.5 billion. Total revenue guidance for 2026 includes the assumptions you see on slide 18. As a reminder, we assume competitive dynamics in our sleep business will increase in the second half of the year, including high-sodium generics gaining volume, and one or more daytime wake-promoting agents potentially entering the narcolepsy market. We also expect to see a decline in the Xyrem and high-sodium authorized generic revenues as generic high-sodium oxybates build their volumes over the course of 2026. And as Sam mentioned earlier, we expect a decline in second-line use of Zepzelca. Our Q1 performance and focus on disciplined capital allocation position us well to achieve our 2026 guidance. Moving to slide 19, our balance sheet remains strong. We continue to generate significant cash from our business, recording $408 million of cash from operations in the first quarter of the year. And we ended the first quarter with $2.9 billion in cash and investments. Our overall financial position and robust operating cash flow provide significant flexibility to invest in value-driving commercial and R&D programs as well as in promising corporate development opportunities to support our rare disease strategy. I will now turn the call back to Renée for closing remarks. Renée Galá: Thank you, Phil. I will conclude our prepared remarks on slide 21. 2026 builds on the successes we achieved in 2025. Our focused commercial execution led to more than 19% growth in the first quarter, and based on these results, we are on track to achieve our 2026 financial guidance. We look forward to several upcoming catalysts, including the second interim of overall survival from the Horizon GEA trial midyear. Top-line readout for overall survival for the confirmatory ACTION trial for Midevo is expected at the end of this year or early next year. And the top-line readout from the trial evaluating zanidatumab in late-stage breast cancer post-ENHERTU treatment is expected in late 2027 or early 2028. We continue to build upon our proven scientific expertise and capabilities to make a meaningful impact for patients. Supported by our strong financial position, you should expect to see us invest in our commercial brands and pipeline and business development to broaden our portfolio in key strategic focus areas of sleep, epilepsy, and oncology, in addition to other areas of rare disease. I would like to thank all our Jazz Pharmaceuticals plc colleagues for their efforts and dedication to making a difference in the patients' lives that led to an exceptional first quarter. We are relentlessly focused on continuing to deliver life-changing medicines to patients. That concludes our prepared remarks. I would now like to turn the call over to the operator to open the line for Q&A. Operator: Thank you. Wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question today will be coming from the line of Jessica Macomber Fye of JPMorgan. Please go ahead. Operator: Please go ahead. Jessica Macomber Fye: Hey, guys. Good afternoon. Thanks for taking my question. Question on zanidatumab for breast cancer. So if we assume zanidatumab beats Herceptin in breast cancer and gets approved one day for use in the post-ENHERTU setting, how do you expect physicians to make decisions about how to sequence agents in the context of a lack of data for other products post-ENHERTU, among other things? Thank you. Robert Iannone: I am happy to address that, Jess. We became very interested in this space based on good advice from many key experts in the field. And the fundamental issue is that once ENHERTU moves to frontline, there is very little data about which HER2 agent to select as subsequent therapy. So the trial that we are running, 303, will be the first time that we definitively, in a randomized setting, evaluate zanidatumab versus what would be considered a standard of care. So we expect to be out ahead with important data that will inform decisions about whether to use zanidatumab or other HER2 agents in that space. Operator: Thank you. One moment for the next question. And the next question is coming from the line of Joseph John-Charles Thome of TD Cowen. Your line is open. Joseph John-Charles Thome: Hi there. Good afternoon. Congrats on the quarter, and thank you for taking my question. Maybe one on Midevo. Do you have any updated thoughts on sort of the size of this patient population? I think historically, it was thought that it was maybe 2,000 or 3,000, but it sounds like you are already hitting, you know, 500 patients. So any thoughts on that total opportunity just given the strength of that launch? And maybe a follow-up, if I can, on M&A. What is your latest thinking in terms of where you would like to go? Obviously, we have seen a lot of activity in the past few weeks in different areas. What is the sweet spot in terms of size and area of focus for Jazz Pharmaceuticals plc moving forward? Thank you. Samantha Pearce: Sam here. I am happy to take the one on Midevo to start with. Yes, extremely pleased with the launch so far. $41 million in Q1 really gives us a lot of confidence around achieving that $500 million peak opportunity in the U.S. And as you mentioned, we have had 500 patients treated since launch. I think that just reflects the very high unmet need that we see in this space. Overall survival from diagnosis is just one year. So this product has had a meaningful impact, and it is supported by high awareness from physicians and obviously very strong patient advocacy support as well. In terms of the size of the patient population, I think our best estimates are aligned to what you mentioned there, and over time, of course, we will continue to evaluate that. But we do see potential upside in duration of treatment, as well as the size of the population. What we have seen so far is that patients are staying on treatment for longer than we initially anticipated. We will have to wait for this cohort of patients to really mature before we get a really good handle on whether the duration of treatment exceeds that that we saw in the trial, which is around about ten months. But we are extremely happy with the start. I think our teams have done an excellent job really executing this launch well in such an important area of medical need. Renée Galá: And, Joe, this is Renée. I will jump in on BD. We are highly engaged on the BD front, and I do expect us to have deals announced over the course of this year. We do have a clear strategy that is focused on expanding our presence in rare disease. In particular, we believe there is a significant unmet need, so strengthening our current areas of epilepsy, sleep, and rare oncology, also expanding into new areas of rare disease—areas we think we can leverage our capabilities and our footprint to continue to scale our business while driving further growth and profitability. In terms of the deal types, it really depends on the transaction at hand, but we are looking at licensing, structured deals, also outright M&A. I think the key here to being successful in BD is valuing or de-risking in ways that others do not see and then staying myopically focused on execution, as we did with the Chimerix acquisition and subsequent Midevo launch. We have very strong momentum now with the new Chief Business Officer on board as of January 1. Importantly, we are well positioned to execute. Phil mentioned we have a strong financial position: $2.9 billion in cash and cash equivalents on the balance sheet, strong cash flow. And while M&A has picked up, we do believe there is still a lot of substrate that is actionable and well aligned with our strategic priorities. Operator: Thank you. One moment for the next question. Our next question will be coming from the line of Leonid Timashev of RBC. Please go ahead. Leonid Timashev: I wanted to stay with—you mentioned epilepsy—just wanted to touch on that. You have been making a lot of investments in that area, both with Epidiolex, with the Cenobamate asset, you also have JZP-47 and now you mentioned potentially looking at BD there as well. So I guess just curious how you are thinking about that area, to what extent a continued focus, and how you are thinking about either synergies or risk of cannibalization across so many different assets there? Thanks. Renée Galá: Yes. Thanks for the question. This is Renée. I would say this is definitely an area of focus for us. There continues to be significant unmet need across the epilepsy space. You see a strong amount of polypharmacy here with respect to multiple medications generally on board, in particular when we are looking at serious refractory epilepsies. We think with the position that we have with Epidiolex being the number one branded product and having very long durability out to the very late 2030s, it gives us greater opportunity to continue to build around that franchise, to build scale. I am thrilled to see additional opportunities for patients with the strong data that we have been seeing come out with a number of companies, whether that is on the proof-of-concept side starting to go into registrational studies or work that is happening early in pipelines. As we think about ourselves, we think there is plenty of room and unmet need for patients to continue to see new mechanisms explored and new options. So we do think there is still plenty of substrate and a great opportunity for us as a leader in epilepsy. You will note last quarter, we said we were advancing the first molecule coming out of our labs that was not just a formulation play, but an innovative target, novel mechanism coming out of our lab that went into patients in the epilepsy space. We will continue to invest here, and we are excited about the opportunities. Operator: Thank you. One moment for the next question. Our next question is coming from the line of Annabel Samimy of Stifel. Your line is open. Annabel Samimy: Hi, thanks for taking my question. Just want to circle up on Midevo again. Obviously, it has been exceedingly promising since the outset, and you have potential to move into first-line treatment. I guess my question is how should we think about the potential move into first-line treatment? Does it significantly expand the market? Should we think about this like we think about Zepzelca moving into first line and how it significantly inflected growth? I am trying to understand the magnitude given that most patients who are in first line progress to second line. Is it only about duration, or is there a population opportunity there? Samantha Pearce: Yes. Hi, Annabel. I am happy to take that. Yes, I think there are two factors when we consider the ACTION study and what that will do for Midevo and for patients. Some patients do not make it to second line. So, of course, there are more patients available to be treated. But having the opportunity to get Midevo to patients before they progress will mean that the duration of treatment should be longer if they can use it straight after radiation. So those two things, I think, will contribute to the $500 million peak potential, which does incorporate an assumption that we will have that first-line label. Rob, anything more to add on that? Robert Iannone: I mean, you covered it well. I would just point out that sometimes it is hard to judge progression in these patients. And then, as you point out, once it is clinically apparent in addition to imaging, the patients may rapidly progress and not benefit from second-line therapy. So the opportunity to start Midevo right after the radiation therapy really does potentially add a significant benefit to patients and ultimately duration of therapy. Operator: Thank you. One moment for the next question. And our next question is coming from the line of Marc Goodman of Leerink. Please go ahead. Marc Goodman: Sam, can you talk about Epidiolex OUS? I heard Phil talk about the FX impact, but those numbers could not have just been FX. Something is doing pretty well there. So maybe just talk—was there any particular country? Was there any buy-in? Anything unusual there? And maybe you could just comment on Rylaze as well, which happened to have a really good quarter, and what was happening there. Thanks. Samantha Pearce: Yes. Thanks for the question, Marc. Yes, it is great to see the performance outside of the U.S. for Epidiolex. Very strong growth indeed. Around about two thirds of that, I believe, was volume, and there was about a third due to FX and some gross-to-net benefits from places like the U.K. with a VPAG adjustment that happened there. I think this is just down to terrific execution by our teams. As you know, Epidiolex was launched a little bit later in Europe, so there is still quite some opportunity to continue to penetrate in the pediatric segment, but, of course, also in that adult segment, which is a focus for both U.S. and the ex-U.S. business. And then your other question around Rylaze, yes? Rylaze delivered a strong quarter, $100 million, which was 10% revenue growth. But that was comparing to quite a low Q1 2025. So I think the performance that we have seen in this quarter is in line with the prior quarters that we have seen, other than the Q1 which is a low point. What we have seen with Rylaze is the COG impact that started in 2024 has been fully realized now. Our focus continues to be on making sure that appropriate patients can receive Rylaze, that they are switched at the first sign of a hypersensitivity reaction, and the opportunity to continue growth in AYA. But I think that $100 million per quarter for Rylaze is a good kind of stable base for us currently. Operator: Thank you. One moment for the next question. Operator: And the next question is coming from the line of Analyst of Barclays. Please go ahead. Analyst: Hi. This is Jordan Becker on for Etzer Darot. Thanks for taking my question and congrats on the impressive quarter. Maybe just one, if we could expand on any second-half dynamics for oxybates now with a full quarter in the rearview. Maybe if you could provide some more color on any potential competitive pressure from Lumryz specifically. And then on that, maybe any perceived pressure to IH growth down the line if Lumryz is approved in IH? Samantha Pearce: Yes, I am happy to take that question on Xywav. We are very pleased with the continued momentum for Xywav. $408 million this quarter, 18% revenue growth and a really healthy 12% volume growth. We continue to see really good patient adds—425 net patient adds in the quarter, most of them continuing to come from 300 net patient adds for IH, which is consistent with what we have seen in prior quarters. So we finished the quarter with 16,600 active patients. And when we look ahead to the outlook for Xywav for the remainder of the year, obviously, we are very pleased with the momentum that we are taking into the second quarter. We still have continued strong payer coverage—more than 90% of commercial lives covered. Nothing has changed around the nature of our Xywav business in the first quarter of this year. And our 2026 full-year guidance does include assumptions that generics will build volumes in the second half of the year, as well as the potential for the entry of new wake-promoting agents entering the market in the second half of the year in the NT1 narcolepsy segment. But we believe Xywav will continue to have a really important place in therapy. We have invested in some really meaningful evidence generation, XYLO and the DUET studies, which show the importance of having a low-sodium option, and the DUET study, which shows just how effective Xywav is as a nighttime agent. We believe those two benefits will continue to resonate strongly with physicians and patients, of course. Operator: Thank you. One moment for the next question. Our next question is coming from the line of Analyst of Baird. Please go ahead. Analyst: This is Charlie on for Brian. I was just wondering if you could give us a sense of the size of the opportunity for Epidiolex in the adult and long-term care setting. And maybe some more color on the initiatives you are taking there with the new formulation as well as would be curious to hear—will you be sharing any data from the Phase 1b in focal when you get that, and do you have any idea in terms of timing there as well as what your expectations are for the setting for Epidiolex? Thanks. Samantha Pearce: I am happy to take the first part of your question in relation to the adult segment, and then I will hand over to Rob to talk about the study. We are very happy with the performance of Epidiolex in the first quarter of this year, $250 million, 15% revenue growth, and 16% volume growth. As you probably recall, Epidiolex was launched initially very much as a pediatric drug, and we have seen really good penetration in that segment, a leading agent, obviously, for pediatric patients. One area that we do continue to see opportunities in is in that adult segment, particularly in long-term care facilities. So we have made some specific investments there with a dedicated team focusing on those facilities. And we have also invested in a diagnostic tool, REST-LGS tool, because we know that adult patients with LGS often go undiagnosed. So we have supported physicians to help ensure that those patients can get a definitive diagnosis and benefit from Epidiolex. In addition to that, one of the hallmarks of Epidiolex is the very long persistency that we see. But we do see an opportunity to drive that even further. We know that patients that are enrolled onto our JazzCares program, which also gets the support of a nurse navigator, stay on treatment longer, so we have a particularly focused effort now on ensuring that as many patients as possible can benefit from our JazzCares suite of services, and we believe that will drive even longer durations of treatment for Epidiolex. In addition to that, we are making quite significant investments in evidence generation. We have the EPICOM study in TSC and the BECOME survey, which has been focused on adults, which really just underlines the benefit that Epidiolex has not just for the control of seizures, but also for controlling some of the non-seizure symptoms that these patients experience as well. That is one of the very significant differentiating benefits of Epidiolex. So overall, we are very encouraged by the momentum that we have with Epidiolex but also really see a lot of long-term potential to continue to grow Epidiolex into the future, particularly in that adult segment. Robert Iannone: Thanks for the question on the focal seizure study. We are super excited about it. There is a lot of interest from epileptologists to more formally evaluate Epidiolex in this setting. As you know, doctors and treaters think about epilepsy in terms of types of seizures, and we have lots of data showing activity of Epidiolex across really every type of seizure with some preliminary evidence in focal onset seizures as well. This is an evidence generation study to go deeper into this particular population, and we would intend to publish this as soon as we have data available to do so. We have not given any specifics on that yet. After a little more time elapses and we get a good sense of the enrollment rate, we may be able to update further. Operator: Thank you. One moment for the next question. Our next question is coming from the line of David A. Amsellem of Piper Sandler. Your line is open. David A. Amsellem: Hey. Thanks. So I have a long-term competitive landscape question on your business. So your competitor has valroxabate, the sodium once-nightly, or potential no-sodium once-nightly product that is in development. To the extent that reaches the market, can you talk about how that could impact your Xywav business, both in terms of narcolepsy and the IH setting? And just in general, how are you planning to respond competitively to overall a more crowded landscape? The obvious is, of course, with the orexins, but also next-generation oxybate products as well. Thanks. Renée Galá: Maybe I can step in on that, and then I will ask Rob to comment on how we are viewing orexins. I would first point to the fact that Xywav has been competing for the last two years with a number of high-sodium options on the market. Over that time, we have not only built a strong group of patients that are relatively persistent in terms of their use of oxybate, but also the specific relief and flexibility that they receive from Xywav, and it is the only product available for IH. We have done a lot of work in the market in terms of disease awareness. One of the areas that we have invested quite a lot in that Sam has spoken to earlier is the patient support services. I think that is highly differentiating for Jazz Pharmaceuticals plc in terms of the extent of our services and the way that we have deployed those. We will continue to ensure that the unique differentiating benefits of Xywav as well as various support services are well understood in the market. I would also note that we do, from a patent perspective, have a lot of confidence in our overall patent estate. So when you are thinking about the various programs that are out there that may be for a 505(b)(2) sort of path, from that perspective, we do have robust patents that include many Orange Book–listed patents out to 2033 and 2037, and then an Orange Book–listed IH patent out to 2041. But maybe I will also invite Rob to comment with respect to orexins coming into the market and our view there. Robert Iannone: Yes, we have been following orexins carefully, and our conclusion is that it is likely to be complementary to Xywav. As Sam mentioned, alluding to the DUET study, we have significant data showing that the root cause in hypersomnia, such as narcolepsy type 1 and 2, as well as IH, has really disrupted nighttime sleep, and oxybates are the only therapy that can address the disrupted nighttime sleep directly. And Xywav, of course, is the only low-sodium formulation that we believe is safest for patients who are at a high risk for cardiovascular outcomes. Certainly, the orexins are showing to be potent daytime alerting agents. Some preliminary data are showing, though, that you can have insomnia, especially with the longer half-life formulations. The limited PSG data that are out there suggest that they certainly are not improving disrupted nighttime sleep and may actually, in the first half of the night, be impacting it negatively with the reports of insomnia. So we continue to think that this is an important space to follow. We have an orexin in development still, but we think, ultimately, this is going to be complementary to Xywav. Operator: Thank you. One moment for the next question. Our next question is coming from the line of Mohit Bansal of Wells Fargo. Please go ahead. Mohit Bansal: Great. Thank you very much for taking my question, and congrats on all the progress. Just want to ask about the Zepzelca IP here. I see a few new Orange Book–listed patents here since 2025, so they go all the way to 2040. So how should we think about the life of Zepzelca beyond 2029 at the compound-of-matter patent at this point? Thank you. Renée Galá: Thanks, Mohit. This is Renée. We do have a strong patent estate for Zepzelca, and as you noted, we have multiple patents that extend out to 2040. We are also pursuing multiple new patents with the Patent Office that would also extend out to that timeframe, with additional applications, whether that be combo therapies, formulations, or methods of treatment. Stepping back and speaking to the ANDA filers that we have disclosed, we have filed suit against all five ANDA filers, and as the result of filing that suit, a stay of approval is in effect for up to 30 months as imposed by the FDA. While we are not going to speak broadly to active litigation, we do feel that we have a strong patent estate, and as we have more clarity and information on that, we will be certain to share that. Operator: Thank you. One moment for the next question. Our next question is coming from the line of Jason Matthew Gerberry of Bank of America Securities. Please go ahead. Jason Matthew Gerberry: Hey, guys. Thanks for taking my questions. Just one for Phil on Xywav. I apologize if I missed this, but you, at the beginning of the year, guided to flat to mid-single-digit growth for Xywav. Given growth of nearly 20% in 1Q, just wondering if we should be assuming that we are coming in towards closer to the high end of that number? Or were there some one-time dynamics in the 1Q number to call out? And how should we think about zanidatumab pricing OUS and any MFN-related considerations? Philip L. Johnson: Thanks for the question, Jason. On Xywav in the U.S., really pleased, as Sam mentioned, with the great execution of our field-based team. In terms of underlying growth, we had volume growth of about 12% here in the first quarter. There was a bit of additional pickup coming from net price, primarily gross-to-net favorability with both mix of business and then patients successfully transitioning more quickly than in the past back onto their insurance in that first quarter reauthorization period. That is something that is more of a first-quarter phenomenon. We would not expect to see that kind of net price pickup quarter on quarter as we get into Q2 through Q4, but definitely pleased with Xywav performance in the first quarter—it sets us up nicely for achieving the full-year guidance. I think that also applies to the total revenue guidance as well, not just Xywav. And then for the MFN, zanidatumab—right now, the MFN considerations, as you know, are a bit uncertain. We have got some sort of conflicting input out there; certainly GLP and GARD are proposed to use a basket of ex-U.S. countries to provide reference pricing for the U.S. We will certainly be taking that into account as we look at the strategy for getting ZYHERA to patients outside of the U.S., which is certainly a priority of ours and one that we will need to take account of the current situation here in the U.S. as we move forward. Not sure, Sam, if you would like to add any of your thoughts from a commercial perspective, or Renée more from a corporate strategic perspective. Renée Galá: I think you covered it nicely, Phil. Jason Matthew Gerberry: Great. Operator: Next caller, please. Operator: Thank you. And our next question will come from the line of Ami Fadia of Needham & Company. Please go ahead. Ami Fadia: Hi. Good afternoon. Thanks for taking my question. I had a follow-up on the comments related to the oxybate franchise, particularly Xywav. I think at the beginning of the year, you talked about anticipating the potential for some additional headwinds either on the pricing side or just in terms of access with the entry of generics. Maybe if you could talk about some of the dynamics around whether you see any pushback on the use of Xywav, particularly in narcolepsy, and how you see the utilization in narcolepsy evolve with more generics on the market? And then just on the Midevo ACTION trial, can you talk about which interim OS analysis will be done by the time you have the data readout in late 2026, early 2027, and your confidence around the timeline of that readout? Thank you. Samantha Pearce: I am happy to take the question relating to Xywav. Yes, of course, we have seen two multisource generics enter the market in Q1. As yet, we have not seen any impact on Xywav's business. As I mentioned previously, we continue to have strong payer coverage supporting the use of Xywav, so nothing really has changed in the nature of our business for Xywav. But, of course, it is still early days for the generics in the market. We do anticipate that as their volume grows through the course of the year, then we may start to see some actions taken by payers that may include utilization management. We do not know yet. But we are very confident that Xywav offers a really important and differentiating option for patients—being the only low-sodium option, the only product approved for IH. And, of course, it has already demonstrated how effective it is as a nighttime agent and the impact that has on daytime symptoms. We have carried strong momentum throughout the last twelve months and into this year, and we are in a strong position as we go into Q2. Philip L. Johnson: Sam, just to add one thing real quickly as we think about what we are seeing with Xywav before we go on to Rob for the data. Certainly the dynamics are a bit unusual in the first quarter given reauthorization, but I do think we are seeing continued support by patients and physicians of the unique benefit that Xywav offers. Think about looking at the net patient adds. Lumryz net patient adds were announced as roughly 100 adds this quarter, like the 100 last quarter. Our numbers just in narcolepsy have been larger than that in each of those two quarters—again underscoring this unique benefit that only Xywav can offer and the safety advantage it confers being valued by patients as well as physicians. So we are in a great position from that perspective as well as we think about the back part of the year and how things could play out. Robert Iannone: Yes. So, Ami, the ACTION trial is an OS-based endpoint and there is one interim analysis and then a final analysis. The projections we gave are based on our current understanding of the events because it is an event-driven trial. Certainly, if the events slow over time, that could change. But we will update as appropriate as time goes on. Operator: Thank you. One moment for the next question. And our next question is coming from the line of Analyst of Deutsche Bank. Please go ahead. Analyst: Hey there. Thanks for taking my questions. I first wanted to ask on the timing of a potential NCCN guideline incorporation for zanidatumab in GEA. Do you have any sense of, relatively, when that might occur versus the PDUFA date, and how important is a category 1 recommendation to drive uptake? And then in breast cancer for zanidatumab, I wanted to get a sense of how you are thinking about the opportunity size in the different settings. Obviously, you are looking at post-ENHERTU, but I think you are also looking at neoadjuvant/adjuvant. I was just curious as to your thoughts on the size of the opportunity in those various settings. Robert Iannone: Great. On the NCCN guidelines, we proactively submitted the abstract data because it was available. We will certainly update NCCN with the full manuscript as soon as that is available, and we hope that gives them everything they need to make a prompt decision on that and adoption, which we expect. Certainly, we think the data speak for themselves. Head to head against Herceptin, zanidatumab definitively wins. It is clear that tislelizumab is adding and likely to be synergistic with zanidatumab, as demonstrated by the activity in the PD-L1 negative subset, supporting its use upfront with tislelizumab. We think those data speak for themselves, and that should be reflected in NCCN. Samantha Pearce: Sorry, just to finish off the remainder of that question there. NCCN guidelines inclusion is obviously important. We think that the data support a category 1 inclusion. If it comes before the launch, then that will open up access ahead of regulatory approval. Of course, we do not promote ahead of regulatory approval, but certainly that will make it easier for physicians to provide access to their patients. And yes, the breast cancer opportunity is obviously very significant—significantly larger than either the BTC opportunity or the GEA opportunity—with many more patients that can potentially benefit from zanidatumab. So we are excited, obviously, about that for the long-term potential for ZYHERA. Operator: Thank you. That does conclude today's Q&A session. I would like to turn the call over to Renée Galá, CEO, for closing remarks. Please go ahead. Renée Galá: Thanks, operator. I would like to close today's call by thanking all our partners and stakeholders for their continued confidence and support. We look forward to sharing further updates on the potential approval and launch of ZYHERA.
Operator: Welcome, ladies and gentlemen, to Embecta Corp.'s Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be available on the company's website following the call. I would now like to turn the call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Sir, you may begin. Pravesh Khandelwal: Good morning, everyone, and welcome to embecta's fiscal second quarter 2026 earnings conference call. The press release and slides to accompany today's call, along with webcast replay details are available on the Investor Relations section of our website at www.embecta.com. With me today are Dev Kurdikar, embecta's Chairman and Chief Executive Officer; and Jake Elguicze, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides, including those referenced on Slide 2 of today's conference call presentation. Such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, which can be accessed on our website. We do not intend to update or revise any forward-looking statements, including any charts, financial projections or other data referenced in this presentation, whether as a result of new information, future events or otherwise, except as required by applicable law. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation, which are also included in the Investors section of our website at embecta.com. Our agenda for today's call is as follows. Dev will begin with an assessment of the company's performance during the second quarter and associated financial guidance implications. We will also share the progress we have made on our strategic objectives and will discuss the expected imminent closing of the Owen Mumford acquisition. Jake will then take you through our second quarter financial results in more detail as well as our updated fiscal year 2026 guidance. Dev will then conclude with our updated approach to capital allocation, and we will open the call for questions. With that, I will now turn the call over to Dev. Devdatt Kurdikar: Good morning, everyone, and thank you for joining us today. I want to start the call by addressing our second quarter performance and full year guidance revision. This was a difficult quarter for embecta. Our results were below expectations with consolidated revenues down 14.4% year-over-year on an as-reported basis or 17.4% on an adjusted constant currency basis. As a result, we are updating our full year guidance to account for the underlying factors that impacted performance during the quarter and that we expect to persist for the remainder of the year. We have a number of initiatives underway already to counteract them as we transition from our roots as a spun-out insulin injection delivery company toward a more diversified broad-based medical supplies company. We are actively laying the foundation to one day serve patients beyond those solely with diabetes. Our strategic priorities, along with our recent acquisition of Owen Mumford, will help us get there. Turning to the second quarter. While our International business performed in line with our prior outlook, our U.S. business fell short of expectations due to a combination of factors that I'm going to take you through now. The largest contributor to the lower year-over-year U.S. revenue is share loss within our pen needle product category, most of which is concentrated at a single customer. We estimate that the remainder is spread across smaller regional and independent pharmacy customers. It is important to understand that the patients switching to competitive products are likely not on payer plans where we have preferred access. That means that the revenue impact of the switching is estimated to be greater than what is indicated by an average unit price. The second largest contributor is overall market volume softness for insulin pens and pen needles in the retail channel. We believe this contributes to most of the remaining pen needle revenue decline. And as it relates to the insulin pen market, we are seeing signs of decline in overall insulin pen prescriptions. This is driven by a decline in the retail channel, but is being partially mitigated by growth in the long-term care channel. We are also seeing volume softness in longstanding accounts where we have a stable share position. Additionally, more patients choosing to acquire pen needles from channels where we do not participate or where products are lower priced is driving additional pressure on retail pen needle volumes. The remaining pen needle decline is related to inventory reductions at certain accounts and additional net pricing pressure. Finally, a reduction in syringe and safety products revenue comprised the remainder of the overall U.S. revenue decline. As a result, we are revising our fiscal 2026 revenue guidance to a range of between $1.015 billion and $1.035 billion. This reflects both the U.S. revenue shortfall in the second quarter and our updated expectations in the U.S. for the remainder of the fiscal year. International is performing as expected, and our outlook there is unchanged. Additionally, the revised range includes approximately $30 million in revenue contribution from the acquisition of Owen Mumford, which is expected to close by the end of this month. This compares to our previous guidance range of between $1.071 billion and $1.093 billion. As a reminder, during our first quarter earnings conference call, we had commented that we expected to be closer to the lower end of that revenue guidance range. Excluding the anticipated 4-month contribution from Owen Mumford, our current organic revenue outlook at the midpoint is approximately $995 million or a reduction of approximately $75 million from the low end of our prior expectations. Pen needles account for approximately 70% of the $75 million revenue guidance reduction or approximately $53 million. Given that pen needle market volume estimates can be somewhat imprecise, it is not possible to exactly calculate the individual contributions of competitive share loss and market volume softness on our product volumes. Our estimate is that share loss accounts for nearly half of the pen needle revenue reduction or approximately $25 million, while overall market volume softness is estimated to account for approximately $20 million. The remaining pen needle headwinds we are seeing are related to inventory reductions at certain accounts and additional net pricing pressure, which together accounts for approximately $8 million of the revenue guidance reduction. Turning to syringes. They account for approximately $13 million of the remaining $22 million revenue guidance reduction, most of which stems from lower syringe use associated with compounded drugs. While our decision to discontinue our swab products accounts for approximately $5 million of the revenue guidance reduction. For context, in late 2025, our sole supplier of the active ingredient in our alcohol swabs exited the API manufacturing space. Despite extensive efforts, we were unable to qualify an alternate supplier under applicable FDA standards. And while we remain committed to supporting our customers and patients through this transition, we recently made the decision to cease production of alcohol swaps. This product line had lower gross margins than our insulin injection devices. Finally, a reduction in estimated growth of safety products accounts for the remaining amount of approximately $4 million. Our guidance assumes that share loss and softness in market volumes persist throughout the remainder of the year without any further deterioration or recovery. Taken together, these are the drivers behind our performance in the second quarter as well as the full year revenue guidance revision. Considering the magnitude of the guidance reduction, we have initiated a review of our cost structure and organizational footprint. We will communicate findings and resulting actions as part of our standard quarterly reporting once that work has been completed. Now let me briefly touch on our strategic priorities. First, we continue to advance our global brand transition program during the quarter. More than 75% of embecta revenue is now represented by products commercially launched and shipped under the embecta label, and we remain on track for substantial completion by the end of calendar year 2026. Second, in terms of the development of market-appropriate pen needles and syringes, we continue to make meaningful progress during the quarter. These products are designed to compete in price-sensitive markets and may help mitigate share loss. Market appropriate syringes have launched commercially in China, and we are monitoring customer feedback. We plan to expand availability of these products in additional geographies upon the receipt of regulatory approvals. Regarding new pen needles, we have active regulatory submissions under review by the U.S. FDA, Brazilian authorities, and BSI for CE Mark certification in Europe. Third, portfolio expansion. During the quarter, we made meaningful progress on our GLP-1 B2B strategy, building directly on what we shared with you last quarter. At that time, we reported that we were collaborating with over 30 pharmaceutical partners with more than 1/3 having selected embecta as their preferred device supplier or having executed agreements in place. Three months later, the pipeline has continued to develop and now approximately 40% of our identified partners are either in active contract negotiations or have executed agreements in place. We also note that our partners have received Canadian approval and the first U.S. FDA tentative approval for a generic semaglutide injection product. Additionally, this quarter, we moved from pipeline to execution as several of our partners launched generic GLP-1 therapies co-packaged with embecta pen needles in India. That is a meaningful proof-point of our B2B value proposition and our commercial execution. Furthermore, our small pack GLP-1 retail configuration launched in Canada and Australia. These products are designed specifically to meet the needs of the growing out-of-pocket GLP-1 user population, and we expect to extend availability of such configurations into the U.S. market in the coming months to serve those patients who need pen needles to administer Zepbound in a pen injector. Regarding our fourth priority, financial flexibility, during the first 6 months of the year, we repaid approximately $75 million of outstanding principal of our Term Loan B. Disciplined deleveraging has been a consistent priority and this repayment of debt is consistent with our track record of applying free cash flow to strengthen the balance sheet and preserve strategic optionality. That financial discipline is what creates the capacity to pursue transactions like Owen Mumford. When we announced this acquisition in March, we noted that Owen Mumford had earned a global reputation for innovation, quality and patient-centered design. The more time we spend with this team in this business, the more confident we are in that view. At its core, this acquisition accelerates our transformation into a broad-based medical supplies company, one that serves both pharmaceutical partners seeking drug delivery platforms and chronic care patients across diabetes, obesity, autoimmune diseases, and the anaphylaxis markets. More specifically, we are adding a differentiated drug delivery platform designed to support pharmaceutical companies seeking a device to deliver injectable drugs. In addition, we will expand our product portfolio beyond insulin injection devices and capitalize on our global presence, thereby diversifying our revenue base. Finally, given the nature of the products being added to the portfolio, we expect to be able to leverage our core manufacturing strengths and optimize our manufacturing and distribution network, all of which is consistent with the strategy we presented at our 2025 Investor Day. Next I'll provide a brief overview of the business we are acquiring. Owen Mumford is a privately held U.K.-based innovator with a 70-year track record of developing medical devices and drug delivery technologies. OM brings a diversified portfolio of devices that serve chronic care and point-of-care testing markets, including self-injection systems, lancing devices and venous blood collection solutions. These are durable, clinically established franchises with long-standing customer relationships. Their top 10 customers have maintained relationships averaging 20 years, which speaks to the stickiness of their platform and the quality of their execution. Like embecta, Owen Mumford also has a September 30 fiscal year-end. And during fiscal year 2025, they generated revenue of approximately GBP 69.4 million with approximately 80% of their revenue concentrated in the U.K. and the United States. Their business is split between medical devices, which represents approximately 60% of revenue, and pharmaceutical services, which represents the remaining 40%. We view the pharmaceutical services business as the higher growth area of the 2, anchored by the Aidaptus auto-injector platform, which I will discuss next. Aidaptus is an award-winning next-generation auto-injector designed with a single form factor that accommodates both 1 ml and 2.25 ml fill volumes. What that practically means is that Aidaptus has a single final assembly process and was designed from the start to address customers' needs for reduced manufacturing changeovers, simplified supply chain logistics and large-scale production. We estimate the total addressable auto-injector market to be approximately $2.4 billion, growing at a double-digit CAGR. This is driven by the adoption of biologics, the emergence of generic GLP-1 therapies and the broad shift towards self-injection as a preferred modality across multiple chronic care categories. Aidaptus is well positioned to capture a meaningful share of that growth as the platform is already supporting customer clinical development programs with a commercial contract pipeline that includes secured long-term agreements with several partners. The strategic alignment with our existing GLP-1 B2B strategy is also worth highlighting as Aidaptus deepens our relevance to pharmaceutical partners who need a drug delivery device to go alongside their injectable therapy. During fiscal year 2026, Aidaptus is expected to generate a small amount of revenue as market penetration and growth are expected in future years. To that point, the acquisition of Owen Mumford was structured as an upfront payment of GBP 100 million at closing and up to an additional GBP 50 million in performance-based payments based on the net sales of Aidaptus. Regarding synergies, we have assumed a modest level of operational synergies in our financial model, reflecting opportunities to leverage embecta's manufacturing scale and infrastructure alongside Owen Mumford's capabilities. And while we have not assumed any revenue synergies in our financial model, given that OM generates approximately 80% of their revenue in only 2 countries, we believe that the commercial opportunity of pairing Owen Mumford's portfolio with embecta's presence in over 100 countries could be significant. That completes my prepared remarks at this time. And with that, let me turn the call over to Jake to take you through the financials in more detail. Jake? Jake Elguicze: Thank you, Dev, and good morning, everyone. Since Dev outlined the items impacting Q2 revenue, I will keep my comments brief. During the second quarter, embecta generated approximately $222 million in revenue, which is a year-over-year decline of 14.4% on an as-reported basis or 17.4% on an adjusted constant currency basis. Within the U.S., revenue for the quarter totaled approximately $95 million, reflecting a year-over-year decline of 29.4% on an adjusted constant currency basis. The lower U.S. revenue is attributed to the factors that Dev described earlier. Turning to our International business. Revenue for the quarter totaled approximately $126 million, representing an increase of 2.1% on a reported basis, but a decline of 4.1% on an adjusted constant currency basis. Results within International were in line with our expectations as revenue within China was lower as compared to the prior year period, given ongoing market dynamics and the broader geopolitical and trade environment. These declines were partially offset by continued strength across Latin America, Asia, and Canada. Meanwhile, from a product family perspective, during the quarter, adjusted constant currency pen needle revenue declined 20.4%, syringe revenue declined 14.6%, safety product revenue declined 2.3%, and contract manufacturing revenue declined 43.2%. GAAP gross profit and margin for the second quarter of fiscal 2026 totaled $127.8 million and 57.6%, respectively. This compared to $164.1 million and 63.4% in the prior year period. While on an adjusted basis, our Q2 2026 adjusted gross profit and margin totaled $131.8 million and 59.4%. This compared to $165 million and 63.7% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year revenue in the U.S. as well as lower year-over-year revenue in China. These headwinds were partially offset by net changes in profit and inventory adjustments and FX. Turning to GAAP operating income and margin. During the second quarter of 2026, they were $35 million and 15.8%. This compared to $62.9 million and 24.3% in the prior year period. While on an adjusted basis, our Q2 2026 adjusted operating income and margin totaled $48.6 million and 21.9%. This compared to $81.4 million and 31.4% in the prior year period. The year-over-year decrease in adjusted operating income was driven by the decline in adjusted gross profit as operating expenses remained consistent with the prior year period. Turning to the bottom line. During the second quarter of 2026, we generated a GAAP net loss of $4.1 million and a loss per diluted share of $0.07. This compared to GAAP net income of $23.5 million and earnings per diluted share of $0.40 in the prior year period. While on an adjusted basis, during the second quarter of fiscal 2026, net income and earnings per share were $16.1 million and $0.27 as compared to $40.7 million and $0.70 in the prior year period. The decrease in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed as well as a higher year-over-year adjusted tax rate driven by the lower U.S. revenue in the quarter. Turning to the balance sheet and cash flow. During the 6-month period ended March 31, 2026, we generated approximately $47 million in free cash flow, and we repaid $75 million of outstanding debt. While our last 12 months net leverage as defined under our credit facility agreement was approximately 3x. This compared to our covenant requirement, which requires us to stay below 4.75x. That completes my prepared remarks on our second quarter 2026 results. Next, I'd like to discuss our updated 2026 financial guidance and certain underlying assumptions. Beginning with revenue. On an as-reported basis, we are lowering our guidance from a range of between $1.071 billion and $1.093 billion to a range of between $1.015 billion and $1.035 billion. This new range assumes an organic as-reported revenue range of between $985 million and $1.05 billion. It also assumes that we will close the acquisition of Owen Mumford by the end of this month, which would then generate 4 months of contribution or approximately $30 million. In terms of adjusted operating margin, given the expected decline in U.S. revenue as compared to our prior projections, we are lowering our adjusted operating margin guidance from a range of between 29% and 30% to a new range of between 22.25% and 23.25%. We are also lowering our adjusted earnings per share guidance from a range of between $2.80 and $3 to a new range of between $1.55 and $1.75. The largest driver of this reduction is the impact of the lower U.S. revenue and associated gross profit, which accounts for most of this change. In addition to the U.S. revenue and gross profit impact, the addition of Owen Mumford, including the interest expense on the associated borrowings is expected to be dilutive by approximately $0.15. Over the longer term, we continue to expect that the acquisition of Owen Mumford will contribute to revenue growth in fiscal year 2027 and beyond, that OM will be immaterial to embecta's fiscal year 2027 adjusted operating income and to be accretive thereafter, that OM will be dilutive to adjusted net income in fiscal year 2027 to be immaterial to embecta's fiscal year 2028 adjusted net income and to be accretive thereafter, and that the acquisition will generate high single-digit return on invested capital by year 4 with increasing contribution thereafter. Lastly, because of the lower expected U.S. profitability, coupled with the addition of Owen Mumford, we now expect that our adjusted tax rate will increase from approximately 23% to approximately 28%, thereby reducing our adjusted EPS as compared to our prior expectations by approximately $0.10. Turning to the balance sheet and cash flow. Despite the reduction in our revenue and profitability guidance ranges, we continue to target repaying approximately $150 million in debt during 2026. Lastly, in terms of free cash flow and inclusive of the addition of Owen Mumford, we now expect to generate free cash flow of between $95 million and $105 million. This compares to our prior guidance range of between $180 million and $200 million. This updated guidance range includes approximately $40 million in one-time use of cash associated with brand transition and the Owen Mumford acquisition. That completes my prepared remarks. And at this time, I would like to turn the call back to Dev to discuss our updated capital allocation framework. Dev? Devdatt Kurdikar: Recently, our Board authorized a 3-year share repurchase program of up to $100 million and concurrently reduced our quarterly dividend from $0.15 per share to $0.01 a share. We believe that this change in our capital allocation will provide us with additional flexibility to deploy capital towards share repurchases or additional debt reduction, which are currently our primary focus areas. We expect to commence share repurchases beginning in the current quarter, subject to market conditions and our share price, amongst other factors. That completes my prepared remarks, and I will now turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Marie Thibault with BTIG. Marie Thibault: I want to spend a little time better understanding the U.S. weakness this quarter and assumptions going forward. I think you said in your commentary that in the U.S. pen needle segment, the losses were concentrated at a single customer. I wanted to understand if that was the same customer as was referenced last quarter, where there were pricing concessions made and why, if so, the volumes weren't stabilized by that move? And then secondly, you called out weakness in insulin pen prescriptions. Can you tell us a little bit more about what's driving that? Could that be short-lived? Or is that a long-term trend? Devdatt Kurdikar: Let me start by taking the market question first on insulin pens and pen needles, and then go to the competitive loss question. So first on insulin pens, if we look at prescriptions for insulin pens, we have now begun to see a decline maybe more pronounced in the most recent quarter that we reported. That decline is actually greater in the retail channel than it is in other channels. And insulin pens are sold primarily in retail, but some in long-term care and very little in the specialty care channel. So insulin pen is mostly stored and sold in retail, and there has been a decline. That decline is greater in long-acting than fast-acting. And it seems to be driven by a decline in new prescriptions. That obviously translates into the pen needle market as well, but maybe a bit exacerbated in the pen needle market because what we are also seeing is a decline in retail that maybe is a little bit faster for pen needles than there is for insulin pens. Now some of this is likely being caused by shift in purchasing patterns from retail to perhaps lower cost channels or where pen needles are available at a lower price. We've also seen declines in accounts, as I referenced, where we believe we have a stable share position, so more indicative of market than anything else. And those are the market trends that we are seeing. Of all the variables that we try to account for in our guidance, this is perhaps the one where there is maybe more uncertainty because what we are observing is more of a recent shift than certainly what we've seen over the past several years. So that's about the market. Now with respect to the competitive loss, yes, it was the same customer that we had referred to earlier. Obviously, I don't want to talk about pricing at any specific customer or even broadly in the U.S. market. But I think what we've ended up is the share loss at that customer is a little bit deeper than we anticipated. But I want to point out a couple of factors that I referenced in my prepared remarks. So when there is a shift in share at a particular retailer, we believe that much of that share loss occurs with patients who are not on preferred plans with us. And so they can move to a different brand of pen needles and still use their insurance plan. And so when that happens, the revenue impact of that share loss is higher since if we are not on a preferred plan for that patient, obviously the rebate amount for that payer plan is less for us. Secondly, while, yes, most of that competitive loss was concentrated at the aforementioned account, we are seeing some declines in smaller regional players as well as independent pharmacies. Now with these smaller regional players and independent pharmacies, the rebates that these retailers get are obviously less than our large customers. And so that has an impact on the revenue as well. And so the competitive share loss affects us maybe at a higher rate than one might imagine just by using an average unit price. So those are the 2 factors that are impacting the U.S. results this quarter and drove the majority of the guidance revision for the year. Marie Thibault: Okay. That's helpful. And just to clarify, could GLP-1s be an impact on the insulin prescriptions? Is that anything you're seeing in the field? Devdatt Kurdikar: It's hard to definitively state what it is. But certainly, as we explored what the factors were that could be leading to market softness, right? The 2 factors that actually bubbled to sort of the top of the mind are, one, GLPs. And now you could ask sort of what's changed in GLP-1s and GLPs have been around. And we do wonder whether the increasing affordability of GLP-1 drugs certainly over the past several months could have played a factor in increasing penetration rate. Now if that were to be the case, what would result is obviously a larger number of patients sort of would try GLP-1s before they start insulin. And could that be having an effect? Certainly, that's possible, but it's hard to conclusively state that. The second thing, obviously, that occurred in December of 2025, so the beginning of our fiscal second quarter, is the expiration of the ACA subsidies. And could that be having an impact on the insured population, particularly as it affects sort of insulin uptake and doctors' visit and getting sort of progressively treated for type 2 diabetes? Maybe. Those are the 2 factors that potentially have shown an inflection point at the beginning of the quarter, Marie, but it's hard at this point to conclusively state the contribution of those factors or whether there are others. Marie Thibault: Yes. Lastly for me, and then I'll hop back in queue. I understand it's early right now. But as we think about embecta long term, beyond this fiscal year, do you envision that you can return to sales growth here from this level? Devdatt Kurdikar: Yes, absolutely. That's certainly what our intention is, that's what our target is, and that's what we believe the Owen Mumford acquisition will position us for, right? So let me zoom back a little bit. Almost 1.5 years ago, we announced the termination of the patch program. And then at the Analyst Day a year ago, we sort of conveyed our strategic intent to diversify into being a broad-based medical supplies company and really get further into chronic care drug delivery and build out our B2B segment. Prior to the acquisition of Owen Mumford, we started some initiatives. We wanted to expand our portfolio of syringes and pen needles, and you heard today about the advances that we've made over there. And we laid out a plan to really go deeper into the B2B segment and establish relationships with generic drug companies wanting to enter the generic GLP-1 market. And we, at that point, pointed out that that was a $100 million opportunity for us. Everything that we've seen since then, I think, further validates that $100 million opportunity, including the launch of generic GLP-1 therapies in India that actually have our pen needles co-packaged with them. Obviously, we noted with excitement, Canadian approvals. We still expect Brazil and China to launch generic GLP-1s as well. Obviously, timing is a little bit uncertain. China might actually end up being in 2027 rather than 2026. But certainly, the advances that we are making over there do position us to get back to revenue growth. And then on top of that, if you add the Owen Mumford acquisition, it really diversifies our product portfolio into chronic care, broad-based medical supplies. Their medical devices business is really concentrated in a few countries. And while we haven't assumed any revenue synergies in our model, certainly we are excited about the prospect of taking that bag of products and putting it into the hands of our commercial people all over the world. And then the auto-injector platform that I talked about Aidaptus, we believe that that is certainly a product that's differentiated. It allows for reducing supply chain complexity and manufacturing changeovers, which we believe pharmaceutical partners will accept. And over time, by the way, it has a list of secured customers, a pipeline that's developing, and it fits in very nicely with what has been our focus, which is establishing smaller -- deeper relationships with pharmaceutical companies that are looking for drug delivery options. I think you take that and you combine it with our efforts on developing a pen injector, certainly will leverage Owen Mumford's expertise since they have right now a reusable pen injector in their portfolio. And over time, we see ourselves as being a company that can provide an auto-injector, a pen injector and pen needles as a suite of products that will be available to pharmaceutical companies. And I think all of these initiatives absolutely are designed and with the intent of really returning us to revenue growth. One final point I want to mention, sorry Marie, is talking about Aidaptus. I mean, we certainly believe that that could be a $100 million product line for us. Operator: Our next question comes from the line of Anthony Petrone with Mizuho Financial Group. Anthony Petrone: So maybe on the pen needle contract, obviously a competitive loss there. But just wondering the length of the contract in terms of the loss there and when maybe it comes up for renewal, do you think looking ahead, whenever there is another request for proposal there, an RFP that you can look at that contract and be more competitive on the next go around. And then I'll have a couple of follow-ups. Devdatt Kurdikar: Yes. Anthony, on that, maybe it's worth clarifying. It's not like we've lost all the share. It's just our share position is reduced versus what it was. So it's not like we are out of that customer entirely. Now with respect to when we can get back, look, I mean, we have action plans right now underway to not only stem competitive losses, but also figure out ways to get back and win that share. So I don't want to sort of forecast exactly when that will happen, but I do want to convey that we are not going to be standing still waiting for contract renewals or what have you since it's not like we are completely out of those accounts. I think our share position has been reduced in those accounts, and we are certainly going to work as hard as possible to bring our share position back up. Anthony Petrone: That's helpful. I don't know, is there any timing you can put around those efforts? Is that a multiyear effort? Or is it something that you can see in a range of a 12- to 15-month time frame? Or is it, again, longer term? Devdatt Kurdikar: Yes. Look, I don't expect it to be a multiyear effort, honestly. So again, I don't want to put a specific time frame on it, obviously, for competitive and other reasons, but maybe I'll leave it at that. I don't expect it to be a multiyear effort, no. Anthony Petrone: No, all good. And then just when you think about the pressure, you kind of highlighted almost 3 areas here. There's lower-cost providers coming in. There's the GLP-1 question that Marie asked. And then just legacy, there was this pressure moving away from multiple daily injections to patch pumps as well as automated insulin delivery devices. When you think of those 3 buckets, it seems like the lower cost strategy kind of won the day here. But if you had to bucket those 3 headwinds, how would you kind of weight, if you had to put a weighted average on those 3 competitive headwinds in the pen needle business, how would you weight those? And then just a real quick one here would be, you had a trade receivables factoring agreement where there were receivables sold, I think, to Becton. It was roughly like $64 million. Just given the impacts in the business here, I want to make sure that that trade receivable agreement is intact. Devdatt Kurdikar: Yes. I'll let Jake take the trade receivable agreement. But with respect to sort of putting a weight on each of the factors, maybe there are 3 different things, I think, factors that affect the market in 3 different ways, right? The increasing affordability of GLP-1 drugs potentially affects insulin pen prescriptions. And we have seen insulin pen prescriptions trend downwards most recently. Could that be because of the increasing affordability of GLP-1 drugs? Maybe so. And what we've seen over there is the long-acting insulin, which is what you would expect the GLP-1 effect to be concentrated on, is decreasing faster than long-acting insulin. With respect to movement towards maybe lower-priced products, what it is is really maybe more a shifting of where patients are buying pen needles. So instead of the traditional retail channel and maybe they are going to retail, but maybe more patients buying sort of cash pay products or over-the-counter products or in channels where lower-priced products are available, that affects the pen needle market. And then thirdly, you asked about pump adoption. The way sort of we think about that is we look at fast-acting, right, so mealtime insulin prescription trends. And yes, while there has been a decline in fast-acting insulin, really what's driving, I believe, the total prescription decline has been the decline in long-acting. So really, pump adoption is something that, as you know, this business has been dealing with for a number of years. It's hard at this point to look at the data and say that that is the primary factor, Anthony. So I would say it's more towards a shift towards lower-priced products and potentially the 2 other factors I outlined earlier in my question -- in my answer to Marie, is that the increasing affordability of GLP-1 drugs. Could the impact of the ACA subsidies have had some impact on the overall market volume as well? Potentially. But it's going to take months, maybe a couple of quarters to really get the data. Jake Elguicze: And then, Anthony, on the receivables factoring program, this is a standard AR factoring program that we have actually with a third-party bank. So very common in the industry to have something like this. It doesn't have anything to do with Becton, Dickinson in any way. It was something, I think, that we put into effect around a year or so ago. We continue to factor receivables under normal due course, and we would continue to expect to do so in the future. So none of that has necessarily really changed by this. And in terms of liquidity and whatnot, we continue to expect good free cash flow, continue to expect to repay $150 million in debt during the course of this year, which was our original guidance assumption coming into the year. And obviously that's despite the revenue call down in the U.S. today. Operator: [Operator Instructions] Our next question comes from the line of Ryan Schiller with Wolfe Research. Ryan Schiller: I was hoping we could look out further to next fiscal year. Understanding there is no formal guidance in place, but maybe how are you thinking about the FY '27 revenue growth given all the pressure in the U.S.? Devdatt Kurdikar: Yes, Ryan, I think it's too early to comment on that. As you heard me say, right, some of the trends that we are observing now in the most recent quarter are all sort of early. So really, our plan right now is to focus on executing on 2026, closing the impending Owen Mumford acquisition, getting those products in our bag, advancing the pipeline, both on our B2B products for pen needles as well as the auto-injector platform. And really, then we'll talk about 2027. It's far too early at this point for me to comment on 2027. Ryan Schiller: Okay. And then OUS finished in line with your expectations in the quarter. I'm hoping you can give us the latest on what you're seeing in China and any updated growth outlook there? Devdatt Kurdikar: Yes, very pleased with our International performance, certainly performing per expectations. With regard to China, just as a reminder, obviously we don't disclose China separately, but we think about Greater China, which includes Mainland China, Taiwan, and Hong Kong. And over there, we sell the product to 3 or 4 national distributors that then go on to sell to sub distributors. Certainly, last year, fiscal 2025, there were significant declines and we took a bunch of steps to stabilize the situation. We are seeing early signs of sequential stability. We really reordered our sales team, that had a more price competitive pen needle that we launched over there. We will see likely some headwinds this year, but certainly it's going to be significantly less than what we saw last year. And look, over the long term, our view on China hasn't changed, right? The market is growing there in mid-single digits. We have a strong commercial and manufacturing infrastructure over there. The new pen needle that I referenced where we've already submitted for regulatory approvals, that is being developed and manufactured over there. And finally, I also mentioned in the GLP-1 generic space that there are Chinese companies that want to get into the generic GLP-1 market as well. And obviously, we want to partner with them. So for all those reasons, we continue to remain optimistic on how China will end up. Now obviously cognizant of the fact that China -- the geopolitical considerations when it comes to China can impact in the short term, but we still remain optimistic in our long-term view on China. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Dev for closing remarks. Devdatt Kurdikar: As we close the call, I just want to thank my colleagues across embecta for their continued focus and commitment. This was a difficult quarter. But I do want to be clear, we are not standing still and actions are already underway to address the issues we face. The steps that we are taking, closing the Owen Mumford transaction, reshaping our capital allocation and executing on our strategic priorities, are purposeful steps to build a stronger, more flexible company for the long term and are aligned with our strategic road map. Thank you for joining us today and for your continued interest in embecta. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
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 Supernus Pharmaceuticals, Inc. first quarter 2026 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Peter Vozzo of ICR Health Care, Investor Relations representative for Supernus Pharmaceuticals, Inc. You may begin. Thank you. Good afternoon, everyone, and thank you for joining us today for Supernus Pharmaceuticals, Inc. first quarter 2026 financial results conference call. Peter Vozzo: Today, after the close of the market, the company issued a press release announcing these results. On the call with me today are Supernus Pharmaceuticals, Inc. Chief Executive Officer, Jack A. Khattar, and Chief Financial Officer, Timothy C. Dec. Today's call is being made available via the Investor Relations section of the company's website at ir.supernus.com. During the course of this call, management may make certain forward-looking statements regarding future events and the company's future performance. These forward-looking statements reflect Supernus Pharmaceuticals, Inc.'s current perspective on trends and information. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section of the company's latest SEC filing. Actual results may differ materially from those projected in these forward-looking statements. For the benefit of those of you who may be listening to the replay, this call is being held and recorded on 05/05/2026. Since then, the company may have made additional announcements related to the topics discussed. Please reference the company's most recent press releases and current filings with the SEC. Supernus Pharmaceuticals, Inc. declines any obligation to update these forward-looking statements except as required by applicable securities laws. I will now turn the call over to Jack. Jack A. Khattar: Thank you, Peter, and thanks everyone for taking the time to join us on today's call. Supernus Pharmaceuticals, Inc.'s first quarter results reflect a strong start to the year, including a 56% year-over-year increase in combined revenues of our growth products and an 11% year-over-year increase in adjusted operating earnings. Starting with Onepco, during the first quarter, Onepco generated net sales of $8.4 million, reflecting a partial benefit from the resumption of new patient initiations in February 2026. We are pleased with the rebound in the business since we resumed patient initiations, with some of the metrics in March reaching or even exceeding levels achieved before the supply constraints. For instance, prescriptions in March reached 463, exceeding the level reached in October 2025 before the supply constraints. Also, the number of prescribers in a single month with shipments to patients increased in March to the highest level since the launch of the product. Overall, more than 645 prescribers have submitted approximately 2,200 enrollment forms since the launch of the product through April 2026. We are also pleased with the progress with the second supplier on Onapro. We expect regulatory submission to the FDA in the third quarter of this year with potential approval before midyear 2027. Switching now to Zirzuve, Supernus Pharmaceuticals, Inc. reported $27.6 million in collaboration revenues in the first quarter. Full first quarter 2026 U.S. sales of XERZUVEY as reported by Biogen increased approximately 100% compared to the same period in 2025. In 2026, Zarzaur saw strong growth of 8,273% in rhythm prescriptions and number of prescribers respectively compared to the same period last year. Since launch, 85% of the prescriptions have come from routine prescribers and more than 29,000 patients have been treated with ZERZUVEC. Regarding KELLI, in the first quarter and as reported by IQVIA, prescriptions grew by 19% compared to the same period last year, outpacing the 10% growth in the total AHD market. Net sales of $78 million represented a strong 20% increase over the first quarter last year. Despite typical first quarter headwinds, Teledy's growth continues to be solid and is coming from both patient populations, with adult prescription growth of 27% and pediatric prescription growth of 15%. In addition, the total quarterly number of prescribers for Ikelebri reached a high of approximately 43,000, with adult prescribers for the first time surpassing the number of pediatric prescribers. Switching now to GOCOVRI for 2026, net sales reached $35.2 million, increasing by 15% compared to the same quarter in 2025. Total number of prescriptions grew by 7% in 2026 compared to the same period last year. Moving on to R&D, the follow-on Phase 2b randomized double-blind placebo-controlled trial with SPN-820 in approximately 200 adults with major depressive disorder is ongoing. This study will examine the safety and tolerability of SPN-820 and its efficacy at a dose of 2,400 milligram given intermittently twice per week as an adjunctive treatment to the current baseline antidepressant therapy. Our Phase 2b randomized double-blind placebo-controlled study of SPN-817 is also ongoing with a targeted enrollment of approximately 258 adult patients with treatment-resistant focal seizures. This trial utilizes 3 milligram and 4 milligram twice-daily doses. And for SPN-443, our novel stimulant ADHD product candidate, we expect to initiate a Phase 1 single ascending and multiple ascending dose study in adult healthy volunteers in 2026. Finally, corporate development will continue to be a top priority for us as we look for additional strategic opportunities to further strengthen our future growth and leadership position in CNS through revenue-generating products or late-stage pipeline product candidates. With that, I will now turn the call over to Tim. Timothy C. Dec: Thank you, Jack. Good afternoon, everyone. As I review our first quarter 2026 results, please refer to today's press release and 10-Q that was filed earlier today. We achieved total revenue of $207.7 million for 2026, an increase of 39% compared to the same quarter last year. Total revenues were comprised of revenues from our commercial products including XERJUVEY, collaboration revenues, and royalty, licensing, and other revenues. Revenues from commercial products increased to $178 million, a 26% increase compared to the same quarter last year. This increase in revenues from commercial products was primarily due to the increase in net sales of our growth products, CalRit, GOCOVRI, and Anapco, as well as the addition of collaboration revenues from ZERZUDE. In addition, revenues from royalty and licensing and other revenues were $29.3 million. This includes $20 million of licensing revenues related to the achievement of a commercial milestone under the company's collaboration agreement with Shinobi. For 2026, combined R&D and SG&A expenses were $164.6 million as compared to $116.9 million for the same quarter last year. This increase was primarily due to an increase in SG&A expenses associated with the collaboration agreement with Biogen. Operating loss on a GAAP basis for 2026 was $8.3 million as compared to an operating loss of $10.3 million for the same quarter last year. The change was primarily due to higher revenues partially offset by an increase in SG&A expenses associated with the collaboration agreement with Biogen. GAAP net loss was $2.3 million for 2026, or net loss per share of $0.04, compared to GAAP net loss of $11.8 million, or $0.21 per diluted share, in the same period last year. On a non-GAAP basis, which excludes amortization of intangibles, share-based compensation, contingent consideration, and depreciation, adjusted operating earnings for 2026 were $28.7 million compared to $25.9 million in the same quarter of last year. As of 03/31/2026, the company had approximately $384 million in cash, cash equivalents, and marketable securities, compared to [inaudible] as of 12/31/2025. This increase was primarily due to cash generated from operations, the timing of Medicaid payments, and the Shinobi-related commercial milestones. The company's balance sheet remains strong with no debt, providing significant financial flexibility for potential M&A and other growth opportunities. Now turning to guidance. For full year 2026, the company reiterates its financial guidance for total revenues, combined R&D and SG&A expenses, and non-GAAP operating earnings. As such, we expect total revenues to range from $840 million to $870 million, comprised of commercial product revenues and royalty and licensing revenues. For full year 2026, we expect combined R&D and SG&A expenses to range from $620 million to $650 million. Overall, we expect full-year operating earnings in the range of $0 to $30 million. And finally, we expect non-GAAP operating earnings to range from $140 million to $170 million. Please refer to the earnings press release issued prior to this call that identifies the various ranges of reconciling items between GAAP and non-GAAP. With that, I will now turn the call back over to the operator for Q&A. Operator? Operator: We will now open the call for questions. Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star-1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star-1-1 again. Please stand by. Our first question comes from Andrew Tsai from Jefferies. Your line is now open. Analyst: Hi. Thanks for the updates, and thanks for taking my questions. Specifically on NAPCO, it is great to see that you have 2,200 start forms now up from 1,800 in January. Ultimately, what percentage of those patients or start forms do you think will be ultimately converted to a paying patient? And can you remind us how many weeks it can take from a start form to a paying patient, how long that could take? Thank you. Yeah. On average, from the time you get a form until you have a shipment, you could lose somewhere in the 40% to 45% of these patients in the process for all kinds of reasons, whether it is a change in the medical condition of the patient over time, the insurance issue, any of these reasons. Or just lack of response; sometimes a lot of these forms do not have all the completed information, so you are calling the patient trying to get more information from them to be able to process it. Sometimes they just do not call back. And then, as far as the period of time, it could take several weeks as we go through this process over time. Of course, we are always looking at different bottlenecks and try to streamline and improve the process. But it is several weeks for somebody to have the form submitted until finally they get the product shipped. Got it. Thank you. And so following up on that, to get to your On APCO guidance, the high end of $75 million, mathematically, you are going to be needing more than 700 patients on therapy. So if I did 2,200, 50% conversion, that would be over 1,000 patients potentially on an—so it looks like you can get there. So can you remind us how many patients are still on Anapco today? And when could you expect most of those kind of hypothetical patients to get on drug? You know, should it be within the next three to six months then? Thank you. Yeah. I mean, the high end of our guidance is, you know, the $70 million— Jack A. Khattar: You are thinking about it the right way. Yes. I mean, that could translate to somewhere around, on an average, about 700 patients that you need to have around 700 patients throughout the whole year, clearly, to give you the $70 million in sales. The thing is with the 2,200, you have to remember that is a number that is launch-to-date. That is not 2,200 in 2026, obviously. So it would be interesting to see how many we generate for this year and how many out of the 20 or whatever is left actually out of the 2,200. If we look at the backlog right now, we have probably somewhere around 570, give or take, patients in the queue. Versus last time we talked, it was around 700. So we are going through the backlog, and we are actually improving as time goes on. We are improving our number of patients that are being processed per week. Remember, I mean, we just restarted the whole machinery, so to speak, or the whole process started, you know, February, so to speak. So it has taken us—March we have been very happy with the progress the team has made through March, really getting us to very high levels. As I mentioned in my previous remarks, even exceeding performance metrics that were before the supply constraints. So things are really on the uptake. We are pretty happy with the rebound in the business, how we are processing these forms, how many of these forms we are able to translate into real patients and real shipments. But we maintain the guidance, of course, because we would like to see another full quarter. So Q1, as I mentioned in my remarks, was really a partial quarter. It was not really a full quarter. So let us see a full quarter and how quickly we can go through this backlog. In the first quarter, we only really benefited from March, so to speak. February was very partial and very minimal initiation in January. And therefore, it is not a true reflection of a full quarter with the business rebounding. But we are very happy with how things are moving along across several metrics, with the demand continuing to be strong, as you pointed out, with the 2,200 forms, but also with the way the team is processing these forms and minimizing the drop-offs and losses throughout the process. We feel pretty good, obviously, and that is why we did not change the guidance. So pretty good about the $45 to the $70 million guidance on that. Analyst: Very good. Thank you. Operator: Thank you. Our next question comes from the line of David Amsellem from Piper Sandler. Your line is open. David Amsellem: Hi. Yes. This is Alex on for David. Thanks for taking our questions. First one, sort of jumping off of the last question regarding the guidance range for MAP Co and the assumptions to get to the top end of the range and the number of patients. Can you maybe speak to what you are seeing in terms of patient persistence for patients who are getting drug? And then secondly, regarding XERZUVEY, can you maybe speak to how you are thinking about the growth runway of the product? Thank you. Jack A. Khattar: Yeah. Regarding the Xueve, as I mentioned in my remarks, we are really pleased with the performance of the product. If you look at the true fundamental metrics as far as prescriptions, number of prescribers, we are really broadening the prescriber base, and we have been very successful with our partner adviser in doing that. And, of course, the prescriptions grew a very healthy 82% in the quarter versus last year. As far as penetration, we are still in the real early innings on this product, as we mentioned in previous quarters. The potential of the product is fairly big. Every year, we have around 500,000 women who experience these symptoms. And as I mentioned again earlier, only 29,000 patients have been treated with ZERZURA since launching, and we are into year three right now. So we have a long way to go with Zanzuve, and we are very happy with the momentum of the brand. And, of course, we also started significant efforts on the DTC side and other programs. So we have pretty nice expectations of growth from the product. Regarding—if I understood your question on WinAPCO—is it really the patient and the kind of patient we are getting on Onepco? It looks like we are starting to get some feel for who is that patient. We do not have a complete full picture yet because, as you would imagine, with a new product, it evolves over time. But some of the early indicators: patients tend to be more on the younger side as far as age and/or the disease, meaning they have not been diagnosed for a long, long time. They tend to be active. From a physician perspective, they are looking for something different than levodopa/carbidopa. So that is the kind of patient profile that seems to be emerging right now as we speak on the oneposide. David Amsellem: Thank you. And then what are you seeing in terms of patient persistence for Panopco? Jack A. Khattar: Yeah. It is a little bit too early for us because we got the disruption in the supply and so forth. Actually, we were pretty happy with the refills and how many patients stayed with us around the time of the supply constraint. We do have dropouts that are fairly consistent with the clinical study, maybe a little bit more. We are watching it very carefully. Typically, these dropouts occur when you have the titration and how well the titration has happened, because with apomorphine, you have to do titration very slowly and with starting with lower doses. You cannot jump in pretty quickly into high doses on apomorphine. So depending on how that is happening and how the patient is responding to that, once they go through that titration, they typically tend to stay with it and be pretty happy and pleased with it. And that has been the experience that historically has been in Europe. Operator: Our next question comes from the line of Kristen Kluska from Cantor. I apologize. Kristen Brianne Kluska: It is okay. Hi, everyone. Congrats on a great start to calendar year 2026 here. Just on a NOPCO, as we think about the mid-2027 approval, how are you working with your partners out in Europe about thinking about what the demand might look like in 2027 onwards to be able to work with them to meet that criteria? And then when we think about the U.S. right now, in terms of the patients that are getting on therapy, given that these capacity strengths are still there to an extent, are you seeing that physicians are prioritizing certain patients over another just knowing that they might not be able to get their hands on enough supply for all of the patients they would want to treat? Jack A. Khattar: Yeah. Regarding the last question, we have not detected anything specific that because of the previous supply chain they are using the product on a different patient or one patient versus another, so we cannot really at this point answer that question specifically. But overall, regarding your other part of the question on the supplier and 2027 demand and so forth, we do have a plan with our second supplier and also the current supplier, because depending on the timing as to when the second supplier comes in in 2027 to meet the demand of 2027, certainly. That is really how we align all that and lay over the current supply, the second supply, and look at the demand in total and make sure that we are covered from either one of them and/or both at the same time. The second supplier also, I should say, has multiples of the capacity that the current supplier has. So once the second supplier is online, we will feel pretty good about 2027. And I did mention once earlier we are even working on another supplier as a backup as well, in addition to the second supplier. So we are giving up a lot of the backups from a supply perspective to make sure we meet the demand not only in 2027, of course, and several years beyond. Kristen Brianne Kluska: Okay. Thanks. And then on XERZUVY, how are you seeing adoption in line with the prescribing? Meaning, are you seeing some patients are coming back for a second cycle of it? What percent of patients are completing the 14-day treatment course? I guess what I am trying to allude to is how close to the recommendations are you seeing this real time? Thanks again. Jack A. Khattar: Yeah. So I think the claim—the people stick with the 14-day course therapy. It is a short-term therapy to start with, so it is unlikely that people are going to quit on it, especially when they start seeing the benefit early, pretty quickly by day three. That obviously even reinforces it and encourages them to finish the 14-day therapy. And with Xelube, obviously, it is a very different kind of business. You do not have refills, of course, unless mom gets pregnant again in another year or cycle, so to speak, and she happens to have also PPD a second time with the second pregnancy. But normally, there is no relapse or anything like that for them to come back and cycle through it again. Operator: Thank you. And our next question comes from the line of Vishwesh Shah from TD Cowen. Line is now open. Analyst: Hi. Thank you. Congrats to you guys on another great quarter. So on Calibri, what are you seeing in terms of some of the adoption trends right now? You commented on some of the adults trying out Calgary, and so is that the shift in focus now, or what do you think will drive growth in adoption through the rest of the year? Thanks. Jack A. Khattar: Yeah. We are actually very excited on Calgary and what we really saw in the first quarter. It is pretty interesting dynamics in a very positive way, specifically in the adult segment of the market. There are several things that I would pretty much emphasize on Calvi. Clearly, the adult growth has been outpacing pediatric growth for a number of quarters, actually. This is not the first quarter it happens. We are very pleased with the fact that the adult continues to grow because it is the biggest segment of the market naturally, and you want to penetrate that segment as much as possible and be very successful in it for the continued future growth of the product. For example, give you another metric: if you look at new prescriptions in 2026, adult again grew by 27%. This is in new prescriptions, not auto prescriptions. And these continue to be strong also with 16% growth. The interesting thing is we have been emphasizing adult. We have been putting a little bit more emphasis on adult, especially when you are out of the back-to-school season because we all pay, of course, the emphasis. We rotate the resources in the back-to-school season. Clearly, we put more of a push on pediatrics, but we do not neglect adults. And then when we are out of the back-to-school season, we try to take advantage of the growth in the adult market because, from a market point of view, in the total market, adult also continues to be the fastest segment that is growing. So we want to take advantage of that as well. We are pretty pleased with that. And as I mentioned earlier, this is for the first time now the number of prescribers in the adult have surpassed our number of prescribers in PDF. It really jumped pretty quickly, noticeably, in this first quarter, so we were very pleased to see that. Also, from the patient perspective, what is really happening, which we are encouraged about also, is the fact that the patient profile—and you would expect that typically in a brand as it stays on the market for a while, and now we are into year six, pretty much, in May—we are in year six of the brand. The patient profile is broadening, so it is not anymore some of the early low-hanging fruit that you are getting. What I mean by that is you are really getting a much broader types of patients into the franchise, and physicians are starting to think of so many different types of patients and needs out there that Calvi could be the answer for. For example, patients who, of course, are intolerant to stimulants. Something interesting emerging is patients are really looking for all-day coverage. A lot of the adults—we know it as a fact—when they use stimulants, even if they use controlled-release stimulants, so many of them have to supplement at the end of the day with immediate-release stimulant to give them that full-day coverage. But with Calvi, you do not need any of that. You just need to take it once a day, whether at night or in the morning, and it will give you full-day coverage. I think physicians, over time, as they have more experience with the product, are finding more ways to use Kaldi as a true solution for a lot of their patients. And then, of course, those who are partial responders to stimulants—I mean, stimulants work, but they do not work for everybody, and sometimes we forget that—and a lot of physicians are using it for those partial responders to the stimulants. Then the complex ADHD—and, of course, that comes with time as we generate more data around the product and the potential use of the product with comorbidities and so forth—more and more patients are starting to understand that Calendly could really play a role with these patients who have that, what we call, complex ADHD because of the serotonin modulation and the way you need multimodal activity and pharmacodynamic profile of Calgary. So a lot of very exciting things continue to happen there and really a lot of momentum in the brand. Analyst: Thanks so much for all the details. And then on NAPCO, what dynamics are you seeing between patients opting for Onabco versus Violet? So what kind of competitive dynamics are you seeing there? Jack A. Khattar: Yeah. I mentioned very quickly—the first cutoff typically is patients who have been on levodopa/carbidopa, and the physician may not see any incremental additional benefit for the patient to stay on that drug, and therefore they could potentially benefit more from something else, a different drug, different mechanism, different molecule, and therefore they would go and turn to something like an apple. And vice versa, if the physician feels that the patient may still benefit from some levodopa/carbidopa maybe for another year or two and then they might consider Onepo. So they might go towards something like, buy something else instead of Onako. So that is the first type of thing that, obviously, the physician is assessing. And then, interesting from our research, it looks like our patient profile tends to be on the younger, active side, earlier in the disease, versus the Vylev patient tends to be a little bit more on the older side. We are trying to dig deeper into this to really understand what is behind some of that. Some of the folks who may need and have a very difficult time at night may choose Vylev because you put Vylev through the night. With our product, you get pretty much a similar efficacy on reducing OFF time, but you do not have to wear it 24 hours. But with Vylev, you have to wear it 24 hours to give you pretty much similar type of efficacy. So there are different patients that are emerging that could be really different candidates for either Onabco or Mylan. Operator: Thank you. Our next question comes from Annabel Samimy from Stifel. Your line is now open. Annabel Samimy: Hi. This is Jack on for Annabel. Thanks for taking our questions, and congrats on the quarter. So on XERZUVEY, I know that there are the DTC campaign running right now. Included product has been doing very well overall. But do you have any additional insights or color on feedback from that and how patients are responding to the DTC campaign compared to maybe a more direct physician recommendation? Jack A. Khattar: Yeah. Unfortunately, no, because it is really early to be able to have a good read. We just started it, and you need several months of data to get a meaningful read on a response, if you are getting a good response from the DTC. The only thing I can tell you is anecdotal feedback from physicians and from patients who have seen it. They really relate to it. The messages, the communication out of the commercial and so forth, we have received very positive feedback on that. But in the end, it has to turn into prescriptions, of course. That is really the key measure at the end of the day. It is pretty early for us right now to say anything as far as the impact of the campaign. But certainly, the effort there is clearly to provide significant education because this is a market that needs a lot of education on the consumer side as well as on the health care provider side. That is what we are trying to do. We have been building the market, and it takes a while to build the market. That is something that needs to be continued to be invested in. But again, initial signals, which are more anecdotal, seem to be positive. Annabel Samimy: No. Very helpful. And then just quickly, given your success with that collaboration, is your current M&A appetite kind of more focused on maybe something similar, like a revenue-generating partnership, or more on acquisition of wholly owned late-stage assets? Are there any shifting preferences there, or are you still kind of agnostic to any option? Jack A. Khattar: Yeah. No. Our priority is revenue-generating assets that we can wholly own and, obviously, build and grow from whatever it is at the time we buy it. The second priority, if it is not revenue-generating, we are looking at assets that are fairly late stage. These assets could potentially be launched in, like, between a year to three years from the time we acquire them. That is really what we are very much focused on, and fairly agnostic in the CNS space and, of course, women’s health as well. Analyst: Hey, guys. Thanks for taking our question. I want to follow up on bringing the second supplier online for Onabco. Did you get a chance to meet with the FDA to get any sort of feedback or alignment on the path of getting the approval? Did any of the feedback help inform the cut timeline guidance you have provided today? What I am wondering is whether there is any accelerated path, like rolling submission, relative to your 3Q filing guidance. And I guess on the other side of things, on approval timeline, you guided to by mid-2027. I recall on the last earnings call you talked about review timeline could be arranged somewhere in the six- to nine-month range. So I am curious if you have any better clarity on the review timeline now if you have already met with the FDA, and I have a follow-up after that. Jack A. Khattar: Yeah. Sure. Yes, we have been very much in touch with the FDA on an ongoing basis, and yes, the guidance we just gave today has been and is based on the discussions we have had with the FDA. So if we do file, which we said we are expecting to file in the third quarter, we expect the approval, again consistent with what we said before, could be six months to nine months. So that will fall at the upper end of the timeline in the nine months—that means midyear 2027. And if it does take only six months for review, that obviously will be earlier than that. So that is pretty consistent. The FDA was consistent with their feedback with all the discussions we have had with them. So depending when exactly we file—July, August, September, whatever—and then you add six months to it, or it could take nine months, that is really within that frame that we just gave today. Analyst: Great. And my follow-up is, obviously, the second supplier already has experience applying the product in Europe. But given the sometimes idiosyncratic nature of the agency handing out manufacturing issue citations and the second more broadly, can you talk about the confidence level of timely clearance of the second supplier? Jack A. Khattar: I mean, we have no indication that something could happen that could really derail this timeline from that perspective. Clearly, once we submit the package, they have to review the data and so forth, and then they have to also schedule the inspection. As far as we know, they have been doing inspections, although it is outside the U.S. and in Europe. We are not aware of anything that could hinder that. That is why we continue to keep the timeline fluid, saying six to nine months, because of that specifically, but we are not aware of anything that could tell us that this could derail this thing completely and make it not an option for us at all. We are pretty confident that we should be able to meet that timeline and secure that second supply. Analyst: Okay. Great. Thanks so much for answering our question. Operator: Thank you. I am showing no further questions at this time. I would now like to turn it back over to Peter Vozzo. Peter Vozzo: Thank you for joining us on this call today. 2026 is off to a great start. We have positive momentum across our business, and we continue to generate strong cash flows beyond the strength of our growth products and through the efficiency of our operations. We look forward to continued strong growth and execution on our growth products throughout the year. Thanks again for joining us this afternoon. We look forward to providing you with updates throughout the year. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the UL Solutions First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. It is now my pleasure to introduce to you, Yijing Brentano. Please go ahead. Yijing Brentano: Thank you, and welcome, everyone, to our first quarter 2026 earnings call. Joining me today are Jenny Scanlon, our Chief Executive Officer; and Ryan Robinson, our Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at ul.com. Our earnings release is also available on the website. I would like to remind everyone that on today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things, statements about UL Solutions results of operations and estimates and prospects that involve substantial risks, uncertainties and other factors that could cause actual results to differ in a material way from those expressed or implied in the forward-looking statements. Please see the disclosure statement on Slide 2 of the earnings presentation as well as the disclaimers in our earnings release concerning forward-looking statements and the risk factors that are described in our annual report on Form 10-K for the year ended December 31, 2025, and subsequent SEC filings. We undertake no obligation to update any forward-looking statements to reflect events or circumstances at the date hereof, except as required by law. Today's presentation also includes references to non-GAAP financial measures, a reconciliation to the most comparable GAAP financial measures can be found in the appendix to the earnings presentation, which is posted on the Investor Relations section of our website at ul.com. With that, I would like now to turn the call over to Jenny. Jennifer Scanlon: Thank you. Good morning, everyone, and thanks for joining us. Let me start off by saying that we had an excellent quarter. We entered 2026 with strong momentum and the first quarter results confirm the trajectory we saw building throughout last year. We are executing with greater precision expanding our margin profile and positioning ourselves to grow with structural mega trends that are propelling our industry's long-term growth. Our resilient business model continues to serve us well as we innovate with our customers while they embrace rapid technological change. Of course, I also want to recognize the incredible team behind these results. executing consistently at this level across geographies and service lines with the backdrop of ever-changing conditions takes real skill and commitment. Our nearly 15,000 employees are both and I don't take that for granted. The decisions we have made to refine our portfolio, optimize our cost structure and allocate capital to growth areas are paying off. Before Ryan walks through the detailed financial results, I'll cover 3 areas: first, highlights of our first quarter performance; second, notable achievements in strategic development since we last reported, including the anticipated acquisition of Eurofins Electrical & Electronics or E&E business; and third, some perspective around the macro and geopolitical factors impacting our end markets. Let me start with the quarter. Our results were excellent. We delivered consolidated revenue growth of 7.5% as compared to the prior year period with organic revenue growth of 5.7%. Adjusted EBITDA grew over 22% and adjusted EBITDA margin expanded 320 basis points. Adjusted diluted EPS increased 31.5% year-over-year. These results exceeded our expectations. Importantly, this performance was not the result of a single factor or a onetime tailwind. It reflects operating efficiency that is increasingly embedded in our business model. The benefits of disciplined expense management higher utilization across our engineering and lab teams and the accelerating impact of our previously announced restructuring program. We are moving quickly on durably improving our costs, and it is showing up in our results. Each of our 3 segments: industrial, consumer and risk in compliance software delivered strong organic growth and several hundred basis points of adjusted EBITDA margin expansion in the quarter. Now let me turn to our milestones achieved and strategic actions from the first quarter and in recent weeks. First, in our core business, we granted our first ever global safety certification for a robot operating in a public environment, certifying Simbe's Tally, an autonomous shelf-scanning robots deployed in retail stores. Tally earns certification to the UL 3300 standard for service robots operating in dynamic spaces where they encounter unpredictable human behavior. As robots expand in the grocery stores, airports, hotels and even homes at scale, we expect the need for rigorous independent certification will continue to grow, and we are a trusted leader in that space. We also issued the world's first certifications for AI-enabled products under the UL 3115 AI safety certification program awarded to Qcells for its data center energy management system and to Omniconn for its smart building platform. Both systems were independently evaluated for robustness, reliability, transparency and degree of human oversight as their operations become increasingly autonomous. As AI moves into critical infrastructure at scale, independent certification is essential to public trust, and we are positioned as a leader. Next, in keeping with our renewed focus on M&A. Last month, we announced a definitive agreement to acquire the Eurofins Electrical & Electronics business, including the MATLAB certification mark. This carve-out is a compelling strategic transaction that we expect to extend our capabilities in key geographies, including EMEA and Asia Pacific, and it will help drive continued growth in the consumer segment. by bringing together a global infrastructure of complementary electrical testing and certification services to meet customer needs. We expect it to close in the fourth quarter of 2026, subject to applicable regulatory approvals and customary closing conditions. The stand-alone business is expected to generate approximately $200 million in revenue for the full year 2026. The transaction is anticipated to be accretive to adjusted diluted EPS in the first full calendar year after closing, excluding intangible amortization and integration costs. We look forward to welcoming the E&E team when the time comes. These are highly skilled colleagues who share our mission of working for a safer world. And we are excited about what this combination means for our customers, and for the long-term growth of UL Solutions. Now let me offer some perspective on the macro environment and what we are seeing across our end markets. The global backdrop is more complex than it was a year ago. but our business is navigating it well. The leading demand drivers of our business remain durable, electrification of products, data center build-outs, advanced product development, fire safety and building construction, supply chain compliance software and the ongoing certification services that support the products carrying the UL mark. We do not view these as cyclical tailwinds. These are structural and they align directly with our capabilities. The characteristics that make us resilient remain strong, recurring revenue, global diversification, long-term customer relationships and a mission-critical role in the product development life cycle. Based on the strength of our first quarter and our visibility into end markets, we are raising our full year 2026 adjusted EBITDA margin outlook. Now I'll turn the call over to Ryan for a detailed review of our first quarter results. Ryan Robinson: Thank you, Jenny, and hello, everyone. I also want to thank all of our team members for delivering a strong start to 2026. The first quarter results reflect the work that has been done to improve our efficiency and earnings quality, and that work is increasingly visible in our numbers. I also want to highlight that Q1 2026 marks the first quarter in which we are reporting under our updated segment structure. As we noted previously, the primary change is the reallocation of certain activities formerly reported in software and advisory into industrial. The remaining software business is now reported as a segment called Risk and compliance software. Recast historical financial data is included in our earnings material and should provide a helpful view of the underlying performance and trajectory of each segment. Now let me walk through the quarter in detail. Consolidated revenue of $758 million was up 7.5% over the prior year quarter, including organic revenue growth of 5.7%. The organic revenue growth was led by our industrial segment, supported by solid contributions from consumer and risk and compliance software. Adjusted EBITDA for the quarter was $197 million, an improvement of 22.4% year-over-year, outperforming our expectations. Adjusted EBITDA margin was 26.0%, up 320 basis points from Q1 2025. Adjusted net income increased 33.8% year-over-year, resulting in a 35.1% increase in adjusted diluted earnings per share. Expenses were well controlled in the quarter. The combination of higher revenues, improved productivity and higher utilization, prudent head count management and restructuring savings contributed meaningfully to our operating leverage. In Q1, revenue benefited by $13 million or 1.8% from FX, and this was offset by higher expenses from FX as local expenses were translated to USD. These changes reduced adjusted EBITDA margin by roughly 40 basis points. Now let me turn to our performance type segment, beginning with Industrial. Revenues in Industrial were $375 million, up 10.3% in total and 8.2% on an organic basis from the first quarter of 2025. Growth was led by ongoing certification services and certification testing with particular strength in energy and automation and materials. Adjusted EBITDA for Industrial increased 20.6% to $123 million in the quarter. Adjusted EBITDA margin improved 280 basis points to 32.8%, driven by operating leverage from revenue growth and disciplined expense management. Turning to Consumer. Revenues were $318 million, up 4.6% in total and 3.0% on an organic basis from the first quarter of 2025. Growth in the first quarter was driven by certification testing and ongoing certification services with particular strength in consumer technology, appliances and HVAC. We noted when we first provided full year 2026 guidance, we expected Q1 to be the most challenging year-over-year comparison period for consumer, given the elevated demand in Q1 2025. In addition, as part of the restructuring program that we announced in November, we exited nonstrategic lines of business with lower profitability. These exits reduced consumer organic revenue growth by about 1% and Considering these dynamics, the underlying consumer growth trajectory remains solid. Consumer adjusted EBITDA increased 25.0% to $55 million. Adjusted EBITDA margin improved 280 basis points to 17.3%, driven by operating leverage, higher employee productivity and expense management, including the head count reductions from the restructuring point. Moving to our Risk and Compliance Software segment. Revenues were $65 million, an increase of 6.6% in total and 4.9% organically from the prior year period. This was led by increased demand for supply chain insights for the retail industry. Adjusted EBITDA for risk and compliance software was $19 million in the quarter, up 26.7% year-over-year with adjusted EBITDA margin expanding 460 basis points to 29.2%. This improvement was primarily driven by operating leverage and higher employee productivity. I want to note that our risk and compliance software segment will look different beginning in Q2 as we completed the divestiture of our EHS software business on April 1. EHS software contributed revenue and profitability to Q1 results and its absence will affect year-over-year comparisons and margin profiles of this segment going forward. We will provide further context when we discuss our outlook. Turning to cash generation and the balance sheet. For the trailing 12 months ended March 31, 2026, we generated $665 million of cash from operating activities and $450 million of free cash flow. During the first quarter, capital expenditures were higher year-over-year, consistent with the commentary we provided on our Q4 2025 earnings call regarding the timing of certain investments from the back end of last year. Our balance sheet remains strong, supported by our investment-grade credit ratings, including Moody's recent upgrade of our rating to Baa2. This provides efficient access to capital to fund both organic investment and strategic M&A. This includes the financing of the E&E acquisition which we expect to fund through a combination of portfolio management activities, cash on hand and available capacity under our credit facility. Approximately 45% of the purchase price is anticipated to be funded through our portfolio management activities. This includes the sale of the EHS software business. In addition, just last week, we signed a definitive agreement to sell our shares in DQS Holdings GMBH for approximately EUR 105 million in cash. We expect the sales to close in the second half of 2026, subject to the receipt of applicable regulatory approvals and satisfaction of closing conditions. The sequencing of our portfolio management actions reflects our deliberate strategy to sharpen our focus on TIC and risk and compliance software while redeploying capital into businesses that extend our core capabilities and global reach. Now turning to our 2026 full year outlook. While the macro environment is more complex today than when we set our original guidance, we have remained focused on our customers. Our execution has been strong, and our performance has been largely unaffected to date. These reasons, among others, have strengthened and allowed us to strengthen our adjusted EBITDA margin guidance. We continue to expect 2026 consolidated organic revenue growth to be in the mid-single-digit range versus full year 2025, anticipating contributions from all 3 segments. As a reminder, the EHS software business accounted for approximately $56 million of 2025 revenue and had margins roughly similar to our consolidated margins. The revenue impact of the EHS software divestiture which was pretty similar each quarter last year will be reflected in the acquisition and divestiture portion of our revenue change starting in Q2, and we do not expect it to affect our organic revenue growth rate. At this time, the forward FX forecast implied an approximately 1% tailwind on revenue growth for the year, and we would anticipate that to be offset with an expense increase from FX. Based on our strong performance in Q1 and the above considerations, we are strengthening our expectation for 2026 adjusted EBITDA margin to be approximately 27.0%, assuming current forward FX rates that I just mentioned. This margin outlook reflects progress on our continued improvement in productivity and restructuring efforts. Q1 was outstanding, and we expect to continue to improve margin. Our capital expenditure outlook for 2026 remains a range of approximately 7% to 8% of revenue. Our current tax rate expectation for the year is approximately 26%. We now expect our remaining expenses related to the previously announced restructuring program to be approximately $3 million as compared to the $5 million to $10 million previously communicated. We anticipate achieving the expense reduction targets we previously communicated. Overall, we are pleased with the start to the year and we believe that we are well positioned to deliver on our objectives while continuing to invest in long-term growth. Now let me turn the call back to Jenny for some closing remarks. Jennifer Scanlon: Thanks, Ryan. For this quarter's highlights some interesting things going on here at UL Solutions, I want to talk about some great events that have been taking place. UL Solutions continues to host data center infrastructure Summit, a series of in-person and virtual events that bring together key stakeholders to align on critical issues surrounding these globally proliferating facilities. Our events began last September at our Northbrook campus and has been a huge hit with our customers and other interested parties around the world. In the first quarter, we hosted our third event in Silicon Valley. This one alone drew more than 150 attendees from 41 different companies. These well-received events really underscore the importance of data center infrastructure and how our customers are looking to us for leadership and help in navigating the complex data center landscape. To close, we are proud of our Q1 results, and we remain dedicated to carrying out our focused strategy on behalf of our customers, our employees and our shareholders. With that, let's open the line for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Andrew Nicholas of William Blair. Daniel Maxwell: This is Daniel on for Andrew this morning. Just curious if you're seeing any notable changes in customer behavior yet, that's attributable to the conflict there on? And then should we think about that similar to how the tariff narrative has played out? Or is it more of a get pressure that can't be resolved by changing factory locations? Jennifer Scanlon: Thanks, Daniel. And we appreciate the question and certainly, in some areas of the world, but everybody is paying attention to. But for us, our demand drivers in the Middle East are a very small portion of our EMEA. And what we're seeing on customer behaviors continues to be what I would term a normal reaction to the uncertainty that they're facing, but no material effect on our business at this point. Of course, we're paying very close attention to the safety of our employees in the region. Operator: The next question comes from Andrew... Jennifer Scanlon: Hold on, I think there was a second part to that question, Daniel? I just want to make sure we got it all. Daniel Maxwell: Yes. It was just how that compares to the tariff impact and whether it would be sort of a similar reaction process from customers or wonder it's something that's a little less avoidable by restoring operations. Jennifer Scanlon: Yes. I think in this situation, again, with regard to comparing it to tariffs. As I always say, our customers just continue to make ongoing decisions that are the smart right answers for their business around where they want to conduct their research and development and where they want to manufacture and how their supply chains all fit together. So we're not, again, seeing anything unusual we're seeing just normal logical decision-making out of customers, and we're positioned to follow them wherever they go. But again, the Middle East for us is a very, very small portion of our customer base amount revenue. Operator: The next question comes from Andrew Wittmann with Baird. Andrew J. Wittmann: Yes. Great. So I guess the question that I wanted to ask about was about the AI adoption, the UL 3300 standard. I'm glad you brought it up, Jenny, because I think this should be an opportunity for the company. And I just -- just given that this is a new standard and kind of rolled out there and its importance, I just was hoping you could give us a little bit more context about where the standard sits relative to the innovation curve of the industry against competitive standards that might be being made other places. I want to get a sense of how well bought into the industries that are making robotics are into this standard versus other things, what may be industry organizations have signed up to use this one as a standard, just kind of the competitive positioning overall for this? And anything you can give us about your outlook in terms of what this means financially over the next couple of years would obviously be helpful as well. Jennifer Scanlon: Yes. Thanks, Andrew. It's a fun topic, and it's certainly an interesting topic. And actually, what it highlights, and I'm going to kick out for a second here, is the confluence of the UL 3300, which is robotics, and safety of robotics in areas where there's a lot of human interaction. And UL 3115, which is really the transparency and the bias and the use of AI when it gets embedded in products. And it's just a perfect example of the confluence of technologies and the complexity that our customers are looking to us to help them address and solve. So certainly, specifically on robotics, what we're seeing is service robotics, that sector has had steady growth. And it is becoming more complicated raising the bar for that safety and that reliability. So we are -- and in particular, our consumer sector, working very closely with a series of customers. This will continue to play out in that space. And it also brings together other service elements that UL provide such as our EMC wireless safety or cybersecurity safety and, of course, just embedded software and functional safety of these products. So it's always hard to point to one trend to say this is how that affects growth and opportunity. But certainly, it's the perfect example of the type of digitalization and megatrends that we've been pointing to. Operator: The next question comes from [ Ryan Rivera ] of Bank of America. Unknown Analyst: I was wondering on the software business, post the EHS divestiture and the move of advisory into industrial. How should we think about the underlying run rate growth of the remaining compliance and risk business? Ryan Robinson: Yes, I would say, overall, we're excited about Risk and Compliance Software. We think the focus in being more transparent about the underlying economics of the software business will be helpful for people. the portion that we divested -- to be divested is slightly slower growing than the remainder of the portfolio. So all things to consider it should mix up a bit more. We don't give specific segment-level revenue guidance, but we would anticipate continued growth in that segment, both based on underlying factors, but our continued efforts to improve our go-to-market sales processes. Operator: The next question comes from Seth Weber of BNP Paribas. Seth Weber: Ryan, I wanted to ask about the strength in the free cash flow in the quarter, unusually strong here. Anything that you'd call out attribute the strength to? And just maybe bigger picture, your view towards larger M&A, your appetite to do a bigger deal and kind of thoughts on leverage. Ryan Robinson: So first of all, we're pleased with our continued growth in cash flow from operations and free cash flow, I think it's more appropriate to look at it on a longer-term basis, and we quote some trailing 12-month figures. In the first quarter, we did have particularly strong cash flow from operations that was driven by our increases in net income margin, but also we had some working capital items like accounts payable growth that can occur in a short period of time like 1 quarter. So we're pleased with the continued growth in free cash flow, and particularly over a longer time period. So we're pleased to be able to fund the Eurofins E&E acquisition relatively easily from portfolio management activities, cash on hand and modest draw on our existing credit facility. We do continue to be very well capitalized and have capacity to do more. It is important for us to maintain a robust capital structure, and we're targeting continuing of metrics that are consistent with investment-grade credit ratings, but that leaves us a lot of flexibility and capacity to do other things. Operator: Our next question comes from Seth (sic) [ Jason ] Haas of Wells Fargo. Jun-Yi Xie: This is Jun-Yi on for Jason Haas. You guys have previously talked about seeing more EBITDA margin improvement to occur in the second half of '26. Is that still the expectation? Or have you seen some of the restructuring initiative improvements been pulled forward into 1Q given the outperformance? Ryan Robinson: Yes. Increase margin comparisons as we progress in the year. And I would expect it to be relatively smooth for the remainder of the year. We continue to make progress on some of the restructuring initiatives that we discussed. We're not free of those. So we expect those to continue to provide some additional benefits. Jennifer Scanlon: Is there a follow-up? Operator: Sorry. I've lost you there, the line had fade its way. The next question comes from George Tong of Goldman Sachs. Jinru Wu: This is Anna on for George. My question is, we're actually hearing a lot about manufacturing capacity looks back to the U.S. in government budget increases for U.S. manufacturing, Along the trend, are you seeing any higher utilization rate of industrial TSC services driven by U.S. specific regulatory that your consumer [indiscernible]? Jennifer Scanlon: And the second half of your question cut out, but I think we got it. But can you just repeat after you said, are we seeing anything affecting industrial? And then... Jinru Wu: Yes. So just with the onshoring trends also impact your consumer segment demand as well from the end market perspective? Jennifer Scanlon: Thank you. I think what we're seeing is continues to be consistent. We're not seeing a dramatic shift on reshoring to the United States, but certainly, there's movement. There's movement all over the world. The places where we're seeing the most movement is across Asia. And again, this is just -- we're able to track where our ongoing certification services are performed. So the areas that we're seeing the greatest increase, but remember, off of a low base are areas like Southeast Asia, Vietnam, India, Malaysia, Indonesia, as well as some miles increase off of a large base in the United States and a mild slope increase off of a large base in China. So as far as affecting our 2 businesses, we test wherever our customers need us to test, and we will perform ongoing certification services wherever they need it. Operator: The next question comes from Stephanie Moore of Jefferies. Stephanie Benjamin Moore: I wanted to touch on the margin performance in the quarter and just to make sure I'm understanding correctly. So obviously, very strong performance at the start of the year. And note, this is with 40 basis points of FX headwinds. I just want to confirm that the actual underlying performance was actually better. So as you think about just the margin expectations for -- as you progress through the year, maybe just talk about your level of confidence just given the momentum in the first quarter and really the decision to still raise our guidance and maybe opportunity for additional upside as the year progresses? Ryan Robinson: Thank you very much for the question, Stephanie. And I'll start with FX just mechanically and then go more deeply into the fundamentals. So yes, you're correct. The first quarter revenue increased by about 1.8% due to translation of non-U.S. revenue in the U.S. dollars, but also expenses that are non-U.S. dollar denominated translated in group. So it had an offsetting effect in our earnings, but because revenue went up, it reduced our reported adjusted EBITDA margin by about 40 basis points. The comment we made in outlook is be volatile, but the current rates would estimate a similar effect by about 1% and have that 1% offset. So some margin headwind as a result going forward. In regard to the underlying we're pleased with the performance in the quarter, and it's 1 quarter. So that allowed us to raise the range from 26.5% to 27.0%, and we're pleased with the progress, and we'll continue to monitor it through the year. We did have some changes. We're divesting that EHS software business that started April 1. We're having a more fulsome impact of some revenue that we're exiting. As a reminder, with our restructuring initiatives, we're stepping out of some service lines that collectively have about 1% revenue impact and we'll continue to monitor the business as we go forward. But we're pleased with the progress so far, and that collectively, 1 quarter in gave us confidence to at least raise the bottom end of the range. Jennifer Scanlon: And let me just add, I want to give a shout out to our 15,000 employees around the world. I'm really pleased with the ways in which they are embracing opportunities to improve productivity is the right use of tools and process improvements. And I'm also really pleased with the way that we've approached our cost discipline. So it put us in a position to move guidance upward. Operator: The next question comes from Josh Chan of UBS. Joshua Chan: Jenny, Ryan, congrats on the quarter. I was wondering about the growth rate in Q1. I guess, you were lapping some tougher compares in at least consumer. So Q1 was supposed to be the lowest growth quarter of the year? Do you think that will still be the case? So how are you thinking about sort of the performance in growth after the strong Q1? Jennifer Scanlon: Yes. There's a lot of nice things that we saw in growth in Q1. And as we look forward, we continue to believe that the trends that we've seen will be consistent. If you look at our industrial growth, as Ryan mentioned, our power and automation opportunities continue and that hits both ongoing certification and certification testing. In consumer, we were certainly pressured by excess of certain typically non-certification testing growth. But again, these were areas that were nonstrategic and lower margin for us. So that will continue to suppress consumer growth year-on-year as we exit those businesses. And then in Risk and Compliance Software, as Ryan indicated, the exit of EHS, while it was a nice margin contributor was on the lower growth side of Risk and Compliance Software. So we're not seeing really any -- as we look at our outlook, it's grounded in fundamentals, and we very confident in our mid-single-digit guidance here. Operator: The next question comes from Arthur Truslove of Citi. Arthur Truslove: The first question I had was just around the the margin development. So essentially, you managed to grow revenue organically by 40 million organic expenses up by just also down by 3. I was just wondering if you could sort of explain how you've had so little cost pressure in there. So I guess, with that in mind, it'd be interesting to know what proportion of the organic revenue growth was pricing versus volume? And ultimately, how you managed to grow revenue so much with so little incremental cost pressure? Jennifer Scanlon: Yes, I'll start, and then I'll let Ryan comment on pricing and volume. But really, when you look at the approach of the messages that we've been delivering, we do see operating leverage off of a stable cost base and continue to have opportunities to better use capacity and have our teams focus on productivity based on the trends and processes that they continue to use and to improve. We did see the restructuring begin to flow through. So that has certainly been beneficial. And then we've been very focused on the value that we provide our customers and increasing the billable utilization in both of our lab teams as well as our engineers. And what's exciting about that is that's the technical leadership that our customers want. And so making sure that we're getting the value from that technical leadership is really important. So I would say those are the kind of the headlines on where we're focused on this margin expansion, and then Ryan can talk about pricing volume. Ryan Robinson: Yes. Thank you for the question, Arthur. So as we said, we report 4 revenue categories, the 2 that are most amenable to looking at price and volume, our certification testing and non-certification testing and other services. So together, those grew 7.1%. And in the first quarter, more of that growth was actually from volume than price. And we're encouraged by that. We believe volume growth reflects real underlying demand for new products. We're expanding in new geographies and there's healthy new activity regarding product introduction. Pricing remains constructive, and the cost of our services is just a small fraction of the total product development costs for manufacturers. We also had growth of 8.2% in ongoing certification services. And in that case, there were meaningful contributions from both price and volume. Operator: And does that conclude your questions, Arthur? Ladies and gentlemen, with no further questions in the question queue. We have reached the end of the question-and-answer session. I will now hand back to Jenny Scanlon for closing remarks. Jennifer Scanlon: Thank you, everyone, for joining us today. We, as always, appreciate your support, and we look forward to updating you on our progress next quarter. Operator: Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.
Operator: Good morning, and welcome to Innovex's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to Eric Wells, Chief of Staff. Eric Wells: Good morning, everyone, and thank you for joining us. An updated investor presentation has been posted under the Investors tab on the company's website, along with the earnings press release. This call is being recorded, and a replay will be made available on the company's website following the call. Before we begin, I would like to remind you that Innovex's comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause Innovex's actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the first quarter financial and operational results announcement that we released yesterday for a discussion of forward-looking statements and reconciliations of non-GAAP measures. Speaking on the call today from Innovex, we have Adam Anderson, Chief Executive Officer; and Kendal Reed, Chief Financial Officer. I will now turn the call over to Adam Anderson. Adam Anderson: Good morning, and thank you for joining us today. I want to start by thanking our teams across the organization for another quarter of strong execution. We continue to operate in a dynamic environment where our people have remained focused on serving customers, leveraging our unique platform and growing our business through relentless innovation and a commitment to delighting our customers. That commitment is reflected in our first quarter performance. Since the merger with Dril-Quip, we've stayed disciplined in how we run the company, improving the cost structure, expanding the technology portfolio and focusing on cash flow and returns. Core to our success is our No Barriers culture, which means we tear down barriers between ourselves, our teams and our customers. We operate as one team across regions and product lines, not as a collection of separate businesses. That remains a real source of competitive advantage for us. On today's call, I'll walk through our first quarter performance, highlight several important commercial and operational developments from the quarter and then turn the call over to Kendal for a more detailed review of our financial results, capital allocation priorities and outlook for the second quarter. Starting with performance. We delivered a strong start to 2026. First quarter revenue totaled $239 million, which exceeded the high end of our guidance range, and adjusted EBITDA totaled $49 million, with an adjusted EBITDA margin of 21%, well above the high end of our guidance range. These results reflect continued strong operational execution, organic growth from new product introductions, and cross-selling across our global platform. We benefited from a favorable mix in the quarter, and we also saw earlier-than-expected benefits from the exit of the legacy Eldridge facility. More broadly, the quarter reinforces our view that our Subsea business can generate margins above 20% when operated with the same disciplined cost focus and a commercial approach that we apply across the rest of Innovex. Our No Barriers culture has unlocked the potential of our combined team. I've been particularly impressed by the contributions from our colleagues who've joined Innovex as a part of the Dril-Quip merger. They bought into the culture and are unlocking the embedded value and technology in the Subsea portfolio. Commercial performance remained healthy across our core markets. In U.S. Land, we continue to outperform underlying activity levels. Organic growth was driven by cross-selling as well as new product introductions. As a reminder, we have curated a portfolio of big impact, small ticket products and services. In aggregate, our offering represents just 2% to 3% of total well cost. Despite representing a small proportion of the cost of a well, our technologies are critical to well performance. Therefore, the purchase decision is driven primarily by performance, not price. Offshore and internationally, we continue to build momentum in Subsea. During the quarter, we secured 2 significant project awards in Asia, each exceeding $20 million in value, reflecting the strength of our specialized technology portfolio and our ability to win complex high-specification work. These awards span multiple parts of the well system, reinforcing the breadth of our Subsea technology portfolio. We also delivered the first Subsea wellhead order in Southeast Asia under the OneSubsea alliance, representing an important milestone in expanding our presence in integrated offshore projects. Beyond Asia, we continue to make encouraging commercial progress across key offshore basins where we see attractive long-term opportunities for our portfolio. More broadly, we are seeing a growing pipeline of Subsea opportunities, which supports our confidence in the trajectory of the business. In the Middle East, first quarter activity was softer than we had anticipated, driven primarily by project timing and conflict-related disruptions. We remain encouraged by our recent commercial progress, including multiple offshore awards in the Kingdom of Saudi Arabia as well as a contract extension for our off-bottom liner systems and lower completion technologies. We continue to view the Middle East as an important long-term growth market. We recently completed the acquisition of Drilling Innovative Solutions for $16 million or approximately 4 times trailing 12-month EBITDA. This is exactly the type of transaction that we believe drives value, one that is priced reasonably and offers substantial opportunity for organic growth by leveraging our platform. DIS brings differentiated production technologies that complement our existing completions offering, strengthening our U.S. offshore market position and create additional opportunities to grow with both existing and new customers. We believe the DIS portfolio has applicability across global deepwater markets as well as select onshore markets. DIS fits squarely with our model of curating a portfolio of big impact, small ticket products with strong margins, low capital intensity and meaningful room for growth. Stepping back, our priorities remain unchanged, gaining share, expanding our technology portfolio, driving innovation, improving efficiency, and disciplined capital allocation. We believe the combination of innovation, execution and capital discipline continues to differentiate Innovex, and we see a strong pipeline of opportunities across both organic initiatives and inorganic opportunities. As we move through 2026, we remain confident in the trajectory of the business and our ability to create durable value for shareholders over time. I will now turn the call over to Kendal to walk through our financial results and outlook in more detail. Kendal Reed: Thanks, Adam, and good morning, everyone. I'd now like to review our first quarter 2026 financial results. For the first quarter 2026, revenue totaled $239 million, down 13% sequentially from the fourth quarter of 2025 and down 1% year-over-year versus Q1 2025. Adjusted EBITDA totaled $49 million, resulting in an adjusted EBITDA margin of 21% compared to 19% in Q4 2025 as well as Q1 2025. We were pleased to exceed the high end of our guidance range on both revenue and adjusted EBITDA despite a dynamic operating environment during the quarter. Profitability in the quarter benefited from favorable product mix and improved manufacturing efficiency associated with the transition out of the Eldridge facility. As we consolidated our footprint and improved throughput, we saw better absorption and stronger operating leverage within the Subsea business. Reported SG&A was higher sequentially due to several discrete items, including legal, transaction-related and other temporary costs. Excluding these items, underlying SG&A remains well controlled, reflecting our continued focus on cost discipline. During the quarter, we recorded a $49 million legal accrual related to patent infringement litigation between Impulse Downhole Tools USA and Innovex's wholly owned subsidiary, DWS, following the previously disclosed jury verdict. No judgment has been entered at this time. We strongly disagree with the jury verdict and intend to pursue post-trial motions and, if necessary, appeal any resulting judgment to the U.S. Court of Appeals for the Federal Circuit. From a geographic standpoint, NAM Land remained a source of strength with revenue holding essentially flat at $137 million compared to $139 million in the fourth quarter despite weather-related disruption during the quarter. International and offshore revenue declined 24% sequentially to $102 million from $135 million in Q4. As we discussed previously, the fourth quarter benefited from an unusually high level of Subsea deliveries, including approximately $15 million of shipments that we had originally expected to occur in the first quarter, creating a tough year-over-year comparison. Lower Subsea delivery volumes, softer activity in certain international markets, and modest disruptions related to the ongoing conflict in the Middle East contributed to the sequential decline. A meaningful increase in activity in Mexico partially offset this softness. We view quarterly volatility as timing related and consistent with the normal variability that can occur in offshore and project-oriented markets. Importantly, underlying commercial momentum remains solid, and we remain constructive on the long-term outlook, expecting significant Subsea momentum in the back half of 2026. Capital expenditures in the first quarter 2026 totaled $6 million, down 35% sequentially, representing approximately 2.4% of revenue. CapEx remained in line with Innovex's historical range of 2% to 3% of revenue despite ongoing facility integration efforts associated with the exit of the legacy Eldridge facility. Free cash flow was $14 million in the quarter, representing approximately 28% conversion of adjusted EBITDA. As a reminder, the first quarter is typically our weakest free cash flow quarter due to the timing of certain annualized cash payments. We also saw a temporary working capital build in the quarter, primarily related to the timing of collections and normal inventory movements, which we expect to moderate as the year progresses. Our capital-light model continues to support strong through-cycle free cash flow generation. We ended the quarter with approximately $201 million of cash and cash equivalents and no bank debt, providing significant financial flexibility. Our balance sheet strength supports a disciplined capital allocation framework centered on balancing organic investment with selective high-return M&A opportunities and opportunistic share repurchases. Our M&A pipeline remains robust, including a mix of smaller bolt-on opportunities like DIS as well as larger opportunities. That said, we will only execute where opportunities align with our big impact, small ticket strategy, can generate high gross margins with low capital expenditures, and can be acquired at reasonable multiples. This disciplined approach remains central to how we intend to create long-term shareholder value. Consistent with that discipline, we also repurchased over $14 million of our shares at a price of $24.59 per share, underscoring our confidence in the intrinsic value of Innovex and our commitment to thoughtful capital allocation. We were also pleased to see Amberjack complete a secondary sale of shares during the quarter. We believe the transaction broadened our public float and enhanced trading liquidity. Amberjack remains a valued long-term shareholder and partner. Return on capital employed for the 12 months ended March 31, 2026, was 12%. ROCE is impacted by our net cash balance sheet. We remain focused on achieving a long-term target of high teens ROCE via margin expansion, high-return M&A, and shareholder returns. Looking ahead to the second quarter of 2026, we expect revenue in the range of $235 million to $245 million and adjusted EBITDA of $43 million to $48 million. Our guidance reflects a less favorable product mix in the second quarter as well as the potential for sales disruptions and higher costs associated with the ongoing conflict in the Middle East. Even with those near-term pressures, we remain confident in our margin improvement trajectory as 2026 progresses, supported by continued share gains in U.S. Land, improving international activity, and the growing Subsea opportunity set that Adam discussed earlier. I'll now turn the call back to Adam. Adam Anderson: Thanks, Kendal. We are pleased with our start to 2026. We exceeded the high end of our guidance range, continued to improve margins, generated positive free cash flow, and strengthened our portfolio through the DIS acquisition. Just as importantly, we continue to build momentum commercially, particularly in Subsea, where recent wins reinforce the progress we are making with customers around the world. While near-term market conditions may create some quarterly variability, our priorities remain unchanged. We will continue to focus on gaining share, expanding our technology offering through innovation, improving operational efficiency, and deploying capital in a disciplined manner. We believe our integrated platform, strong balance sheet, and No Barriers culture, positions Innovex well to create durable long-term value. Thank you again to our employees, customers, and shareholders for your continued trust and support. Operator, we can now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Derek Podhaizer from Piper Sandler. Derek Podhaizer: Maybe first start on U.S. Land growth from here. Obviously, a great quarter. What are you seeing when you look out in the second quarter, maybe the back half of the year? One of the biggest E&Ps in the Permian just gave the industry the green light to add rigs and activity and completion. So maybe just help us understand your exposure into that, which specific product lines you are seeing gain the most traction or have the most potential to grow here and really take advantage of the E&Ps restarting a bit of work? Adam Anderson: Yes. Derek, thanks for the question. So I think up until now, the tone we have largely heard from our customers is, say, on the margin they are going to do a little bit of extra work, really around like workovers, maybe a couple of incremental DUCs that they were going to frac, which would -- all that would largely benefit our fishing tool and production accessory business. It does feel like in the last couple of weeks, there's been acceptance that maybe the price signals a little bit stronger for longer than people were expecting a couple of weeks ago. So I would expect that the rig count ticks up a little bit in North America Land the rest of the year. That particular customer, Diamondback, is an important partner of ours. We'd expect to benefit on all of our technologies leveraged to the drilling of new well count. So hard to tell from here. I don't think it's going to be a big, big ramp-up, but I think we do see a little bit of incremental addition to rig count between now and the end of the year. The other thing the benefit of our business model is we do not have to be great at predicting forward activity. We just have to be highly responsive to that activity as it ticks up or down. So it feels good right now, but we all know that, that can change a little bit in the near term. Derek Podhaizer: Yes. That is for sure. Maybe on your latest acquisition, Drilling Innovation (sic) [ Innovative ] Solutions, interesting here. Maybe just help us understand exactly what they do, maybe describe to us their product line, their service? Really curious around the commercial rationale with the platform that you created at Innovex driving those revenue synergies, putting it on the global platform, similar to what you have been able to really successfully accomplish with DWS and Citadel? So maybe just some help understand this a little bit better on what you plan to do with DIS here? Adam Anderson: Yes, so really excited about the DIS deal. Like you said, it's very similar to the Citadel and DWS acquisitions, really great products that fit nicely with our strategy of big impact, small ticket, capital-light products and an area where they can help us and we can help them. And what I mean by that is, in this case, a really strong team and products that our customers really are asking our salespeople about have been doing for a while. So it really helps. We think their team and kind of the halo effect of their products will help us on the margins, pull through more downhole tools in their core market, which today is largely the U.S. offshore. And then similarly, there's a home for their products in some of the international offshore markets as well as potentially on U.S. Land that was probably going to be hard for DIS to realize in the short term on a stand-alone basis. So we can help them there. With respect to their product, they really have 2 big products, one being the Gatekeeper product, which is a valve running the shoe track of liners in the U.S. offshore. That fits great with our float equipment business. We're running other products at that shoe track as well as our liner hanger business. So this is just an integrated part of that portfolio. And then they've got a valve called the Sentinel valve, which is a drill pipe valve used in underbalanced drilling applications, used a lot again in U.S. offshore. There's a variant for the U.S. market that they are just starting to roll out, that again fits really nicely with the legacy Innovex and our drilling enhancement business that we got through the DWS business. So yes, this is, I think, a great deal both for DIS as well as Innovex. So we are really excited about it. Operator: Your next question comes from the line of Don Crist from Johnson Rice. Donald Crist: I wanted to ask about the Middle East. Obviously, there's a lot of talk about it. It doesn't feel like there's that many impacts in the first quarter. Can you just kind of explain whether or not you were running through inventory in the first quarter and that could have a bigger impact in the second quarter? Or just any comments around the Middle East given that the conflict continues to rage on? Adam Anderson: So. Yes, so we did have some impact in Q1, expect to have some impact in Q2 as well from the conflict. For us, the biggest area is some of the offshore markets, particularly in Saudi, has been impacted the most. Most of the land activity is still going, perhaps at a slightly lower pace than it was before. So we saw some impact. It's a little hard to quantify precisely. Certainly, our thoughts and prayers are with everybody in the region, and are pulling for a pretty quick resolution to the conflict for everybody's best interest. I think going forward, the other impact we're going to see in Q2 that we didn't have as much of in Q1 is just the logistical cost. To your point, we were pulling down -- we were serving our ongoing operations with inventory in the region to withstand a little bit of disruption in the supply chain. Q2, we have to airfreight some things in that we previously would have sea freighted in. And those -- as you can imagine, those airfreight rates are pretty high right now. So we will see a little bit of incremental cost burden tied to that as well as some other kind of onetime expenses. All that is baked into our Q2 guidance. Donald Crist: Okay. But going forward, it shouldn't be that big of an impact. Obviously, there will be some impact, but you are getting things into the region. Adam Anderson: Yes, for now, that's correct. So kind of what's baked into our forecast is that we are able to continue to get products and equipment in region, everyone is kept safe over there, and that activity levels are kind of what we see today is what we see for the rest of the quarter and that there's no meaningful change one way or the other in the region. Donald Crist: Okay. And just turning over to the optimization of the businesses and the manufacturing around the world. Obviously, we saw some good margins in the first quarter. Your goal is to come up a couple of more percentage points as we move through the year. But are there any milestones that we're really looking for? Is it Singapore ramping up? Or is it Vietnam ramping up or something like that, that's going to drive a lot of it? Or is Eldridge enough for it to see a boost as we kind of move through the rest of the year? Kendal Reed: Yes, so I think what we are really pleased with in the first quarter was how much progress we have made on that. What we had kind of told everyone previously is we're looking to be out of Eldridge by the middle of this year, which is still the target, but we were able to make a lot more progress on the manufacturing efficiency side in Q1 than even we had hoped. It has been a core initiative internally and kind of testament to all the good work that our team has been doing. So if you look at the gross margin improvement from Q4 to Q1, rough numbers, about half of that's going to be driven by product mix and about half of that's driven by improved manufacturing efficiency. So that was a big driver for the Q1 margin performance. Now, like we have always said, that's not going to be a smooth linear thing. We will make the final push here in Q2 to fully exit that Eldridge facility. We'll incur some moving costs to do that. So not to say it's going to continue to tick up at the same pace. But I think we've seen a big improvement on our manufacturing cost structure that we're really excited about through the rest of the year. But like you said, the big domino that has to fall is to fully exit Eldridge, get all that demand flowing through the other plants, and really realize the full benefits of that absorption. So I think that's what we are really focused on here in Q2 so that back half of the year, we're kind of in that consistently north of 20% EBITDA margin range like we talked about. Donald Crist: Okay. And if I could sneak in one more. Obviously, a good couple of orders in Asia. But just more broadly, can you talk about the offshore? Is energy security becoming more top of mind and you're seeing more operators accelerate plans or get more aggressive on plans going forward? Just kind of any comments around that? Adam Anderson: I think there is some talk of that. As you know, that is a really long-cycle business in the offshore market. So I -- We're not forecasting a really robust recovery in offshore right now as a direct result of the geopolitical situation we have seen over the last couple of months. We still feel like it probably does tick up a little bit here later this year into next year, but there has not been a massive response that we have seen from the customers yet. Operator: Your next question comes from the line of Keith Beckmann from Pickering Energy Partners. Keith Beckmann: I was wondering, we talked a little bit about the Middle East and kind of the 1Q, 2Q impacts. I was wondering maybe, kind of following a little bit on Don's question, what are the additional potential work scopes you guys think you may see following the conflict if activity really starts to ramp? Is there any sort of products or anything in particular you think could be helpful to maybe a recovery in the Middle East whenever we get to that point potentially? Adam Anderson: Yes. So in the Middle East, most of our -- as it is true across the world, most of our business is tied to the number of new wells drilled and the complexity of those wells. One thing we do a lot of in the Middle East and Saudi Arabia in particular is we do a lot of workover work where they're taking existing wells and modifying them, drilling longer laterals, and we sell a lot of equipment and solutions into that application. So if that were to ramp up meaningfully on the back end of that, that's probably where we would see the biggest near-term tick up. As we talked about regularly, we have a nice fishing business, a nice artificial lift accessory business, if we do -- is a nice chunk of our business in the Middle East, although smaller. I think those things would also see a nice boost if there's really a lot of workover work, fishing activity, things like this to get existing wells back on production. Keith Beckmann: Awesome. That's really helpful. And then on my second question, I just wanted to ask around free cash flow conversion, how you guys are thinking about that now. Obviously, we're in a little bit of a different world. How should we be thinking about maybe working capital through the balance of the year? Is there potentially a little bit of a delay on customer payments early on that could potentially reversed into the back half of the year? Just any thoughts on free cash flow? Kendal Reed: Yes, thanks, Keith. It's a good question. So like we talked about on the Q4 call, Q1 is always seasonally our lowest free cash flow quarter. We have a number of annualized cash payments that hit in the first quarter. So not unexpected that cash was down. But as you pointed out, we did see a healthy working capital build in the quarter as well. Some of that's driven just by timing of customer payments that, yes, we would naturally expect to even out and be a nice tailwind to cash over the next few quarters. And then we did have some inventory build as well, hopefully gearing up for some increased customer activity. So those 2 things I would expect to normalize. And as we talked about, we're not going to specifically guide free cash flow. But given the kind of market dynamic we're in, we would expect to be kind of on or above the high end of that 50% to 60% through-cycle conversion that we talked about. So Q1, I expect to kind of be the low point for 2026 free cash flow. Operator: Your next question comes from the line of Blake McLean from Daniel Energy Partners. Blake McLean: A lot of good stuff on here. I was hoping maybe we could just go back to the M&A stuff real quick. You guys have talked a lot about your pipeline and the potential deals, both small and large, that are in the marketplace. I was just hoping if you maybe talk a little bit about how a choppy macro environment kind of impacts what that pipeline looks like, your ability to move deals forward? Is there anything that changes in a market that feels a little more uncertain? Kendal Reed: No, it's a really good question. I mean, I guess I would say a couple of things about that. One is that when we are looking at acquisitions, we tend to underwrite deals over the long-term, right? So one, kind of building in a lot of room for error on the valuation side. We try and be pretty disciplined on valuation. And given the dynamic we've been in where there are just a lot more potential sellers and potential buyers, I think we've been able to benefit from that over the last several years. And then as Adam mentioned, we don't have to be that great in our business at predicting the future, what activity is going to do over the next couple of quarters. We're very responsive to that. And the types of businesses we look to acquire are generally more in line with that approach, right? These big impact, small ticket products, very little CapEx. So we can kind of benefit and create value through the ups and downs of the cycle. So I wouldn't say that changes our thinking too much other than, yes, it's going to have some impact on how you think about valuation and bid-ask spreads. And then, yes, the other thing I would say is just generally the private markets where we're mostly looking at acquisitions, react to news a lot slower than the public markets, which tend to be very forward-looking. A lot of times when we're looking at M&A deals, it's much more of a conversation about current run rate or trailing 12-month results, that type of thing. So it takes time for these things to get incorporated. So it doesn't have quite the same volatility in terms of valuation expectations. Operator: There are no further questions. I'd like to hand back for closing comments. Adam Anderson: Thanks, this is Adam again. Thanks, everyone, for taking the time today. Thanks for the questions. And really, another great quarter, really exceeded our expectations. And I just have to say thank you to our employees, our customers for all of the good work. I think this is really an exciting time, and we are thrilled with how things are progressing and look forward to the next couple of quarters rolling out. So I appreciate everyone joining us. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect
Operator: Good day, and welcome to the Willis Lease Finance Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views as of any subsequent date, and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including, without limitation, WLFC's most recent quarterly report on Form 10-Q, annual report on Form 10-K and other periodic reports, which are available on the Investor Relations section of WLFC's website at www.wlfc.global/investor-relations. At this time, I would like to turn the conference over to Mr. Austin Willis, CEO. Please go ahead, sir. Austin Willis: Thank you, operator, and thank you all for joining us today to discuss Willis Lease Finance Corporation's First Quarter 2026 Financial Results. On our call today, I'm joined by Scott Flaherty, our Chief Financial Officer. We have posted an accompanying presentation on our website to give further details supporting our remarks. This morning, I'd like to start by taking a step back and discussing our industry's macro environment. Since the conflict began in Iran, we haven't seen a material impact on pricing or lease rates. Demand remains robust. We have minimal exposure in the Middle East, where the effects are being felt most acutely. Airlines are reacting to higher fuel prices and the prospect of fuel shortages by reducing capacity, in some cases, flying less frequently and in other cases, parking aircraft. Should high fuel prices persist into the fall, we expect the airlines to feel liquidity pressure. Historically, we have been countercyclical in such environments. When airlines are trying to preserve cash, they tend to opt for leasing solutions rather than overhauling engines for $10 million or more, which drives up utilization in our portfolio. We have seen this phenomenon firsthand following prior periods of macro disruption. If fuel prices remain elevated longer than anticipated, some of the parked aircraft will likely be retired, and that could lead to lower lease rates and values for midlife aircraft. We would expect changes in midlife engine values to be more resilient than aircraft as they will continue to support shop visit avoidance, as I described earlier. However, and even in spite of this, we consider ourselves to be well hedged with over 50% of our engine portfolio in modern technology, specifically the LEAP, GTF and GEnx engine types. Another way for airlines to address short-term liquidity concerns is the sale and leaseback transactions for their unencumbered aircraft and engines. Our capital strategy over the past year has positioned us well to capture such opportunities. Turning to the quarter. We ended with $4.1 billion of assets under management, approximately $1.5 billion of capital that is ready to deploy through our discretionary funds and capital through our joint ventures to include a $750 million revolving credit facility. This, combined with undrawn amounts in our recently expanded $1.75 billion revolver and our low net leverage of 2.7x, we are positioned for significant growth. As we have talked about in prior quarters, the aviation market remains increasingly engine-centric, and that dynamic is driving demand across our platform. Engine availability remains a key constraint to both delivering new aircraft and keeping operational aircraft flying. And we continue to see extended maintenance timelines and sustained pressure on spare engine supply. This environment supports strong lease rate dynamics and ongoing demand for our leasing and services offerings. Continued strong demand for our products and services helped us deliver first quarter adjusted EBITDA of $124 million and fully diluted earnings per share of $3.26 as compared to $2.21 during the same period in 2025. We have also seen strong stock price appreciation during the first quarter despite market volatility driven by geopolitical uncertainties. We attribute this primarily to the strength of our underlying business as well as investors' confidence in our growth strategy, both on and off balance sheet. This strategy will deliver synergistic benefits through fees and carried interest, along with additional advantages such as a larger asset base that we can service through our two engine MROs, our airframe MRO, our parts business and our consulting business. Let me take a few minutes to discuss the 3 key areas of our business: leasing, Willis Aviation Capital and services. First, leasing. Leasing utilization for the quarter was up to 86% from 80% year-over-year, and the lease rate factor of our on-lease assets was 1.04%. As mentioned earlier, we continue to modernize the portfolio towards the next generation of assets. And although higher in value, we are experiencing similar lease rate factors as compared to the current generation of assets. These factors led the company to experience an all-time high lease rent revenue during the first quarter of 2026, totaling $77 million, demonstrating the strength of the aviation market, demand for next-generation assets and improved lease rate dynamics. We are able to effectively optimize asset placement across global customer base through our programs such as ConstantThrust. Under ConstantThrust, operators' engines are seamlessly exchanged with fully serviceable replacements from our pool of owned and managed assets as they come off-wing. This program specifically leverages WLFC's global expertise in spare engine provisioning, technical management and maintenance and repair services to ensure uninterrupted operational performance for airlines worldwide. Earlier this year, we expanded our constant thrust program by signing a new purchase and leaseback agreement with Nauru Airlines for CFM56-7B engines. The agreement will provide Nauru with reliable constant thrust support for the airline's entire fleet of CFM56-7B engines, powering Boeing 737-700 and 800 aircraft for 6-plus years. Turning to Willis Aviation Capital, or WAC. Last quarter, we announced Willis Aviation Capital, which is a natural extension of our business and enables us to manage third-party capital alongside our balance sheet and significantly expand our addressable market. This creates a flywheel effect where greater scale drives more opportunities to deploy our services across a larger asset base, enhancing returns and accelerating platform growth. Through our partnerships with Blackstone Credit & Insurance and Liberty Mutual Investments as well as our existing joint ventures, Black now manages more than $2.7 billion of committed or deployed capital. In the first quarter of 2026, we funded approximately $90 million of finance leases through our Liberty Mutual Fund, which do not generate gain on sale as these were par sales to the fund. In April, we began selling operating lease engines from our balance sheet to the Blackstone fund. We are encouraged by the early traction we're seeing with a solid pipeline of opportunities as we move through the year. This platform is designed to generate high-quality recurring earnings through the management fees and carried interest while also driving incremental demand for our services capabilities. And finally, services. Our services businesses remain a core strength for our platform, reducing both off-wing time across our fleet and turnaround times for our own customers' assets as compared to larger MROs. As I've mentioned before, the outlook for engine shop visits remains strong through the mid-2030s and our services businesses remain a key differentiator, playing a critical role as engine maintenance demand grows. Having multiple geographically distinct hospital shops, we are well positioned to capitalize on demand across those markets since we are the low-cost alternative to more costly full overhauls. To meet growing demand for the technical and maintenance expertise of our engine shops, which contributed revenue of $10 million in the first quarter. Exclusive of intercompany sales and to enhance our vertical integration, we continue to invest in deepening our in-house technical capabilities. In February, we announced the successful completion of our first core engine restoration of the CFM56-7B in our U.S.-based Willis Engine repair center. We have branded this new capability as Willis Module Shop, allowing us to complete comprehensive core restorations that reduce maintenance cost, improve turnaround time and strengthen the control over our assets. Over time, we believe this capability will be an important driver of both operational efficiency and portfolio returns. Now to touch briefly on our capital deployment priorities. To support future growth across our platform, we have increased our financial flexibility through an amendment and extension of our revolving credit facility from $1 billion to $1.75 billion. The amended facility positions us with the liquidity and flexibility to further expand our business. Additionally, we closed 2 Japanese operating lease with call option or JOLCO transactions, totaling approximately $50 million. These transactions reflect the strength of our lender relationships and our ongoing focus on maintaining a well-capitalized flexible balance sheet. Scott will speak to the specifics of these transactions momentarily. We have also continued to invest in top talent where we see growth opportunities, particularly in the Asia Pacific region. We welcomed Marilyn Gan as Head of Origination for the region, strengthening our ability to source and execute opportunities in a key growth market. Looking ahead, we remain well positioned to deploy capital across a broad range of opportunities. We see attractive prospects across leasing and services, supported by strong long-term fundamentals in the aviation market. We also remain committed to returning capital to our shareholders as evidenced by the quarterly recurring dividend of $0.40 per share that we declared earlier this quarter. Overall, we are confident in our strategy and the progress we are making as we continue to scale our platform and deliver long-term value for our shareholders. And with that, I'll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth. Scott Flaherty: Thank you, Austin, and good morning all. Another strong quarter for Willis Lease Finance. Our first quarter experienced record quarterly lease rent revenues of $77.4 million, quarterly adjusted EBITDA of $123.8 million, $36.8 million of quarterly earnings before taxes, or EBT, and $23.7 million of net income attributable to common shareholders or $3.26 of diluted weighted average income per common share. Walking through the P&L, our strong top line performance reflected solid growth in nearly every revenue channel, record lease rent revenues of $77.4 million in the quarter. 14.2% quarter-over-quarter growth in lease rent revenues were driven by a combination of increased portfolio size, utilization and lease rates. Our owned portfolio at the end of the first quarter was $2.86 billion. Our own portfolio is reflected on the balance sheet as equipment held for operating lease, maintenance rights, notes receivable and investment in sales type leases. Average utilization was up from 79.9% in Q1 of 2025 to 85.8% in Q1 of 2026, a nearly 6-point pickup. Additionally, we continue to see a solid average on-lease lease rate factor across the portfolio of 1.04% compared to 1.0% in the first quarter of 2025. Maintenance reserve revenues for the quarter were $55.5 million, up slightly from $54.9 million in the first quarter of 2025. $12.4 million of these maintenance reserve revenues were long-term maintenance reserve revenue associated with engines coming off-lease and the associated elimination of any maintenance reserve liabilities as well as the receipt of end of the lease cash payments. $12.3 million of this related to one engine coming off-lease and included both the release of a maintenance reserve and the receipt of an end-of-lease cash payment. The $12.4 million in long-term maintenance reserve revenue compared to $9.6 million in the first quarter of 2025. $43.1 million of our maintenance reserve revenues were short-term maintenance reserves compared to $45.3 million in the prior comparable period. Spare parts and equipment sales increased by $3.4 million or 18.9% to $21.7 million in the first quarter of 2026 compared to $18.2 million in the first quarter of 2025. Spare parts sales were $10 million and $16 million in Q1 of '26 and 2025, respectively, a decrease of $5.8 million. The decrease in spare parts sales reflects variations in the timing of sales to third parties and were not reflective of $7.5 million of intercompany sales, which was up from the prior comparable period and eliminated in our financial consolidation. These intercompany sales represent the added value of having a vertically integrated parts business. Equipment sales in the first quarter of 2026 were $11.4 million, up $9.2 million from the prior comparable period. These revenues reflect the sale of 3 engines that were not previously leased. The trading profit on sale of these 3 engines was $5.7 million, representing a 50% margin on these sales, validating the significant discount that exists between the book value and the market value of our portfolio. Equipment sales for the 3 months ended March 31, '25, were $2.2 million for the sale of 1 engine. Gain on sale of leased equipment, together with our gain on sale of financial assets, a net revenue metric, aggregated to $18.4 million in the first quarter, up $13.6 million from the $4.8 million in the comparable prior period. The $18 million gain on leased equipment was associated with the sale of 14 engines for $60 million of gross sales. Included in our engine sales were 5 engines sold to our Willis Mitsui joint venture. The gain on sale represents an effective 30% margin on such sales, further validating the significant discount that exists between the book value and the market value of our portfolio. The company recognized $0.4 million of gain on sale of financial assets where we sold 11 notes receivable and investment in sales-type leases for $87.1 million of gross sales, which generally reflects car sales of these financial assets. Maintenance services revenue, which represents fleet management, engine and aircraft storage and repair services and revenues related to management of fixed base operator services was $9.8 million in the first quarter of 2026, up 74.9% from $5.6 million in the comparable period in 2025. The increase reflects growth in engine and aircraft storage and repair services, especially when factoring the lack of comparable period fleet management revenues in the current period due to the sale of our BAML business in late Q2 2025. Gross margins grew to 9.3% from 4.6% in the prior comparable period. Our maintenance service offering enhance our customer program solutions and provide vertical integration to increase the profitability of our owned and managed assets. Management and advisory fees represent the fees generated through our asset management efforts. These fees include those made from our joint ventures and other managed assets as well as through our new fund strategy announced at the end of 2025. Management and advisory fees increased by $5.9 million to $7.9 million for the 3 months ended March 31, 2026, from $2 million for the 3 months ended March 31, 2025. This increase was primarily driven by $4.9 million of fees earned from our LMI or Liberty Mutual Fund in the company's role as general partner. The LMI fund commenced operations in March of '26 and reimbursed formation and other costs to the company, which flowed through both revenue and the G&A lines of our P&L. On the expense side of the equation, depreciation in the first quarter increased by $5.2 million or 20.6% to $30.2 million as compared to $25 million in the prior comparable quarter. The increase is primarily due to an increase in the size of our lease portfolio and the timing of placing acquired engines on lease, which starts their depreciation through the P&L. Write-down of equipment was $1.1 million in the first quarter, reflecting the write-down of 1 engine. There was $2.1 million of write-downs of equipment for the 3 months ended March 31, 2025, reflecting the write-down of 5 engines. G&A expenses increased by $8.9 million or 18.6% to $56.6 million in the first quarter of 2026 compared to $47.7 million for the first quarter of the prior comparable period. The increase primarily reflects a $12.5 million increase in personnel costs, which included an increase of $6.9 million in share-based compensation and an increase of $4.1 million in wages. The increase in share-based compensation reflects appreciation of the market value of the company's equity as well as share awards to new personnel to support the continued growth of the company. In January of '25, the company modified its share-based compensation program due to the significant rise in our stock price. The nearly 300% increase in the company's stock price since mid-2024 had a P&L effect as the company's historical plan was structured with predetermined share grants occurring after the achievement of specified goals or performance metrics. Generally, the share grants had a 3-year vesting, which created a noncash P&L effect over the vesting period. Our new share-based compensation plan will reduce share-based compensation expense savings, but such savings will not be fully realized until prior grants flow through the P&L. The $4.1 million increase in wages was driven by higher headcount to support the company's growth. Also contributing to the higher G&A cost was $4.9 million of costs, which were recharged to the LMI fund, with the associated revenue of $4.9 million included in management and advisory fees. Lastly, G&A also included $2 million increase in acquisition, financing and divestiture-related expenses as compared to the prior period. Partially offsetting these increases was an $11.7 million reduction in project expense due to our decision to cease investment in and pursue strategic alternatives for the sustainable aviation fuels project. Technical expense was $9.7 million in the first quarter, up from $6.2 million in the comparable period of 2025. Technical expense generally relates to unplanned maintenance, whereas engine performance restorations tend to be planned and capitalized events. Net finance costs were up $7.6 million to $39.7 million in the first quarter compared to $32.1 million in the comparable period in 2025. The increase in costs was predominantly related to $7 million in loss on debt extinguishment related to refinancings completed in the quarter. Less than $1 million of the $7 million was a cash expense as the lion's share was related to an acceleration of previously incurred capitalized issuance costs. Total indebtedness remained relatively flat at $2.25 billion as compared to $2.23 billion in the comparable period of 2025. Our weighted average cost of debt capital, inclusive of swap agreements was 5.12%. The company also picked up $3 million in ratable earnings from our investments, which include our joint ventures and fund interests. Income from investments was up 126% and most significantly influenced by our Willis Mitsui joint venture. The company produced $23.7 million of net income attributable to common shareholders, which factors in GAAP taxes and the cost of our preferred equity, which was up 52.9% from the comparable period in 2025. Diluted weighted average income per share was $3.26 per share in the first quarter, up 47.5% from the $2.21 in the first quarter of 2025. Adjusted EBITDA for the quarter of 2026 was $123.8 million, up 19.9% from $103.3 million in the first quarter of 2025. We believe that our adjusted EBITDA reflects the normalized cash flow generation of the Willis enterprise. Our adjusted EBITDA makes adjustments to our net income attributable to common shareholders for income tax expense, interest expense, preferred stock dividends and costs, loss on debt extinguishment, depreciation and amortization expense, stock-based compensation expense, write-down of equipment, acquisition financing and divestiture-related expenses and other discrete gains and expenses. Net cash provided by operating activities was up 38.3% to 56.7% in the first quarter of 2026 as compared to $41 million in the first quarter of 2025. The increase was predominantly related to increased net income, the noncash effects of stock-based compensation, depreciation and the loss on debt extinguishment expenses and a period-over-period $10 million increase in cash flows from changes in other assets. On the financing and capital structure side of the business, the company completed its seventh and eighth JOLCO financings in the first quarter, bringing total JOLCO financings at quarter end to approximately $170 million. In March of 2026, the company amended and extended its existing revolving credit facility, increasing total commitments from $1 billion to $1.75 billion and extending the maturity out to April of 2031. The expansion of our credit facility provides Willis with increased liquidity and flexibility to pursue our growth strategy. Concurrent with the $750 million expansion of our credit facility, we terminated our $500 million warehouse facility. We regularly access the capital markets as we endeavor to source competitively priced capital to help continue to grow our balance sheet and P&L. In February, we paid our seventh consecutive regular quarterly dividend of $0.40 per share. Subsequent to quarter end, our Board of Directors declared our eighth consecutive recurring quarterly dividend of $0.40 per share, payable to holders at May 11, 2026, on May 22, 2026. Our recurring dividend provides shareholders with a moderate current cash yield on their investment while not degrading the strong cash flow of our business. With respect to leverage, as defined as total debt obligations, net of cash and restricted cash to equity, inclusive of preferred stock, our leverage ticked lower to 2.68x at the end of the first quarter of 2026. We have made significant strides over the last several years to reduce leverage to position Willis to be able to access market opportunities when they become available. With that, I will hand the call back to Austin. Austin Willis: Thank you, Scott. Q1 set in motion great momentum for the year ahead as we track towards our long-term strategy. growing our portfolio on balance sheet and managed assets through Willis Aviation Capital while bringing exciting opportunities to the entire Willis platform. Thank you for joining us on our call today. And with that, I will let the operator open up to Q&A. Operator: [Operator Instructions]. We'll go to Will Waller with M3F. William Waller: Excellent looking quarter. I was wondering if you could comment a bit more on the asset management business, like the Blackstone funds and so on. What the management fee and incentive fee will look like, if there's kind of any general parameters that you could give out as it relates to that? Austin Willis: Will, thanks for the question. So in terms of the funds, we're not disclosing what the specific management fees are. But I can tell you that they're roughly in line with what's standard for discretionary funds, a percentage of the value of the assets managed and then a percentage of the profitability via carried interest. We started deploying capital into Liberty Mutual in the first quarter, and you're really going to start to see the fees from that come in when we deploy more capital over time. And with respect to Blackstone, I think you'll start to see fees kicking in here in the next quarter. And as I mentioned earlier on my prepared remarks, we started to deploy capital there in April, so just subsequent to the quarter. I think we're probably going to see about $200 million from our balance sheet into the Blackstone portfolio. So that's a good starting point and then hopefully get the remainder deployed in relatively short order. William Waller: Great. That's super useful to hear, and we think it's a very wise strategy and that you're using all your knowledge to the fullest. So we really think highly of that strategy. So thanks for that additional information. Operator: With no other questions holding, I'll turn the conference back for any additional or closing remarks. Austin Willis: Thank you very much. We appreciate everybody giving us their time today. And I guess we answered all the questions in our lengthy prepared remarks. So thank you very much. Take care. Operator: Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.
Operator: Good day, and thank you for standing by. Welcome to the Diamondback Energy, Inc. first quarter 2026 conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam T. Lawlis, VP of Investor Relations. Please go ahead. Adam T. Lawlis: Thank you, Corey. Good morning, and welcome to Diamondback Energy, Inc.’s first quarter 2026 conference call. During our call today, we will reference an updated investor presentation and letter to stockholders that can be found on Diamondback Energy, Inc.’s website. Representing Diamondback Energy, Inc. today are Kaes Van’t Hof, Daniel N. Wesson, Jere W. Thompson, and Albert Barkmann. During this conference call, the participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company’s filings with the SEC. In addition, we will make reference to certain non-GAAP measures. Reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I will now turn the call over to Kaes Van’t Hof. Kaes Van’t Hof: Thanks, Adam, and welcome, everyone. As with the last few years, we are going to go straight into Q&A. Operator, please open the line for questions. Operator: Thank you very much. One moment. As a reminder, to ask a question, you can press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. We will now open the call for questions. Our first question comes from the line of Neil Singhvi Mehta of Goldman Sachs. Neil, your line is open. Neil Singhvi Mehta: Good morning, Kaes, and good morning, team. The big development you have been signaling is the move to a green-light framework from yellow-light, adding two to three rigs and moving to the fifth completion crew. Can you take a moment to talk about the thought process that went into this decision and how you are thinking about where and when to add activity? Kaes Van’t Hof: Yes, Neil. Good question. There are macro and micro elements. From a macro perspective, there is a clear market signal. We are two months into the world’s largest oil supply disruption in history, and while Diamondback Energy, Inc. is solely based in West Texas and somewhat of a tourist in this situation, it is a very serious event with a lot of oil supply off the market. If that is not a signal to grow production in an advantaged area like the Permian Basin, I do not know what is. We hope there is a resolution to the conflict, but even if there is, there is a lot of noise in the system and a lot of barrels have been taken off the market. Global inventories are starting to decline rapidly, and we are going to do our small part to add production. On the micro, Diamondback Energy, Inc. has the best inventory quality and depth in North America, executed at the best cost structure. If this is not the time to grow now, then when? We are able to do this in a very capital-efficient manner and get it done quickly. We have a backlog of DUCs and we prepare our business for up, down, or sideways. By adding a frac crew earlier in the year, we can get production up immediately. It is a testament to the team’s preparation and the whole organization working together to do this very quickly. In other organizations, the decision might take longer. Neil Singhvi Mehta: Thanks, Kaes. On the return of cash framework, you did not move away from the fixed framework, and while you bumped the dividend, you indicated you might slow the buyback a little bit. What did you intend to communicate with that? Also, there is a concentrated seller ownership base. If the family ultimately sells down their stake, do you still view Diamondback Energy, Inc. as a logical buyer to help offset that potential risk on the stock? Kaes Van’t Hof: Let us take it higher level. Allocating capital is our most important job. The return-of-capital programs were put in place after the COVID near-extinction event, when investors said, “I want my money back and I want it in a formulaic manner.” That has worked very well. We do not expect our ability to return capital to stockholders to change. We just want the flexibility to make more cyclical moves versus moves within a 90-day window. We have a very good track record buying back our stock: 42 million shares for $6 billion to date at $148 per share. With the stock where it is today, that is a very positive return for our stockholders, and I expect that to continue. We recognize we also have a large shareholder, and we have found ways to help monetize their stake efficiently. They are most focused on us creating long-term value. Allocating a ton of free cash to the balance sheet in times of extremely high oil prices creates long-term value with, in our mind, a higher floor for the stock. I would not expect anything to change. We have a great relationship with the family and the ability to help them monetize. If we use excess free cash flow over the next couple of quarters to pay down debt, we can help monetize their stake more efficiently coming out of this. They are long-term holders and they want the stock higher. Operator: Thank you very much. Our next question comes from the line of Scott Michael Hanold of RBC Capital Markets. Scott, your line is open. Scott Michael Hanold: Thanks. You all had pretty robust production performance in 1Q. Based on our chat last night, it sounds like your completions were as planned. Can you walk through why performance was so strong? It sounds like it was a lot more well performance versus any other dynamic. Is that something we should anticipate moving forward, and what is embedded in guidance? Kaes Van’t Hof: Yes, Scott. High level, our well performance year-to-date looks up relative to last year, which is probably even a surprise to us internally. We continue to try new things in completion design and efficiency that are starting to pay dividends. On the production side, there are a lot of good things happening in the field: less downtime, more automation—call it AI or automation—impacting that side of the business. Better wells and lower downtime is a good recipe for a production beat. Daniel N. Wesson: Post the Endeavor merger and getting the team together, we started trading a lot of ideas to optimize primary completions as well as the base. On the completion optimization side, with perforating strategies, rate design, and sand loadings, we think we are seeing uplift, and time will tell as we continue to implement that design. On the production side, workovers and treatments—acid jobs, chlorine dioxide jobs, surfactant jobs—are starting to pay dividends. Layering on machine learning as we continue to look at our data streams and processes, we are working toward implementing AI into field operations. We are seeing downtime come down, which was a big part of the beat in Q1. Little bits of optimization across the board are starting to show through to the top-line number. Scott Michael Hanold: When you guided oil, it looks like you could be greater than potentially 520 thousand barrels per day. If the macro environment continues, how much desire is there to continue to let oil production grow versus curtail it? Is there a scenario where you would step it up even higher if the macro remains heightened? Kaes Van’t Hof: It is fluid, and the board wants us to take this quarter by quarter. If there is outperformance and we still have triple-digit oil prices and the market is calling for oil, this could be a year where, instead of pulling back activity, you keep efficiencies going and let production continue to climb. We are only two months into this conflict, and it could be resolved quickly. We are ready to react. We still have levers to grow further, but for now, 520 thousand-plus barrels per day of oil is the new baseline. Operator: Thank you very much. Our next question comes from the line of Neal Dingmann of William Blair. Neal, your line is open. Neal Dingmann: Morning, Kaes and team. Thanks for fitting me in. My question is on activity. How much, if any, will negative Waha prices impact what you might or might not do? Same question with oilfield service prices—are you expecting OFS inflation given what is going on with prices? Kaes Van’t Hof: On Waha, pricing is deeply negative. We are well protected with financial and physical hedges. Our mix is moving more toward physical when the two new pipes come on, hopefully in the second half of the year. We are protected to get through this tight spot financially while we continue to add oily inventory—we are drilling some of the oiliest stuff in the basin. We will continue to work on physical protection on the gas side. We have worked on a power project for almost a year; we will see if we can get that done. We have talked at length about monetizing our gas, and we are on the cusp of that starting to happen when these pipes come on. Danny, on services? Daniel N. Wesson: We have not seen much pressure to date on service pricing. It is really a capacity question—what does service capacity look like? We have not seen industry activity ramp aggressively through these first couple of months of this conflict, so there is still quite a bit of capacity in rigs and completions. Calendars are not squeezed enough yet for providers to push pricing when we look for additional equipment. We have seen some inflation in consumables tied directly to commodity price, but those have been minimal thus far. We will see what activity does in the Permian and the Lower 48 to gauge service inflation through the rest of the year. Neal Dingmann: On capital allocation—given likely record free cash flow per share—how does capital for M&A stack up against buybacks or near-term debt repayment? Kaes Van’t Hof: The options for free cash flow are to grow—organically or inorganically—return cash, pay down debt, or hold cash. On organic growth, we pulled that lever in a small way by going to the top end of our CapEx guidance. On inorganic (M&A), we have been very good over the years, but this volatility makes deals difficult, private or otherwise. M&A is likely fairly quiet at Diamondback Energy, Inc. for the foreseeable future. We increased the base dividend. With oil prices where they are, we do not know if investors are capitalizing this price environment yet. For us, the bigger use of free cash is to pay down debt rapidly and convert that debt value to equity value in our NAV, and to keep some cash for a rainy day because this is a very volatile environment. Operator: Thank you very much. Our next question comes from the line of Arun Jayaram of JPMorgan Securities. Arun, your line is open. Arun Jayaram: Good morning. The 2026 and 2027 strips are around $90 and $75. How do you think about development in a much stronger oil price than 90 days ago? For the two to three incremental rigs, how are you thinking about capital allocation across the asset base? Are deeper benches now competing for capital as you drive down well costs in the Barnett? Kaes Van’t Hof: Even with higher commodity pricing, we are going to hold to the vast majority of our spacing assumptions throughout the basin. We look at each DSU-level project to maximize wells until the incremental last well generates a 40% rate of return at $60 oil. That provides prudent spacing and solid returns despite volatility. Drilling our best stuff first and sticking to that knitting continues. The Barnett, particularly given well sizes from a production perspective, generates more PV today, so it is getting more attention. Albert Barkmann: That is right, Arun. The acceleration coming in with these two rigs is really an acceleration of the Barnett plan. We are focused on that development and getting ahead of the Barnett obligations we discussed last quarter. Daniel N. Wesson: I will add that Barnett activity and obligation activity are almost entirely focused on the JV area with another partner. Those wells are not as high working interest—about half and half, a little heavier weighted to Diamondback Energy, Inc. The two to three rigs equate to about 1.5 net rigs at Diamondback Energy, Inc. The top line looks like we are adding a bunch of activity in the back half, but net to us it will be less impactful. Arun Jayaram: For Jere, you have taken pro forma net debt down to $12.7 billion. Given the intention to pay down more debt in a higher commodity price environment, what are your targets for the balance sheet from a gross or net debt perspective? Jere W. Thompson: Great question. We previously talked about hitting $10 billion net debt sometime in the next 12 to 18 months. With current commodity pricing and excess free cash flow generation, it looks like we can hit that much earlier—potentially in a couple of months. As we move into the back end of the year, we will have an opportunity to reduce both net and gross debt. We will build cash on the balance sheet through the fourth quarter and then look at calling our $750 million of 2026s outstanding. As we move into 2027, we may consider a larger liability management exercise with additional cash to take out as much as we can from near-term maturities, particularly anything maturing prior to 2030. We are in an advantaged position to move our balance sheet from a position of strength to a fortress in the near term. Operator: Thank you very much. Our next question comes from the line of John Christopher Freeman of Raymond James. John, your line is open. John Christopher Freeman: Thank you. Even after increasing activity, your reinvestment rate still fell sharply from what you planned last quarter—from 44% to 34% at the current strip. You have the ability to increase activity more and still have an industry-leading low reinvestment rate. Is there a reinvestment rate that you want to stay below regardless of the commodity environment? Kaes Van’t Hof: We have polled investors who own the stock. The general consensus: a little growth will differentiate Diamondback Energy, Inc. and makes sense, but do not do it in a capital-inefficient manner. We were going to run between four and five frac crews to hit our original guide. That fifth crew was going to go away for five or six months and then come back. It is a Halliburton e-fleet simul-frac, as efficient as it gets. We are just bringing that crew back to run five crews consistently. That maintains capital efficiency versus going too fast too soon, which has driven inefficiencies in E&Ps’ plans and, at times, ours. Staying capital efficient is the priority; the reinvestment rate is an output of that. John Christopher Freeman: Along those lines, the original 2026 plan did not forecast meaningful DUC draws or builds. How does that look now with the new plan? Kaes Van’t Hof: It evolves through the year. We will draw down DUCs in Q2 and backfill with two rigs worth of activity to build the DUC balance back up. We peaked a little over 200 DUCs in Q1. That number will come down in Q2, and the backfill rigs will rebuild it. We likely need to keep a slightly higher DUC balance than with four crews—around the high hundreds, about 200 DUCs—so we have two projects behind each crew ready to go. Daniel N. Wesson: We like to keep a quarter to a quarter-and-a-half worth of inventory ahead of each crew for flexibility if we run into a pad issue or takeaway constraint. Each crew will do about 100 wells per year, maybe a little more. A couple hundred wells ahead of five fleets is the right carry DUC balance. As crews get more efficient and complete more wells, it either means releasing crews to keep the same well count or building 20 to 30 more wells for the year in total—still within our original guidance window. We took the momentum from Q1’s beat and kept it going through the rest of the year. Operator: Thank you very much. Our next question comes from the line of Analyst of Barclays. Your line is open. Analyst: Good morning. On crude oil marketing, 1Q pricing was a bit stronger. Can you remind us of your exposure to premium price indices and the marketing strategy on oil? Kaes Van’t Hof: Strategy-wise, we learned from the Permian takeaway crisis of 2018 that we needed to use our balance sheet to get crude to the biggest markets—Corpus Christi and Houston. We invested in EPIC, Gray Oak, and Wink to Webster. Those made our investors money and protected Diamondback Energy, Inc. commercially. We have about 300 thousand barrels per day going to Corpus on EPIC and Gray Oak, and another 100 thousand barrels per day going down Wink to Webster into Houston refineries. We are exposed to water-based pricing and even have a small contract with dated Brent exposure. That has helped us. This is a good playbook for gas; we are a little behind there because oil is 90%+ of revenue, but the next trend is to improve gas marketing. Analyst: On the acquisition line item in 1Q, there were just a few hundred million. Are you doing any organic acquisitions or bolt-ons at good pricing? Jere W. Thompson: There were a couple of small acquisitions in our backyard in the Midland Basin. In that line item, we also have capitalized interest and capitalized G&A, which made up the vast majority. Add a couple of small acquisitions and about $50 million to $75 million in leasehold bonus as well. Operator: Thank you very much. Our next question comes from the line of Phillip J. Jungwirth of BMO. Phillip, your line is open. Phillip J. Jungwirth: Good morning. Can you talk about how you are viewing Viper ownership and what is optimal for Diamondback Energy, Inc.? You sold some in the quarter, still own 39%. With a stronger free cash flow outlook, there is less need for divestitures. Is there a minimum level of ownership you would maintain, and how does that play into capital allocation? Kaes Van’t Hof: We sold down a little Viper ownership as a follow-on from the drop-down where Diamondback Energy, Inc. took a lot of Viper stock. We could have taken more cash then, but instead waited and sold a little last quarter. We are done selling Viper shares at Diamondback Energy, Inc. The growth opportunity set for Viper is significant. Could Diamondback Energy, Inc.’s ownership be reduced through dilution? Possibly. But no desire today to monetize more shares. In a few months, both companies will be very well positioned from a balance sheet perspective to do anything from an M&A perspective, which is where we wanted to be. Phillip J. Jungwirth: In the 2022–2023 upcycle, private operators drove an outsized share of rig additions and oil growth. How would you characterize privates’ ability in the Permian to respond to higher oil prices now versus a couple of years ago, given implications for tightening OFS markets? Kaes Van’t Hof: Important question, and it has factored into our calculus. In 2022, Endeavor (now part of Diamondback Energy, Inc.) went from 2 rigs to 15; CrownRock (now part of Oxy) from 2 to 8; EnCap North (now part of Aventa) from 2 to 6; DoublePoint/Double Eagle (now part of a combination of us and Exxon) from 1 to 6. Big private-side moves back then. Much of that Midland private activity growth has been consolidated. There will be private growth—the model has shifted to smaller asset packages developed quickly, farm-ins to larger operators, and growth in Northern New Mexico—but by our math that is 20–30 rigs, not 100 like 2022. They will move quickly, but the volume impact will be much smaller than 2022. Operator: Thank you very much. One moment for our next question. Our next question comes from the line of Scott Andrew Gruber of Citigroup. Scott, your line is open. Scott Andrew Gruber: Good morning. In light of the impact of privates, how do you think about Diamondback Energy, Inc.’s volumes over the next five to ten years on an organic basis? Do you think about modest growth, stepping higher during periods of elevated prices and then maintaining that new level so net-net you are growing? Or, when prices are soft, do you pare back activity and let production fade? Kaes Van’t Hof: The operator with the best inventory quality, lowest cost structure, and longest inventory depth has the right to grow organically and create shareholder value. We have been looking to hit the organic growth accelerator for a while but did not have macro support. If mid-cycle pricing is a little higher—say $70–$75 WTI—I think a couple percentage points of organic growth adds to NAV and long-term free cash generation. Importantly, this new plan generates more free cash flow per share at any oil price above $60 than prior plans. In a $70+ world, that is advantageous to shareholders long term. Scott Andrew Gruber: On capital efficiency, it appears to improve on the margin with the updated plan, but it is hard to separate the DUC draw impact from adding rigs in the Barnett where you are still ramping learnings and efficiency. How would you describe the underlying trend in capital efficiency as you lap the DUC draw into 2027? Kaes Van’t Hof: DUC draws and Barnett timing are noise. Below that, the team is executing. We set records on drilling two-, three-, and four-mile laterals. Wolfcamp D development: we set a goal of $300 per foot for drilling, down from $360 per foot last year—we are already at $300 per foot. Barnett drilling needed to be below $400 per foot to target $800 per foot well costs to be competitive with the base program—we have already put a well in under $400 per foot. Efficiencies continue to improve above ground, and the big move is drilling and completing better wells subsurface. Those are the long-term drivers of capital efficiency. Operator: Thank you very much. Our next call comes from the line of Derrick Whitfield of Texas Capital. Derrick, your line is open. Derrick Whitfield: Good morning, and thanks for taking my questions. Regarding your share buyback and guiding principles, where do you view mid-cycle pricing now in light of the Middle East conflict and the risk premium? Also, what are you seeing in degradation of inventory quality across the Permian, clearly beyond Diamondback Energy, Inc.? Kaes Van’t Hof: We are long-term bullish. Within three months, we went from a projected largest oversupply (which was debatable) to the largest undersupply, and we are only two months in. It is hard for us to move off our mid-cycle framework—mid-$60s WTI, mid-teens NGLs, and $3 gas with Waha differentials. Energy security is becoming more important, meaning more landed storage and the U.S. barrel being more important than ever. We think the U.S. shale cost curve is moving up. Operators have done a good job with efficiencies, but geologic time catches up and there are signs of degradation in productive quality across the U.S. Our job is to keep Diamondback Energy, Inc. at the low end of the cost curve, with top-tier inventory depth and quality and low execution costs. We are very well positioned. It is too early to raise mid-cycle pricing. Derrick Whitfield: As a follow-up on the Barnett, referencing the play outline, how large could you reasonably grow this position beyond the 200 thousand you are highlighting? You have one of the most prolific buyers in Midland working with you. Kaes Van’t Hof: We announced the position after we felt we had a solid base of what we could get. We continue to add in Q1 on a small basis. Now we are doing a lot of trades. Big operators have Barnett positions, and we are all looking to block up to three- and four-mile laterals. There is a lot of Midland-based private equity building six- to eight-section positions that likely come to market. I think the position will grow, and we have the sizable base to continue growing it. Operator: Thank you very much. Our next question comes from the line of Analyst of Pickering Energy Partners. Kevin, your line is open. Analyst: Good morning. Can you provide color on the cadence of net lateral footage per quarter throughout the year and the lateral length per well? We assume the additional 200 thousand lateral feet is back-half weighted. Daniel N. Wesson: It will be pretty evenly weighted toward the back half. We went up to around 6.2 million lateral feet, so we are looking at probably 1.5 to 1.6 million per quarter for the back half of the year. Q1 was one of our lighter quarters on lateral length—about 11.5 thousand feet. For full-year 2026, we still expect to be at 12.9 thousand feet, ramping through the back half. Analyst: As a follow-up, any updates on the surfactant tests? Daniel N. Wesson: We had a big push toward the end of last year to get tests in the ground and try different surfactant combinations across rock types to understand drivers of well performance. Those tests are in, the team is studying results, and we are refining the process. We plan the next deployment early this quarter. Kaes Van’t Hof: One thing I would add: we tested about 50 wells last year. On average, we saw a 100-barrel-per-day uplift, but some wells were up 400–500 barrels per day and some were zero. We are figuring out what we did right in the 400–500 barrel-per-day wells and what we did wrong in the zeros. This is version 1.0. I think the basin and Diamondback Energy, Inc. are on the cusp of technological breakthroughs related to increasing recoveries past primary development. That will likely be a mega theme over the next four to six years. That is why we have held as much acreage as we have. We have some of the best oil in place in the basin and some of the smartest people working on this—potentially extending the basin’s life by a decade or two. Operator: Thank you very much. Our next question comes from the line of Analyst of Truist. Your line is open. Analyst: Morning. Thanks for the time. On the return-of-capital framework and pursuing growth this year—which makes sense—what is an upper bound of oil production growth for Diamondback Energy, Inc., assuming a green light on the macro? Is 5% a fair assumption, or could it be higher? Kaes Van’t Hof: I do not want to get into a specific number. We have already grown low single digits year-to-date. I do not think there is a lot of investor appetite for a large CapEx bump and more than mid-single-digit growth. It is early, there is a lot of noise, and no one is sure how the macro unfolds. We are keeping our cards close, coming out with a good Q1 forecast, and will see how the year unfolds. Investor appetite is not for the “go-go” days of 2017–2018 with multiple CapEx increases and mid-double-digit growth. We will keep it steady and capital efficient and take the macro quarter by quarter. Analyst: Any update around your surface position in light of a potential new market entry there—specifically the power project? Jere W. Thompson: As Kaes alluded to, we are making meaningful progress with our partners. We view the power and data center opportunity as a unique way to use our natural gas in-basin at advantaged pricing. Once we finalize a project, we will discuss more details, but it continues to move forward. Operator: Thank you very much. Our next call comes from the line of Charles Arthur Meade of Johnson Rice. Charles, your line is open. Charles Arthur Meade: Good morning, Kaes and team. On the acceleration of CapEx, can you give us an inside-baseball account of how you came to that decision—board latitude versus a quick telephonic/Zoom meeting? I am looking for insight into how you operate as a fast mover in a volatile tape. Kaes Van’t Hof: Our board is very nimble for its size—13 members who are responsive and move quickly when the decision is obvious. We also got advice from Jamie Dimon last year: communicate with your board often and tell them everything. We decided to overcommunicate through this crisis. The crisis kicked off a week after earnings; we had set the budget. We sent three or four notes to the board in March to update how we were thinking. Then it was a simple meeting ahead of earnings to make this decision. The board had resounding support for the plan. That is the inside baseball on how Diamondback Energy, Inc. works with its board. Operator: Thank you very much. Our next question comes from the line of Leo Paul Mariani of Roth. Leo, your line is open. Leo Paul Mariani: There has been discussion of weak Waha prices in 2Q. Could there be short-term negative volume impact for the company? Are there wells with a lower oil cut you might choke in for a period given how bad gas prices are? Kaes Van’t Hof: At these NGL prices, we think negative $3 Waha basically cuts out the value of your NGLs. Worse than that—negative $4 to negative $6—you start to eat into the value of oil production. Oil is $100 a barrel, not $60, so the math on shutting in oil barrels is different, but I do think shut-ins are happening in the basin. In areas like New Mexico, with tighter restrictions on midstream development and flaring, that is probably happening. For us, back in October when Waha blew out due to maintenance, we shut in 2 thousand–3 thousand barrels per day of production for a period and then brought it back. I would bet we are around that range today with Waha as weak as it is. It is not impeding new development, particularly with the amount of financial hedges we have. Leo Paul Mariani: That is helpful—it sounds like you still have flow assurance and this is more of an economic decision. Kaes Van’t Hof: That is right. Every molecule we have produced has moved; it is just moving at a negative price. Leo Paul Mariani: On growth, your oil guidance is a bit open-ended with 520 thousand-plus. You did around 520 thousand in 1Q. If the oil environment holds, should we think about that plus a little growth in the second half? Kaes Van’t Hof: That is fair. We will take it quarter by quarter. If we are outperforming the plan, we will hold activity and produce more oil into a market that needs it. Operator: Thank you very much. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our next question comes from the line of Analyst of Wolfe Research. Analyst: Thanks. Back to the balance sheet—Jere, with no variable dividend in the capital return structure, is it inconceivable that your net debt could go to zero over the next two or three years? Would you allow it to go to that level? Kaes Van’t Hof: That would be a good problem to have. We will be transferring a lot of value from the debt side of the NAV to the equity side over this quarter. We will take things quarter by quarter. If this oil price environment persists and the stock continues to go up, we will allocate less to buybacks and continue to put cash on the balance sheet. This is a cyclical business. We want the ability to pounce on opportunities when the cycle turns—M&A, buying back a lot of stock, or leaning on the balance sheet to buy back stock. The key is flexibility and long-term value creation. We want to get to zero debt and one share outstanding—it will be a race between those two with free cash generation over the coming decades. Analyst: Follow-up on non-operated positions: what are you seeing from your non-op and how could that influence consolidated growth? Perhaps a Viper question, but any color on private-side rigs and non-op activity? Kaes Van’t Hof: Diamondback Energy, Inc. carries very little non-op. Viper sees about half the wells in the basin. Early signs show nothing major on permitting, but field discussions suggest rigs are getting picked up on the private side. If we had to give a Permian rig count forecast for year-end, we are probably up 25–30 rigs from today. Operator: Thank you very much. Our next question comes from the line of Analyst of Melius Research. Your line is open. Analyst: I know things are fluid and you are taking it quarter by quarter, but the market has significantly changed in the last 60 days with structurally higher oil. You raised guidance for this year. How are you thinking about out-years and setting up the company to continue to grow at a mid-single-digit rate or not in 2027, 2028, 2029? Kaes Van’t Hof: We have to think long term. If we are in a higher-for-longer world, an advantaged company with advantaged inventory like Diamondback Energy, Inc. should answer the call for production growth—so long as it maintains capital efficiency. That would shift the business from a steady-state bond-like free cash generator to a free-cash-flow-per-share growth generator over the next few years, into the decade. It is early; we will see what the macro holds. It does feel like the world changed a lot since our last call. Analyst: As you think about your inventory depth versus peers, you are in a leading position. How would you characterize your position versus peers given the longevity you have? Kaes Van’t Hof: We are fortunate to have incredible inventory quality and duration. Within Diamondback Energy, Inc., we are always looking for the next stick—organically (Barnett generation, Upper Spraberry development) and inorganically. This machine is built to do significant transactions like Endeavor, but also the sub-$20 million deals. We do not want a unit in the Midland Basin to trade hands without Diamondback Energy, Inc. knowing it could be in our hands. We are set up for both small bolt-ons and larger transactions. Operator: Thank you very much. I am showing no more questions at this time. I would now like to turn it back to Kaes Van’t Hof for closing remarks. Kaes Van’t Hof: Thank you, everybody, for your interest. We are always available to answer any questions. Please reach out to the number or email on the notices. Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.
Operator: Good afternoon, and welcome to PennyMac Mortgage Investment Trust's First Quarter 2026 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call as well as an Excel file with supplemental information are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. Starting on Slide 3. PMT's first quarter net income was $14 million or $0.16 per diluted common share, representing a 4% annualized return on common equity. These results were impacted by a lower contribution from our interest rate sensitive strategies primarily due to a decrease in servicing fees as a result of seasonality and a larger-than-expected MSR runoff related to higher note rate loans. These impacts were partially offset by improved results in our aggregation and securitization segment. PMT paid a quarterly dividend of $0.40 per share and book value per share on March 31 was $14.98, down 2% from the end of the prior quarter. Turning to Slide 5. I would like to note we have renamed what was previously the Correspondent Production segment to the aggregation and securitization segment. We believe this name more accurately captures the breadth of PMT's participation in the mortgage ecosystem, specifically our focus on aggregating high-quality loans for execution in the secondary market to drive organic asset creation. In total, during the first quarter, PMT purchased $4.3 billion in UPB of loans from PFSI. $2.8 billion in UPB was through its correspondent purchase agreement with PFSI, for which PMT pays fulfillment fees. The remaining $1.5 billion represented loan sales from PFSI to PMT outside of their loan purchase agreement where PMT's private label securitization platform provided optimal secondary market execution for PFSI. Slide 6 highlights the continued success of our organic investment creation engine. Similar to last quarter, we completed 8 private label securitizations totaling $2.8 billion in UPB. This activity resulted in the retention of $190 million of new subordinate bond investments in the credit-sensitive strategies and $12 million of new senior bond investments in the interest rate-sensitive strategies. We also generated $40 million of new MSR investments. Our momentum has continued after quarter end, with 2 additional securitizations completed and another 1 priced totaling $1.1 billion in UPB, and we remain on pace to complete approximately 30 securitizations in 2026, which we expect will build a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On Slide 7, we provided a snapshot of the high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of subordinate bonds within our credit-sensitive strategies totaled $744 million. 66% of this portfolio is comprised of bonds from nonowner-occupied loan securitizations. 20% is comprised of bonds from general loan securitization with the remainder primarily from agency eligible owner-occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics. including a weighted average FICO origination of 774, a weighted average LTV and origination of 72 and negligible delinquencies. Within our interest rate-sensitive strategies, as of quarter end, we held $94 million in fair value of senior and mezzanine bonds. These investments are diversified across our jumbo non-owner occupied and agency eligible owner-occupied loan securitizations. And similar to our credit-sensitive bonds, these investments are backed by high-quality collateral with weighted average original FICO scores in the 770 range and original loan-to-value ratios in the low 70s. This consistent credit quality across these organically created assets underscores our ability to produce attractive, high-yielding investments on Slide 8, approximately 60% of PMT's shareholders' equity remains deployed to long-standing investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for nearly half of shareholders' equity, providing stable cash flows from the portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments represent 12% of shareholders' equity and consists of seasoned loans with a weighted average current LTV of 46%. Turning to Slide 9, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes have been below our dividend level for the past several quarters. As you can see, we are showing an average run rate return of $0.31 per quarter for the next year. And focusing on the interest rate-sensitive strategies, increased amortization on higher coupon loans as well as reduced expectations for declines in short-term interest rates, which drive financing costs have lowered expected returns on MSRs in the near term. As is our long-standing practice, we continue to actively evaluate our overall equity allocation and investment opportunities to refine and optimize our returns on a go-forward basis. We are working diligently to reposition PMT to capture the opportunities more aligned to our long-term return hurdles. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market. By leveraging our unique ability to create credit-sensitive, high-quality assets, and drive our overall returns higher through disciplined capital allocation, I remain confident in our strategy to support our dividend and create long-term value for our shareholders. Now I'll turn it over to Dan to review the first quarter financial performance. Daniel Perotti: Thank you, David. Net income to common shareholders was $14 million or $0.16 per diluted common share in the first quarter or a 4% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $16 million to pretax income, generating an annualized return on equity of 17%. Gains from organically created CRT investments were $10 million, which included $7 million of realized gains and carry and $3 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $6 million, $2 million of which were market-driven value gains. Interest rate-sensitive strategies contributed pretax income of $8 million for an annualized ROE of 3%. Income excluding market-driven value changes for the segment was $11 million, down from $21 million in the prior quarter, impacted by increased prepayment speeds during the quarter, particularly on higher note rate MSRs, which drove higher runoff of our MSR assets, as well as lower servicing fees from seasonality and lower placement fees on custodial balances as a result of lower short-term interest rates. Regarding market-driven value changes, our hedging activities during the quarter yielded a small net decline as the $40 million MSR fair value increase was more than offset by $46 million of net declines in fair value of MBS and interest rate hedges, including the related tax expense. Additionally, during the quarter, we sold $477 million of agency fixed rate MBS to capitalize on intra-quarter spread tightening, resulting from the GSE MBS purchase announcement, and we redeployed the capital into retained investments from our private label securitizations. The aggregation and securitization segment reported pretax income of $16 million compared to a pretax loss of $1 million in the prior quarter. The prior quarter amount was primarily driven by spread widening on jumbo loans during the aggregation period and lower overall margins. In total, PMT reported $28 million of net income across strategies, excluding market-driven value changes, up from $21 million in the prior quarter, primarily due to an increased contribution from the aggregation and securitization segment. I want to address our dividend in the context of our current results and the updated run rate return potential. While projections for income, excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend of $0.40 per share, which is supported by our taxable income and which we expect to be sufficient to fully cover the dividend at its current level. Turning to Slide 13. We highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we redeemed $345 million of exchangeable senior notes originally due in March 2026 using capacity from existing financing lines. And finally, on Slide 14, we continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage and that ratio declined to 5.6x at quarter end from 6x at the prior quarter end within our expected range. PMT's total debt to equity increased to approximately 11:1 from 10:1 at December 31 as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization mitigating any additional exposure to PMT. We expect the divergence between these 2 metrics to continue increasing as our securitization program grows. We'll now open it up for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: Question related to your comments on Slide 9 about actively evaluating the asset allocation of the company and some new investment opportunities. Can you elaborate on what you guys are looking at in terms of kind of new investments if that includes things like non-QM or home equity. And also was curious if sales of maybe some lower returning assets are part of the valuation that's ongoing? David Spector: Well, I think it's all of the above would be my response. I think first of all, if you look at Slide 9, when you look at the annualized return on equity, you can see that the -- in terms of achieving that minimum required return of, call it, 13%, 14%. Means that the sector that's really under delivering and has been the net interest rate sensitive strategies and, in particular, MSRs. And so as we look across our MSR portfolio, I mean, clearly, there's parts of that, that have real value and there's demand in the marketplace for it. And there's others that have real value that perhaps there isn't as much demand in the marketplace. So we're strategically evaluating the MSR portfolio to help accelerate perhaps the weighted average equity allocation down in that operating strategy and moving more to the credit-sensitive strategies. The point you raised in the credit-sensitive strategies, of course, there's more opportunity to do additional securitizations in nonowner-occupied loans and agency-eligible loans even jumbo loans. But given what we're seeing in the non-QM originations, both in correspondent and over a PFSI in their broker division, the ability to aggregate for securitization is very apparent to me. So I wouldn't be surprised to see us do a non-QM securitization over the next year. And to your point, there's other assets that we see in the marketplace that you can create investments that achieve our return target. And so as we've done in the past, we're going in and we're evaluating how to -- where can we recycle out of lower returning assets in the higher returning assets. Operator: And your next question comes from Bose George with KBW. Bose George: So first, just the change in the ROE expectation that you gave for the $0.31 down from $0.40, it looks like it's mainly on the Agency MBS, but can you just walk through the drivers of that change. Daniel Perotti: So the -- so really, the bigger driver of those is on the MSRs, which -- where the return came down a few percentage points in the allocation, weighted average equity allocated there is a larger proportion. The Agency MBS also did decline. That was really related to -- if you look at the expectations for short-term rates going back from last quarter versus this quarter, there was obviously a sharper decline and thus a greater expected carry from the agency MBS in that -- in the prior run rate scenario. But the bigger impact is related to really the prepayment speeds and expectations that we see in the short to medium term on the MSRs. Bose George: Okay. That makes sense. And -- the -- and in terms of the bridge now from the $0.16 you guys did this quarter up to the normalized. Can you sort of walk through just the bridge there? Daniel Perotti: Well, certainly, obviously, rates have increased a bit, and so we are expecting slower prepayments on the MSRs. But still below -- still elevated from what we saw earlier in prior quarters or in earlier quarters in 2025. And then as David has mentioned, there we mentioned some allocation out of MSRs and into -- if you look at the allocation here, for example, some ability to ramp up other investments as we move through the next few quarters. Operator: And your next question comes from Jason Weaver with Jones Trading. Jason Weaver: In your prepared remarks, you mentioned the sale of roughly $0.5 billion of MBS on tightening to redeploy towards retained securitization, which looks like a material rotation in the interest rate-sensitive book. All else equal, is this a sort of glide path we should think about for the remainder of 2026? Or was this more of a tactical rotation? Daniel Perotti: I think that was really more opportunistic or tactical. We wouldn't necessarily expect to continue to wind down that portfolio, especially, although we will adjust as we're looking at rotating out of certain portions of the portfolio. But given the returns that we expect from the Agency MBS portfolio and what we have here overall, we wouldn't expect to drawdown necessarily further on the MBS portfolio, but it's something that we'll continuously evaluate based on where spreads are in the market. Jason Weaver: Got it. And I think you redeemed about $350 million of exchangeable senior notes from the existing financing book. What is the unsecured corporate debt stack look for the next 24 months, if you can just guess. And are you targeting any sort of opportunistic refinancing or extension given current spreads? Daniel Perotti: So we issued about $150 million of additional convertible debt towards the end of Q4 last year. We additionally in 2025 issued a few unsecured baby bonds. That was effectively a pre-refinancing of the convertible debt that was retired in Q1 of this year. So we don't have a need to necessarily raise additional unsecured debt. It is something that we will continue to look at and see if there are opportunities. but no immediate plans necessarily, but it's something that we will be opportunistic with to the extent that we see opportunities. Operator: [Operator Instructions] Your next question comes from the line of Doug Harter with BTIG. Douglas Harter: As you think about the opportunity in the non-agency securitization, do you view it as more opportunity limited today or more capital constrained and as you think about the ability to scale -- continue to scale that business? David Spector: I think it's really capital more than opportunity. I think the great story about PMT is obviously, the synergistic relationship it has with PFSI and the ability to source the underlying assets, the ability to underwrite and process the loans on the front end and where we have the ability to actively select the loans that we want in our investments is a really important feature that we have in PMT. And so the -- whether it's investor or non-owner securitizations where we create subordinate bonds or general loan securitizations and even the agency eligible loans where we're not securitizing just for best execution purposes, we're securitizing to create investments for PMT. And so I think that it's really more of a capital issue for us. And I think that's why we're focused on opportunistically getting out of lower returning assets and most likely reinvesting the capital into our credit-sensitive strategies sector, which, by the way, from the very beginning of PMT is what the -- is what the investment thesis was for PMT looks to be a credit-sensitive strategy vehicle. And so that's really the guiding -- the kind of the guiding force here. We're -- I think we've done a great job in being the preeminent securitizer of these non-agency loans and creating the investments behind them. And you look at the performance of these, and they're really remarkable. And I think that we've done a nice job when CRT was discontinued to be able to move to figure out, okay, how do we create a like investment without the CRT opportunity, and that's how we ended up where we are today. But I think you're going to continue to see us grow the equity allocation in the credit sensitive strategies over time. Douglas Harter: And David, as you mentioned, you're seeing increased non-QM volume, how much crossover is there in your traditional agency originator that's a correspondent partner versus non-QM or some of these other products that you haven't necessarily gotten as large in yet? David Spector: I'm really -- I've been really pleasantly surprised and I think it's a function of the size of the market that we're seeing a good amount of our correspondent getting into non-QM lending. And so I think that they are -- they're recognizing that they need to expand their product base. And so this is where being the leading correspondent aggregator with over 700 plus [ clients ] is really an advantage to us and being really good, meaningful deliveries of non-QM correspondent. And I expect that to meaningfully grow. I think the important part of non-QM, like all non-Agency products, you have to keep an eye on the fact that you don't want to get caught in a market disruption or with spreads widening. And so we're being really diligent at least initially in selling and forward selling the non-QM product to really lock in the margin until such time as we want and we decide to do a securitization. And that's where again, the synergistic relationship with PFSI to be really valuable because similar to the correspondent side on the PFSI side, we're seeing really good receptivity to non-QM with our broker partners. And so I think when we decide that we want to do a securitization and really deploy capital there, we'll be able to do so. But by and large, I think there's part of the non-QM market that we're participating in is getting more readily accepted in the broker and correspondent communities has more akin to their credit profile and their risk management framework than when it was originally -- when a vision was born some 10 years ago and people thought of it as maybe a little less than prime. But I've been pleasantly surprised by this. Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks. David Spector: Well, I'd like to thank everyone for joining us on our call today. If you have any questions, please don't hesitate to reach out to me or our IR team, Dan and I look forward to speaking to all of you in the near future. Thank you. Operator: The concluded today's call. You may now disconnect.
Operator: Greetings, and welcome to the Lifetime Group Holdings, Inc. Q1 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Connor Wienberg, Senior Vice President, Treasury and Investor Relations. You may begin. Connor Wienberg: Good morning. Thank you for joining us for the First Quarter 2026 Lifetime Group Holdings Earnings Conference Call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Eric Weaver, Executive Vice President and CFO. During the call, we will make forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from those forward-looking statements made today. There is a comprehensive discussion of risk factors in the company's SEC filings, which you are encouraged to review. The company will also discuss certain non-GAAP financial measures, including adjusted net income, adjusted EBITDA, net debt to adjusted EBITDA or what we refer to as net debt leverage ratio and free cash flow. This information, along with the reconciliations to the most directly comparable GAAP measures are included when applicable in the company's earnings release and earnings supplement issued this morning, our 8-K filed with the SEC and on the Investor Relations section of our website. With that, I will turn the call over to Erik. Erik Weaver: Thank you, Connor, and good morning, everyone. We appreciate you joining us for our Q1 business and financial update. Please note that this morning, we posted an earnings supplement on our Investor Relations website which includes additional detail on our membership mix and comparable center revenue. Starting with our first quarter revenue. Total revenue increased 11.7% to $789 million driven by continued strength and performance across our portfolio, including higher dues revenue and strong utilization of our in-center businesses. Comparable center revenue grew 8.6%, slightly above our expectations. As outlined in the earnings supplement, components of our comparable center revenue were as follows: improved membership mix, which contributed 3.5% growth. This includes changes in membership types, the replacement of lower dues memberships with higher dues memberships, which we refer to as churn and continued expansion of clubs into more affluent, higher use markets. Price contributed 3% growth. This includes legacy membership dues increases and changes to the new join price of clubs within the previous 12-month period. And in center businesses contributed 2.3% growth due to continued strength in utilization of our in-center businesses, particularly dynamic personal training. Volume contributed a negative 0.2% to comparable center growth. This was driven by a reduction in qualified medical memberships, which I'll discuss shortly. As expected, comparable center revenue growth continues to move towards our long-term target of 6% to 8%. Average monthly dues were $230, up approximately 10.5% year-over-year, and average revenue per center membership was $930, up 10.2% year-over-year. Growth in average dues was driven primarily by positive membership mix trends and execution of our pricing strategy, as I just described. We ended the quarter with nearly 838,000 center memberships, which reflects 1.4% growth. As we've discussed on past calls, we have been managing our membership mix. Part of our strategy has been to limit certain qualified memberships, specifically those administered by third-party medical insurance providers. We refer to these as qualified medical memberships. These memberships have significantly lower average dues. In Q1 2026, qualified medical memberships represented only 3.4% of our total dues revenue. We expect this to be approximately 3% by the end of the year and continue to represent a smaller proportion of our dues revenue over time. In the first quarter, qualified medical membership declined by approximately 15,000, down 14.9% year-over-year, while all other memberships grew by approximately $27,000, up 3.7% year-over-year in total, resulting in 11.9% growth in total dues revenue. Due to further year-over-year reductions in qualified medical memberships, we expect total center membership growth of 0.5% to 1% in the second quarter, 1% to 1.5% in the third quarter and 2% to 3% in the fourth quarter. However, we expect membership growth, excluding qualified medical memberships of 3.5% to 3.8% in the second quarter and 4% to 5% in both the third and fourth quarter. With this strategy, we expect to deliver revenue growth of 10% to 12% for each quarter and the full year. Moving on to net income. For the quarter, net income was $88 million, an increase of 15.8% year-over-year. First quarter net income included approximately $8 million of net tax affected items excluded from adjusted net income, primarily consisting of share-based compensation. Net income in the prior year benefited from approximately $1 million of net tax affected items, driven primarily by $12.6 million of income tax benefits resulting from a significant exercise of stock options by our Chief Executive Officer, ahead of their 2025 expiration, partially offset by share-based compensation. Adjusted net income, which excludes the tax-affected impact of these items was $96 million, up 27.4% year-over-year. Adjusted EBITDA was $227 million, an increase of 18.3% over the prior year quarter, and our adjusted EBITDA margin improved by 160 basis points to 28.7%. The primary factors for our margin expansion included greater leverage on our center operating costs and corporate G&A, an overperformance of dues revenue and timing of sale leasebacks. Of the 160 basis point margin expansion, approximately 30 basis points relates to employer payroll taxes associated with the CEO's option exercises incurred in Q1 2025. As noted in our earnings release, we updated the midpoint of our full year adjusted EBITDA margin guidance to 28%. This guide includes the impact from a majority of our clubs that are opening in the second half of 2026. And the associated preopening expenses and early operating ramp impact on margin. Net cash provided by operating activities increased to $199 million, approximately 8% higher compared to the prior year quarter. Total capital expenditures were $260 million, up 82% from the prior year, reflecting construction activity in support of our new club openings for 2026 as well as the start of construction on clubs planned for 2027. As of today, we have opened 5 of the 14 clubs scheduled for opening this year. The remaining 9 clubs and the number of the clubs scheduled for 2027 opening are under construction. In April, we closed on sale-leaseback transactions that generated approximately $200 million of sale-leaseback proceeds and expect to complete approximately $400 million for the full year, supporting our ongoing focus on generating annual positive free cash flow. With that, I will now pass the call to Bahram. Bahram? Bahram Akradi: Thanks, Erik. Good morning, everyone, and thank you to our teams across the company for their outstanding work this quarter. As Erik mentioned, we continue to see strong performance across all aspects of our business. We're not seeing any impact from the broader macro environment at this time. Demand has been particularly strong for our new clubs, including 4 clubs we just opened in the last 30 days. They're all performing extremely well. Our real estate pipeline continues to be robust. And we expect to continue growing both revenue and adjusted EBITDA in the low double-digit range. I'm going to keep my prepared remarks very brief as the results of our business speak for itself. But I would like to focus and provide clarity on our positive free cash flow outlook. Last week, we announced the close of $200 million of sale leaseback and raised our full year sale leaseback target to $400 million, delivering positive free cash flow in 2026. We expect to deliver growing positive free cash flow each year going forward, while selling only a portion of our fee-owned real estate assets built in any given year, resulting in an increase to the value of real estate portfolio that could be used at any time as additional liquidity. All of this puts us in a very strong position with very low leverage, robust and growing operating cash flow and a significant portfolio of real estate assets. We will continue to invest in our existing clubs, take advantage of our white space by opening new clubs and thoughtfully return capital to our shareholders. With that, we will open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: When we look at what we know about right, it looks like another year of suburban ground-ups very significantly. How do you think about beyond '27? Do you think '28, '29 look like '26 and '27 in very much? And then what's your thought on takeovers. You had done a bunch -- you haven't done many in a while. I don't know if you like that use of capital. What's your thought on that that type of project. Bahram Akradi: Great question, John. Great to hear from you. The market is incredibly exciting ahead. We have some amazing club openings, nonsuburban an incredibly amazing urban markets. We've been dying to get into these with significant-sized clubs. Interestingly, right now, our urban clubs are performing with incredible return on invested capital as we go into those into leases and we put some leasehold improvements, the returns are incredible. They ramp exceptionally well. And the suburban clubs have never been better. Like what we are opening right now anywhere suburban, semi suburban is the best results I have ever seen in for the years. So we're just excited. We're excited about all the sites in the pipeline, whether they're in a super, super hot urban markets where we are going to be part of larger developments, and we've been negotiating on some of these things for 5 years, 6 years, 7 years, I mean they just -- they take longer. So they're closer to the other side. And then we have a -- we still have a growing number of suburban prototype opportunities as the demographic shifting into markets like we just on Monday opened the club in Akatio. It's a second location in Gilbert, Arizona, not only that one, all 4 clubs, incredible results. But there are -- that market 5 years ago, there was nothing there. And right now, it's one of the hottest market. So we have continued to explain, we are not having a concern about an outlook where we're going to run out of opportunities to build urban semi-urban or suburban clubs. I don't -- that is the last thing on our list of concerns here, just amazing opportunities, and they're all performing exceptionally well. The most important thing that I think is just misunderstood about this business is the return on -- the cash-on-cash return doesn't matter which way we do it. When we go into these clubs, into a lease with our leasehold improvement dollars in, we are always north of 30% in aggregate. And when we are doing our clubs and take them to sell leaseback we do that or better. So I just don't -- it doesn't really matter to me. If it doesn't matter to me at all. if it's more suburban or urban or what markets right now, they're all doing exceptionally well. Hopefully, that answers you and others in regards to that. John Heinbockel: Maybe as a follow-up to that, has that changed your -- that success to maybe lack of competition in some respects, has that changed your view on what the whitespace opportunity is whether it's -- I think at points you've said 600 maybe or more than that. In your mind, has that increased? And if so, by how much do you think. Bahram Akradi: Fortunately or unfortunately, I think, is going to be way past your time and my time, John. I don't think we are concerned about running even -- we do 14 clubs a year. I don't see when we're going to get to the point where we have a hard time. And we have been looking at so much opportunity in the United States that, that always makes us ponder taking the time to engage in all the requests to go 10 hours, 20 hours, 30 hours away on an airplane to get to the international demand that there is for our brand. So that's because the amount of opportunity here in North America is enormous. So there is really no concern. I think that we've always said 450, 500, I don't think we see any -- I don't think we see any window that is going to be smaller than that probably is going to continue to grow. Operator: Our next question comes from the line of Brian Nagel with Oppenheimer. Brian Nagel: Congratulations on a very nice quarter. And also very much appreciate the press disclosure on numbers, -- so -- thank you. So the question I have -- the first question, we've talked about this before, but in the release again today, you talked about within the inset of offering a dynamic personal trading has been a driver there. So the question I want to ask is how do you look at the current penetration of DPT -- where is kind of the slack there -- and then with regard to membership and the disclosure we gave today, as you continue to sort of say, upgrade these memberships in these clubs, does that, in a way, give you more opportunity in DPT assuming that these nonqualified members are more likely to uptake that. Bahram Akradi: Let me just first give credits to our entire DPG team from every DPT themselves all the way to our Senior Vice President who runs that. They do an amazing job that the brand of dynamic personal training has been understood. The quality of our trainers are exceptional -- we are continually seeing an increase to the number of productive dynamic resonate trainers. And the execution is exceptional. And we continue to see more opportunities. And you're correct, as we are executing our new brand positioning, which we have been in progress for the last 3, 4 years, positioning Lifetime as an acolyte country club with the exceptional desirability where the price is really not a factor. The kind of customers who are coming to us they're not talking about the price. We're not promoting. We're not advertising. We're not giving a 3 month for them to join. They're just coming in and wanting to be part of the lifetime brand and experience. when those members also engage in in-center businesses way easier than the ones that you pull in of trying to give them a 3 month or 2 months or something like that to get them signed up. Lifetime has never been in a better position, brand. We have never been in a better position, and it's entirely because of the change in the positioning of our company and our brand over the last 4 or 5 years. Erik Weaver: Yes. And if I can just add to that, Brian, Bahram talked about a number of trainers as we look to serve the demand. As we look across the portfolio, they're up -- trainers are up low double digits and new business is actually up even more. So again, that just speaks to the increased demand that Ron is talking about. Brian Nagel: That's very helpful. And then my follow-up question, different topic. But thanks for the commentary on the cash flow dynamics here at '26. But as we look at that CapEx number, either what was closed from Q1 or guidance for '26. I mean, how should we think about that relative to the clubs that you're opening in '26. In other words, me, how much of that growth CapEx that you earmarked, so to say, is actually associated with clubs beyond the current year. Bahram Akradi: Yes. So that's a great question. But we kind of Erik has covered this multiple times. It's roughly half and half, about half of the capital that we are -- we launched this year as a new club growth CapEx, half of it was the clubs are opening in 2026 and half are the clubs that they're starting -- we have already started construction. We bought the land for -- mostly for '27 and some of the '28 even. That's going to be always the case with the way we build our business, these are -- this is what the advantage of lifetime business is the incredible moat that is around this company that also don't think has been appreciated because it takes such a long time to develop these things and it takes stamina and capability. For us, it's a routine process. We are investing in 2026, 2027, 2028 and maybe even some beyond at any given time. The interesting thing that I just really wanted to cover is that we are in an amazing financial position as well as our brand position. We have very, very low leverage significantly below my maximum target of 2x debt to EBITDA. That's flexibility. We have zero balance on our revolver. We're sitting on several hundred million dollars of cash. We build every year more than $400 million, $500 million, $600 million in what I would call fee-owned sellable assets. So if we sell $400 million of that, this is not the portion of the CapEx that goes to leasehold improvements. This goes into the assets we buy the land, we build, we own the fee that it goes into the pool of fee-owned real estate assets that we can sell and add and think of it as additional liquidity. Over the next 4, 5 years, our expectation is that, that number will continue to grow even after -- if you kept building 14 clubs a year constant, if you build that constant, if you build that you're going to do $400 million a year constant. These are just make it simple assumptions for clarity for people. We will be adding to the value of our net sellable assets fee-owned sellable assets,[indiscernible] assets. And we will be adding to our free cash flow from '26 on every year. Our long-range plan shows by roughly about 2030. That free cash flow will be more than $400 million, which basically will give you an option I don't want to sell any of my real estate. That's not really how we're thinking about it. Our assumption is we're going to continue to sell that number, roughly that. And then otherwise, now we have an extra $400 million of free cash flow, and we have added. We're not trading our real estate assets to be cash flow positive. We are adding to that. We're cash flow positive. We're growing that -- and that puts us in a position we can start thinking about all different ways of return of capital to the shareholder. Hopefully, this creates really, really nice clarity for everybody. Operator: Your next question comes from the line of Arpine Kocharyan with UBS. Arpine Kocharyan: So you raised revenue for the full year by about $20 million and EBITDA is going up by about $15 million. That is a very healthy flow through as we think about incremental revenue upside. So maybe if you could go through drivers of that. But more importantly, your underlying members seem to be growing in that 4% to 5% range, which is definitely healthier than what meets the [indiscernible] right, with the qualified down double digit, the blended number. Can you maybe expand a little bit more how you think about member growth in light of revenue optimization versus just chasing volume, sort of your updated views on that? And then I have a very good follow-up. Erik Weaver: Yes, I can take the flow through there. Yes, on the revenue, we're seeing extremely strong performance in our dues line, which, of course, as you know, most of that is going to fall that's going to flow through to the bottom line. And we're also seeing continue to see strong performance in DPT, which, of course, has a little lower margin than Dues does. So that's how kind of that relationship dues and flow-through is coming in. And what you're talking about on the membership mix versus volume is exactly the strategy as we kind of laid out instead of just chasing raw volume, it's all about the membership mix. So that means number of members per membership, that has a higher LTV. So that's a better outcome for us, both from revenue and just strategically. Bahram Akradi: And if I can add to that another way for you guys to think about. We are really prioritizing revenue, quality of that revenue, quality of membership, the ability to do in-center business retention, we prioritize those, and of course, all of that results in the EBITDA pass-through. And that the mix that he's talking about is naturally taking place. It's been a continued quarter-after-quarter result of changing the positioning of the company are -- we were very, very decisive. We wanted to create a brand that the desirability brings the customer who is not price sensitive is experience sensitive. That's taken us 4 or 5 years, and we're still getting some churn through that. We love our older customers as we love the young ones and the middle age ones, all of them. However, as time goes on, we're going to see that some transition from that into more direct memberships also add to this mix shift that he's talking about. At the end, all we are working on is what does a club do in revenue? What is it doing a contribution margin? And how is the retention, what's the experience? And the focus that the team has on executing that is delivering these results. Arpine Kocharyan: That's great. And then just a quick follow-up on buybacks, just really quickly. You have a $500 million of authorization and you just raised sale-leaseback target even before reporting today. Could you just give your broad take on how you think about capital allocation at this point as far as buybacks go, and where the stock is and the potential to be a little bit opportunistic. Bahram Akradi: Well, I think that we are going to definitely use our authorization here as long as we see the stock below a fair value to us, we're going to be able to take advantage of that opportunity and buy some shares back. Yes. Ultimately, as I mentioned, as the cash flow grows, we're going to be analyzing with our Board and capital allocation committee on how to think about different ways to deliver return on capital to the shareholders. But right now, we have this vehicle in place, and we're definitely going to be looking at the share prices and at the right times, we're going to take the opportunity to buy some of the shares back. Operator: Your next question comes from the line of Randy Konik with Jefferies LLC. Randal Konik: Look, I think the theme I'm getting from this is appreciating the continuous growth of quality of the product, the experience and the membership. So I guess for Bram, to you first, kind of maybe give us some perspective on some of the product services and amenities you're thinking about over the next few years and some of the ones in existing that are existing today that you can see adding more penetration into the centers and for your members? And then I guess then for Erik, have you kind of looked at revenue per membership into -- in different quintiles -- and are there any kind of interesting dynamics between what you see in the first quintile of revenue per member ship versus the fifth? And how you can try to grow that fit quintile or fourth quintile to get it closer in spread to what you're seeing with the first quintile of spending in their highest-performing membership kind of members. Can you give us some perspective there, guys? Bahram Akradi: Let me start by giving you. We have CTR in the rollout right now. We are only in 30, 40, 50 locations, targeting to about executions, maybe we can beat that by end of the year. We're working as fast as we can to roll those programs out we are launching hybrid XT, that's just at the infancy got tons of potential. Dynamic stretch has got significant opportunity going forward. We are working on lifetime health and wellness hub, which basically aggregates the opportunity for people to come to the most qualified registered dietitians in the country to basically get direction about where they go in a world where people are advertising all kinds of things, and some are fantastic, and some are snake oil. So I think we can be -- the authority to help people navigate through all that information. And then, of course, channel number there is Tamura to lifetime health LTH products, our personal trainers, dynamic stretch, CTR classes, whatever. So I -- we got so much that is into their thinking and strategy and rollout. Some are further along the way. They've been proven. It's just a more rapid rollout and some are at the earlier stage where we're still fine-tuning the model before we put into a heavy rollout plan. We are busy, I don't -- I mean we're not running out of ideas or concepts on how to improve what we run. And I have said this repeatedly, Adaptation is a necessity of survival, Lifetime has demonstrated over the last 35 years, how we adapt. This team is poised to adapt as fast as necessary to deliver the best experiences for the customer that is relevant to the customer in today's world. In 5 years, these customers are going to want different things. I can't tell you exactly what that is. All I can tell you is whatever it is, we will have adapted and delivered it to them as they desire. Erik Weaver: Yes. And then on your second part of your question there, I would say exactly what Rob said, we're always doing things to add value to the memberships at all levels in all quintiles. But I guess I would just point you to what we're doing around our qualified medical because that is the biggest opportunity. When you look at our ability to -- because our clubs are busy, right? So where can we make the most impact to improve average dues and increase in center utilization, it's exactly what we're doing with those qualified medical. Operator: Your next question comes from the line of Chris Woronka with Deutsche Bank. Chris Woronka: So I also appreciate the expanded disclosure, especially around those qualified memberships, I think, super helpful. Maybe just go one step further a little bit. I mean, when you guys are evaluating a new club and you're looking at different locations, you're underwriting, I mean, how important is a metric like membership per club that you could put in there versus what kind of does do you think you can get? What kind of ancillary do you think you could get, what kind of engagement you get? Just trying to kind of put a button on the idea that members per club is the most important metric to look at for you guys on development because I don't think that it is, but if you guys would like to opine on that, that would be terrific. Bahram Akradi: It isn't. This is where I want to be clear, that has been the, I think, the gap between what we keep trying to explain to the Street and is being misunderstood -- what I care about is we spend x amount of dollars on a facility. We want a rate of return on that. That demands we want to be looking for a certain amount of revenue and a contribution margin out of that. The -- when I launched this company, I have said this 100 times, we've envisioned comprehensive delivery of all experiences under one roof. And we sold it way too cheap. That caused actually a contrary outcome to what was -- what I wanted. I wanted this exceptional experience in the clubs. We couldn't get it with 11,500 memberships in 100,000 square feet club. We just couldn't get it. it wasn't there. So mistake was -- it was too cheap and the vision of delivering exceptional quality just would not work with that much volume. Today, every time we do a business plan in the last 2, 3, 4 years, and this is why I want to avoid giving you guys a number. We thought we do these clubs for like 5,000 members instead of 10,000 and then what it really boils down to is that the number is actually a lower number that brings in fetches a higher revenue and higher margin and better experience. So what's happening is we are -- the way we have our position, the demand for our business and the amount of people in a wait list, we generally end up launching a club at a higher price than we had initially in the business plan. Therefore, it's just an easy mathematics. It's fewer memberships, but we end up with better revenue, better margin, better results, better experience. So we are curating 100% of that experience. And that is the magic to winning to make sure the experience remains wow. And as long as we deliver that, the numbers will work. And so we don't want to emphasize membership. I want to emphasize revenue and EBITDA and our margin pass-through. And I couldn't be more pleased with what our team is executing with that results speak for themselves. Chris Woronka: Yes. Thanks, Bahram. That's a very, very helpful answer, I think, hopefully, for folks here. As a quick follow-up, I know at one point, there has been talk on the app or monetization, things like advertising, other forms of revenue generation. Maybe can you spend just a minute on where some of those initiatives are? Is that still on the table? Bahram Akradi: Not in the near term. The reality of AI and the way AI is advancing in such a fast pace -- our focus has been delivering, again, the best. Right now, there are features of our lacy that I think if you experienced it, you will be impressed in terms of like a workout generator, answering any questions regarding health and wellness. It's way more in depth -- we are continually executing the same strategy to deliver something exceptional on that. But our main focus is delivering the best experience inside of our clubs, we want Lacy to be that navigator for the customer to help them find what they want to find. One of the challenges for our company is that we offer so many things. And often, if you are doing one service, it's easy to create an app that gives you the great experience for that one business. We're delivering 20, 30 different businesses inside of umbrella of lifetime. It becomes way more complicated even if the components are good for people to even find a navigation. So Lacy is lifetime AI companion. It's your AI companion to help your experience get better. And right now, we are singularly focused on making sure that experience. The subscribers are growing still at 100,000 rough and tough additional subscribers month. At some point, we will focus on how naturally start thinking about benefiting from that. But right now, we're getting more members coming through from our 3 million, 4 million people on that list it's easier for them to join the club, and we're seeing that starting to kind of get ramped up. So we will find the wins as long as we stay focused on delivering something exceptional. Operator: Your next question comes from the line of Stephen Grambling with Morgan Stanley. Stephen Grambling: I guess in order to not necessarily surprise investors, I think everyone appreciates the focus on ROIC and your confidence in the new clubs hitting very healthy ROIC. But as we think about some of the KPIs perhaps over this year, thinking through whether it's members per club in center spend, margins as they ramp, any reason to believe that these will be different than what we've seen historically or relative to what's in the pipeline? Bahram Akradi: Yes. I mean, from a margin perspective, no, I mean you take the revenue per membership and the growth that we've seen there. We expect that to continue. That's obviously an important KPI for us. So no, nothing that I could point you to, to suggest that we're going to have anything significantly different from kind of what we've been showing with our existing KPIs. Erik Weaver: I think our execution right now, as I mentioned, is best ever is like the term we hear when we're going through our analytics best results ever best results ever across so many aspects of our business -- we're just -- our opportunity is to look at individual clubs to see within a particular club what is the embedded additional opportunity. But systematically, if you look at the entire system, results are fantastic. And I think we don't have a reason to believe they're going to do anything is going to deteriorate any shape or form. Bahram Akradi: No. But I do think it's worth reemphasizing. We already covered this when you talk about a number of memberships per club. Ron covered it, but I think it's worth emphasizing as we open these new clubs, we're doing so with fewer memberships to reach our desired call it, utilization. So when you look at that metric today, it's roughly 4,400 per club. The trend that we're seeing is, again, intentional as part of the clubs that we're opening at the number of memberships we're planning. Operator: Your next question comes from the line of Anthony Bonadio with Wells Fargo. Anthony Bonadio: So I just wanted to ask about EBITDA margin. It looks like another all-time high there in Q1. Can you just talk about what drove the performance you saw there and I know you've historically pushed... Bahram Akradi: Erik drove that performance. Erik. Erik Weaver: Well, I can speak to it. I didn't drive it. Yes. I mean so it was a good quarter. Like we mentioned, I mean, we saw -- obviously, I talked about does, and that was a portion of the flow-through center ops margin, as you saw, improved as well. I mean that was just really great execution from the business in expenses across the board, really. And we -- the timing of sale leasebacks and the overall rent that we executed later in Q2 all of that really combined, whether it was G&A or center ops, we got leverage and scale. Bahram Akradi: Yes. I want to add. I think actually, I want to give credit to our team starting the year with all the uncertainties in the macro, our focus was making sure we execute the customer experience at the highest level however, don't waste any dollars anywhere that doesn't need to be wasted. And so the team has executed exceptionally well. And I think the -- I always try to caution -- the Street is not asking for more, more and more because this is the Doomsday for public service public companies on a long-term basis is that you keep trying to squeeze more and you cannot pinch the customers' experience or the team members' experience. We are in a phenomenal place, we are in a great place. We have some additional clubs opening significantly more. We've got 9 more clubs to open. There are some preopening expenses with those, albeit the clubs are performing so well, many of them starting did a contribution margin positive in the second month. But still, from an EBITDA standpoint, they can have some margin compression. But for the most part, again, I cannot see anything that's ever executed in better across the lifetime. So I'm proud of our team, but don't expect more. Anthony Bonadio: Got it. That's helpful. And then maybe just on the consumer, can you just talk a little bit more about the demand side of the equation? It seems like in-center spend growth remained strong in Q1, reads on the high income consumer remained good. But there's also been a lot of headline fatigue out there -- just any thoughts on whether appetite to spend has changed at all in that cohort would be helpful. Bahram Akradi: Absolutely zero. We're not seeing any any negative pressure. I have expected it. I have thought this macro cannot deliver this. But right now, we haven't seen -- as of right this second, we haven't seen anything. It is the customer, the demand is strong for the clubs. Again, we're doing this without hardly do any marketing spend. It's just naturally coming to us. And the in centers are doing great, and we're super weight lists are substantial for our new clubs. And so we're just basically navigating through giving people the desired service or expectation, and it's just -- it's all working extremely well. Operator: Your next question comes from the line of Eric Des Lauriers with Craig Hallum. Eric Des Lauriers: Congrats on the very strong results here. You've already touched on it, but just wondering if you could expand on that improving membership mix. How much runway do you have here before we sort of reach kind of a new normal balance of members here? And just kind of how long do you expect this to be a tailwind to your overall dues here? Bahram Akradi: I think that as you look at our business, we still have roughly, I want to say, 2/3 of our membership that they're paying somewhere below the rack rate. And we've gone through this. And we expect to see some pass-through as some of the older legacy paying customers drop out because they move or something happens and we get a new customer replacing that. No additional membership count, but we get more dues from that. As of right now, we don't have any immediate change in the outlook. I think it's going to continue. But eventually, it will slow down. But right now, it is still. Erik Weaver: Yes. The thing I would point out is we highlighted in our Q3 supplement, where we really began deemphasizing the qualified medicals, right? And so that's why we kind of gave that guidance over the next couple of quarters to kind of help as we see Q2, Q3 and even into Q4. But as we get into -- we're opening up the larger -- opening up the clubs in -- and as you look at those qualified medical as a proportion of our total membership mix, that's going to continue to become smaller and smaller. So I think when you talk about it, when is it going to be maybe a little more pronounced, again, I'd take you back to the guidance we gave for Q2, Q3. Eric Des Lauriers: Awesome. That's very helpful. And then overall, just looking at the sort of, I guess, macro category horizon here. It's great to hear earlier comments that you even have 14 clubs per year, the saturation point is basically not even on the horizon. You've got an extremely long runway. How do you view the competitive dynamics in the space between sort of overall growing pie, increased demand for premium fitness, third places, et cetera. And then your ability to sort of increase your size of the pie. I mean seems like there's great tailwinds on both sides. I'm just sort of wondering how you view this kind of longer-term outlook here and your positioning within that? Bahram Akradi: It's a great question. I don't and I've kind of often said this. If I took off on my own and I brought some of the best people with me, we couldn't put a dent into a lifetime. You're looking at a couple of hundred locations that they are open this year. We have another 50 to 75 AD facilities in the pipeline. These things take several years of gestation and massive amount of dollars, an incredible amount of detail to execute the complexity. The competition for a to lifetime will not be a head on operator that can execute the complexity, the scale, the size, and the brand recognition of lifetime, you will have to compete with somebody opening sort of a recovery space. Somebody opening up a stretch play, somebody doing a yoga place. I mean -- or some combination, we really don't feel like any concerned that there is going to be somebody taking on this model, good luck if they want to try it. But we're just kind of executing, flowing through the opportunities we have. It's not a real concern. I just don't think it's real. Operator: The next question is coming from the line of Logan Reich with RBC Capital Markets. Logan Reich: Congrats on the solid results I want to ask first just on how visits per member or anything you can share on retention was trending in the quarter? I know it's been an area of strength for you guys. Just curious if you can provide an update there. Bahram Akradi: Yes. The visits for membership is up. Retention is absolutely great. I mean, it's just -- the more they use the club, the less they are likely to want to drop out -- so all those metrics are working in our favor right now. Logan Reich: Got you. That's helpful. And then I wanted to ask on the on hold memberships. That number actually declined on a year-over-year basis for the first time I think it was 23%. Just any color there on what that -- what drove that decline on a year-over-year basis? Bahram Akradi: Yes. I mean there's really nothing there. I mean that number is -- I think it went down maybe 3,000 or something in that range. But from time to time, you're going to see that fluctuate as people come on or off hold, but there's nothing in there to point you to a trend or anything like that. Operator: Our next question is coming from the line of Owen Rickert with Northland Capital Markets. Owen Rickert: Congrats on another pretty unbelievable quarter. Just quickly for me. Can you guys talk about the vision behind this new lifetime innovation hub and how you see it influencing future member experiences, potential ancillary revenue opportunities and maybe the broader long-term growth strategy there? Bahram Akradi: Well, look, if you don't have innovation hub, you need to go home. You need to be thinking about how to innovate and how to -- and our company has all been directed to be thinking about how we can navigate through what is the new ways we can serve the customer, whether the new products, new services, that people are sort of seeking and then how do we create an engine to deliver what's being asked for. But is part of the things we're talking about, the delivering -- coming up with rolling it out and executing that. And the dynamic stretch which happened a little before that, now hybrid XT. So we're constantly working on doing those things. And then the next piece is, like I told you, is that building this lifetime health and wellness hub and try to create a whole sort of a robust registered dietitian center that basically can navigate people through all different aspects of our business. So we're working on all different types of things at all times. Now we still got tons of runway in thinking about what else we need to add to the clubs, how do we transform the clubs. So people continue to come in as the place they want to stay in, whether for entertainment to work, to eat to meet other people or exercise and get their hormone replacement done. I mean all of those things are endless opportunities for us to innovate through.; Owen Rickert: Awesome. Got it. And then secondly for me, just on MIORA maybe can you just tell us how many locations you're currently in? And is the long-term vision there still about 1 to 3 per region. Bahram Akradi: Look, I think with that, what we are doing right now is we're in massive, massive sort of period of making sure we fine-tune the customer journey to an exceptional experience. My belief in this space is that it is going to be a main sort of the main street in terms of what people are going to want to engage in and then once they get on it, they'll probably -- there's really no way to get away from it. They want -- they would want to do that. It's being done in mom-and-pop clinics across the country. So it's a huge opportunity for us. And for a clinic of a couple of providers, one lifetime location has all the customers they would need and more. So can we have a more in just about every club eventually? The answer is yes, just like we have personal training in every club. But we just got -- we got a crawl walk run. We need to sort of kind of do that with the complexity of the medical aspects of it, the HIPAA compliance and all the rules and regulations around it, it's a little more complex than rolling out the dynamic threat or CTR. So we got to make sure we execute that exceptionally well, but I am an incredible believer in the potential of MIORA. And myself and our senior VP that is in charge of that with me, we're all over it in terms of making sure we have a model that we want to roll out much faster in the next 12 to 24 months. We're working on it, and I'm really excited about it. Operator: Our next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Just looking at Slide 5 in the supplement, kind of conceptually in terms of the building blocks for the comp, when I think about maybe 2 or 3 years out, -- is it the right way to think about it that the membership volume piece kind of reverses as a headwind maybe related to qualified memberships kind of no longer churning off but membership mix might come down a bit? And then just in terms of membership price and in-center business, any thoughts around kind of those building blocks over the next couple of years, too? Bahram Akradi: Yes. I'll take the price 1 first. I mean we've kind of -- we've given our long-term algorithm and we've kind of stated in there as we look at the pricing component of that roughly 2% to 3%. So I think that's a very sustainable part of this model. And yes, you're right, like as we work through kind of some of these membership dynamics with qualified, right, the -- those things kind of work themselves out. And in your matures, you're basically, call it, flattish, and you're getting your growth from your ramping in your new clubs. So I think that's a directionally fair expectation. Noah Zatzkin: Got it. Really helpful. And then maybe just one on GLP-1s. I wanted to get any updated thoughts there in terms of that being a tailwind to the industry. Anything you guys are seeing around maybe benefit to new adds as well as retention. Any thoughts there would be helpful. Bahram Akradi: Me, I'm going to take this question for you. It is going to be a home run win for all exercise facilities across the country. It is an absolute no-brainer science it will make people lose weight, so they're going to be happy and celebrating there. It's going to kill their muscle mass, which then is going to kill their bone density, which is going to be an absolute issue for them. It will be an epidemic if it's not handled correctly. I believe that the doctors, the pharmaceuticals will continue to improve their education to people that they need to do this along with weight-bearing exercise. So I don't believe the net outcome. I can say from the 40 years of experience that a lot of times, people have not come to the clubs to exercise because they feel self-conscious, they feel like they're overweight. They don't want to go in because they feel like they're fat. I think actually now, they're going to be able to feel like, "Oh, God, I'm comfortable going in but they absolutely and positively need to combine exercise with GLP. We're going to -- in Miura, we're going to -- basically, we are telling people come in and get your GLP here. But what we're doing is -- if you look at the history of what we -- if you look at the results of what we are delivering with people who are coming to us through Morato do GLP, they actually are not losing muscle mass. Because we're combining that with the proper regiment of nutrition exercise, that is going to help every health club operator long term. It's a zero concern. It's a wrong bet, thinking that GLP is going to hurt the Health Club business. Operator: Your last question comes from the line of John Baumgartner with Mizuho Securities. John Baumgartner: Maybe first off, Erik, I wanted to come back to your outlook for membership growth. Placing the qualified membership to the side -- can you speak to the mix from that bucket of all other memberships? I realize there's some noise from the mix of club locations, more locations in urban areas now. But -- what are you seeing broadly in terms of families versus singles and the influence of programs like Pickleball on drive membership growth? Bahram Akradi: Yes. I mean, as we look across directionally in our mix, when we take the number of couples and families as a percent of our mix, that continues to increase. So when we're talking about improved mix, we're talking about more members per membership. That trend continues. We're talking about our mix of clubs that are opening in locations that have higher average dues. So again, those trends are all part of kind of that mix story, and those are continuing. John Baumgartner: Okay. And then, Bahram, in terms of your programming, exiting COVID, I think a lot of the programming investments seem to focus on enhancing your offerings of classes that we're they were available outside of lifetime in the specialty boutique segment and doing it better and giving members more for their money. But now I look at CTR, hybrid XT, which seem more specific or exclusive to lifetime and your ecosystem that you're building. And I'm curious the extent to which this is maybe a new angle in your strategy to I don't know, maybe lead more and more visibly than maybe you have in the past with classes that are different than what's available outside of lifetime and that you can leverage to drive new members going forward? Bahram Akradi: Yes. Look, we are navigating through a couple of hundred clubs, new and brand new coming in and existing clubs -- and then we work on specialization efficiency. We look at the spaces that we have. We look at how they're being used, the services the customer -- the services the customers are receiving and so it takes a tremendous amount of thought process on how to change the space from one program to the other. And then really the longevity of the program that is coming versus the longevity a program that maybe is being deemphasized. So it's a complicated equation that we are working on, but there is tremendous opportunity for us to think about these programs and how we can accelerate our growth through different channels. I'm not going to get into too much detail on that. But right now, I am most excited about how well we are rolling out these different programs and how well they're being sort of accepted or covered by the members. Altogether, what we're looking for is maximizing the visits in a club and a spread throughout the day as much as possible throughout the week, so that the club gets a steady utilization but doesn't create sort of a discomfort for too much traffic at one given time. It's -- it's quite a bit. Hopefully, I answered your question, but we're not out of ideas in terms of how to kind of roll out new programs is navigating through all that we are delivering at 1 given time in a club. Does that help, John? Operator: John is no longer in queue, sir. Bahram Akradi: I guess it did. Operator: There are no further questions at this time. I'll turn it back to management for closing remarks. Bahram Akradi: Thank you, operator, and thank you, everyone, for joining us this morning. We look forward to having you on the next quarter call. Operator: This concludes today's conference. You may disconnect your lines. Thank you for your participation.
David Cohen: Good morning, everyone. Welcome to Gartner's First Quarter 2026 Earnings Call. I am David Cohen, SVP of Investor Relations. [Operator Instructions] After comments by Gene Hall, Gartner's Chairman and Chief Executive Officer; and Craig Safian, Gartner's Chief Financial Officer, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. This call will include a discussion of first quarter 2026 financial results and Gartner's outlook for 2026 as disclosed in today's earnings release and earnings supplement both posted to our website, investor.gartner.com. On the call, unless stated otherwise, all references to revenue are for adjusted revenue, and all references to EBITDA are for adjusted EBITDA, in each case, excluding the divested operation and with the adjustments as described in our earnings release and supplement. 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Gartner is the best source for clients looking to achieve success on their AI journeys, and our teams are incredibly optimistic about our future. Looking ahead to the rest of the year, we expect contract value will accelerate. We will continue to drive strong free cash flow that we can put to use to drive incremental shareholder value, and we expect to deliver adjusted EPS on a compound annual basis above 12% over the next 3 years. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian. Craig Safian: Thank you, Gene, and good morning. First quarter contract value, or CV, grew 1% year-over-year. This was an acceleration from the fourth quarter. Insights revenue, EBITDA, adjusted EPS and free cash flow in the first quarter were better than expected. We are increasing our EBITDA, adjusted EPS and free cash flow guidance for the full year. In the first quarter, we reduced our share count by about 4%, buying back $535 million of stock. And we expect to generate significant free cash flow and have fewer shares outstanding over the course of the next several years. First quarter revenue was $1.5 billion, up 2% year-over-year as reported and down 1% FX neutral. In addition, total contribution margin was 72%, EBITDA was $395 million, up 6% as reported and 1% FX neutral. Adjusted EPS was $3.32, up 11% from Q1 of last year. And free cash flow was $371 million, up 29% year-over-year. Rolling 4-quarter return on invested capital was about 27%. Insights revenue in the quarter grew 3% year-over-year as reported and was about flat FX neutral. First quarter Insights contribution margin was 78%, up about 120 basis points versus last year. Contract value was $5.3 billion at the end of the first quarter, up 1% versus the prior year and an acceleration from year-end. Excluding the U.S. federal government, CV growth was 3.5%. At March 31, we had approximately $114 million of U.S. Federal CV. Q1 is normally a higher-than-average renewal quarter and our seasonally lowest new business quarter. The second quarter is a smaller renewal quarter and a larger new business quarter than Q1. We had more than $200 million in new business in the first quarter as there continues to be considerable interest in Gartner's proprietary unbiased insights. As you recall, new business dollars increase each quarter as we move through the year. Driving engagement is critically important to retention. As Gene discussed, through both digital and human interactions, we understand our clients' mission-critical priorities, and we are proactive in helping them to address those priorities. This ongoing engagement helps drive client success and strong retention. We've increased license user engagement levels over time. In each month of the first quarter, they are higher than they've been in any of the same months over the past 3 years with consistent engagement improvements in both digital and human interactions. Derived from analyzing monthly active users, overall engagement in Q1 was up over 170 basis points compared to the prior year quarter. Digital engagement improved by more than 160 basis points year-over-year. Human interactions increased more than 80 basis points year-over-year through improvements in the usage of analyst inquiries. Global Technology Sales contract value was $4 billion at the end of the first quarter, up versus the prior year. GTS CV for both enterprise leaders and tech vendors increased by more than 3% year-over-year ex Fed. Wallet retention for GTS was 97% for the quarter. Ex Fed, wallet retention was 99%. GTS new business was down 4% compared to last year and down about 3% ex Fed. As Gene noted, new business was tracking ahead of the prior year through February and was affected a bit in March due to the geopolitical environment. Global Business Sales contract value was $1.3 billion at the end of the first quarter, up 3% year-over-year. Ex Fed, GBS CV grew 5%. Growth was led by the sales, supply chain and legal practices. Wallet retention for GBS was 98% for the quarter. GBS new business was down 2% compared to last year. Again, as Gene noted, new business was tracking very favorably through February with some client decision-making slowing down in March. Conferences revenue for the first quarter was $78 million. On a same conference basis, revenue growth was around 9% FX neutral. Contribution margin was 39%. We held 10 destination conferences in the first quarter as planned. Q1 consulting revenue was $119 million compared with $140 million in the year ago period. Consulting contribution margin was 31% in Q1. Labor-based revenue was $90 million. Backlog at March 31 was $201 million. In contract optimization, we had $147 million of revenue on an LTM basis, about flat compared with Q1 of 2025. On a 2-year CAGR basis, revenue was up about [ 15%. ] As you know, our contract optimization revenue is highly variable. EBITDA for the first quarter was $395 million, up 6% from last year as reported and 1% FX neutral. We outperformed expectations in the first quarter through effective expense management and a prudent approach to guidance. Adjusted EPS in Q1 was $3.32, up 11% compared to Q1 last year. We had 70 million shares outstanding in the first quarter. This is an improvement of about 8 million shares or approximately 10% year-over-year. We exited the first quarter with 68 million shares on an unweighted basis. Free cash flow remained strong in the first quarter, up 29% year-over-year. Free cash flow on a rolling 4-quarter basis was $1.3 billion. Adjusting for several items detailed in the earnings supplement, free cash flow was 20% of reported revenue, 79% of adjusted EBITDA and 145% of GAAP net income. At the end of the first quarter, we had about $1.7 billion of cash. This includes about $500 million for running the business and around $1.2 billion available to deploy on behalf of shareholders. Our March 31 debt balance was about $3 billion. Our reported gross debt to trailing 12-month EBITDA was under 2x. We repurchased $535 million of stock during the first quarter, reducing our share count by more than 4%. Last week, the Board increased the buyback authorization to about $1.2 billion. We expect the Board will refresh the amount as needed. We are updating our full year guidance to reflect recent performance and trends, including FX. For Insights revenue in 2026, our guidance reflects Q1 contract value. The revenue outlook is operationally unchanged as we had modeled in the NCVI performance we saw in the quarter. We increased the outlook for FX. For conferences, we are basing our guidance on the 56 in-person destination conferences we have planned for 2026. We have good visibility into current year revenue with the majority of what we've guided already under contract. For consulting, we have reflected a prudent view for the balance of the year based on the Q1 results. Contract optimization has had several very strong years and the business remains highly variable. For 2026, we expect consolidated revenue at or above $6.405 billion, which is updated from last quarter and is FX-neutral growth of 1%. We now expect full year EBITDA at or above $1.545 billion, up $30 million from our prior guidance. This reflects full year margins at or above 24.1%, also up from last quarter. We expect 2026 adjusted EPS at or above $13.25, an increase from last quarter that primarily reflects the increase in the EBITDA outlook and a lower share count. For 2026, we expect free cash flow at or above $1.16 billion. This reflects a conversion from GAAP net income of 137%. Our guidance is based on 69 million fully diluted weighted average shares outstanding, which incorporates the repurchases made through the end of the first quarter. We exited Q1 with about 68 million fully diluted shares. For Q2, we expect EBITDA at or above $425 million. Our profit and cash flow results in Q1 were ahead of expectations, and we've increased the EBITDA, adjusted EPS and free cash flow guidance for 2026. Contract value ex Fed grew 3.5% in the quarter and total CV growth improved from the fourth quarter of 2025. We are positioned to accelerate CV growth in 2026, and we expect to deliver adjusted EPS on a compound basis above 12% over the next 3 years. We'll also deploy our capital on stock repurchases, which will lower the share count over time and on strategic value-enhancing tuck-in M&A. With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator? Operator: [Operator Instructions] First question comes from the line of Jeff Mueller with Baird. Jeffrey Meuler: Yes. So it makes sense that the selling environment would be tougher in March. Can you give any perspective on if that has started to convert in April, the things that kind of slipped out of March by some indications, maybe the environment is getting a little bit better. And then just any differentiation on new business sales trends between new logo versus upselling in the base, which I think had been lagging? Eugene Hall: Okay. Jeff, it's Gene. I'll get started. So in terms of -- again, as I said in my prepared remarks, we had really good January and February, March decision slowed down. By and large, clients and prospects told us, we still want to buy from you, but we can't make a decision today. To your point, as a role to April, we're seeing many of those deals actually closed where clients delayed in March, but actually be came through and closed in April. Craig Safian: And then Jeff, on the mix between new logo and existing client growth, the what we saw through the first 2 months where we did see nice year-over-year growth that was broad-based across both new logo and with existing clients. And then with the challenging -- more challenging environment in March, it was also broad-based across new logo and existing clients. And so as we continue to see some of those things, as Gene just mentioned, come through, it's a mix of new logo growth and growth with existing accounts. Jeffrey Meuler: Got it. And then on -- good to hear overall engagement of both in person and digital. Just anything you can give us on the evolution of AskGartner, either usage statistics or any meaningful changes in, I guess, user experience, either from something new with the foundational models that underpin it or any adjustments that you've been making to it? Eugene Hall: Yes. So as Gartner is just one part of our value proposition. Obviously, there's a whole lot of other pieces of Gartner like people buy. We have a start and it's important we will make it competitive. The client usage continues to increase and the amount of repeat client usage continues to increase. And so we're seeing increasing engagement with AskGartner. We do a new release every 2 weeks. Clients -- we have a telesales you want a button on there and they do, plus we do market research. And every 2 weeks, we have new releases. As Craig and I mentioned in our remarks, we've added sort of support for 25 languages. You can now create PowerPoints directly from the from with AskGartner, and there's all series of other kinds of upgrades. And we're upgrading every 2 weeks, so it's too numerous to actually talk about over the course of the quarter. Craig Safian: Yes. And Jeff, it's a common -- those upgrades are a combination of feature enhancements and incremental proprietary data that the tool is going from as well. And so we are very quickly rolling out new features, as Gene mentioned, every 2 weeks, and we'll continue to do that as there's demand for it, as the models improve and as our clients give us feedback on what they want from the tool. Operator: Our next question is from Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. I wanted to follow up on the geopolitics comment. And I'm curious if you could give us some regional color. Did you see slowing sort of across the board? Or if there was any differentiation regionally? I'm assuming maybe you saw some slower decision-making outside the U.S., but just would love some additional color there. Eugene Hall: So there was a slowdown across the board by by industry. It was worse in some places than others. So if you could imagine, with airlines and transportation companies, it was worse in financial institutions, for example. And. It was worse in the country's directly impact such as the Gulf Cooperation Council countries than it was in places that were less impacted like in the U.S. Faiza Alwy: Okay. Understood. And then I'm curious if you're reevaluating any pricing strategies, maybe just thinking about the overall price point just as virtually every company is trying to figure out AI, but maybe they can't afford your services at -- or your subscription at the price point that it is. So just curious how you're thinking about any changes around pricing. Eugene Hall: We talk to our clients a lot about price and understand how they think about pricing, weather we're priced appropriately or not. And the feedback we get from our clients today is that their pricing is very appropriate where they expect. They're very comfortable with it. We have different price points. So if a client -- we have our community guide the products was the highest price than our guided products and our advisory products and our reference products. And when clients have price sensitivity, we give them an option they can go for a different level of service. So same content with a different level of service with those, and that's what clients choose to do. As we look within each of those groups, we feel like we're priced at property. Again, we talk we bench work with clients to see if that's the case. We also look when clients say I'm not going to buy a price is a major issue. And price is not the issue, it's potentially, if they're not going to buy, the CFO said, we have to cut all expenses 50%. And so whether we're at 4 points or 8 points higher isn't tissue at all, it's kind of a broader cost cutting that organization is going through. Craig Safian: And Faiza, it's important to remember who we're targeting and focusing on from a go-to-market perspective and a strategy perspective, which is really the top of the org chart and each of the functions that we serve. And so again, we are going in and targeting the CIO, the Chief Information Officer or the CFO or the Chief Supply Chain Officer, et cetera, and their teams. And so we're starting at the top of the pyramid where there tends to be much less price sensitivity around those things. And again, we have, as Gene articulated, an architecture where if there is price sensitivity, there are offerings that we can provide to the clients if they're not willing to sign up for a guided product. They'll go to adviser product. If they're not willing to go with the adviser product to go with the reference pros and so on. Eugene Hall: And the other thing to think about is that, it's a very small part of their budget. So even our smallest clients would have $100 million of revenue. And so individual executive likes to have a $10 million budget and their service card might be $100,000 out of that $10 million budget. So the -- whether it's $100,000 or $104,000 isn't big issue, it's about the value they had. Operator: Our next question comes from the line of Andrew Nicholas with William Blair. Andrew Nicholas: I wanted to ask on the U.S. federal government business, in particular. I think it was 250 basis point headwind in the quarter. Maybe a little bit more than I would have thought because I thought you had lapped most of that. Can you just level set for us where you sit in that kind of renewal cycle post kind of some of the government approach changes early last year? And maybe at what point would you expect that headwind to alleviate as we move through '26? Craig Safian: Andrew, it's Craig. On the U.S. Federal side, as we talked about through most of last year, the DOGE impacts, we really didn't start feeling them until March of last year. And so Jan and Feb were, let's just say, semi normal month from a selling environment perspective. And then when the DOGE activities kicked in, that was really March and April and then forward from there. And so I think as we roll into Q2, we really do start to then lap the significant challenges that we had there. From a U.S. federal CV perspective, we exited Q1 with about $114 million worth of U.S. federal CV spread across GTS and GBS, the bulk of that actually in GBS -- GTS, I'm sorry, the bulk of that in GTS, I should say. What we saw from a renewal rate perspective in the quarter was obviously a significant improvement on a year-over-year basis. we are renewing a lot of business. We are writing new business, but we really do start to lap the significant challenges starting in Q2 with the U.S. Fed clients. Andrew Nicholas: Perfect. Very helpful. And then for my follow-up, I just kind of want to go to the headcount growth. I think you had outlined low single-digit growth for GTS and in mid-singles for GBS as kind of your targets for this year. Is that still the case? And any color you could give us on the cadence of the slope of that ramp would be great. Craig Safian: Yes, Andrew. So the target still remain. You articulated them correctly. That is what we are gunning for over the course of the year. We typically do see a little bit of a step back in the numbers in Q1 just because we do a lot of our promotions in the first quarter from a frontline seller to manager. It does -- we try and get ahead of that from a hiring perspective, but it often does take a little bit of time to catch up on some of that hiring. As we noted, the hiring we're doing in 2026 is really about 2027 and 2028 and beyond. We've got ample capacity in 2026 to deliver on that CV acceleration that we've been talking about. The other note I'd mentioned is we are hiring more incremental new business developers than AEs. It's not one or the other, but we definitely have a bias towards hiring incremental BDs right now as opposed to hiring incremental account managers going forward. And that's baked into those year-end numbers you talked about, and that's all baked into our OpEx guide as well. Operator: Our next question comes from Jason Haas with Wells Fargo. Jason Haas: I'm curious for the ex federal government CV, did that accelerate from the 3.5% that you reported for 1Q in April? And how are you expecting that to trend through the year? Do you expect an acceleration in ex federal government CV growth? Craig Safian: Jason, it's Craig. So we're not giving any stats on April yet. We've barely closed the books on that. So I can't quite comment on that. I think the answer on the CV trend is we expect the whole CV base to accelerate over the course of 2026 and then continuing onward, which would be a combo of the U.S. Fed recovery and then also the non-U.S. Fed base accelerating as well. Jason Haas: Okay. Great. And then do your pre-existing long-term targets still hold? Or are those no longer in place? Craig Safian: That's a great question. So there's no change to the medium-term objectives. I would say those objectives really do apply to a normal operating environment, and you can still find those medium-term objectives in our Gartner 101 presentation, which is on the Investor Relations site. I do think as we think about where we are today, and both Gene and I articulated this, we expect in the current environment for our CV growth to accelerate. We're committed to driving compound annual growth at or above 12% to our EPS number. We continue to have a great and very large addressable market and a compelling client value proposition. Those 2 things are unchanged. We've rebaselined the EBITDA margin now based on our updated guidance of 24.1%, and we would expect our margins moving forward over the medium term to expand from there. And then obviously, with the great free cash flow engine that we have, we expect to generate a significant amount of free cash flow. As CV growth accelerates, we'll get more towards the higher end of our typical conversion levels of net income to free cash flow or EBITDA to the free cash flow. And obviously, we'll have all that free cash flow to put to use on behalf of our shareholders as well. Operator: Our next question, it comes from Surinder Thind with Jefferies. Surinder Thind: When looking ahead, when we think about the acceleration in CV growth, any color there where you can maybe disaggregate the drivers? Is the expectation maybe a bit more new business development? Or should we expect wallet retention to continue to improve and maybe a bit more upsell at existing clients? And then maybe I assume it's also underpinned by just normalized annual price increases that are normally embedded. Eugene Hall: The reason we're expecting CV to accelerate is, we're expecting -- so we're making a bunch of changes in visit we talked about. So Craig talked about how we're driving engagement, and we expect engagement to go up. And in fact, engagement has been rising just as Craig outlined. We expect that to continue because we've got a big focus on it. When we get more engagement, we expect that our retention will increase as well. And so our CV retention will increase with our increased engagement. In addition to that, we're making a bunch of changes in BTI and I articulated all the changes we're making. And we expect that's going to lead to more and better insights that again leads to even more engagement and also help support new business growth. And so as we look forward through the year, we expect that our new business growth and our retention both improving as we go through the year. Based on all the changes we're making and the leading indicators, which Craig and I talked about that indicates that these things are causing increased engagement with our clients, which ultimately should result in more more business, more retention and higher growth. Craig Safian: And Surinder, you should see that come through, obviously, in the CV growth rate but also in the lot retention number, which is the measure of net growth from clients that stay with us. And so the more that clients stay with us, the more new business opportunities we have with that. The more that they stay with us, the more opportunity we have to expand the relationship and so on and so on. So we would expect the CV acceleration to read through both, obviously, to the top line CV growth, but also on the [indiscernible] retention line as well as we will be selling more new business to existing clients over that time frame as well. Surinder Thind: Got it. And then just on the management of costs, can you maybe provide a bit more color there just relative to your expectations versus just kind of normally being conservative when you initially guide, just any update where maybe there's a bit more benefits from even if it's AI or just other things that are going on and the opportunity for any potential structural change in the outlook for margins at this point? Or is it just one small step forward each quarter at this point? Craig Safian: Yes, it's a great question, Surinder. So as we look at the OpEx number, I'd say a couple of things. So 1 is we're obviously very focused on making sure that we're delivering on our commitments from both EBITDA profitability perspective and a free cash flow perspective, and we are tuning our OpEx model as we go. The second thing I'd say is we're very focused on making sure that we keep our run rates aligned with our CV growth expectations, which are essentially what drive future revenue growth. And again, we want to make sure that we not only deliver strong earnings and free cash flow in current year, but that we're setting ourselves up to continue to do that into the future. Third thing I'd say is we are always focused on continuous innovation and continuous improvement and driving operational efficiencies through the business. we can leverage AI for some of that. We can leverage other technologies for other things. We can improve processes as well, and we will continue to do that. And then the fourth thing I'd say is we're doing all that while also making sure we're making investments that we believe will drive future medium- and long-term growth for us. And so under the covers, we'll be investing in places and we may be harvesting benefits and efficiencies in other places so that we can reinvest in the places that we know drive value. So we know we need analysts in our business and technology insights business. We're not going to stop investing there. We know adding QBH drives long-term growth we're going to be adding there. It may mean that we are driving significant operational efficiencies in other areas, and we'll continue to do that so that we free up the appropriate resources to invest in the things that we believe will drive long-term growth. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: I guess, as we think about sort of the selling environment on a year-over-year basis, it's obvious that in Q1 it was worse than last year. But as we go into Q2, you lap Liberation Day in the prior year, et cetera. How do you think about the year-over-year selling environment comparison as we kind of go through the rest of the year? Eugene Hall: So what I'd say, Josh, is it kind of depends on how the world evolves. As I sit here today, as I mentioned, a lot of the deals that clients in March said, let's wait and revisit this in a couple of weeks actually closed in April. In fact, one of the things that will an interesting is that a lot of these companies think airline shipping companies, other energy-intensive industries and geographies. And basically that normally a functional leader like a CIO, which have [indiscernible] decision, when times are tough, what will happen is I'll say we're going to escalate that maybe even the CEO depending on how have the decision with the company. And so we saw more of those kind of escalations. They got escalated, they said you the values there and then they closed. It just took longer to close. And so I think that what happens in the rest of the year is going to depend on kind of what the environment looks like. Craig Safian: The one thing I'd add, Josh, though, is we pride ourselves on adapting. And so yes, the environment is crazy and continues to remain a little bit chaotic, but we're making sure that our sales and our service people are armed with the right tools, contracts back up, et cetera, to be successful in any sort of environment. We'll see how the world evolves, but we're going to make sure that we keep -- we're going to make sure that sales and service from our perspective are armed to deliver value, highlight the value for prospects, continue to deliver the value for clients, et cetera, moving forward. Eugene Hall: Yes. To build on Craig's point, one of the things that I talked about both the last and on this call is we made more change in the last year than we've ever opened Gartner in terms of increasing value to clients. And those -- the [indiscernible] speed farm is going to be tough going forward. And we want to make sure we're resilient in that environment. And I think what we're seeing here is that selling cycles are longer, but they're still buying. And so that's kind of what we saw happen in March. So again, January and February, actually, we had great very robust new business growth that is Greg and I talked about. Decisions then took longer starting March. And so I think there are good signs overall for what the selling environment, but it's probably going to take longer decision cycles if the environment continues to have the uncertainty in does today. Joshua Chan: Sure. Sure. That makes a lot of sense. And I appreciate the color there. And then maybe on your EPS CAGR outlook, can you talk about the drivers behind that 12%? I mean, obviously, revenue growth, at least currently is not probably at that level, so you're going to need some margins or buybacks. Can you just talk about what contributes to that level of EPS growth? Craig Safian: Yes, Josh, happy to. So again, over a 3-year period, where our expectation is CV growth will reaccelerate, which will drive future revenue growth. As we noted earlier and have noted for a while, we're committed delivering strong margins and margin expansion over time as well. And then obviously, on top of that, we have significant capital to put to use on behalf of our shareholders. Over the last 12 months, I think we've bought back like $2.4 billion, $2.5 billion worth of stock, reducing the share count significantly. And obviously, our intention will be to continue to do that, and that's obviously, one of the bigger drivers to that EPS CAGR as well. Operator: Our next question comes from Toni Kaplan with Morgan Stanley. Toni Kaplan: Gene, just a strategic question. A number of the other info services firms have been starting to use large LLM providers as like an additional distribution channel. And I know your business is different being more weighted towards advisory, but you still have proprietary data that people want. And so I was wondering if -- is there a sort of broader data distribution that you would consider? Or do you think that, that dilutes your value proposition too much because, obviously, a lot of the value isn't talking to the research analysts and the network and everything like that? Eugene Hall: Yes. Toni, I think you're at the nail on the head, which is what clients rule out us for is for us to proactively go to them and say, given your mission-critical priorities, here's the things you should be worried about, things you may not have thought of, things that you might be surprised by. And so what they rely on us for is to be very proactive as opposed to wait and answer a question. So that's not our plan to work with us. That's not our value proposition. And then in addition to that, there's a big human component, and so we have our executive partners, which can function as advisers to our clients, with our analysts, which are world-class experts. And while they publish, obviously, a lot of content and insights, the kind of rule that we have, that's only like 5% of what they know that could be active and valuable. It's our -- when they do it an inquiry with our analysts, clients get access to that other 95% that actually isn't -- we have a vast content library, but again, that's only a portion of what our analysts actually know. And then we have our conferences that they go to which clients get to interact live, we have peer interactive. And so if you think about it, the -- that piece of it is just a small piece of our overall value proposition. And so we want to focus on what clients want from us the most value, which is a whole tell us what I'm not seeing, help you see around corners, tell how world is going to evolve so that I can be successful in this uncertain environment. And that doesn't really fit well with feeding into an LLM that is really answering questions, which is we have as Gartner. That's not the majority of what we do that's all my clients [indiscernible]. Toni Kaplan: Yes. That makes sense. I wanted to shift to consulting. I know both the labor-based and contract optimization was down a bit year-over-year, and contract optimization can be volatile and the comp was tough. But on the labor base, any -- do you just attribute the slowdown there to just normal macro slowdown? You mentioned a lot that March was slower, or do you think that there's something structurally worse going on right now given AI? Eugene Hall: Yes. Toni, I don't think if there's something structurally worse. And again, this is a different behavior than we saw in Q4. So it's not something that has been kind of a long-term thing. I think basically, it's what you said, which is the American environment changed a lot, and that affects both the -- it effective differently, both the labor part of the business as well as CFC -- FX CFC, because if a client was going to buy something, and they postpone that decision. We get paid when they buy something. And so with CFC, you had both a very tough comp, as Greg went through. In addition, if clients, and we saw this, say, "Hey, I was going to do that big software deal. I've decided to push the decision of for a month," that puts us getting paid off as well. Operator: Our next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: I wanted to take a step back on CV performance. Can you provide more details on the reasons why CV growth is coming below historical levels in the high single, low double-digit range? Specifically, can you outline how much of the slower growth is due to tariff affected industries, government spending, the macro environment and other potential unnamed factors? Craig Safian: George. So I think; one, the first obvious headwind is the U.S. federal business, which we talked about in detail and is a 250-basis-point headwind in the quarter alone. That business, we believe, is rebaselined. Our current assumptions are for it to be flat in 2026 and grow from there going forward. And so that is a temporary headwind. Obviously, we've been dealing with it for since really March of last year, but that certainly remains the most dominant headwind that we have going forward, or that we have had that have impacted the results and should write itself going forward. In terms of the other areas, I think it's a combination of -- the macro has been really, really, really challenging over the last several quarters and whether it's the DOGE impacts that started in March of last year, josh referred to Liberation Day, which I remember was April 2 of last year to lots of other geopolitical challenges over the course of the year to where we sit today. I think the short answer is, we fully expect our CV growth rate to accelerate over the course of 2026. As I mentioned earlier, we expect it to increase across the board. So yes, we expect the U.S. Fed growth rate improve as we lap some of the more challenging areas, but we also expect the non-U.S. Fed business to accelerate. That includes tariff affected and nontariff affected, that includes software companies and IT services companies, et cetera. And so I think from where we sit today, we expect CD growth to reaccelerate over the course of 2026. And again, we believe the combination of that CV growth reacceleration, our operating expense management, our ability to invest in the right areas that drive and support future growth will allow us to drive significant free cash flow and earnings per share growing at a 12% compound a growth rate. Keen Fai Tong: Got it. That's helpful. And then following up on the CV growth expectations. So you noted acceleration over the course of the year. What are your CV growth expectations exiting the year? And do you expect the improvement to be relatively linear from 1Q? Craig Safian: So we don't guide to CV growth, George, and we're going to continue to not do that. What I can tell you is we expect to accelerate over the course of this year. I did note in my prepared remarks that Q1 happens to be a heavy renewal quarter and our smallest new business quarter. As we roll into Q2 and Q3, we see increasing levels of new business dollars, and we just have less CV that is up for renewal in those quarters. And so that certainly helps. CV though, is a rolling 4-quarter number. And so we expect to continue to see improvements across the year. And we don't believe that we're done at the end of this year. But right now, we're focused on making sure we're driving engagement, making sure we're delivering on all the transformations Gene outlined, and all those things should lead to CV growth accelerating over the course of this year. And again, that should benefit us as we roll forward in 2027 and beyond. Operator: Our next question is from Jeff Silber with BMO Capital Markets. Jeffrey Silber: You mentioned a couple of times your goal to have compounded adjusted EPS growth, I think, over -- at or above 12% over the next 3 years. What kind of headcount growth do you need to get there both from a sales force perspective and an analyst perspective? Craig Safian: Yes, Jeff. I mean, I think it's all baked into our ability to drive the margin to get the desired results that give us that 12% CAGR. Our operating model with QBH or sales headcount, is unchanged, so grow at roughly [ 300 ] bps slower than what we're growing or our expectation around CV growth. That framework still -- we're still operating with that framework going forward. And on the analyst side, it's really demand-driven. And because we've got such a good finger on the pulse of what our clients are most interested in, we're actually able to predict where that demand is and make sure that we've got the appropriate analyst levels and analyst count to handle that. And so it's not a specific number. And we'll do all that while also driving efficiency and improvement across the rest of the business. And so the combination of those three things is what gives us the [indiscernible] the operating result levers to get to that 12% EPS CAGR over time. Jeffrey Silber: Okay. That's great. And just to clarify something, the base here that you're talking about, is that 2025 or 2026? Craig Safian: That base year is 2025. It's a great question. Thanks for clarifying that, Jeff. Operator: And our next question is from Jasper Bibb with Truist Securities. Jasper Bibb: Again, I know you don't guide for CV, but I think you've mentioned on a couple of earlier questions that CV should reaccelerate those total and ex fed through the year and helpful context to around the seasonal payments of renewals and new business. I just wanted to clarify, like, do you think we see a reacceleration in the ex Fed CV growth number next quarter? Or maybe are we still a little bit further away from the acceleration in ex Fed CV? Craig Safian: Jasper, so all I'll tell you without getting into too many details is we expect the CV growth rate to accelerate over the course of the year. We're not going to get into the details of expectations by segment of business per quarter. We'll tell you all about that when we report our Q2 results. but the headline should be that we expect CV growth to accelerate. Jeffrey Silber: Got it. And then maybe following up on the early pricing question. I think there was some speculation intra-quarter if sales teams have made offers to sign on below the normal $50,000 ASP for new LUs, I guess can you just clear up kind of in response to that, like if there's anything that's changed on your approach to pricing or offering discounts? Craig Safian: Yes. So we do not offer discounts. Our pricing strategy and focus and mechanics are unchanged. We put through our normal annual price increase on November 1 of last year. That has been in place since then. And we are -- despite -- well, of course, you may be hearing, I could assure you we are not -- there's no change in our discounting posture or philosophy. Operator: And our next question comes from Scott Wurtzel with Wolfe Research. Scott Wurtzel: Just one for me. Just wondering if you can talk a little bit about just the puts and takes on client versus wallet retention in the quarter with client retention ticking down a little bit, but wallet retention ticking up. Just wondering if there was any incremental, I guess, price realization or upsells that drove that expanding wallet retention will client ticked down? Craig Safian: Yes. Scott, great question. I think it's largely a function of those are both rolling 4 quarter numbers. In the first quarter, as I noted earlier, it's our smallest new business dollar quarter, which implies it's our smallest new business enterprise quarter as well. And so we added new enterprises there. But as always, there is a lot of churn within our small tech clients. That's -- it's improved over the last couple of years, but that's still the most significant impact on that client retention number. And because those are typically lower spending clients, does not have as big of an impact on the wallet retention number. With wallet also, we are lapping some of the challenges from last year, but also we are holding on to more dollars than we have historical -- than we did last year as well. And so I think that's manifesting itself in that modest improvement in the wallet retention number as well. Operator: And our next question is from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I just wanted to focus on the tech vendor conversation. I was wondering if you could provide any color on that front, how is that trending? And also, if you could talk about some of the challenges that software companies are facing, has that influence any of that conversation? Craig Safian: So on the tech vendor side, I think what we're seeing is consistent with what we saw in the last couple of quarters where our business with software companies and services companies is growing at high single-digit growth rate, and other elements of our tech vendor client universe are not performing as well, most notably, I'd say, hardware providers and telecom carriers, which we classify as part of that that tech community. But the bulk of our CV sits with software and services and the software and services business continues to grow at high single-digit growth rates. Ashish Sabadra: That's very helpful color. And then on the quota-bearing headcount, I just wanted to follow up on the prior comment around hiring more incremental new business developers than account managers. How should we think about the overall QDH growth going forward, but also how do we think about that mix shift going forward and influence on productivity. Craig Safian: Yes, it's a great question. So again, it's not binary 1 or the other. We're obviously -- as we are successful with our BD and they sell more new business, we do need to hire account managers to catch that business, retain it and going forward. But what we've been doing is driving productivity and efficiency out of our account management teams by adding incremental clients to their territories. And again, we've studied this really intently to make sure that we're not going too far on any of those, and we feel really good about the productivity gains we've driven there. And what that does is free up incremental for us to invest in business developers. And when you think about the size of the addressable market opportunity, the fact that there are roughly 140,000 enterprises that we think to be clients of Gartner, and we're currently doing business with 14,000 of them, the way we capture that market -- that incremental market is really through business developer investment. It's a slow shift in mix, though, because, yes, the bias is towards hiring incremental BDs, but it's not like a student body left or a student right. And so that mix will move moderately over time but we think it's the right combination of being able to manage, retain and grow the existing client base while having the right-sized engine to be the new logo addition and incremented growth going forward as well. So we think we've got the right mix there going forward, and we'll continue to update our investors and the investment community on that incremental investment and the mix of that investment going forward. Eugene Hall: The vast majority of our sales force today is account executives. They do a lot of new business growth as well, and we expect that to continue. And even given with our accounts executives under the covers, we changed territories all the time. So if there's less demand in the U.S. federal government, then what we'll do is reduce territories there and move those over to places where there's higher demand. And so there's more change when under the covers to actually improve productivity as well. Operator: And our last question comes from Wahid Amin with Bank of America. Wahid Amin: Just one for me. On an earlier remark, you talked about sometimes clients and budgets are tight, maybe the selling environment is much longer than expected. How would you classify the customers that want to keep a Gartner subscription, but may consider down selling or using a different user experience? Are you seeing a huge influx of that? Eugene Hall: It's a great question. So in all times, we have some clients that are upgrading some upgrading, there are some that are downgrading clients. Because while there's more concern today because of so much political things. Any time there's always clients, sometimes they are doing well and some that aren't. And so to your point, we often see clients that are doing really well, so they want to upgrade and get more value. They try it at lower price points and more value. Similarly, we often see clients say, "Hey, my CFO says cut half expenses, I won't keep Gartner, so let's go with the lower service level unless we still keep partner. Those things actually tend to balance out. And so we see about as many upgrades as downgrades, which is why we don't talk about it that much because it actually -- the 2 balance out almost exactly. Operator: Ladies and gentlemen, this will conclude the Q&A session. I will pass it back to Gene Hall for closing comments. Eugene Hall: Well, here's what I'd like to take away from today's discussion. Gartner has an unparalleled and enduring value proposition. We're the best, most trusted source for executives who want to succeed with their mission-critical priorities. We're transforming our business and technology insights organization processes to deliver even more client value. Clients engage ritually with our insights receive greater value and retain higher weights. Gartner is the best source for clients looking to achieve success upon their AI journeys. We are incredibly optimistic about our future. And looking ahead to the rest of the year, we expect contract value will accelerate. We will continue to grow our strong free cash flow that we can put to use to drive incremental shareholder value. And we expect to deliver adjusted EPS on a compound annual basis above 12% over the next 3 years. Thanks for joining us today, and I look forward to updating you again next quarter. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Good morning, and welcome to HealthStream, Inc.'s first quarter 2026 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I will now turn the conference over to Mollie Condra, Head of Investor Relations and Corporate Communications. Please go ahead, Ms. Condra. Mollie Condra: Thank you, and good morning. Thank you for joining us today to discuss our first quarter 2026 results. Also on the conference call with me is Robert A. Frist, CEO and Chairman of HealthStream, Inc., and Scott Alexander Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream, Inc. that could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-Ks, 10-Q, and our earnings release. Additionally, we may reference certain non-GAAP financial measures relating to the company's past and future expected performance on this call. The most directly comparable GAAP financial metrics and reconciliations are included in the earnings release that we issued yesterday. I will now turn the call over to CEO, Robert A. Frist. Robert A. Frist: Good morning, everyone. We do have a lot to cover this morning, and I will ask Scotty and Mollie to be on guard in case I have a cough. I am still working off a bit of a cold. That is my issue. I am going to get through it, though. Just in case, Mollie, be ready. Alright. Well, good morning, everyone. It is our first quarter 2026 earnings call. We have a lot to go over, starting with the strong financial growth we delivered in the quarter, which included record-setting revenues of $81.2 million, up 10.5% year-over-year, and record-setting adjusted EBITDA, which just pushed through $20 million to $20.1 million, up 24.1% year-over-year. Operating income grew 71% year-over-year. The strong performance in Q1 is allowing us to increase investment beyond our original plan, including in growth initiatives related to our current products, new products on the horizon, and accelerated use of AI. I am going to talk about some of those investments towards the end of my section. We are reaffirming our 2026 full-year guidance and continue to anticipate revenue between $323 million and $330 million, net income between $20.4 million and $22.8 million, and adjusted EBITDA between $73 million and $77 million. Our strong cash balance of $66.5 million and untapped line of credit and no long-term debt continue to position us well to take advantage of M&A opportunities as they arise, as well as other capital deployment strategies that we believe will benefit our shareholders. As a reminder, last quarter I described four reasons why HealthStream, Inc. sees real opportunity in today’s rapidly expanding AI environment. As AI continues to develop, I am pleased to reaffirm our increasing belief in each of those four reasons today. First, our healthcare user base continues to expand. Unlike companies facing seat compression from AI agents, healthcare keeps hiring and keeps growing. Roughly one quarter of all new U.S. jobs over the next decade is projected to come from the healthcare industry, and nurses, our largest user base, are leading that growth. AI is not expected to reduce demand for nurses. If anything, it should free them to spend more time with patients and less time documenting. Second, our data profile remains a meaningful differentiator. Our customers utilize our enterprise applications as a system of record for managing their learning, credentialing, and scheduling programs. The data in these applications serves as a source of truth for our customers as they carry out their operations. I believe they will use that source of truth in training their own AI. Third, in addition to the data profile, our career networks, which is going to be an area of investment, generate proprietary individual-level data that we believe is valuable for finding, developing, retaining, and engaging the healthcare workforce. NurseGrid alone, for example, now reaches roughly one in five U.S. nurses, telling us where, when, and for whom they want to work. Fourth, our hStream platform is built to incorporate AI as a core element rather than bolting it on. Platform elements like the hStream ID, which we have talked about extensively in the past, and our growing API footprint serve as essential infrastructure to help enable AI-driven innovation in healthcare workforce technology. Our ecosystem ties it all together. Millions of caregivers, thousands of healthcare organizations, and dozens of industry partners combined with more than 30 years of domain experience, and the hStream technology platform creates something difficult to replicate. AI cannot manufacture an ecosystem like HealthStream, Inc.’s, but it can enhance it, and our ecosystem can enhance AI in what we believe will be a virtuous loop of value creation for our customers and investors alike. Building on that foundation, I am pleased to share that we have meaningfully expanded our internal role of AI across the company and are making great progress. Adoption is broadening across teams. Our employees are putting these tools to work in their day-to-day, and we are encouraged by the early productivity and quality benefits we are already seeing. It is still early days in terms of realizing the benefits of AI, and with driving innovation as one of our company’s six constitutional values, I believe our employees are on the front foot of ensuring that HealthStream, Inc. is an innovator in this promising area. Before we go further in our call, I want to briefly summarize our business for the benefit of anyone who is new to the HealthStream, Inc. story, and I hope there are lots of you on the call today. First and foremost, HealthStream, Inc. is a healthcare technology company dedicated to developing, credentialing, and scheduling the healthcare workforce through technology solutions, each of which is becoming more valuable because of the interoperability they are achieving through our hStream technology platform. We have also started to open our sales channels directly to healthcare professionals and nursing students through our three career networks. These help nurses, CNAs, and students throughout their career journey. The company holds 20 patents for its innovative products, which have been awarded over 40 Brandon Hall awards. Historically, we sell our solutions on a subscription basis under contracts that average three to five years in length, which makes our revenues recurring and predictable. In fact, 97% of our revenues are subscription-based. We are profitable, have no interest-bearing debt, and reported a strong cash balance of $66.5 million at the end of the first quarter of 2026. This strong cash balance allows us to allocate capital to product development, M&A, share repurchases, and dividends. We are solely focused on healthcare and, more specifically, the healthcare workforce and those preparing to enter it. The 12 million to 12.5 million healthcare professionals and nursing students in the United States comprise the core total addressable market for our solutions. At this time, I will turn it over to Scott Alexander Roberts. We will turn our attention to our financials and hear a report from Scott. Scott, take a look at the first quarter of 2026 and give us your financial outlook. Scott Alexander Roberts: Alright. Thanks, Bobby, and good morning, everyone. I will be happy to cover our financial results for the first quarter with you this morning. For the first quarter, our revenues were a record $81.2 million, which was up 10.5%. Operating income was $7.5 million and was up 71.6%. Net income was $5.9 million, up 36.4%. Earnings per share came in at $0.20 per share, which is up from $0.14 per share, and adjusted EBITDA was also a new record of $20.1 million, which was up 24.1%. Our revenues increased by $7.7 million, or 10.5%, to $81.2 million compared to $73.5 million in the prior year. Revenues from subscription products were up $7.6 million, or 10.7%, while professional services revenues were up $0.1 million, or 4.3%. Our organic revenue growth rate was 5.8%, and the inorganic growth rate was 4.7% in the first quarter. Inorganic revenues are associated with the Verisys (Versus)12 and MissionCare Collective acquisitions that we completed in 2025. The first quarter of 2026 is the first full quarter with both operating as part of HealthStream, Inc. I am pleased to report that both post-acquisition integrations are progressing well. Verisys (Versus)12 is extending our reach into payer credentialing, a meaningful expansion of our addressable market, and MyCNAjobs is building momentum connecting CNAs and home care providers with the organizations that need them. Together, these two acquisitions contributed $3.4 million in revenue in the first quarter, and we continue to see compelling opportunities to cross-sell and integrate capabilities into the broader HealthStream, Inc. platform. In addition to the revenue contributions from these two recent acquisitions, our core business was supported by strong subscription growth performance from CredentialStream, which grew by 19%, and ShiftWizard, which grew by 29%. Revenues from our legacy credentialing and legacy scheduling products approximated $7.6 million of our first quarter revenues and declined by 16% compared to the first quarter of last year, as we continue our efforts to migrate customers from those solutions. Our remaining performance obligations were $687 million as of the end of the first quarter compared to $613 million for the same period of last year. We expect approximately 39% of the remaining performance obligations will be converted to revenue over the next 12 months and that 67% will be converted over the next 24 months. Gross margin was 65.8% compared to 65.3% in the prior-year quarter, and this improvement was primarily related to the growth in revenues, including contributions from the recent acquisitions. Operating expenses, excluding cost of revenues, increased by 5.3%, or $2.3 million. Product development increased by $1.6 million, or 12.9%. Sales and marketing increased by $0.8 million, or 6.7%. Depreciation and amortization increased by $0.6 million, or 5.7%, while G&A expenses declined by $0.7 million, or 7.7%. These operating expense increases were partially impacted by the recent acquisitions, while the G&A expense decline resulted from our office sublease. To wrap up, our net income was $5.9 million and was up 36.4% over the prior year, and adjusted EBITDA improved to a record high of $20.1 million and was up 24.1%, and the adjusted EBITDA margin was 24.8% compared to 22% last year. We ended the quarter with cash and investment balances of $66.5 million compared to $57 million last quarter. During the first quarter, we paid $7.5 million for capital expenditures, returned $1 million to shareholders through our dividend program, and repurchased $7.5 million of our common stock under the share repurchase programs that we announced in November 2025 and March 2026. In addition, we made $1.8 million of minority investments in companies that we expect to leverage our ecosystem and our platform. Our days sales outstanding were 39 days for the first quarter compared to 37 days in the prior-year first quarter. Our objective is to maintain our DSO in the 40–45 day range or better, and I am pleased with our continued progress in this area. Cash flows from operations came in at $27.1 million for both the current year and the prior-year first quarter. Cash flows were partially impacted by the minor increase in DSO that I just mentioned, as well as higher payments for sales commissions following the strong bookings that we achieved in the fourth quarter of last year. Our free cash flow was $19.7 million, which is up from $18.2 million from last year, an increase of 7.9%. Our capital expenditures came in at $7.5 million compared to $8.8 million last year. Ending the quarter with $66.5 million of cash and investments, strong free cash flows, and no debt, we are well positioned to deploy capital to improve our shareholder value. As a reminder, we maintain a disciplined approach to capital allocation and how we prioritize our use of capital. Our utmost priority is making organic investments back into the business, which is evident by our annual capital expenditure and R&D plans. The second is pursuing acquisition opportunities, which we have a long track record of executing. The third is returning a portion of profits back to shareholders in the form of cash dividends, and our fourth priority is that our Board may authorize share repurchase programs. Yesterday, as announced in our earnings release, our Board of Directors declared a quarterly cash dividend of $0.035 per share to be paid on May 29, 2026, to holders of record on May 18, 2026. During the first quarter, we made share repurchases of $7.5 million under two Board-authorized share repurchase programs. We repurchased the remaining $5 million under a $10 million share repurchase program that was authorized by the Board of Directors in November 2025, and in March 2026, the Board authorized a new $10 million repurchase program. We made $2.5 million of repurchases under this plan during the first quarter, and we have continued to make repurchases during the second quarter. This program will terminate on the earlier of September 12, 2026, or when the maximum dollar amount under the program has been expended. We may suspend or discontinue making purchases under the program at any time. I will finish up this morning by just recapping our financial outlook for 2026, which we are reiterating as previously announced in February. We continue to expect our consolidated revenues to range between $323 million and $330 million, net income to range between $20.4 million and $22.8 million, adjusted EBITDA to range between $73 million and $77 million, and capital expenditures to range between $31 million and $34 million. For the second quarter, we expect our revenue growth rate will approximate 9.5% and adjusted EBITDA margin will approximate 23%. Consistent with our operating budget for the year, we have several planned operating expenses that will begin in the second quarter, including higher labor costs, higher marketing costs from trade shows, sponsorship, and attendance, and new technology investments to support our infrastructure, among others. In addition, our strong performance in the first quarter provides us with additional capacity to accelerate investments towards several initiatives such as our career networks. These guidance expectations do not include the impact of any acquisitions or dispositions that we may complete during the year, gains or losses from changes in the fair value of non-marketable equity investments or contingent consideration, or impairment of long-lived assets that we may complete during the year. That is all I have for today. Thanks for your time this morning. Bobby, I will go ahead and turn the call back over to you for some more updates. Robert A. Frist: Thank you, Scotty. I am going to start this section of the call as I usually do with some business updates that highlight successes we have achieved in the learning, credentialing, and scheduling areas, along with updates on our career networks. Starting with the learning product family, which includes the Competency Suite, many customers are increasingly taking advantage of the opportunity to purchase a bundle of several of our most popular workforce applications and content libraries, which we call the Competency Suite. Customers purchase a subscription to the Competency Suite for all of their applicable employees, particularly the clinical staff, which comes with unlimited use. We saw strong momentum of this product in the first quarter with a 17.3% increase in revenues achieved. Our American Red Cross Resuscitation Suite continues to be in demand by customers. In the first quarter, we provided the marketplace with 18 updated courses, which included education content in our BLS, ALS, and PALS programs. The updated content was deployed simultaneously across the entire customer network in a single day, all aligned to the new ILCOR science guidelines. Among the sales successes we had in Q1 with the Resuscitation Suite was a decision by Cedars-Sinai Medical Center to renew and expand their number of users by 50%. They also informed us that the expansion will be beneficial as they have been named the official medical provider to the 2028 LA Olympic and Paralympic Games. That is super exciting for our teams as well. Now let us move to credentialing, where our flagship product CredentialStream continued its strong momentum in the first quarter. Revenues from sales of CredentialStream in the first quarter were up approximately 19% over the same quarter last year. One thing we love to see is our customers growing along with us, and some of our customers meaningfully expanded through M&A last year. In fact, two of our largest CredentialStream sales in the quarter were significant expansions due to M&A and enterprise-wide standardization on CredentialStream. We take it as a strong vote of confidence when our customers trust and rely on CredentialStream so much as the system of record that they choose to stop using solutions from our competitors and standardize on CredentialStream when they expand their operations. We are dedicated to repaying that vote of confidence by helping these customers improve their operating results by reducing the time it takes to onboard, enroll, credential, and privilege their physicians. There is a significant economic benefit when a health system can show demonstrable improvement in the time to revenue on these physicians. We believe our software plays an essential role in getting that outcome. Verisys (Versus)12, which we recently acquired in order to expand our market share and product offering and expertise in the payer credentialing space, also delivered one of our top three credentialing wins in the quarter. We are still in the earlier phases of our expansion to the payer market, and we are pleased to see Verisys (Versus)12 already contributing to that effort. Let us move to scheduling, where our core product ShiftWizard continues to deliver strong revenue growth, with first-quarter revenues up approximately 29% versus the first quarter of the previous year. It continues to be our top-performing product in our scheduling application suite. Our top two ShiftWizard deals in the quarter were once again takeouts of a competitor that is horizontally focused instead of solely focused on healthcare. Our sales leaders attribute these wins to the fact that our growing ShiftWizard customer base is increasingly touting the value of the healthcare-specific solution that ShiftWizard provides. When the rubber hits the road, scheduling and staffing clinicians is simply different than scheduling a labor pool for retail or factory shifts, and the market is taking note of that. Now let us turn to our career networks. They include My Clinical Exchange, NurseGrid, and MyCNAjobs. Importantly, career networks directly benefit both individual healthcare professionals as well as the health organizations seeking to employ and engage them. For individuals, HealthStream, Inc. Career Networks serve as a career catalyst through every stage of their pre-professional and professional journey. Last year alone, My Clinical Exchange connected over 364 thousand nursing and allied health students to clinical placements. NurseGrid, the number one app for nurses in the Apple App Store, engaged over 683 thousand monthly active users. MyCNAjobs connected approximately 70% of America’s direct care workforce in the home caregiver space. In doing so, these solutions guided caregivers through every stage of their career journey, helping them discover their path, build meaningful professional relationships, access focused learning, and advance to what is next in their career. For healthcare organizations, our career networks provide employers with direct access to the largest, most engaged audience of nurses and caregivers through targeted recruitment, development pathways, and in-app promotion. My Clinical Exchange served as the first touch point for helping over 715 health organizations and over 1.9 thousand schools seeking to place nurses and allied health students into clinical rotations. NurseGrid was utilized by nurses in approximately 37 thousand unique clinical sites as NurseGrid users manage their professional calendars and engagement across those sites. Finally, MyCNAjobs helped over 8 thousand healthcare organizations access our home caregiver and CNA community to promote work and learning opportunities. Today, the usage of our Career Networks has created over 450 thousand hStream IDs, and counting, among students, nurses, and allied health workers. In aggregate, Career Networks contributed approximately $3.78 million in the quarter. While this is modest compared to the company’s total revenue, we believe that the growth potential, differentiation, and diversification of Career Networks make them an important area for incremental investment. We are already rolling some of the profits from the quarter’s outperformance into new sales hires for this area, the Career Networks, to scale the three solutions. I am pleased to announce the promotion of Michael Collier to Chief Operating Officer and Executive Vice President. In this expanded role, Michael will lead enterprise operations across HealthStream, Inc., including customer experience, corporate development and M&A, implementations, legal, human resources, and other critical areas. He also serves as executive sponsor of the company’s AI transformation, driving AI readiness across operational teams. Since joining HealthStream, Inc. in 2011, Michael has been instrumental in our growth, including leading more than two dozen successful acquisitions. We look forward to his continued leadership in this expanded capacity. Before we move on, I want to remind our shareholders and investors that our annual shareholders meeting is scheduled to take place virtually on Thursday, May 28, 2026, at 2:00 PM Central. Notifications of the meeting and access to the proxy statement, 10-K, and shareholder letter were sent out on April 13, 2026. We encourage you to vote your shares and participate in the future of our company. I will close with the same reminder I share with you every quarter. If you are interested in a recurring-revenue, profitable, healthcare technology company that expects to deliver growth, then HealthStream, Inc. may be the right investment for you. If you are interested in a company whose core user base, the clinical health workforce, is expanding faster than any other sector in the job market, then maybe HealthStream, Inc. is the right investment for you. If you like a company whose software serves as a system of record on behalf of healthcare customers, then HealthStream, Inc. may be a company for you. If you favor ecosystems over point solutions, then maybe HealthStream, Inc. is the right investment for you. For all these reasons, HealthStream, Inc. is positioned for another exciting year helping the nation’s top health systems find, develop, credential, schedule, onboard, and retain the growing healthcare workforce. Maybe HealthStream, Inc. is the right investment for you. I will turn it over to the operator to begin the Q&A session. Thank you. Operator: We will now open the call for questions. To ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by. Our first question today is from Matthew Gregory Hewitt with Craig-Hallum Capital Group. Your line is open. Matthew Gregory Hewitt: Good morning, team, and congratulations on the strong start to the year. Maybe first up, obviously a nice pop in gross margin. It sounds like the acquisitions were aiding in that. Should we anticipate a little bit more lift here in Q2? And longer term, how could that play out? Are you anticipating annual improvement in gross margins or is it more about driving operating leverage as you go forward? Robert A. Frist: Scotty, I will let you take that one to start us. Scott Alexander Roberts: Yes. Really, Matt, no significant expectation of improvement in gross margin. I think the 65.8% we delivered in Q1 was a little bit ahead of where we expected to be in the quarter, and it is just revenue mix. We got a little bit of improvement in revenue in the first quarter from a variety of things. Some of it is timing that we anticipated to come in, in, say, Q2 or Q3, that kind of moved forward in the year. Some of that is early activations from customers that we had sold in, say, Q4, and some consumption-based revenue, things like that that we pulled forward. So we got a little bit of improvement in margin because of that. Some of our ambitions for moving to the cloud could compress margins a little bit over time as we make some of those transitions, but that is still a good ways in front of us to see how that plays out. That is just something that is on our to-do list for this year, to begin this year anyway. Matthew Gregory Hewitt: Got it. And then maybe a question for you, Bobby, since you addressed it in your prepared remarks. You spoke to how AI is expected to drive increasing efficiencies with nurses. What do you think will be the downstream effect of that? Will that allow them more time to care for patients? Will that allow more time for them to work on their training and education? From a hospital’s perspective, if nurses are becoming more efficient, maybe they do not need to hire as many. I am just trying to think what the downstream effects of AI adoption by the nursing group would be. Thank you. Robert A. Frist: Overall, we see a shortage of nurses, and we see the early successes of the deployment of AI in our customer base around ambient listening, and ambient listening definitely frees up more time for the nurses and caregivers to spend with patients, which I think is greatly appreciated by all patients, and helps the health systems put a more friendly face on their adoption of technology. I think the early use and adoption is in areas that will directly impact the patient experience in a positive way. As far as demand for nurses goes, every report that I read seems to indicate that there is far more demand than there will be supply for the next five years plus. I do not see fewer caregivers. I see more, and a better opportunity to be more in the care delivery. We view that as an opportunity to be a close ally to all those health systems. We continue to expand the value that we provide with these career networks, helping health systems not just develop and retain the ones they have through our learning capabilities, but now helping find, identify, and match new talent for them to employ. We are servicing more of the continuum of the workforce need at a time of great need for more workforce. We think we are well positioned with the mixture of our product sets to be a great ally to these health systems. Matthew Gregory Hewitt: That is great. Thank you. Operator: Thanks for your questions. Our next question is from Richard Collamer Close with Canaccord Genuity. Your line is open. Richard Collamer Close: Hi. Just, Scotty, maybe a question on the revenue dollars, $3.4 million acquired revenue. Is it okay to annualize that to get the $13.6 million expected contribution from the acquisitions this year? I am just trying to get a sense of the organic growth that is embedded in the annual guidance. Scott Alexander Roberts: I believe our expectation, we mentioned this on last quarter’s call, was for the two acquisitions. We were targeting around $13 million for the full year. So maybe the annualization of Q1 might be slightly ahead of that $13 million, but I think $13 million is where we would still forecast it to. Richard Collamer Close: Okay. Great. That is helpful. Thanks for the reminder there. And you have been providing some commentary on the legacy license drag in the past. I am just curious if there is any update in terms of what the impact there was in the first quarter? Scott Alexander Roberts: One thing we did disclose this quarter was the amount of revenue from those legacy applications in the quarter. It was around $7.6 million. The decrease was around 16%–17% versus the first quarter of last year. We tried to give a little more color on the magnitude of that bucket of revenue relative to our consolidated revenue and also this continued rate of decline. We continue to look for opportunities to migrate those customers to the new applications. We do see some trade-offs there in that decline. Some of that is moving into CredentialStream and ShiftWizard, but there is still some attrition going on as well. Richard Collamer Close: Okay. And then I guess my final question: clearly, if you annualize the first quarter EBITDA, it gets you above the high end of the annual range. I appreciate you calling out investments. Maybe a little bit more detail on those investments and the timing of them. Is it spread out throughout the year? I am trying to better understand what the cadence of EBITDA will be from Q2 through Q4. Robert A. Frist: Let me start, and then Scotty can add some color. First, the first area of investment we looked at was the sales organization. We had a budgeted plan as we ended the year to hire the sales organization, and specifically, we have decided after this Q1 performance that we are going to add to that original plan. Even more specifically, in the Career Networks area, we think the products warrant a stronger and bigger sales organization, so we are going to go ahead and start building that in the first half of the year, particularly in Q2. From a timing standpoint, we are going to post some new positions in the sales area around our Career Networks and try to hire them. Second, the area is a high-growth area for us, and to keep it current, we are going to increase our planned investments in the technology infrastructure specifically around My Clinical Exchange. We have some work to do there. That was an acquired product originally. We have continued to enhance it. This will give us a chance to enhance it even faster and expand it. The constituent base for that is growing rapidly, and we want to make sure that it meets the needs of that expanding market. We have had some unique opportunities present in the market where we think we are well positioned against some competitors there, and now is the time to invest in both the sales organization and the technical infrastructure for that category of product. More specifically within Career Networks, for My Clinical Exchange we are putting more into the tech stack as well. Remember, that software has three constituent audiences: the students are a user, the nursing schools are a user, and the healthcare organizations are a user. It is a network-effect piece of software that has a market effect as the school adopts it, the hospitals in the region adopt it, and that gets the students to use it as well. There is a lot to do technologically, and we are going to increase our rate of investment in that tech stack. Richard Collamer Close: Is that front-loaded into the second quarter, or is all that spread out? Robert A. Frist: Part will be spread out and will include a mixture of CapEx and OpEx to enhance the platform and the application suite. The sales team will be as fast as we can hire and onboard them. We already have several open positions in the sales team we are trying to fill, so we are using some outside recruitment to go faster there, as well as our incredible internal teams to find the talent we need to staff it up. I would like to see that be front-half loaded on the sales organization so that we might get some back-half benefits. Certainly, we will get benefit early next year, but salespeople take a little bit of time to ramp up and get productive in closing deals. Richard Collamer Close: Alright. Thank you. Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our next question comes from Vincent Alexander Colicchio from Barrington Research. Your line is open. Vincent Alexander Colicchio: Hey, Bobby. What differentiated ShiftWizard in the competitive takeout wins? Were any of the wins involving large enterprises with ShiftWizard in the quarter? Robert A. Frist: We did have some larger wins on a relative basis. They are not massive systems, but a 10 thousand-employee system went with ShiftWizard in the quarter. That was a huge win. We are seeing more of the larger to medium-sized—call them medium-large, not the supersized—health systems make that decision. That was nice to see a couple of wins there. In general, as I mentioned on the call, the vertical-specific nature of the software is more appropriate for this environment. We have a great long-term vision for the software as well. We are starting to outline a little bit more of that in some of the work we are doing to integrate our Career Networks with our scheduling systems, which is not done yet, but I think we are getting some excitement around the future direction of where we are going with this platform—integrating both our applications and, hopefully, also our Career Networks. Vincent Alexander Colicchio: Can you give us an update on your bundling effort in the small hospital market, and somewhat related, how is the Competency Suite doing in that part of the market? Robert A. Frist: In the smallest market, we are seeing a little bit of uptake. We created several market bundles specific to the skilled nursing space, the long-term care space, and the small hospital spaces, often called critical access hospitals. We are seeing some uptake. We are investing in the sales team there and getting some good bundle selling. We are pleased. The bigger bundles, as you pointed out, the Competency Suite, are really helping drive growth. I like adding the users of those smaller clinics because we are an ecosystem. We want all these healthcare professionals, because they may change jobs over time. We want them in our network, even at the small hospitals. But the revenue growth is coming from the bundling of the Competency Suite to the mid-market and bigger health systems. We are seeing uptake in the Resuscitation Suite when we see a medium to large health system switch to the Red Cross solution. The revenue growth contributions are coming from the mid-market and above. The small markets are very important to us. We are getting much better at both having the appropriate mix of products for them, and we view the market holistically. A clinician in an urban or rural market is important to have in our network, as well as the nurses in these rural centers, because they are mobile over their careers. We think of it as servicing the totality of the healthcare workforce, not just the urban centers. Vincent Alexander Colicchio: Thanks for all the color. Nice quarter. Robert A. Frist: Thank you. Operator: I am showing no further questions at this time. I would now like to turn it back to CEO, Robert A. Frist, for closing remarks. Robert A. Frist: Thank you, everyone, and especially to our little over 1.1 thousand employees who are delivering these great results. We have an exciting year in front of us and look forward to reporting the next earnings report here in another 90 days or so. We will see you throughout the quarter. Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.
Operator: Welcome to the 2026 First Quarter Results Announcement Conference Call for Budweiser Brewing Company APAC Limited. Hosting the call today from Budweiser APAC is Mr. YJ Cheng, Chief Executive Officer and Co-Chair of the Board; and Mr. Bernardo Novick, Chief Financial Officer. The results for the 3 months ended 31st of March 2026, can be found in the press release published earlier today and available on the Hong Kong Stock Exchanges and Budweiser APAC websites. Before proceeding, let me remind you that some of the information provided during this result call, including our answers to your questions on this call, may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It is possible that Budweiser APAC actual results and financial condition may differ possibly materially from the anticipated results and the financial condition indicated in these forward-looking statements. Budweiser APAC is under no obligation to and expressly disclaims any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For a discussion of some of the risks and important factors that could affect Budweiser APAC's future results, the risk factors in the company's prospectus dated 18th September 2019, the 2025 annual report published and any other documents that Budweiser APAC has made public. I would also like to remind everyone that the financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed during today's call are both organic and normalized in nature and unless otherwise stated, percentage changes refer to comparisons with the 2025 full year. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Budweiser APAC's normal activities. As normalized figures are non-GAAP measures, the company disclosed the consolidated profit EPS, EBIT and EBITDA on a fully reported basis in the press release published earlier today. Further details of the 2026 first quarter results can also be found in the press release. It is now my pleasure to pass the time to YJ. Sir, you may begin. Yanjun Cheng: Thank you, Ari, and good morning, everyone. Thank you for joining today's call. We entered 2026 with a clear focus on recovering volume through disciplined execution across our market. For Bud APAC total volume returned to a positive growth, supported by continued strong momentum in India. In China, our increased investment shows a sign of progress. With the quarter-over-quarter volume decline tightening further as we remain committed to our strategy of enhancing our in-home route to market enriching our portfolio and innovating behind our mega brand to rebuild momentum. In South Korea, we gained market share in both on-premise and in-home channels. Before we go over our financial results, I wanted to take a moment to introduce Bernardo Novick, our new Chief Financial Officer, effective from April 1 this year. Novick joined ABI Group in 2009 through the global MB program and has worked across various functions in multiple markets. He brings deep finance and global resource allocation expertise, having led projects, delivering savings and meaningful value creation. I'm pleased to welcome him to the Bud APAC team. Let me now hand over to Novick for a brief introduction. Bernardo Novick Rettich: Good morning, everyone. I am delighted to join the Bud APAC team. I would like to thank you, YJ for your trust and invitation to join the team. I joined AB InBev 16 years ago and spent 5 years in finance roles, 5 years in commercial roles and 5 years in innovation roles where I led the corporate venture capital arm in New York. Most recently, I was responsible for our global capital allocation division reporting to the global CFO. I hope I can bring this experience to grow Bud APAC's business in a profitable way. I have already had the pleasure of meeting some of you joining the call today, and I look forward to meeting many more in the next weeks and months ahead. Let me share our financial results for the first quarter of 2026 in more detail. In the first quarter, APAC volume returned to growth, even if it's just 0.1% after many quarters, driven by strong growth in India, and a sequential improvement in the industry and our volumes in China, with volume decline narrowing quarter-over-quarter. This progress was driven by both enhanced execution as well as increased investments across channels and our portfolio, which added temporary pressure to our bottom line. We also maintained strong brand momentum in South Korea, despite a soft industry and a challenging comparable last year. In India, we continue to advance premiumization, delivering strong double-digit volume and revenue growth. In summary, for Bud APAC, total volumes increased by 0.1%. Revenue and revenue per hectoliter decreased by 0.7% and 0.8%, respectively. Normalized EBITDA decreased by 8.1%, while our normalized EBITDA margin contracted by 246 basis points. Now let me cover some of the highlights from each of our major markets. In China, volumes decreased by 1.5%, improving sequentially with a quarter-over-quarter decline continuing to narrow since the second half of 2025. Revenue and revenue per hectoliter decreased by 4% and 2.5%, respectively, impacted by increased investment to support our wholesalers and activate our brands in the in-home and emerging channel. Normalized EBITDA decreased by 10.9%, impacted by our top line performance and increased investments. We continue to make progress in expanding our distribution in the in-home channel, while increasing the distribution of our premium brands. This premiumization is more clear in the online to off-line or O2O channel, which grew strong double digits in the quarter. Now let me share with you some of the investments we are making on our brands through our marketing campaigns as well as liquid and package innovations to better connect with our consumers across more occasions and increased sales momentum particularly in the in-home channel. On Budweiser, we accelerated the national expansion of Budweiser Magnum, building on its strong consumer traction and sustained sales growth. In March, Budweiser Magnum, launched an integrated nationwide campaign, anchored by a strategic partnership with global football icon Erling Haaland, and the FIFA World Cup mega platform to drive geographic and channel expansion. Regarding our Harbin family, we introduced Harbin 1900, celebrating its brewing heritage as the birthplace of Chinese beer. Position in the Core++ segment, which is the RMB 8 to RMB 10 price range. This new innovation is 100% pure malt classic lager, pairing distinctive vintage packaging with a rich authentic taste. The launch reinforces Harbin's role in driving innovation and placing new bets in this growing and important Core++ segment. In South Korea, volumes decreased by low teens and revenue decreased by mid-single digits, mainly due to a challenging comparable in the first quarter of last year, driven by shipment phasing ahead of a price increase that if you recall, was in April 2025. Revenue per hectoliter on the other hand, increased by low single digits, also comparing with the first quarter last year before the price increase. This led to a normalized EBITDA decreasing by low teens. Having said that, we maintain a good commercial momentum in both in-home and on-premise channels, and we foresee a recovery in the second quarter. Finally, India continues to grow and will play a bigger role in our footprint. Industry momentum continued in the first quarter, and we gained total market share. We delivered strong double-digit volume and revenue growth led by a strong growth in our premium and super premium portfolio. We also continue to see momentum in the moderation agenda with states like Maharashtra and Karnataka introducing changes that decreased the current relative tax advantage of hard liquor versus beer. We see this as a step in the right direction and a sign that some states understand the importance of evolving towards an alcohol tax policies that are consistent with global policy standards where high alcohol products are taxed higher than low alcohol products like beer. And with that, YJ and I are here to answer any questions that you might have. Operator: [Operator Instructions] Our first question is coming from Xiaopo Wei from Citi. Xiaopo Wei: Can you hear me now? Operator: Yes, we can hear you very well. Xiaopo Wei: I'm sorry. That -- I have two questions on China. I'll ask one by one. The first one, in the past 2 years, we have seen a few senior management leadership changes in the company. So far is any achievement or breakthrough that the company would like to share with us with the new leadership? [Foreign Language] Yanjun Cheng: I'm YJ. Let me take these questions. So let me start in English, then let me turn to Chinese, if needed. So the changes we have, mainly happened first half year last year. And the reason for the change is kind of retention between either global other between the region in China. So and also between Headquarter in China versus operation in the field in each sales region. And the reason for that is to share some best practice and to further strengthen their strengths in each area or each function and also learn each other best practice sharing. So that's kind of a normal retention changes. And to be able to share the more the answer to your question about the changes of the people. As I mentioned earlier, we keep a consistency of our strategy which is focused on portfolio, brand portfolio, which is meaning Harbin and Budweiser and also focus on in-home and market. And third one is focus on execution. So those are the 3 strategies we set up early last year and we have no changes. And also, you see the progress we have been made as Novick just mentioned, quarter-over-quarter on decline narrow quarter-by-quarter and see very good trends. And also, we see the execution in each area make a huge improvement, and we put a lot of effort to invest in our brand and also further focus on the in-home channel that the channel changes reached which and that's our further opportunity in our operation. So we see starting from second quarter last year and the fourth quarter last year, and first quarter this year, the things getting improved quarter-by-quarter. So I think that's I tried to answer your question. Xiaopo Wei: Shall I start a second question? Yanjun Cheng: Yes, go ahead. Xiaopo Wei: Okay. The second question is about the channel inventory. As far as I can recall, the company in China start destocking the channel in 4Q '24. It has been a few quarters of destocking and I remember in the last quarterly earnings call, you mentioned that actually, our China inventory actually was young and lower versus historic level. But we know that China is a very dynamic market and the changing areas on a daily basis. So were you foreseeing the future that the China channel inventory will be below historic level as a new norm? Or is any factor you expect to see before you become more exciting and try to restock the channel looking forward. [Foreign Language] Yanjun Cheng: Thank you for your question. You're right. We have been proactively taking steps to adjust our inventory given the current business environment. [Foreign Language] Operator: Our next question is coming from Ye Liu from Goldman Sachs. Ye Liu: Thanks. Can you hear me? Yanjun Cheng: Yes. Ye Liu: This is Liu from Goldman Sachs. Thanks for the opportunity and welcome Novick for your first earnings call with Bud APAC. I have 2 questions. The first one is on China. So basically, our ground check shows that there has been some volume recovery in the super premium segment, including Corona, Blue Girl in the first quarter. So how to look at the sustainability of this trend? How to comment on the on-trade consumption recovery so far, including any color on 2Q to date on the on-trade performance in China? I will translate to Mandarin by myself. [Foreign Language] Yanjun Cheng: Let me take this question. I will start the summary of the answer first, then I'm going to talk a little bit detail in sort of answer in Chinese. Indeed we grow Super Premium volume by double digit in the first quarter 2026 as we focus on premiumization in the in-home channel and O2O. In terms of on-trade recovery nightlife channel contribution was stable, and we grew volume in the nightlife the first quarter 2026. However, Chinese restaurant channel remains under pressure. [Foreign Language] Ye Liu: The second question is to our new CFO, Novick. So I would like to know what's the 3 key focus for you this year, would you please share with the investors on the call. Thank you so much. Bernardo Novick Rettich: Thank you, Liu. Nice to hear from you, and thanks for the question. So let me share the 3 priorities that me and my team will focus this year. The #1 priority is growth. And the main objective here is to stabilize the volumes in China. The second priority is to improve execution. And the third priority is value creation. So on the #1, the #1 is consistent to the business strategy that YJ was describing. And the main objective of the business is to grow volumes here, right? And in order to do that, we really need to stabilize volumes in China. And the finance role to do that is increasing investments and making the investments more effective. I think it's important here, when we manage to stabilize volumes in China, given our footprint in India and in Southeast Asia, will be able to reignite growth for the whole Budweiser APAC. Number two priority is execution. I think here, finance has an important role, collaborating with our commercial team in China to enable and upgrade our route-to-market model to help on this transition to more volume in the in-home channel. That's another important priority for us. And the third one is value creation. Here, we are reviewing internal investment decisions, improving efficiencies, cost controls. One example here, for example, we are reviewing the unit economics of different packs to make decisions that can help us be more efficient with resource allocation. But ultimately, Liu we are here for growth, and that's our main priority for this year. Thank you very much for the question. Operator: Our next question is coming from Elsie Sheng from CLSA. Yiran Sheng: Thank you management for taking my questions. Thank you, YJ, and also welcome Novick. I have 2 questions. My first question is on China in-home development. Do you have any update or progress to share on the development of off-trade channel in China. I will translate myself. [Foreign Language] I will ask my second question later. [Foreign Language] Yanjun Cheng: Thank you, Elsie. This is YJ. Let me take this question. As a channel shift to in-home channel, we are taking actions to expand in the in-home channel to adapt. As we have a relative low exposure in in-home channel, which means we have a massive growth potential. We are investing to catch up. [Foreign Language] Yiran Sheng: My second question is on China commercial investment. So previously, management mentioned that you will increase marketing this year. Is that plan still on track? And what's the marketing plan for the coming peak season and sport events like World Cup? [Foreign Language] Yanjun Cheng: Yes. So as Novick mentioned, as I mentioned earlier, in 2026, our top priority in China is a stabilized volume. To achieve this, we have given room to the team, to the commercial team to increase commercial investment. So that's the direction we set up for the commercial team. [Foreign Language] Operator: Our next question is coming from Mavis Hui from DBS. Mavis Hui: My first question is on China. Could we have some more updates on the growth of your emerging channels such as O2O instant retail and e-commerce in China. More importantly, how do margins and pricing dynamics across these channels compared with traditional off-trade and how are we managing potential channel conflict with our distributors? But let me translate first. [Foreign Language] Yanjun Cheng: Thank you for your question. I will take this question as well. O2O is one of faster emerging channel in China. We have started to make a fair significant effort to increase our presence with it. And we see this as a great opportunity for us in 2026 and beyond. We partnered with a major O2O platform to further expand our participation. [Foreign Language] Mavis Hui: And my second question is on Korea. Excluding shipment phasing effects, are we still seeing underlying share gains in South Korea? What are the key challenges to sustaining outperformance in the market? [Foreign Language] Yanjun Cheng: Thank you. Let me take this question again. Total industry in Korea have remained soft in the first quarter 2026. With a soft consumer environment continued to impact overall alcohol consumption. However, our underlying momentum in Korea continued and we outperformed the industry in both the on-premise and in-home channel. [Foreign Language] Operator: Our next question is coming from Anne Ling from Jefferies. Kin Shun Ling: I have 2 questions here. First is on the cost of goods sold in general. We saw some raw materials price volatility, and this has been coming up recently for example, like aluminum. So what will be our view on the raw material costs for year 2027? [Foreign Language] Yanjun Cheng: In 2026 of first quarter our cost per hectoliter has decreased by 0.8%, mainly driven by efficiency improvement, partially offset by commodity headwind. [Foreign Language] Kin Shun Ling: [Foreign Language]. So my second question is on the India side. So could you share with us now on the Indian market update? How do we see the market competition and our strategy over there? I understand that we are focusing on more market share. So may I know when the company will start focusing on the profitability of the market? Is it still a little bit too early? And that competition is still very keen? Should -- I mean should Carlsberg be listed? What is your view on the competitive environment afterwards? [Foreign Language] Yanjun Cheng: Thank you. In India, we are focused on sustainable and meaningful top line growth that can translate to EBITDA and cash flow growth accordingly. [Foreign Language] Operator: Our next question is coming from Lillian Lou from Morgan Stanley. Lillian Lou: And thank you, YJ and Bernardo for the detailed answer previously. Congrats to Bernardo for your new role. I have two questions. The first one is on China pricing because YJ just mentioned that the raw materials are fully hedged and were relatively stable. But on the pricing side, any price action and mix shift that you observed that could improve the overall pricing in the market in general? [Foreign Language] Bernardo Novick Rettich: I can take this question YJ. Yanjun Cheng: Go ahead. Bernardo Novick Rettich: Lilian, nice to hear from you. Thank you for the question. I think all the answers should start with the same reminder that our main priority, right, is growth and particularly to stabilize the volumes in China. It's true that in the first quarter, our net revenue per hectoliter was below last year and this was impacted by investments, mainly in 3 objectives for the investments to support our wholesalers, to activate our brands and also to accelerate the growth in O2O. But on the other hand, we had positive mix effects coming from our brands, mainly driven by our Premium and Super Premium brands. I think it's important to mention to you and the press that we expect to continue to invest in 2026. Regarding price, we will continue to monitor always the prices in the market, and we are open to adjustments if something changes. But at this moment, we don't have any news regarding price increase for China. Lillian Lou: My second question is on Korea -- South Korea market. We all know that last year, April, you had a price increase, which still benefited the first Q this year on the pricing side. But what will drive the South Korea revenue and also pricing and the EBITDA growth for the rest of the year, in particular, the industry remain a little bit soft and the competition is still there. So this is the question on Korea. [Foreign Language] Bernardo Novick Rettich: I can take this one too. Very good question, Lillian, thanks. When we think about like a medium-term margin growth for APAC East and Korea, I think there are mainly 3 things that can drive this. One is, of course, pricing. The second one, operational efficiencies. And the third one, I think it's important to mention is mix and innovations. Maybe let me talk about each one of them. On prices, of course, we always consider our pricing decisions looking at what's happening in the beer market, but also the macroeconomic situation in the country. We'll continue to monitor similar to China. We don't have anything to announce at this point. On the second part, operational efficiencies. Here, we continue to implement cost management initiatives. This is one of our main strengths at Budweiser APAC, as YJ was talking about our efficiency and excellence programs that we have so this is something that we still see opportunities. And number three, I think mix and premiumization and innovations are very important for us in the future. Maybe I can share a couple of examples one of them is the growth of Stella Artois in the on-trade. I think that's a prudent healthy growth. The other one is the nonalcoholic beer, like example like Cass 0.0. I think both of them are good examples of innovations that can both drive volume growth, but also margin expansion. So overall, I think that we see opportunities to keep recovering margins in Korea in the future. Thank you for the question. Operator: In interest of time, our final question will come from Linda Huang from Macquarie. Linda Huang: My first one is regarding for the dividend. And given that Bernardo has really taken up the CFO role. So I just want to know that whether from the group perspective, whether you will change the capital allocation approach. Especially the last 2 years, right, we -- they paid out USD 0.0566 per share dividend to the shareholders. So whether this is the dividend per share policy under review. So this is my first question. [Foreign Language] Bernardo Novick Rettich: Thank you, Linda. Nice to hear from you. Thanks for the question. So I think it's important to remind everybody, right, we are working to deliver sustainable long-term results for our shareholders, right? And the other message is that our capital allocation strategy remains the same. Our first priority continues to be to invest in our business like we are doing this year to drive organic growth. followed by M&A when we see opportunities for acquisitions. That's the second one. And then the third one to return to our shareholders, for example, via dividend, but it's also what we have been doing, right? So I think we are very proud of our dividend track record since the beginning, recently with the announcement of the $750 million dividend that we announced for 2025, which by the way, was consistent to the dividend for the previous 2024. So I think if I have to summarize, we are working towards improving our business performance this year to be able to keep this consistency in the future. Thanks for the question. Linda Huang: My second question is regarding for our products, and I think this may be YJ can help. So when we compare China to the other Western countries. I think there's always plenty of alcohol product innovation. So I just want to know that, again, whether the management can elaborate more about our product innovation plans? And then what kind of the innovation strategy will fit well for our China market. [Foreign Language] Yanjun Cheng: [Foreign Language] Operator: Thank you. That concludes our Q&A session today. I would like to turn the conference back over to YJ for the closing remarks. Yanjun Cheng: Thank you. As I mentioned on our 2025 annual results call early this year, our priority is to stabilize volume and rebuild our market share momentum in China by investing in our in-home route to market and a leading permium portfolio. The progress we have been seeing in the first quarter and have been encouraging. On this positive note, thank you all for joining us today, and I'm looking forward to speaking to you soon. Operator: Thank you. And this concludes today's results call. Please disconnect your lines. Thank you.
Operator: Welcome to CPI Card Group Inc.'s First Quarter 2026 Earnings Call. My name is Carrie, and I will be your conference operator today. If you are viewing on the webcast, you may advance your slides by pressing the arrow button. The call will be open for questions after the company's remarks. If you would like to enter the queue for questions, please press star then 1. If you would like to withdraw your question, press star 1 again. Now I would like to turn the call over to Mike Phillips. Please go ahead. Michael A. Salop: Thanks, operator. Welcome to CPI Card Group Inc.'s first quarter 2026 earnings webcast and conference call. Today's date is 05/05/2026, and on the call today from CPI Card Group Inc. are John D. Lowe, president and chief executive officer, and Tara Grantham, interim chief financial officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group Inc.'s most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only. We undertake no obligation to update any statements to reflect events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release as well as the presentation that accompanies this conference call and the Form 10-Q are accessible on CPI Card Group Inc.'s Investor Relations website, investor.cpicardgroup.com. On today's call, all growth rates refer to comparisons with the prior-year period unless otherwise noted. The agenda for today's call can be found on slide three. We will open the call for questions after our remarks. I will now turn the call over to John. John D. Lowe: Good morning, everyone. Overall, we are off to a solid start in 2026 and are on track to achieve our full-year outlook. We are executing on our initiatives to deliver on our strategy of growing and diversifying the business by helping our customers win as we expand our proprietary technology platform, grow our marketable base of relationships, and evolve our payment solutions to meet market needs. We exceeded our expectations in the first quarter, delivering 20% revenue growth, which reflected another strong contribution from AOI, as well as good growth across our other Secure Card Solutions businesses. This included strong performance from our contactless solutions, led by continued strength of contactless metal as we emphasize our offerings of value-driven metal solutions, and increased sales of personalization services. As expected, our Prepaid Solutions segment had a slow start to the year, but we continue to anticipate growth for the full year. Integrated Paytech grew only slightly due to comparisons with a strong prior-year quarter, and we continue to expect the segment to grow more than 15% for the full year. Adjusted EBITDA increased 9% in the quarter, and we generated strong cash flow with more than $10 million of free cash flow in the quarter. We also improved our financial position, ending the quarter with a net leverage ratio just below three times. Based on first quarter results and our current forecast, we are affirming the full-year financial outlook we provided in March. Tara will give you more details on first quarter results in a few minutes, but first, I would like to provide a brief strategic update on slide five. As I said before, we are executing on our strategy as we start 2026 and are fortunate to operate in multiple growing markets. In addition to ongoing increases in cards in circulation in the U.S. payments market, our business is supported by increased demand for digital solutions by financial institutions and an increased focus on security for prepaid cards and packages. As we discussed last quarter, our strategy is to continue providing payment technology solutions that help our customers win, driven by three primary growth pillars that underpin our value proposition. First, our proprietary technology platform with a vast reach into the U.S. payments ecosystem. Second, our marketable base of thousands of deep and broad relationships across the U.S. payments market. And third, our proven track record of delivering evolving payment solutions that reflect changing market needs. We continue to make progress on driving our strategy forward, laying more pipes to further expand our platform, expanding our marketable base of relationships, and introducing new solutions for the market. We mentioned at year-end that we had locked in a new referral agreement giving us the opportunity to significantly advance our marketable base for our Integrated Paytech segment. We are excited to share that we are actively marketing our solutions with the help of Fiserv and are seeing positive customer interest. And we continue to expand our pipes on our technology platform, creating further integrations and customer connections for our digital solutions. We have also expanded our solution set by delivering for the closed loop prepaid market, seeing strong closed loop revenue growth from Q4 2025 in the first quarter. And we continue to explore the viability of chip-embedded cards in the U.S. prepaid market, advancing our extensive pilot with a large national retailer testing Card Safe-to-Buy technology. We believe our strategic efforts and investments will continue to drive long-term growth, expanding our addressable markets and providing the solutions needed by the market as it continues to evolve, creating value for our company and our shareholders. We will continue to update you on progress throughout the year, but now I would like to turn the call over to Tara to take you through the first quarter results in more detail. Tara? Tara Grantham: Thanks, John. I will begin with the segment results on slide seven. Overall, as John said, we are pleased with our first quarter performance. First quarter revenue increased 20% to $147 million, led by our Secure Card Solutions segment. Secure Card Solutions revenue increased 35%, which included a $16 million contribution from ArrowEye. As John mentioned, we experienced strength across this segment in the first quarter with good growth from our contactless solutions and personalization services. Our Prepaid Solutions segment declined 17% in the first quarter, reflecting timing of orders from key customers, with the first quarter decline partially offset by better-than-expected incremental sales of closed loop cards. Integrated Paytech increased 1% in the quarter due to comparisons with a strong prior year while we maintained strong gross margins at over 55%. As John said, we still expect to grow revenue in this segment by more than 15% in 2026. Turning to profitability on slide eight, first quarter net income declined by 57% to $2.1 million, primarily affected by $3 million of pretax integration costs, while adjusted EBITDA increased 9%, driven by sales growth including the addition of AOI. Integration costs were high in Q1, and we expect them to remain at similar levels in Q2 but drop significantly in the second half of the year. Our 2026 integration costs are meant to drive revenue synergies and lower operating costs and primarily result from go-to-market spending, technology investments, and certain vendor termination fees as we drive operating synergies. As a reminder, integration costs are not included in adjusted EBITDA but do impact net income. Gross profit margin declined from 33.2% to 30%, affected by lower sales and margins in our Prepaid segment and increased production costs including tariffs and depreciation, partially offset by benefits from increased sales from Secure Card Solutions. Production costs in the quarter compared to prior year included $2 million of increased depreciation primarily related to ArrowEye and the new Secure Card production facility and $1.2 million of tariff expenses. We expect Prepaid margins to improve in the second quarter with higher revenue levels, and we also expect overall company gross margins to be much stronger in the second half of the year. Margin comparisons with prior year should also improve going forward as ArrowEye depreciation and tariff primarily began impacting results in 2025. Overall, we anticipate full-year gross margins to be relatively consistent with prior-year levels. We have multiple initiatives in place to drive margin improvement over time, including targeted supplier negotiations, automation investments, production optimization across our sites, driving more favorable product mix, and achievement of ArrowEye synergies. We are also managing discretionary spending and driving operational efficiencies as volume increases, including in our new Indiana production facility, where we expect volumes this year to be 30% higher than 2024 levels in our old production facility. First quarter SG&A expenses increased $6.5 million from the prior year, primarily due to ArrowEye integration costs, the inclusion of ArrowEye operating expenses, increased employee performance-based incentive compensation, increased severance, and higher technology spending. Investment spending was less than anticipated in the first quarter, and we expect that to ramp over the remainder of the year beginning in the second quarter. Turning to slide nine, we had strong cash flow generation in the first quarter. Our cash flow generated from operating activities for the quarter increased from $5.6 million last year to $13.6 million, driven by strong working capital management. Free cash flow increased from $300,000 in the prior year to $10.1 million in 2026. We spent $3.5 million on CapEx in the quarter compared to $5.3 million in the prior year, although we still anticipate full-year capital spending to be similar to 2025 levels, with increased focus on technology spending. On the balance sheet, at quarter-end, we had $19 million of cash, $15 million of borrowings on our ABL revolver, and $265 million of senior notes outstanding. Turning to our 2026 financial outlook on slide 10, we are affirming the full-year outlook provided in March. This includes high single-digit revenue growth, low- to mid-single-digit adjusted EBITDA growth, free cash flow conversion at similar levels to 2025, and a year-end net leverage ratio between 2.5x and 3.0x. We expect Q2 revenue to be similar to Q1 levels, with adjusted EBITDA expected to be slightly lower than the prior year due to timing of investment spending, including some spending that was delayed from the first quarter. I will now turn the call back to John for some closing remarks. John D. Lowe: Thanks, Sarah. Turning to slide 11 to summarize before we open the call for Q&A. We are executing on our strategy with a better-than-expected start of the year. The segment trends are largely as we anticipated, and we are on track to achieve our full-year outlook. We also generated strong cash flow and brought net leverage back down to just below three times after the temporary increases following last year's ROI acquisition. We intend to continue growing and diversifying our business, leveraging our expanding proprietary technology platform, our extensive marketable base, and our evolving portfolio of payment solutions to meet market needs, drive growth, and enable our customers to win. Operator? We will now open the call for questions. Operator: Thank you. We will now open the call for any questions. If you would like to ask a question, please press star then 1. If you would like to withdraw your question, press star 1 again. Your first question will come from Peter James Heckmann with D.A. Davidson. Peter James Heckmann: Hey, good morning. Thanks for taking my question. In terms of thinking about Instant Issuance, Card@Once solutions, you did not mention it in the prepared remarks, but what are you thinking for this year in terms of base business as well as some of the tangential areas that you have expanded into over the last fifteen months? John D. Lowe: Yeah. Pete, good morning. We are excited about Instant Issuance. It is a great platform for us. Just as a reminder, it is a software-as-a-service platform. We built it from the ground up. It took us, you know, ten-plus years to build it, especially all the integrations into what we refer to as the payments ecosystem that we service. So we have thousands of customers across the U.S., and we expect that to be a large chunk of the growth out of our Integrated Paytech segment for 2026, growing that segment from an outlook perspective greater than 15%. I think the Fiserv deal we announced helps us grow. And just on the breakout between Instant Issuance and everything digital — I will say digital — we are essentially building the business there. It is small in relation to the rest of the business, but we are seeing strong customer demand, a good pipeline, and we continue to build out the pipes and integrations, if you will, to continue to service multiple areas of the market. So we are excited about what we are doing in Instant Issuance, but broadly in digital too. Peter James Heckmann: Okay. Great. And then just in terms of contactless, where do you think we are in terms of contactless cards? I have not seen recently any information that would suggest what percentage of cards out today have a contactless chip embedded. John D. Lowe: Good question. What we produce today is 90% plus contactless. So, you know, we used to use the baseball analogy. I would say we are in the very late innings of the transition. That is on the debit and credit side. I would say on the prepaid side of our business, there is a lot of opportunity. The volumes within prepaid broadly, when including open loop and closed loop, are somewhat greater on an annual basis than even the debit and credit side in terms of what is produced. So to the extent that that market starts to move more towards chip, it starts to move specifically towards contactless — which is what we are doing with Carta and what we are doing with a large national retailer, where we have a pilot underway, which we are having positive kind of movement on, if you will. If that market continues to move towards chip and grows, we will see a long transition there. It is what we would expect, and we would be in a unique position to capitalize on that transition. So on the debit and credit side of your question, I think we are late innings; we are pretty much fully penetrated, but I think there is a lot of opportunity on the prepaid side. Peter James Heckmann: Got it. I appreciate it. I will get back in the queue. John D. Lowe: Yep. Thanks, Pete. Operator: Your next question comes from Jacob Michael Stephan with Lake Street Capital Markets. Jacob Michael Stephan: Hey, guys. Good morning. Nice quarter. I just wanted to ask on the Fiserv relationship. It seems like that was expanded a little bit. Maybe you could touch on some of the things and ways that it was different from the past contract with them, or agreement. And then maybe touching on the supply chain a little bit — last year about this time we were talking a lot about tariffs. From a supply chain perspective and chip tightness, what are you seeing out there in the market today? And lastly, you are kind of expecting a bigger ramp in the second half from the Integrated Paytech segment. What are going to be the main drivers of that growth in Paytech? John D. Lowe: Yeah. No. Jacob, I think the main difference is we call out their name. We had entered into this agreement around year-end, so we mentioned an agreement at year-end, but we just did not call out Fiserv's name. I would say getting marketing teams together to finalize documents takes a long time, but the agreement is in place. We are excited about it. We are seeing positive customer interest in Q1, kind of ramping up, if you will, and Fiserv is a great partner. We love working with them. They have thousands of customers across the United States that we have worked with them to build good relationships with and make sure we are helping our customers win and helping their customers win at the same time. On supply chain, broadly I would say it has normalized, and I think that is credit to not only the teams that we put in place to manage it that continue to focus on how to manage things well, especially today in light of the Iran war. That is another kind of thing to tackle from a cost perspective, although that is not significant, I would say. But tariffs are something we had to work through from a supply chain perspective. I would say tariffs have somewhat normalized as well. But we are — just to get ahead of your probably next question — we are expecting refunds on tariffs. But we do not necessarily have a timing aspect to that. We hope to see them at one point, but as I tell my team, I will believe it when I see it. Put it that way. On the second-half ramp in Integrated Paytech, a lot of it is in relation to the deal that we signed with Fiserv. That is a chunk of it. Another chunk is just the growth in the business as it stands. Last year, it grew roughly at a 20% rate. If we look back over time, it has been growing at a faster pace generally than the rest of the business, and that is because we have a unique value proposition in the market. I am talking about our Instant Issuance solution specifically. On the digital side of the house, that is an area that is growing even faster. Now you are talking about smaller dollars — so it is smaller dollars growing — but at the same time, that is an area we continue to see just a large amount of interest in, and we are trying to build out that business as quickly as we can to support that large customer interest. So it is our Instant Issuance solution growth, which we have seen historically be pretty strong — we are confident in that, especially in light of the new deal — and digital growing just given what we are seeing in the market and the customer demand. Jacob Michael Stephan: Got it. Very helpful. Appreciate it. Thank you. John D. Lowe: Yep. Thank you. Operator: Your final question will come from Craig Irwin with ROTH Capital Partners. John D. Lowe: Hey, Craig. We cannot hear you. Craig Irwin: Thank you. Sorry about that. Can you hear me now? John D. Lowe: Yes, we can. Okay. Perfect. Good morning. Craig Irwin: Good morning. So can you help us unpack the comments around Indiana, the 30% increase in volume? Is this something novel in the last quarter? Did something materially change there? And then with 30% higher volumes, this clearly is not translating to the top line. Is there a mix issue or price erosion or something like that impacting the contribution to revenue growth and, obviously, profit growth if the revenue is not following? Any color there would be helpful. John D. Lowe: Yeah. Craig, good question. The reason that we shared that number specifically is it is an indicator as we have kind of come to the end of building out Indiana. You know, just a step back, it took about a year plus to build. The team in Indiana has done a great job. We essentially had nearly zero customer complaints as we were transitioning. And the reason for the growth in volume disclosure is really the fact that we could not have done what we were doing in our old facility. We were at capacity. If you go back two, three years — in 2022, as an example, when the market was insatiable in a sense — we were busting the team. So there were multiple reasons to move, but I think moving has been a large success for us. And I think your question about margins — there is depreciation on ROI. There are tariffs that have come up. Those types of things have affected our margins. There is always a competitive pricing market, but I would not say the pricing is irrational. I would say that overall, from a margin perspective, we have definitely had some impacts, but nothing that has created an irrational pricing market. I do not know. Derek, you would provide any other comments. Tara Grantham: Yes. So I would just say that we did grow pretty strongly in our overall Secure Card Solutions space, up 35% overall, and then from an organic basis, we did grow 15%, so we did get strong top line growth in that solution, and that was in part driven by contactless growth across our Secure Card Solutions. So, related to that, as John said, we did get operating leverage based on that growth. It was offset by things like tariffs as well as the higher depreciation across the business related to our new Indiana facility as well as related to the acquisition of ARY. John D. Lowe: Craig, one thing I would add, though, we do expect our overall gross margins — they are somewhat stabilized. Right? So we would expect them to be somewhat stable over the course of the year, if not increasing. Tara and team are doing a good job driving a lot of margin improvement goals. So between that and the growth of the business and the leverage we expect to get, I know we have had a lot of impacts over the last year and a half, two years, but we do expect margins — not only on a gross margin basis, but on an EBITDA basis — to improve over the course of the year. We expect this year, similar to last year, fourth quarter to be our biggest quarter. And so think of Q1 as kind of a starting point for the year, if you will. Craig Irwin: Understood. That makes sense. So then, ROI — I will admit, I was a little surprised to see the increased integration expenses this quarter. I thought that you were a long way down the path of already integrating that. Can you maybe give us some detail around the actions that are being completed right now? What did you complete over the last couple of months? Strategically, I thought that you might be actually adding a little bit more CapEx for ROI and focusing on the growth of that platform, given that personalization really is such an exciting opportunity. John D. Lowe: Yeah. I mean, I would say the integration costs we are spending now are really in two big areas. One is technology, and one is go to market. And when we look at ROI and its position in the market specifically, when we look at our broader solutions that we provide outside of Airline, we see a lot of revenue synergies. Airline signed, even in their first deal — I mean, 10 plus deals — and we have not owned them, I mean, since essentially one year ago from now. So we have seen really strong progress in terms of AirWise performance on a revenue basis. And the other side that we are spending on is operating synergies, trying to make sure that the way that we operate on the floor is — I would not call fully integrated, but essentially aligned with everything we are doing on a broader basis, which ultimately means we get purchasing power, things of that nature. So there were some termination fees from a vendor perspective as we transition vendors. Things of that nature pop up, and unfortunately they are not small. But we do expect integration to drop off in the second half of the year. We expect a little bit in Q2 — that will continue — but in the second half of the year, you should see that drop off dramatically. Craig Irwin: Thank you for that. I will take the rest of my questions offline. John D. Lowe: Thanks, Greg. Operator: Your next question will come from Harold Lee Goetsch with B. Riley Securities. Harold Lee Goetsch: Hey. Thanks for taking my question. On the Prepaid statement, it was said it was down 17% in the quarter. Can you give us some of the friction points? And again, were there some maybe significant nonrecurring customer revenues that came in 2025 and before that that are at least driving these declines? Or is the channel rather full right now and we are working through channel inventories? And is organic growth through the channel slower than expected? Thanks. John D. Lowe: Yeah. Hal, on the Prepaid side, just as a reminder, the whole business and the market in general — think of on the open loop side — we have leading market share. We are positioned really well, especially if that market starts moving towards chip. And so if you think about the broader market and our customers, they are trying to determine, based upon not only regulatory demands, but just customer demands, how do you increase security around the package itself? You can do that in two ways. You can increase the actual security around the package itself, or you can put a chip in the prepaid card itself. And that is why we are working with Carta. That is the pilot we are working with the large national retailer on. And because of that kind of testing and transition that we ultimately do expect to occur over a long period of time, we are seeing the normal-course open loop market be weaker. And we knew coming into the year this would be a slow start to the year. We are hearing that from our customers on the Prepaid side. That is because we believe from a longer-term transition perspective the value of the market is going to grow, and we are well positioned to capitalize on that. The other side on Prepaid is the closed loop side of the business, and that actually has performed very well for us. It is fairly small today, but we had pretty strong growth over Q4 of last year in Q1. And so we are excited about where the Prepaid business is going, but it is definitely a weaker quarter for us. And you can see this in the Prepaid financials. That business gains a significant amount of operating leverage as it grows, and you saw the opposite in Q1, and that brought down broader margins. Tara Grantham: Yeah. Just a reminder that we do expect good growth across our segments this year, including in Prepaid. So even though it was down in Q1, we do expect better growth throughout the year. And just looking back, still very confident in that business. Look back to 2024, we did grow that business 26%. And even though we were down last year, we were only down 3% once you adjusted for the accounting change that we made in Q2. So I do expect that return to growth as well as the increase in gross margins throughout the year. John D. Lowe: Okay. Thank you very much. Thanks, Hal. Operator: And there are no questions in the queue. I would like to turn the call back over to John D. Lowe for any closing remarks. John D. Lowe: Thank you to all of our CPI Card Group Inc. employees for their dedication and for continuing to deliver for CPI Card Group Inc. and our customers. Tara Grantham: Thank you all for joining our call this morning, and we hope you have a great day. Operator: Thank you for your participation. This does conclude today's conference. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Q1 2026 Revvity Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Steve Willoughby, SVP, Investor Relations. Steve, please go ahead. Stephen Willoughby: Thank you, operator. Good morning, everyone, and welcome to Revvity's First Quarter 2026 Earnings Conference Call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind you that today's call may include forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from our expectations. Please refer to the safe harbor statements in our earnings release and to our SEC filings for a detailed discussion of these risk factors. We assume no obligation to update these forward-looking statements in the future. Additionally, we will refer to certain non-GAAP financial measures during this call. Reconciliations to the most directly comparable GAAP measures are available in our earnings release. I'll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad? Prahlad Singh: Thank you, Steve, and good morning, everyone. I have several important developments to discuss today. First, I'm really excited to report that Revvity delivered strong first quarter results with 3% total company organic growth, demonstrating the resilience and strength of our business. Our adjusted operating margins came in at 23.6%, which was above our 23% outlook. These results are a good start to the year and position us well to achieve our full year expectations, which Max will update you on in a bit. The better-than-anticipated revenue and margin performance in the quarter led to our adjusted earnings per share in the quarter being $1.06, which was solidly above the $1.02 to the $1.04 outlook that was implied in our guidance. I next want to highlight a transformative strategic decision we have made that will accelerate our growth trajectory, improve our financial profile and allow for even more focused investments. Following an extensive review, we have decided to divest our immunodiagnostics business in China, which represented approximately 6% of total company revenue last year. This decision reflects our commitment to focusing resources where we can generate the highest returns for shareholders going forward. The health care market in China, particularly diagnostics, has faced persistent policy-induced headwinds that have dramatically impacted both customer demand and pricing dynamics. Unfortunately, we see these challenges continuing over the medium term. To maintain our position in this space, it would require us to make substantial investments, including fully localizing manufacturing, supply chains and regulatory capabilities. This would require meaningful capital allocation, resulting in a deprioritization of other higher potential return initiatives available to us. Rather than deploying material dollars and management attention to address the structural challenges in the China immunodiagnostics market, we are choosing to concentrate our efforts on business areas where we have clear competitive advantages and see healthy growth trajectories. This is an intentional strategic allocation of our resources towards higher value opportunities that will drive and further improve our future performance. In fact, this selective approach is being validated by our performance in other parts of our China business. For example, our Life Sciences business in the region, which was larger in absolute revenue dollars last year than the immunodiagnostics business we will be divesting continued to perform well with reagents growing solidly above our overall reagents performance last year. We anticipate a continuation, if not acceleration, of our strong Life Sciences performance in China as we move through 2026, demonstrating our ability to succeed and grow meaningfully in China with the right products, market positioning and appropriate policy backdrop. We have signed a letter of intent with a local management-led buyer group for the purchase of this business and expect to reach a definitive agreement within the next 2 months, which would include our retaining a minority interest in the new company. The transaction is anticipated to close by the end of next year, allowing time for the buyer to establish local manufacturing capabilities and obtain necessary regulatory approvals. Until closing, we will continue to report the financial impact of these operations, but will exclude them on a pro forma basis to provide clear visibility into our ongoing business performance. The financial benefits of this planned divestiture are meaningful. On a pro forma basis, China will now only represent approximately 8% to 9% of our total revenue with approximately 7% being Life Sciences. If you were to exclude this business, our pro forma organic growth in the first quarter would have been 6%, while our pro forma adjusted operating margins would have been an even better 24% overall. We expect this change to improve our 2026 total company organic growth by approximately 100 basis points and enhance our operating margins by approximately 30 basis points. This move reflects the removal of a lower growth, lower margin business that has been a significant drag on our cash flow conversion over the last several years and was also consuming disproportionate management focus and capital resources. More importantly, this move further supports our long-range plan, which calls for 6% to 8% organic growth and double-digit EPS growth. As it pertains to our updated pro forma guidance for 2026, which now excludes the immunodiagnostics business in China, we are now looking for organic growth of 3% to 4%, adjusted operating margins of 28.4%, and adjusted earnings per share of $5.20 to $5.30, which includes a 20% reduction related to the planned divestiture, offset by $0.05 of benefit from improved operational execution throughout the year. This move will result in a more focused business with cleaner financial metrics that better reflects our core growth drivers. Turning to our end markets. We saw a modestly improved pharma and biotech spending environment in the first quarter, which led to positive low single-digit year-over-year organic growth from these customers. This was the strongest year-over-year growth we've had for reagents and instrument sales to this customer group since the first half of 2023. While customer behavior continues to remain somewhat measured as customers work through budget cycles, we are seeing early indicators that we believe should lead to future improvement. On the academic and government side, there have been some promising developments from a budget and policy perspective, which also bodes well as we look ahead. I'm encouraged by the positive mid-single-digit growth overall in the first quarter from our academic customers. And in the U.S., we also saw positive growth from these customers for the first time since the second quarter of 2023. So while we are pleased by the first quarter trends in this end market and recent policy developments, we remain mindful of the world we live in today and how quickly policies and regulations can change. Consequently, until we see a bit more consistent performance from both our pharma and academic customer bases, we plan to remain prudent with our forward-looking assumptions across each of these end markets. As it pertains to Diagnostics, we had a fantastic quarter within reproductive health as it grew in the low double digits organically overall. This was driven by a combination of continued success in our newborn screening business despite continued challenging global birth rate trends and a better-than-expected contribution from our Genomics England contract. Within immunodiagnostics, we saw challenging conditions in China as anticipated, while the business outside of China performed in line with our expectations. During the first quarter, we also continued to demonstrate strength in our ability to drive innovation, a consistent priority of ours. In our Signals software business, we introduced Xynthetica in December, our AI models as a service platform that serves as a secure marketplace, collecting computational capabilities to wet lab research. Last month, we introduced BioDesign, our cloud-native molecular design platform for biologics development. Upon its official launch at a major industry trade show next week, BioDesign will be the only cloud-based offering of its type, addressing a critical need for molecular biology teams developing the next generation of antibody cell and gene therapies. Then towards the end of this year, we'll introduce LabGistics, a novel AI-first drug discovery to drug development workflow offering, rounding out an impressive year of software innovation that demonstrates our ability to rapidly bring new capabilities to market. In our instruments business, we have been highlighting to you for several quarters that we have been seeing stronger demand for our high content screening portfolio, driven by increases in GLP-1 related research, new approach methodologies, including organ on chip development work and data generation for AI model creation and training, amongst other validation related work. Our launch earlier this year of our new flagship Opera Phenix OptIQ system will only further build on this momentum. The OptIQ's enhanced confocal imaging capabilities, advanced 3D cell analysis and automated phenotypic profiling aligned perfectly with current market trends focused on complex disease modeling and precision medicine research. This is another great example of one of our key product lines, which we believe will meaningfully benefit from increasing AI adoption by our customers in their preclinical R&D work. I think it is important to clearly address the transformational impact of artificial intelligence and life sciences research. AI is dramatically accelerating scientific discovery, enabling researchers to identify and design exponentially more therapeutic compounds and biological targets than ever before. This acceleration means more discoveries to validate and more insights to unlock through physical experimentation than ever before. To understand the opportunity, let me provide you an example to consider in where we believe we are in the AI adoption cycle. Today, we are in what would be called the infrastructure build-out phase, similar to the early days of the Internet, when companies were laying fiber optic cables and building foundational systems that would support the digital transformation. After that Internet infrastructure was established, we witnessed an explosion of value creation. Companies like Google, Amazon and Meta built entirely new business models that created fundamentally new ways of organizing information and commerce. AI in Life Sciences is following a similar trajectory. We expect our consumables, instruments and software to see significant increases in demand in the future. as they are utilized by our customers to create new insights at an accelerating rate in order to capitalize on the new capabilities that AI provides. Our offerings are used by our customers to actually uncover and translate the new data that the AI models and the infrastructure can then learn from. This value creation phase is only just beginning, and this is where the real opportunity lies for Revvity. Every AI-generated discovery will still require physical validation through wet lab experimentation. One cannot approve a drug based solely on computational predictions. It must be synthesized, tested, screened and validated through rigorous and laboratory work given that only a small fraction of human biology is well understood. We believe that as more compounds are designed and combined with new ways to develop and refine them, a continuous loop of innovation and improvement will be created. That is likely to result in a demand bottleneck in validation related work for our customers. As AI generates more promising therapeutic hypothesis at an unprecedented rate, the downstream demand for laboratory tools, reagents, and instruments to validate these discoveries will grow substantially. This inflection point sits squarely within Revvity's core strengths, providing the critical technologies that translate AI-driven insights into real-world biological validation. Looking ahead, I anticipate a third phase emerging after value creation, which is value capture. This is where our customers will begin realizing substantial returns on their AI investments through faster development time lines and higher success rates. These gains will incentivize even greater investments in research capabilities, creating a virtuous cycle that expands the entire market for scientific research tools. Beyond our external AI strategy, we are dramatically transforming our internal operations through AI adoption that I believe is quite differentiated and includes appropriately repositioning our employees and their roles. The well-known research from Gartner recently published a research paper highlighting our internal AI deployment, which stands out across the industries that they've researched. They noted how our structured approach has accelerated software delivery and enable impactful initiatives that previously would not have been feasible. With our unique rollout of multiple leading LLMs to the entirety of our global employee base, we are seeing employee adoption rates of AI well above corporate averages, and we are doing so at a fraction of the cost of traditional AI corporate implementations. We also continued to execute on our operational efficiency initiatives that we discussed on our fourth quarter call. Implementation is well underway and remains on pace to be fully completed around midyear, which will result in a greater impact on our financials starting in the second half of this year. These initiatives are a meaningful driver of the operating margin expansion we have communicated. Since the contributions from these actions will not anniversary until midyear next year, it positions us well for robust margin expansion in the first half of 2027 as well. Before turning the call over to Max, I want to make you aware and invite you to our Investor Day in New York City on Friday, November 13. This will be an excellent opportunity for us to showcase the progress we've made across our business and share our vision for where Revvity is heading in the future. Software will be a central theme of that discussion, and we are excited to provide much deeper insights into how our offerings in this space will enable long-term growth. I've never been more excited about the future potential of Revvity than I am right now. We are exceptionally well positioned in both the near and long term to lead the transformation of how preclinical research is performed, while delivering an outstanding opportunity for our shareholders as end market demand trends normalize. With that, I will now turn the call over to Max. Maxwell Krakowiak: Thanks, Prahlad, and good morning, everyone. As Prahlad highlighted, we started 2026 on a strong note as our first quarter organic growth, adjusted operating margin and adjusted earnings per share all came in ahead of our expectations, which sets us up well to achieve our full year expectations. Additionally, the plan we have announced to divest our immunodiagnostics business in China is an extremely important strategic decision for the future of the company as it allows us to continue to refine Revvity so that we can focus on the areas that we believe have the highest returns for our shareholders in the years to come. This is a bold decision and one that has a multitude of benefits for the company, including improved financial performance metrics and returns, streamlined operations and management focus and reduced future uncertainty from a market, which has been challenging over the last several years and will likely remain pressured over the medium term as the impact from policy changes continues to unfold. As Prahlad mentioned, we are actively working with a local management-led group and expect to reach a contractual agreement with them over the next few months with an expected closing of the transaction to occur by the end of next year as it will take them some time to receive the necessary regulatory approvals and to localize manufacturing. Going forward, our guidance and reported organic growth will exclude the financial impact of this planned divestiture. We have provided historical financials for 2025 in a supplement that is available on our Investor Relations website, which excludes this business so that you are able to understand what the future of Revvity looks like and how we plan to provide guidance and report our results going forward. For 2026, our plan to divest this business would result in the reduction of approximately 4.5% of our previously expected revenue. When combined with FX, which we now only expect to contribute approximately 50 basis points to our revenue growth, down from our previous 100 basis point expectation, these 2 factors represent the entirety of change and our updated 2026 total revenue outlook, which now calls for $2.81 billion to $2.84 billion in total revenue this year. We anticipate this planned divestiture will also positively impact our organic growth by approximately 100 basis points this year while also positively impacting our organic growth rate in the years to come. For 2026, we are now estimating 3% to 4% organic growth overall, which excludes the impact and contribution of the China Immunodiagnostics business. We also expect this change to positively impact our adjusted operating margins, leading to our adjusted operating margins this year now expected to be approximately 28.4%, up 40 basis points from our prior outlook. Finally, by excluding the financial impact of this business from our outlook, we also anticipate a net reduction of our expected adjusted EPS this year of approximately $0.15, resulting in a new EPS outlook for this year of $5.20 to $5.30. Another important benefit from this action is a dramatic further expected improvement in our cash flow conversion. For example, in fiscal year 2025, when excluding this business in China, our free cash flow conversion of our adjusted net income would have been approximately 300 basis points higher than the already solid 87% conversion we had reported. With these changes, I am confident that we are well positioned to be in an even stronger position to deliver accelerated top and bottom line growth in the future. Now turning to the specifics of our first quarter performance. All of the figures I'm about to provide are on a total company basis and the same format that we provided guidance on -- during our fourth quarter earnings call, which includes our immunodiagnostics business in China. I will then separately provide an update on a pro forma basis, demonstrating what our performance looked like when excluding the China Immunodiagnostics business that we plan to divest. Overall, the company generated revenue of $711 million in the quarter, resulting in 3% organic growth with an approximate 3% tailwind from FX. We also had a 75 basis point incremental contribution from ACD/Labs, our recent software acquisition. As it relates to our P&L, despite known headwinds from FX, having an extra week this fiscal quarter, tariffs and the timing of our cost efficiency initiatives, we exceeded our expectations for the quarter by generating 23.6% adjusted operating margins. Looking below the line, our adjusted net interest and other expenses were $23 million in the quarter, and our adjusted tax rate was 18.3%, both in line with our expectations. We repurchased another $86 million of our shares in the first quarter, resulting in an average of 111.9 million diluted shares in the quarter. Our adjusted EPS in the quarter was $1.06, which exceeded the high end of our expectations due to the revenue and margin upside. Moving beyond the P&L. We generated free cash flow of $115 million in the quarter, resulting in a robust 97% conversion of our adjusted net income. Our balance sheet remains strong as we finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.8x, with 100% of our debt being fixed rate with a weighted average interest rate of 2.6% and weighted average maturity out another 6 years. As we evaluate capital deployment, we still plan to pay off the roughly [ $600 million ] we have outstanding on Eurobond, which is coming due in mid-July, which will leave us with a gross leverage of below 3x as we exit the year. I will now provide some commentary on our first quarter business trends, which are also highlighted in the quarterly slide presentation on our Investor Relations website. Again, these results include our immunodiagnostics business in China and are comparable to the guidance we provided 90 days ago. The 3% growth in total company organic revenue in the quarter was comprised of 3% growth in our Life Sciences segment and 4% growth in Diagnostics. Geographically, organic growth declined in the mid-single digits in APAC, with China being down double digits overall due to diagnostic pressures, grew in the low single digits in the Americas and continued to grow double digits in Europe. From a segment perspective, Life Sciences generated revenue of $362 million in the quarter. This was up 6% on a reported basis and 3% on an organic basis. From a customer perspective, sales in the pharma/biotech grew in the low single digits in the quarter, while sales in the academic and government grew in the mid-single digits in the quarter. From a business perspective, Life Science Solutions grew in the low single digits organically in the quarter with low single-digit growth in reagents and mid-single-digit growth in instrumentation. Our Signal software business grew in the mid-single digits in line with our expectations. As it pertains to some of the software industry specific metrics, our SaaS pipeline continues to grow robustly with 40% ARR growth year-over-year leading to the business, again, growing double digits from an APV perspective. In our Diagnostics segment, we generated $349 million of revenue in the quarter, which was up 8% on a reported basis and 4% on an organic basis. From a business perspective, our immunodiagnostics business declined in the low single digits organically in the quarter, which was in line with our expectations. Our performance was strong outside of China but was offset overall by meaningful declines in China as anticipated. Our reproductive health business had a great quarter and grew double digits organically with broad-based strength across the portfolio, including in newborn screening, which grew low double digits in the quarter. Reproductive health also benefited from an increasing contribution from our work with Genomics England, as sample volumes from this project are now running slightly ahead of our initial expectations. I now also want to give you some perspective of what our first quarter performance looked like on a pro forma basis, which excludes our immunodiagnostics business in China that we plan to divest as this is how we will be providing guidance and reporting our results going forward. Overall, on a pro forma basis, we generated total revenue of $687 million in the quarter. This equates to pro forma organic growth of 6%. While there is no impact from this change on the 3% growth in our Life Sciences segment, on a pro forma basis, our Diagnostics business grew 9% organically in the first quarter. There is no impact to our reproductive health performance, but our immunodiagnostics business grew in the mid-single digits on a pro forma basis. Moving to the P&L. Our pro forma adjusted operating margins were 24% and our adjusted pro forma EPS would have been $1.04. Now moving to our updated guidance for the year. Our updated guidance is on a pro forma basis as it excludes the business we are planning to divest as this is the most appropriate view of what the company and its performance will look like going forward. As Prahlad discussed, we were pleased with our first quarter performance and believe key end markets may be starting to show signs of moving in the right direction, though we want to remain prudent in our outlook until we see more sustainable signs of concrete improvement. With this backdrop, we are now expecting our pro forma organic growth this year to be in the 3% to 4% range. FX is now expected to positively contribute approximately 50 basis points to growth, while we still expect the ACD/Labs acquisition to add approximately 75 basis points to our revenue growth this year. We expect this all to result in our 2026 pro forma total revenue to be in a range of $2.81 billion to $2.84 billion overall. We performed well from a margin standpoint in Q1, and our cost efficiency programs are in flight and progressing as planned. Consequently, we now expect our pro forma adjusted operating margins this year to be 28.4% with 30 of the 40 basis points of the improvement versus our prior guidance reflecting the impact of excluding the business in China that we plan to divest. Our outlook for net interest expense and other is now approximately $90 million and we continue to anticipate our adjusted tax rate for the full year will be approximately 18%. We also still expect our diluted average share count to continue to be approximately 112 million. This all results in us expecting that our pro forma adjusted earnings per share will now be in the range of $5.20 to $5.30. For the second quarter, we expect our pro forma organic growth to be in the 2% to 3% range, which is an improvement from our prior assumption as it no longer includes the immunodiagnostics business in China. Assuming FX rates as of the end of March and the incremental contribution from the ACD/Labs acquisition, this puts our expected total pro forma revenue for the second quarter in the range of $699 million to $707 million. We continue to expect an improvement in our margins as we progress throughout the year and anticipate them being approximately 27% in the second quarter on a pro forma basis. With net interest and other expected to be similar to the first quarter and an assumed 19% tax rate, this should all result in our pro forma adjusted EPS in the second quarter being approximately 23% of our updated full year pro forma outlook. Overall, we had a good first quarter to start the year and are on track for our full year expectations. Our decision to divest our immunodiagnostics business in China is the right one for our company and will benefit our performance going forward while removing a business that required a disproportionate amount of internal and external focus, as well as requiring near-term capital investment for what have become an increasingly small contributor to our overall company. I'm extremely excited about the direction in which Revvity is headed, and I look forward to sharing more with you in person at our Investor Day in November. With that, operator, we would now like to open up the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Patrick Donnelly with Citi. Patrick Donnelly: Prahlad, maybe on the software SaaS piece, helpful to get some data there. Can you just talk about the recent conversations with customers? I know you talked a lot about your offering with all the focus on that business. Would be curious just the recent trends. And then Max, on that business, I know there's some comp dynamics. So if you'd be able to talk through just the cadence of the software as we work our way through the year would be helpful. Prahlad Singh: Sure, Patrick. On the software side, as we've talked about both -- you heard in the prepared remarks and even during some of the investor conferences, the excitement and the engagement with our customers continued to remain high. We announced the Lilly TuneLab partnership, which is a great launch path for Xynthetica, leveraging the ecosystem that Lilly brings to the table. But more importantly, I think as we talk to our big pharma biotech customers, the question really is not really how AI is going to impact, but how are we going to leverage AI in the development of the software into bringing Xynthetica early on. As Signals continues to be on the plan of record, the excitement level around Xynthetica, BioDesign, LabGistics, as you know, these are 3 of the biggest launches that could have happened in the software business, and all of them are coming in this year. So the engagement level and excitement level continues to remain very high for that business. Maxwell Krakowiak: Yes. And then, Patrick, on the OG cadence piece, I think a couple of things to mention. First, I would say, as you look at our software business, organic growth is not always the best measure to look at the performance of this business. As we mentioned, we always quote the APV, which sort of normalizes for [ rev rec ] and that again was strong double digits in the first quarter here and a trend that we expect will continue and has been playing out over the past couple of years, especially as we bring a lot of these new products to market. It was also encouraging in the first quarter, we continue to see robust growth from a SaaS and ARR perspective, and that was north of 30% in the quarter. And then I think when you look at it from an organic growth standpoint, for the full year for this business, we are calling for positive mid-single digits organic growth. If you look at the cadence over the course of the year, it was positive mid-single here in the first quarter. In the second quarter, we do have tougher comps. And so we expect that business to be down approximately 20% in the second quarter. However, those comps ease in the second half of the year and for the second half of the year for this business, we expect it to grow in the high teens. That's how I think about it from a cadence perspective. Patrick Donnelly: Okay. Okay. That's helpful. And then maybe just on the reagents business, it sounds like that was improving a little bit, Prahlad. Can you talk about -- it sounds like ac and gov got a little bit better. Are you seeing the recent biotech funding start to show up a little bit? What do those conversations look like? Would love just some more color on the reagents business and how you're feeling there. Prahlad Singh: Yes, Patrick. I would say that I would characterize it as positively stable. We experienced better performance from this customer segment in the first quarter as our revenue was up positive mid-single digit. There might -- there has been in this market a continuation of soft trend last year, but we are definitely starting to see signs of improvement, both around the instrument and on the reagent side. And as we continue to see this uptick in the reagent behavior from our customers, it will build on the optimism that we are starting to see in this end market. Operator: Your next question comes from the line of Puneet Souda with Leerink. Puneet Souda: First one, actually, both of them high-level questions, I would say, on the portfolio side, you've obviously taken important steps early, and this appears to be another important step for -- on the China DX side. Does this change your appetite for further M&A and capital deployment in the space? I mean I appreciate the deal hasn't closed yet. But when we look at the broader tools, multiples, they took a step down further after a larger peer recently reported, but you guys are clearly showing stronger momentum versus that peer. Prahlad Singh: Yes, Puneet. I think this is the journey that we have taken in the portfolio transformation. We are starting to see the differentiation in our performance was on the end markets versus our peers. This was the intent and the idea of setting up what we have today. If you look at our performance, especially in pharma/biotech and in academia, we are diverging from the peer group in terms of what we are seeing in growth. But the journey doesn't get over. Obviously, with the China divestiture, it is a challenging and uncertain end market environment there, particularly in Diagnostics. And this was a strategic direction to address that. It brings us back to what I would say our China business would be 8% to 9% of our total revenue, of which 7% is now in Life Sciences, which is a strong growth market there, and about 1% to 1.5% is reproductive health, which we've already localized. So we feel very good with the way we have set up the portfolio. In terms of capital deployment, we'll continue to be an acquisitive company. But when we look at our share buyback performance, if you see what we've done over the last year, we'll continue to be aggressive and opportunistic on the stock buyback, too. So we have enough avenues to deploy capital in both ways. Puneet Souda: Got it. Super helpful. And then on the software side, great to see the progress. But just wanted to understand a bit more about the AI corporate implementation. What are some of the steps there that you're taking that could yield sort of an immediate or near-term result? And how are you thinking about margin uplift from that this year? Prahlad Singh: Yes, Puneet, some of this I addressed in my prepared remarks. From an internal operations perspective, the AI adoption, I would say, is going very well and is quite differentiated. I referred to the Gartner research paper that was recently published that sort of laid out what we are doing in that. We've tried to use a much more structured approach and we are starting to see the benefits of it primarily around the software development component. It is enabling initiatives in the company. We are rolling out multiple leading LLMs to our total employee global -- global employee base. And the adoption rate is well above what we are seeing in terms of peers' metrics out there from corporate averages perspective. But I think most importantly, we are doing this at a fraction of a cost that you would see from traditional AI corporate implementation. So we feel really good about it. And the feedback that we are getting from an employee -- our employee base in terms of productivity and efficiency initiatives. And in the mid- to longer term, the cost-out impact that it will have on the business will be remarkable. Operator: Your next question comes from the line of Dan Brennan with TD Cowen. Daniel Brennan: Maybe just starting on the quarter for reproductive health. Can you just unpack a little bit the strength there? You mentioned GEL strength in the quarter, you're running samples. So just kind of what's now incorporated for the full year for GEL? And just speak also on the ex-GEL reproductive health for the full year. Maxwell Krakowiak: Yes, I'd say from a reproductive health perspective, it was a very strong quarter. It grew double digits versus our expectation of high single digits. And I think when you look at the drivers of it, it was really a multitude of factors. One, we did just have stronger underlying performance from a reagents perspective but also benefited from some additional instrument placements, which will bode well for us in the years to come? And then secondly, GEL, the Genomics England partnership was a little bit stronger than what we had anticipated. I think just to answer your question on what that looks like for the rest of the full year, there's been really no change in our assumption to contributing about $20 million for us in the first year, obviously, for this year. First quarter was obviously a little bit stronger than we had anticipated, but we'll see how the rest of the quarters play out from a sample volume perspective. But just stepping back, I would say, on reproductive health, it continues to be a really strong business for us. And I think when you look at even with the challenging birth rate environments, the performance, not only in the first quarter, but over the past several years has well outpaced that and has been growing above its LRP. That's really due to the fact of, I would say, the execution of our commercial pillars where there's still 100 million babies born every year that don't get any level of testing. There continues to be differing levels of testing menus across different geographies and countries around the globe. And we continue to come out with new assays where we can test for different rare diseases. And so that business continues to have, I would say, a lot of Revvity specific tailwinds that should allow us to well exceed whatever happens from a birth rate perspective. Daniel Brennan: Great. And then maybe as a follow-up, just on the ImmunoDx business in China. Just can you speak to a little bit of like the deal itself? I mean you're kind of pulling this business out of your guide, but the deal hasn't closed yet? Like what kind of protection do you have, certainty of closing, things like that, if you could. Maxwell Krakowiak: Yes. Look, I think as we mentioned in the prepared remarks, we have engaged in a letter of intent to divest our immunodiagnostics business in China. We expect definitive agreements to be completed here within the second quarter. So I do think we have a high degree of confidence in our ability to get this done. It is being led by an internal management group as part of the buying consortium. And so obviously, we've got a lot of strong coordination there and communication. And I think we are confident in our ability to get this deal closed in 2027. Operator: Your next question comes from the line of Vijay Kumar with Evercore ISI. Unknown Analyst: Maybe Prahlad, on your Q1 pro forma organic of 6%. That came in quite nicely, excluding China, was certainly well above expectations. But when you look at the annual guide, pro forma 2 to 4 implies I think a step down to 3% for the remainder of the year. Why -- your comps don't necessarily get harder, right? So maybe talk about why the 6% slows down. Was there anything one-off in Q1? Anything that stood out? Maxwell Krakowiak: Vijay, thanks for the question. Yes, I think as you -- maybe just speaking holistically on our 2026 organic growth guidance and the cadence over the course of the year, so the way I would think about it is with our updated guidance, we're now calling for, again, 3% to 4% for the year. And with that's doing about 6% here in the first quarter on a pro forma basis and a guidance in the second quarter of 2% to 3%, we essentially are averaging about 4% in the first half of the year. So then if you look what's required for us to hit our 3% to 4% organic growth for the full year, that would imply about a 3% to 4% growth in the back half of the year. I think when you look at our assumptions, I would say for 2 of our business units for Life Science Solutions and Diagnostics, we do have conservative assumed in the back half of the year versus the trends we're seeing for the first half. I already talked about the software cadence as a result of Patrick's question. But I do look -- expect us to have, I would say, a strong performance here in the first half of the year and continued trends on that in the second half. And should markets maintain or, if not, even improve, we would expect to see potential opportunity for upside versus our current organic growth guidance of 3% to 4%. Unknown Analyst: Understood. And maybe one more sort of guidance-related questions, Max. Organic was raised by 100 basis points, EPS came down by $0.15. So one, is the organic raise, is that all driven by removal of China Immunodiagnostics or did base go up? And on EPS, does it include any contribution from proceeds, from sale proceeds? Maxwell Krakowiak: Yes. So on the organic growth, the only change of that 100 basis points was a result from the removal of the China Immunodiagnostics business. So you're correct in that. Secondly, as you look at the EPS for 2026, it does not include any benefit from proceeds, as we mentioned in the prepared remarks, the deal won't close to 2027, which is when we would expect to see the proceeds. Operator: Your next question comes from the line of Mike Ryskin with Bank of America. Michael Ryskin: Great. Let me just pick up exactly where you left it with Vijay there on impact of the divestment in the model and how to think about it going forward. So you talked through the bridge for this year. I want to dig a little bit into the future years. So I mean, I realize you haven't even announced the deal yet, so hard to talk about cash incoming proceeds, use of proceeds, anything like that. But just any high-level thoughts on how we should think about dilution in future years? You've got $0.20 impact this year. But what about future years? And the same thing on the margins and on the top line, it's 100 bps uplift this year. I think it's -- you said it's 30 bps impact to margins. Is that -- should that relatively flow through the future years as well? Or any other moving pieces to think about in the out years for adjusting the model for this? And I got a follow-up. Prahlad Singh: Yes, Mike, let me start by addressing it at the higher strategic level, right, and then Max will give you more color. This definitely further fortifies our LRP. Let me start with that, right? This was one of the overhangs, and we were over-indexed on China, especially in the end market around Diagnostics, which was in a challenging market environment. That takes away that overhang, it further fortifies our LRP. More importantly, I think from the question around what we would do with the proceeds, share buyback is a great opportunity to leverage the proceeds that we would get. And from an EPS impact perspective, the cost efficiency initiatives that we are putting that will be fully implemented starting in the second half of this year will also go a long way in offsetting the earnings-related dilution as we move into the next year. And we'll continue to see the impact from their impact throughout the first half of next year and 2027. Max? Maxwell Krakowiak: Yes, I think that's right. I mean maybe the only other color I would add is in terms of the operating margin adjustment. That is going to be a permanent change. The pro forma results are meant to represent what our business would look like excluding this business. And as a result, we're calling for 28.4%. So that is sort of I would think the new baseline exiting this year, Mike. Just to add that point on. Michael Ryskin: Okay. And then I want to dig in on 2Q a little bit as well. I think you're guiding for 2% to 3%. You previously talked to flat, give or take. Obviously, the changes in China. So I want to dig into that. Did anything change ex-China, if maybe you could give us that bridge? I think one point you called out, I think with Patrick's question was you said you expect software to decline 20% in the second quarter now. I think previously you talked down mid-teens. So can you just talk about the moving pieces in the 2Q guide? Maxwell Krakowiak: Yes. Thanks, Mike. I would say on its surface for the second quarter, the biggest change is really the removal of the China IDX business. And so again, we're calling 2% to 3% organic growth here. I mean some things might have moved around on the edges, but I would say fundamentally, the underlying business, assumptions more or less remain the same. . And just to provide a little bit of color on what those splits look like. So if you look at the 2% to 3% overall organic growth for the company in the second quarter, Life Sciences, we expect to be sort of roughly flattish with Life Science Solutions, which again, comprises our reagents and platforms business growing in the low single digits in the second quarter. And then software, we have down, as I mentioned, about 20% expectations for the second quarter. And conversely, if you look on the Diagnostics side of things, we expect Diagnostics to be up mid- to high single digits in the period with relatively similar results across immunodiagnostics and reproductive health. Operator: Our next question comes from the line of Tycho Peterson with Jefferies. Tycho Peterson: I want to dig in a little bit more on biopharma. Some of the signals you're seeing, you talked about working through budgets. When do you think you're really going to see a turn here? Maybe just unpack what it is you're seeing? Is it instrument demand, just more discussions, funnel activity? And I think there's also been a view that spending on upstream is going to go up to train the model. So how do you think about that kind of layering in over the next couple of years? Prahlad Singh: Yes, Tycho. I mean if you look on the instrument side and on the reagent side, we already started seeing modest improvements in the fourth quarter from these customers, which has continued into the first part of 2026. Our Life Sciences Solutions were up low single digit from pharma/biotech in Q1, which was the strongest core growth we've seen on both instruments and platform from these businesses from this customer group since the second quarter of 2023. Low single digit is obviously not where we want to be, but it appears to be slowly moving in the right direction. And I think that is more important that this is coming back to what normal should look like. We would like to obviously continue to see even greater pickup in the reagents before we can say things are on a clear path to improvement. But I'm optimistic that these customers are now starting to move on the right path. Tycho Peterson: Okay. And then for the follow-up, just on operating margins. Max, can you maybe just talk about some of the gives and takes in the quarter, cost inflation, incremental spending? And then maybe get us comfortable with the bridge from where you are now to 28.4% target? Maxwell Krakowiak: Yes, sure. Look, I think as you look at the first quarter results, obviously, we are encouraged by the margin performance on a pro forma basis. We finished at 24%, which is about 40 basis points above what we had in our underlying assumptions going into the quarter. I would say, that was really driven by the strong incrementals we got on the additional volume that we had in the period. Again, we were slightly above the higher end of our expectations. And so that flew through at about 45% incrementals, which is really where the beat in the first quarter came from. I think as you look over the cadence of the rest of the year from an operating margin standpoint, we will see an improvement here from the first quarter to the second quarter, going from 24% to 27% on a pro forma basis. That step-up between Q1 and Q2 is really driven by half from not having the extra week and a little bit of FX benefit. And the other half is just from the incremental revenue as you do get a seasonal pickup from Q1 to Q2. I think then when you look between the jump of 2Q to 3Q, we do expect our margins to go up about from 27% in the second quarter to 29% in the third quarter. That step-up is really driven by the cost productivity initiatives that we've put into place. We've talked about those being completed by the end of the second quarter. We're still on track to drive those costs out on that time line. And I think when you look at some of the dynamics of it, again, the majority of this is really head count driven by us driving further integrations, additional -- new centers of excellence, and just a general sort of delayering of management and layers across the organization. And there's about 1/4 of it that's from sort of non-labor operational initiatives, whether that be around footprint consolidation, sourcing, whether it be in-sourcing, renegotiating with vendors, freight optimization. And so I think we're really starting to see a lot of the revenue business model on our playbook come through here. We have a high degree of confidence in our ability to execute on those cost initiatives. On the last leg of this is then from 3Q to 4Q, again, I would encourage you to remember that we do have a seasonal step up between 3Q and 4Q from a volume perspective. And really, all you're seeing there from the margin step-up is really just a matter of that incremental volume leverage from the seasonal revenue increase. Operator: Your final question comes from the line of Catherine Schulte with Baird. Catherine Ramsey: I know we're sitting here in May, so we shouldn't be talking about '27, but you did bring it up regarding the robust margin expansion that we could see. So just hoping we could unpack your comments a bit more just to frame the opportunity there? Maybe how should we think about the margin jumping off point for next year, just given the cost initiatives that you have underway? Maxwell Krakowiak: Catherine, yes, I appreciate your caveat there upfront, too, that we are in May '26 here and aren't giving any guidance for 2027. But I think as you look at things from an operating margin standpoint, what I'd encourage you to think about is if we're talking about the cost actions being completed by the end of the second quarter, it's giving the benefit in the second half, that will mean that we will get the annualization benefit of that in the first half of '27. And so again, we're not providing formal guidance, but yes, there should be an additional catch-up from a margin perspective in the first half of '27 once we exit this year. Catherine Ramsey: And then maybe just back to Puneet's question on capital deployment. Are there other parts of the portfolio you think could be pruned? And then from an M&A standpoint, what are your priorities here? Should we just stick back tuck-ins going forward? Or would you be open to larger deals as well? Prahlad Singh: Yes, Catherine. I mean, if you look at our track record, we continue to be acquisitive and we will continue to be acquisitive to ensure that if there are any gaps in the portfolio, we fill. We don't see anything that is really compelling either from an opportunity perspective that might be large in scale. You might see some tuck-ins here and there. But really, the biggest opportunity for us continues to be the share buyback. Right now, we will continue to be opportunistic on that element. But we have a fertile pipeline on the M&A side, and we look at opportunities on both sides. Operator: There are no further questions at this time. I will now turn the call back to Steve for closing remarks. Stephen Willoughby: Thank you, Nicole, and thank you, everyone, for your time this morning. I know it's a busy day, but we look forward to touching base with you later today and over the next few weeks. Have a good day.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Carlsmed, Inc. first quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to turn the conference over to your first speaker today, Stephanie Vadkovich. Stephanie Vadkovich: Thank you, operator. Welcome to Carlsmed, Inc.'s first quarter 2026 earnings call. Joining me on today's call are Michael Cordonnier, chairman and chief executive officer, and Leonard Greenstein, chief financial officer. Before we begin, I would like to caution that comments made during this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding the market in which Carlsmed, Inc. operates, trends, expectations and demand for Carlsmed, Inc. products, expectations with respect to reimbursement, statements about the company's clinical data, surgeon adoption and utilization, and Carlsmed, Inc.'s expected financial performance and position in the market. Any forward-looking statements made during this call, including projections for future performance, are based on management's expectations as of today. Carlsmed, Inc. undertakes no obligation to update these statements except as required by applicable law. These statements are neither promises nor guarantees and are subject to known and unknown risks and uncertainties that could cause actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements. For more detailed information, please review the cautionary notes on the earnings materials accompanying today's presentation as well as Carlsmed, Inc.'s filings with the SEC, particularly the risk factors described in Carlsmed, Inc.'s Annual Report on Form 10-K for the year ended 12/31/2025. I encourage you to review all Carlsmed, Inc.'s filings with the SEC concerning these and other matters. Additionally, during today's call, management will discuss certain non-GAAP financial measures, including adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in today's earnings press release. These filings, along with Carlsmed, Inc.'s press release for the first quarter 2026 results, are available on carlsmed.com under the investor section, and include additional information about Carlsmed, Inc.'s financial results. A recording of today's call will also be available on Carlsmed, Inc.'s website by 5:00 p.m. Pacific time today. Now I would like to turn the call over to Michael to go over Carlsmed, Inc.'s business highlights. Michael Cordonnier: Thank you, Stephanie, and welcome to the team. I would like to welcome everyone on our call today. At Carlsmed, Inc., our mission is to improve outcomes and decrease the cost of health care for spine surgery and beyond. To achieve this mission, we have pioneered patient-specific digital surgery for lumbar and cervical spine fusion procedures. Our vision is to make personalized surgery at scale the standard of care for spine surgery. Our AI-enabled digital surgery empowers surgeons to partner closely with patients to seamlessly create three-dimensional surgical plans and 3D-printed spine fusion devices designed to achieve predictable patient outcomes while supporting the surgeon's preferred surgical approach. We then provide postoperative outcome analytics to our surgeon users for each procedure through our Aprivile Insights as part of the MyAprivile ecosystem. We believe this personalized, outcome-driven, AI-enabled ecosystem approach represents the future standard in medical technology, one that is better for patients, surgeons, hospitals, and payers. Importantly, our model is built to scale efficiently. By manufacturing only what is needed for each specific procedure, we avoid the traditional prebuilt inventory trays of implants and instruments that have long burdened the legacy spine and orthopedics businesses. Instead, we are able to provide patient-specific, sterile-packed implants and instruments specific to each patient just in time for their surgery. This capital-light, demand-driven approach enables us to scale rapidly while maintaining a relentless focus on patient outcomes. With this vision as our guide, 2026 is off to a great start with solid execution across our business. In the first quarter, we saw strong adoption of our lumbar and cervical personalized surgery procedures, reinforcing our view that Aprivo as a platform technology is positioned to transform spine surgery. Our clinical outcome data continues to be robust, and our investments in technology continue to drive the scale and productivity needed to make personalized surgery the standard of care for spine fusion procedures. With the peer-reviewed data published on reduced reoperations with the Prevost personalized surgery procedures, we continue to execute on our mission to improve outcomes and decrease the cost of health care for spine surgery. Turning to the first quarter, we delivered strong revenue of $16.1 million, representing growth of 58% over the prior year. Our growth was driven by the continued focus on medical education and compelling clinical outcome data, driving expansion of our surgeon base and increasing procedure volumes. Operationally, we continue to leverage our investments in technology to further drive production efficiencies, reducing lead time by more than 30% to six business days in the quarter and delivering more than 200 basis points of margin expansion year over year. Our fully integrated digital system allows us to partner with hospitals, surgeons, and patients to seamlessly integrate into clinic and operating room workflows preoperatively, intraoperatively, and postoperatively for nearly all indicated patients. Our commercial growth continues to be driven by a surgeon-led adoption model and expanding utilization. I am proud to report that we grew our total surgeon user base by more than 60% year over year, reflective of the rapid clinical adoption of personalized surgery procedures. We continue to drive particularly strong engagement from early career and post-fellowship surgeons who are eager to adopt new technology to differentiate their practices and improve outcomes. With our rapidly growing base of surgeon users, we are still in the early innings of market penetration and have a long runway ahead of us. The Opdivo lumbar procedure represents the majority of our business today, where we continue to gain traction within the estimated 445 thousand lumbar spine fusion procedures performed annually in the U.S. Clinical evidence generation continues to support the early adoption of Aprivo by consistently demonstrating improved outcomes for patients compared to stock implants. In January, data published in the Global Spine Journal further validated our personalized spine surgery approach, including evidence demonstrating a 74% reduction in surgery revision rates at two years compared to stock devices. This peer-reviewed study compared two-year revision rates among complex adult spinal deformity patients receiving Carlsmed, Inc.'s Aprivo personalized interbody implants with previously published revision data from a similar patient cohort receiving conventional stock implants. Patients treated with Aprivo experienced significantly fewer revisions due to mechanical complications, showing a revision rate of 4.3% in patients treated with Aprivo compared to a revision rate of 16.6% in patients who had stock devices. To put this into perspective, over the past 25 years, lumbar fusion technologies have not published data to demonstrate significant reduction in reoperation rates at the standard two-year benchmark. In contrast, Aprivo’s patient-specific lumbar procedures have demonstrated clinically meaningful reduction in reoperations driven by significant decreases in key complications like rod fractures and proximal junction kyphosis. Importantly, this improvement is measured against procedures with traditional stock fusion devices used by the most experienced and skilled surgeons. As a further expansion of our Prevel lumbar procedure, we have announced successful completion of the first Aprivo bilateral lumbar fusion procedure in February. We are seeing great data in our limited market evaluation and are on track for our full commercial launch in the fourth quarter of this year. Carlsmed, Inc.'s Suprivo Lumbar Fusion has strong hospital reimbursement from CMS with all Aprivile lumbar fusion procedures covered by one of 11 different MS-DRG codes. The majority of Aprivo lumbar procedures are reassigned to the three elevated major complication or comorbidity MS-DRG codes. This provides hospitals with superior economic and clinical value to provide access to the Aprivile procedure for patients. On 04/10/2026, CMS published the FY 2027 proposed rule for the inpatient prospective payment system. Under this proposed rule, all Aprivile lumbar spine fusion procedures would be reimbursed by one of three new MS-DRG codes—523, 524, or 525—at a premium to traditional spine fusion procedures. If finalized as proposed, we see this development as very positive for patients, surgeons, and hospitals to establish and maintain long-term access to the Prevost lumbar spine fusion procedure. This published rule is preliminary. We anticipate the final rule to be published prior to becoming effective on 10/01/2026. Shifting to cervical, the first quarter 2026 represented our first full quarter in market commercially with the Aprivo cervical fusion procedure, which we launched in December 2025. With an estimated 370 thousand cervical fusion procedures performed annually in the U.S., we believe that this additional growth lever can provide additional momentum in our business as a further extension of the Aprivo platform. Cervical and lumbar spine fusion procedures are performed by spine surgery trained neurosurgeons and orthopedic surgeons alike. Many of the spine surgeons perform both lumbar spine fusion and cervical spine fusion procedures, demonstrating a substantial procedural overlap across spine surgeons. We believe that we can leverage our team to train and onboard many of the surgeons already familiar with the lumbar Privo technology platform on the Privo cervical platform. In the early days of launch, we have already trained more than 20% of our surgeon users on the cervical platform. The Aprivo cervical procedure is designed to address common causes of variable outcomes associated with anterior cervical discectomy and fusion (ACDF) failure, including subsidence, malalignment, and reoperations. The procedure is designed to optimize bone contact surface area to improve load distribution, bone graft loading, preserve end plate strength, reduce subsidence risk, and restore or maintain alignment. To complement Aprivo cervical and achieve progress against some of these challenges in cervical fusions, our newly announced Cora cervical plating system marks the debut of Carlsmed, Inc.'s patient-specific fixation portfolio and represents a fully personalized solution for ACDF procedures. The first procedure was performed in February 2026 at the University of California, San Francisco. We are progressing well with the limited market evaluation and are on track for the launch of Cora cervical personalized plating system in Q4. Much like the lumbar Aprivo procedure, the cervical Aprivo procedure has a strong inpatient reimbursement profile. In October 2025, the Aprivo cervical procedure received a new technology add-on payment up to an incremental $21 thousand 125 hospital reimbursement. This reimbursement program is for a three-year period, and CMS renewed the NTAP payment for FY 2027 as anticipated in the publication of the preliminary rule. Looking ahead, our strategic focus remains consistent and positions us to continue the durable, high-quality growth we have demonstrated to date. Within our first area of focus, patient-centric innovation, we continue to advance our proprietary personalized surgery platform, including AI-enabled 3D surgical planning, workflow automation, patient- and surgeon-specific devices, and single-use sterile-packed surgical instruments, and further procedural integration in the clinic and operating room. As discussed previously, we have demonstrated great early traction with the recent launch of Aprivo cervical, and we are collecting early clinical experience with the bilateral posterior Prevo procedure and personalized Cora cervical plate fixation. Our product innovation portfolio includes further advancement to drive ease of integration in the surgical workflow and further personalization of spine surgery. Our second area of strategic focus is surgeon education and includes further investments in our medical education team and programs to meet accelerating demand for Aprivo personalized surgery. We continue training new surgeons every month by leveraging success in academic centers to drive peer-to-peer surgeon education with the thought leaders in personalized spine surgery. We also continue to support education initiatives with upcoming resident and fellow courses in partnership with leading academic institutions. As previously mentioned, we have seen strong uptake with early and mid-career surgeons who are adopting digital surgical planning into their practice in their efforts to streamline workflow and improve patient outcomes. These surgeon users will continue to shape the future of spine surgery, and this is an ongoing growth driver for Carlsmed, Inc. that we believe will continue to drive adoption and utilization. Our third area of strategic focus, commercial execution, continues to center on surgeon onboarding, increasing surgeon utilization, and expanding within hospital systems. As we continue to scale, we have expanded our strategic and national accounts efforts to enable local and national access across large hospital systems. Across both lumbar and cervical platforms, hospitals are recognizing the clinical workflow benefits enabled by the Aprivoo ecosystem. By providing deeper integration within a surgeon's preoperative and postoperative clinical workflow, we believe that our platform solution can simplify the surgeon's pre-op planning, reduce time and complexity of the spine fusion procedure in the OR, and enhance surgeons' ability to provide predictable outcomes to spine fusion patients. Lastly, we will continue to generate clinical data to support medical education and market adoption of our transformative personalized surgery technology platform. We believe that personalized surgery at scale is a new standard of care for spine fusion and are committed to providing solutions to patients, surgeons, and hospitals that reduce revision surgeries, improve outcomes, and reduce the cost of health care. We are just getting started and look forward to providing further updates on our rapid market adoption. With that, I will turn it over to Leonard, who will review our financial performance. Leonard Greenstein: Thank you, Michael, and good afternoon, everyone. I will begin today with first quarter 2026 P&L highlights. Revenue for Q1 2026 was $16.1 million compared to $10.2 million in Q1 2025, representing 58% growth year over year. This growth was driven by the continued expansion of our total surgeon user base and increased unit volume sales of Aprivile, as our average revenue per procedure remains substantially consistent between periods. Gross margins were 77.1% in Q1 2026 compared to 74.9% in Q1 2025. This 220 basis point increase was driven by our stable average revenue per Aprivo procedure combined with efficiency improvements in our digital production system with investments made over the past few quarters. This now allows us to deliver the Aprivoo kit to the operating room within six business days of surgeon approval of the digital surgical plan. This lead time and the associated production capacity it enables will support our continued scale. Total operating expenses were $21.7 million in Q1 2026 compared to $13.4 million in Q1 2025. Of this amount, R&D expenses were $5.2 million this quarter, compared with $3.2 million in Q1 2025. This increase was primarily due to higher personnel cost to advance our patient-centric product development priorities and AI-enabled initiatives for our digital surgical planning processes. Sales and marketing expenses were $10.3 million this quarter compared with $6.7 million in Q1 2025. This was substantially driven by increased sales headcount to drive our commercial execution strategy and variable commissions to our sales team and independent sales agents with our revenue growth, as well as increased marketing spend. General and administrative expenses were $6.2 million this quarter, compared with $3.5 million in Q1 2025. The increase was driven by personnel additions and professional services costs and legal fees for customary corporate and intellectual property matters, as well as compliance and other public company related costs. Our GAAP net loss was $8.7 million this quarter compared to a net loss of $5.7 million in Q1 2025. EBITDA adjusted for stock-based compensation was negative $7.5 million this quarter, compared to negative $5.5 million during Q1 2025. We anticipate continued improvement in adjusted EBITDA over the coming years driven by expected revenue growth and leverage across our expense base. As we scale, expanding contribution margin dollars enabled by our capital-light, digital-first business model provide a clearly modeled pathway towards cash flow breakeven. Moving to our balance sheet, our cash and investments as of 03/31/2026 totaled $97.1 million. The outstanding principal under our $50 million debt facility remains at $15.6 million. While we have no current plans to make additional draws ahead of its October 2030 maturity, this facility provides low-cost, nondilutive standby capital and supports general corporate flexibility. Total liabilities as of 03/31/2026 were $26.5 million, of which $15.6 million relates to this debt facility. Our cash used in operating activities was $13.0 million during the quarter, compared to $8.2 million in Q1 2025. Unlike traditional medtech businesses that require capital investments and stock implant and instrument sets, our business scales without these barriers to profitability. As a pure-play personalized surgery company, our working capital can be more strategically deployed towards continued commercial investments to drive significant growth, delivery of our operational excellence priorities in digital production, and continued R&D pipeline development for our business value and growth. Turning to guidance, we are raising our full-year 2026 revenue range to be between $72 million and $77 million, representing 48% growth at the midpoint over full-year 2025. As we progress towards profitability, we continue to expect gross margins to remain in the mid to high 70s, and anticipate driving operating expense leverage in the coming quarters with expected revenue ramp in Aprivo lumbar and cervical. With that, I will turn the call over to the operator for questions. Operator: As a reminder, to ask a question, you will need to press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question comes from David Roman of Goldman Sachs. The line is now open. Analyst: Thank you. Good afternoon, everybody. I wanted to start a little bit on what you are seeing from a surgeon utilization perspective. We did see strong surgeon adds exiting 2025. Can you maybe give us some perspective on what you are seeing year to date qualitatively, and then how you are seeing utilization across both new and existing surgeons trend in the quarter? And how you are thinking about the balance of the year? And I think, Leonard, in your prepared remarks, you mentioned that average selling prices for Aprivo were roughly flat year over year. If I remember correctly, cervical procedures do come with lower ASP than lumbar. Can you corroborate that point? Is it just that cervical is not big enough as a percentage of total to move average ASPs, and how should we think about the weighted average selling price as cervical becomes a larger percentage of total going forward? Michael Cordonnier: We feel really good about our surgeon enthusiasm for the Aprivile platform. As we exited Q4 with really strong new surgeon adds, we saw that continue to accelerate into the year. As we discussed on the call, year over year, we have added about a 60% increase to our surgeon users. With that, we continue to see ongoing increases in utilization, particularly among those surgeon users that have gone through the initial trial process and continued through adoption. So we feel really good about the utilization and surgeon user adds that we have had. Leonard Greenstein: Yes, David. Our Q1 average revenue per procedures were consistent over the prior year quarter and in Q4 as well as Q1. As we think about the future and the combination of cervical and lumbar, we are projecting our average revenue per procedure to be in the mid to high $20 thousands as cervical takes a greater proportion of revenue over time. The average revenue per procedure for cervical is less than lumbar. To answer your question directly, the contribution margin and the ability for us to further scale our business on a single Aprivile platform that serves both the lumbar and cervical indications with largely the same ballpoint provides the operating leverage in our business to continue to scale efficiently. Operator: Thank you. One moment for our next question. Our next question comes from Travis Steed from Bank of America. Your line is now open. Analyst: Hi. This is Aden on for Travis. So first quarter, first full quarter of the cervical launch, can you talk about the puts and takes and how that is progressing? I think you said 20% of your surgeon users are trained on that. What are you seeing from those accounts that have been trained so far? And are we still expecting high single-digit to low double-digit revenue contribution from cervical for the year? And then I have a follow-up. Michael Cordonnier: Thank you. We feel really good about the traction that cervical has received here in the first quarter of launch. As reported, about 20% of our total lumbar users are now trained on cervical and going through the ramp. As we see this progression, high single-digit to low double-digit percent contribution of revenue from cervical in the total plan for the company looks about right. Analyst: Great. Thank you. And then in the Q, I see a callout of cost improvements and production fees charged by your contract manufacturer. Can you double click on that and talk about if that is a one-time item, or is that something we can expect to continue going forward? Thank you. Leonard Greenstein: Yes. We have made investments in our digital production system holistically that have allowed us to hit that six-day lead time. That really provided efficiencies in our production process inclusive of those with our contract manufacturer. The investments made in earlier quarters going back to 2025 now allow us to cut out costs and time—importantly—out of the system. What we are currently reporting in that high-70s gross margin we see to be sustainable. Operator: Thank you. As a reminder, to ask a question, you will need to press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Our next question comes from Richard Newitter from Truist Securities. Richard, your line is now open. Analyst: Hi. Thank you for taking the questions, and congrats on the quarter. I wanted to go to the CMS proposal that just came out. You mentioned a premium and also broader coverage. I think in the past those are two things that could be pretty significant tailwinds for you in 2027, assuming everything goes as proposed into the final rule. First, what percentage of your procedures currently are getting reimbursed and covered consistently, and how much would this broaden that coverage or access? Then on the premium, we did some calculations and are estimating it could be an incremental $50 thousand reimbursement for stock implant on average—there is a big range in there—somewhere around $25 thousand to $30 thousand on average today above and beyond the premium to traditional stock implants. Is that ballpark kind of the math that you have worked out? Thanks. Michael Cordonnier: Hi, Rich. Thanks for the questions. I will talk about this in two parts. First, the current state of reimbursement for the Opdivo lumbar platform. As reported in the script, we currently have 11 different MS-DRGs that cover the Aprivo lumbar platform, all with existing coverage and reimbursement. As noted, a portion of those elevate to a higher-paying DRG today. With the proposed IPPS rule, it really simplifies the coding and reimbursement such that all Aprivo procedures would map to one of three different MS-DRGs. Based on your calculations, that seems about in line with the national average, and we agree. We think this is a really great solution that CMS is proposing to give significant reimbursement to these procedures. Analyst: That is great. In terms of where you are potentially meeting resistance or there is just not great coverage currently, what could this do for you from that standpoint? Is it 50% currently? Is it 80%? Give us a sense as to how this could broaden your coverage and access. Michael Cordonnier: We really look at this as access versus coverage because we have full coverage today. Where we really think this will provide value to hospitals in particular is to remove the ambiguity and actually simplify coding for the Aprivo procedure. We see this as very beneficial to hospitals to simplify the process so that they can code procedures as they normally would and know that they will map to the right MS-DRG. Analyst: Okay. That is really helpful. If I could squeeze one more in, just following up to David's question earlier. As cervical increases as a percentage of the mix moving through the year, Leonard, how should we think of the gross margin impact if revenue per procedure gets impacted? Leonard Greenstein: As we mentioned during our prepared remarks earlier, we see gross margins being in the mid to high 70s over the coming quarters. That factors in, as Michael covered earlier, a high single-digit to low double-digit mix between lumbar and cervical. The headwinds with the lower gross margin profile of cervical—notwithstanding the tremendous contribution margin it provides and the leverage it provides in our business—are going to be offset, as we see it, with our efficiencies in digital production for lumbar. Operator: Thank you. Our last question comes from Ryan Zimmerman from BTIG. Ryan, your line is now open. Analyst: Hi. This is Izzy on for Ryan. Thank you for taking the question. Michael, I heard your comments and the discussion around the IPPS proposal for 2027. I was just curious what you have heard in terms of feedback from your hospital customers and surgeons in reaction to the proposal. I know it is going to simplify coverage, but do you expect that there could be some benefit in terms of volumes if it is finalized as written? Michael Cordonnier: Thanks for the question. It is early days, and it is a preliminary rule. We are really holding off on those discussions until the final rule goes into place. However, this is something that, as mentioned, simplifies coding and reimbursement and makes a permanent change to the Aprivo procedure at a higher reimbursement level. Net-net, we think this is better for all stakeholders. Analyst: Appreciate it. Thank you. And then, Leonard, I have heard your commentary on guidance, but as we consider contributions layering in in the back half of the year from those new product launches, is there anything that we need to keep in mind in terms of cadence on the top line? Thanks for taking the question. Leonard Greenstein: We see, over the coming quarters, Aprivo lumbar carrying the majority of our revenue and overall contribution. Certainly, we are very pleased with the early days here at cervical and the clinical results our surgeons are seeing with that indication, and how neatly it tucks into the Aprivile platform and ecosystem. We will provide additional color as we progress into the subsequent quarters with how we see additional things shaping up in the company's favor to further drive revenue beyond what we previously guided. Operator: This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Hello, everyone. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coupang 2026 First Quarter Earnings Conference Call. [Operator Instructions] Now I'd like to turn the call over to Mike Parker, Vice President of Investor Relations. You may begin your conference. Michael Parker: Thanks, operator. Welcome, everyone, to Coupang's First Quarter 2026 Earnings Conference Call. I'm pleased to be joined on the call today by our Founder and CEO, Bom Kim; and our CFO, Gaurav Anand. The following discussion, including responses to your questions, reflects management's views as of today's date only. We do not undertake any obligation to update or revise this information except as required by law. Certain statements made on today's call may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. As we share our first quarter 2026 results on today's call, the comparisons we make to prior periods will be on a year-over-year basis, unless otherwise noted. We may also present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures are included in our earnings release, our slides accompanying this webcast and our SEC filings, which are posted on the company's Investor Relations website. And now I'll turn the call over to Bom. Bom Suk Kim: Thanks, everyone, for joining us today. I'd like to cover a few things where we stand in the recovery from last quarter's data incident, how we see the path forward on growth and the nature of the temporary dislocation in margins and how we think about it over the longer term. Starting with where we are. Customer obsession, operational excellence and disciplined capital allocation have guided us since our inception, and they're the same principles guiding us through this period. As we shared previously, January marked the low point in our Product Commerce revenue growth rate. Each month since has improved on a year-over-year basis and the pace of improvement strengthened through February and March. Our recovery is powered by the same drivers that have shaped our business since we launched Rocket Delivery over 10 years ago, a relentless focus on [ WOW-ing ] customers across selection, price and service. That experience was built or many years and billions of dollars of investment and one which we believe continues to widen its lead in the market. The customer behavior we've seen since the data incident reinforces this. For example, the vast majority of WOW members never left, and they have continued to compound their spend at double-digit rates throughout this period. Of those who did leave, the majority have come back and picked up where they left off, resuming the levels of spend they were at before the incident, and they're now compounding alongside the members who stayed. Through the end of April, we've closed nearly 80% of the decline in WOW memberships that followed the incident through a combination of those returning members and strong new sign-ups. New WOW sign-ups and churn have returned to historical stable levels. Across the board, customers are reengaging in ways that reflect the conviction they've long placed in the Coupang experience. It's worth to spend a moment on how this recovery shows up in the reported numbers in Product Commerce. Year-over-year growth will take time to fully reflect the underlying recovery. The months of pause compounding from the effective period continue to weigh on the comps even as customer behavior normalizes. Our revenue growth rate trajectory from January to March is running ahead of historical patterns, and we expect the year-over-year comps to continue improving throughout the year. Turning to margins. Two distinct factors are pressuring profitability this quarter, and I want to describe them separately because they behave very differently going forward. The first is the customer vouchers we issued in response to the incident. These are onetime in nature. The bulk of the impact is contained to Q1, with a modest tail into the first part of Q2. The second is a set of temporary inefficiencies in our network. Our capacity build-out and supply chain commitments are all made well in advance, calibrated to a demand trajectory we project based on a stable, predictable customer pattern. That's how we manage cost to serve efficiently, and that's the path we were on before the incident. When an external event of this kind disrupts that pattern, actual demand falls short of what those commitments were sized for, and we carry the cost of underutilized capacity and inventory secured through the period. As demand returns to a predictable curve, we expect our capacity and supply chain to come back into balance and the inefficiencies to work their way out. We're adapting our network and supply chain through this period as we did when we came out of COVID, and we expect those adjustments will show up progressively in the P&L. Stepping back from the near term. We believe the long-term drivers of margin expansion at Coupang remain intact and continue to improve. We expect operational efficiencies across our network, supply chain optimization, ongoing investment in automation and technology and the scaling of our margin-accretive categories and offerings to drive further margin expansion over the long term. We expect annual margin expansion to resume next year, and we have strong conviction in the underlying margin potential of the business over the long term. Beyond the recovery, the work of building the business continues. Selection remains the primary lever for unlocking the underlying growth potential in our Product Commerce segment. A meaningful portion of what customers want to buy is still not available on Rocket. And we believe the combination of our first-party catalog and Fulfillment and Logistics by Coupang is the path to closing that gap at scale. Automation and AI across our services, including our Fulfillment and Logistics network, continue to improve service levels and lower cost to serve in parallel, and we expect them to be meaningful contributors to both the customer experience and margin expansion in the years ahead. Turn to Developing Offerings. In Taiwan, we're building the foundation for a truly differentiated customer experience. Our own last-mile delivery network, which guarantees next-day delivery now covers the vast majority of our volume and that coverage continues to expand. We're still in the early stages of bringing the full Rocket Delivery experience to Taiwan customers. But even at this stage, the response from customers has been remarkable. Cohort retention behavior is reminiscent of what we saw in the early years of Product Commerce in Korea. Our conviction in the long-term opportunity, both to WOW customers and to generate attractive returns on the capital we're deploying grow stronger each quarter. Given that conviction this year, our focus in Taiwan is on building the foundation for an unparalleled customer experience and durable growth over the long term. That means deliberate long-term investments in network design, last-mile logistics build-out and supply chain improvements, the kind of foundation that takes time to lay, but that will define the customer experience and competitive position of the service for years to come. In Eats, as I mentioned, the recovery is following a similar path to Product Commerce, which speaks to the strength of the customer value proposition we are building across both services. In Developing Offerings, our approach is unchanged. We start with small investments, test rigorously and deploy more capital only into opportunities we believe can generate lasting customer WOW and durable cash flows. We remain disciplined capital allocators taking the long view. Our recovery is ongoing, and we have more work ahead. We're focused on continuing to build and improve on the experience that brought customers to Coupang in the first place across Product Commerce and Developing Offerings. I'll now turn the call over to Gaurav to walk through the financials in more detail. Gaurav Anand: Thanks, Bom. As we guided coming into the year, Q1 reflected the impacts from last quarter's data incident, and our results are consistent with the trajectory we outlined in February. The underlying business has continued to strengthen as we have progressed through this period, and we expect the impacts on Product Commerce to diminish as we now move further from the affected quarter. I will first walk through the segment operating results and then speak to our consolidated performance. In Product Commerce, we reported segment net revenues of $7.2 billion, growing 4% on a reported basis and 5% in constant currency. As we look at each month within the quarter, the constant currency growth rate adjusted for timing of holidays reached its low point in January and accelerated sequentially in February and March, consistent with the recovery that we had described earlier. Product Commerce active customers for the quarter were 23.9 million, growing 2% year-over-year but down 3% over last quarter. The sequential decline reflects the lagging effect of the data incident on the metric because active customers are measured on a trailing 3-month basis and the incident occurred late in Q4. The affected period is more fully reflected in this quarter's count than in the last quarter. The most recent trend is the more meaningful signal. We have seen stabilization and improvement in the underlying metrics this quarter with encouraging momentum in account reactivations and new customer growth. The recent positive momentum in WOW membership, we spoke to last quarter has also accelerated over the past few months. As we noted, the vast majority of our members never left, and through the end of April, we have closed 80% of the decline in WOW membership that followed the incident. And the majority of WOW members who left have returned and they have resumed the levels of spend they were at before the incident. Product Commerce gross profit for the quarter was $2.2 billion, with a gross profit margin of 30.3%. This represents a contraction of approximately 100 basis points year-over-year and 160 basis points quarter-over-quarter. The decline in gross profit margin is the result of near-term factors tied to the data incident, including the impact of vouchers we issued in response to the incident and the temporary inefficiencies in our network such as excess capacity and supply chain commitments positioned against our pre-incident demand curve. We believe the long-term drivers of margin expansion at Coupang remain intact and will continue to compound, including operational efficiencies, supply chain optimization, ongoing investment in automation and technology and the scaling of our margin-accretive categories and offerings. We expect them to resume driving margin expansion and their underlying impact to become more evident as we move past these temporary inefficiencies. Segment adjusted EBITDA for Product Commerce was $358 million for the quarter, resulting in an adjusted EBITDA margin of 5%. This represents a contraction of roughly 300 basis points year-over-year and 270 basis points quarter-over-quarter, driven primarily by the gross profit dynamics I just described, along with the near-term pressure from operating costs that were sized for a pre-incident demand curve. We expect this to normalize as we work through those commitments, and we make adjustments. Turning to Developing Offerings. We reported segment net revenue of $1.3 billion, growing 28% on a reported basis and 25% in constant currency. The growth is primarily driven by the hyper growth rate in Taiwan, along with a continued high growth rate in Eats and Rocket Now in Japan. We generated $123 million in gross profit for the quarter in Developing Offerings, down 25% over last year as we continue to make investments in response to the encouraging customer engagement we are seeing across these early-stage offerings. Segment adjusted EBITDA losses were $329 million, consistent with our expected cadence of investment, underlying our full year guidance of between $950 million and $1 billion in segment adjusted EBITDA losses that we communicated last quarter. On a consolidated basis, we reported total net revenues of $8.5 billion for the quarter, representing growth of 8% on both a reported and constant currency basis. This is consistent with the 5% to 10% constant currency growth rate range we guided to last quarter. Consolidated gross profit was $2.3 billion with a gross profit margin of 27%, a contraction of approximately 230 basis points year-over-year and 180 basis points quarter-over-quarter. This margin compression reflects the temporary impact that I outlined in Product Commerce from the data incident along with the increased level of investment in Developing Offerings. OG&A expense was $2.5 billion or 29.9% of total net revenues, roughly 250 basis points higher than Q1 of last year. The year-over-year increase largely reflects 2 dynamics. Much of our cost base was sized for the demand trajectory we were on before the incident, which creates a near-term gap between cost base and current revenue. And the increase in operating costs within Developing Offerings consistent with the levels of investment we are making to support those growth initiatives. Our losses before income taxes was $255 million and we incurred income tax expense of $11 million. Our effective tax rate this quarter was elevated because the losses in our early-stage operations in Taiwan and Japan don't generate offsetting tax benefits at the consolidated level. We anticipate an effective tax rate of between 75% to 80% for the full year. We continue to expect this to normalize closer to 25% over the long term. We are reporting an operating loss for the quarter of $242 million and net loss attributable to Coupang stockholders of $266 million, resulting in a diluted loss per share of $0.15. Consolidated adjusted EBITDA was $29 million, resulting in an adjusted EBITDA margin of 0.3%. This represents a contraction of approximately 450 basis points year-over-year and 270 basis points quarter-over-quarter, driven primarily by the Product Commerce gross profit dynamics from the data incident and the increased level of investment in Developing Offerings. On cash flow, for the trailing 12-month period, we generated operating cash flow of $1.6 billion and free cash flow of $301 million. The year-over-year decrease in trailing 12-month free cash flow is primarily driven by the increased losses in Developing Offerings as well as higher levels of CapEx. This quarter, we also repurchased 20.4 million shares of our Class A common stock for $391 million. Our Board of Directors has recently approved an additional $1 billion to be added to a stock repurchase program as part of our broader capital allocation strategy to generate meaningful returns for our shareholders. Now a few final comments on our outlook. For Q2, we anticipate consolidated constant currency revenue growth of 9% to 10%. We also expect our top line growth rates to continue improving over the course of the year as the impacts from the data incident diminish. We also expect consolidated adjusted EBITDA margin year-over-year contraction of approximately 300 to 400 basis points for Q2, primarily reflecting the near-term factors from the recent data incident. As we have noted, the long-term drivers of margin expansion remain intact. As we work our way through the temporary inefficiencies in our network, we expect margins to improve throughout the year with annual margin expansion resuming next year. The levels of service and value we are able to consistently provide to customers and the response we increasingly see from those customers give us confidence that the recovery will continue to build through the year, and we remain intensely focused on delivering moments of WOW for our customers every day. Operator, we are now ready to begin the Q&A. Operator: [Operator Instructions] The first question is from Eric Cha with Goldman Sachs. Minuh Cha: I have 2 questions. First one is, would you say, given the returning WOW members and probably higher demand visibility into the second half, the timing difference of demand and investment could be somewhat resolved in second half. And if so, would the 2027 margin would have profitability expansion over 2025 level? So that's the first question. And the second question is, did the Developing Offerings guidance you gave previously, did that include the voucher impact? And I don't think it is, but any likelihood the annual guidance may be revised higher, given the annualized loss in first quarter was a bit higher than expected. Bom Suk Kim: Eric, thanks for your question. I think it's worth going a little bit deeper into the margin point that you raised. I mentioned earlier that some short-term factors are in play, like customer vouchers as well as temporary inefficiencies. On the latter point, let me take a moment to explain how our cost structure works because I think it's important context for understanding both this quarter and the path forward. A meaningful portion of our cost base is fixed and built in advance. That includes our fulfillment centers, logistics network, supply chain commitments we make to partners as well as headcount we secure to operate all of it. And none of these decisions are made on a quarter's notice. A new fulfillment center takes substantial time to plan, build and bring online. Supply chain commitments are negotiated with significant lead times. And as you can imagine, hiring and training our people is something we do well in advance of when we need them. And we size all of these against the projected demand curve. That's what we expect customer demand to look like quarters and in some cases, even years from now based on the trajectory we're on. When demand follows that curve, our fixed cost base operates at the utilization we plan for and our cost to serve looks the way it should. And that's how we've consistently expanded margins over time. When an external event temporarily disrupts that curve, demand falls short of what those costs were sized for. The fulfillment centers are still there. Supply chain commitments are still in place. The teams are still on payroll, but the volume flowing through is lower. So our utilization of those costs is temporarily below target. And that underutilization shows up directly in our gross margins and our adjusted EBITDA. It's the same dynamic that played out when we came out of COVID, when capacity built for one demand curve, we're suddenly serving a different one. And when this happens, we have typically 2 choices. The first is to make dramatic changes in the short term to try to hit some short-term number, close facilities, reduce head count and so forth. That option is available, but we believe it's the wrong one for our business and our customers in the long run. We'd be unwinding capacity that we know we'll need again as the recovery continues and unwinding now to rebuild it later, especially with the lead times so that some of these things have is not only disruptive but highly inefficient. And the second choice that we have is to absorb that temporary underutilization knowing that as growth recovers demand catches up back up to the cost base and the utilization returns to target. And that's the choice we're making. And we're making this -- we're managing this period actively. We're adapting our network where appropriate, much like we did coming out of COVID. But our overarching posture is that the cost base we've built is the right one for the path we're on, and we're not going to dismantle it for a temporary dislocation. And as the recovery progresses, utilization rebalances and the margin pressures work their way out. And that's the mechanism that gives us confidence in resuming annual margin expansion next year. Gaurav Anand: Eric, on your question regarding the DO losses, the $329 million loss in Q1 is in line with what we had expected. And our full year Developing Offerings investments remain tracking to the $950 million to the $1 billion range we had given. It includes a voucher program that we have provided. So Developing Offerings, again, is in early foundational building stages with lots of moving pieces across initiatives and a lot of decisions being made at regular intervals. We are watching -- continue to watch it closely, and we'll continue to update you as the year unfolds, if anything changes. Operator: Our next question will come from Jiong Shao with Barclays. Jiong Shao: I have 2. I'd like to perhaps ask one at a time if that's okay. I was just wondering, firstly, would you able to sort of sort of help us quantify a bit about the voucher impact in Q1 on revenue or EBITDA for Product Commerce and to deal given some vouchers for [indiscernible] some vouchers for Product Commerce or to whatever degree you are willing to share? That's my first question. Gaurav Anand: Sure. Let me take that. So regarding the $1.2 billion voucher program, our primary objective has been to ensure that our customers felt valued and supported during this challenging period. The redemption levels were consistent with our internal expectations. And from an accounting perspective, the vouchers are netted against the revenue. So they did have an impact this quarter on both revenue growth and margins. So as we noted earlier, with the voucher utilization period extending into the first few weeks of April, we do expect there to be a modest impact in Q2 also. Jiong Shao: Gaurav, if I may, just follow up on that. I believe your vouchers are expiring in about 10 days, so the impact for Q2 should be much smaller. But at the same time, you are guiding your Q2 EBITDA to be down 3 to 4 points year-over-year. Was that just because of the sort of the scale of the operation Bom talked about earlier, like you sized that up for certain scale. Now there's a lot of fixed cost? Are there other reasons that's driving the 300 to 400 basis points decline year-over-year on the group EBITDA for your Q2 guide. Gaurav Anand: Yes. Jiong. As Bom mentioned earlier, we had planned fixed capacity, both that shows in gross margin and our OG&A to be at the levels which were higher than the current trends that were created by this event. So because of that, the continued margin Q2 guidance is what we said it is. Jiong Shao: Okay. Okay. My second question is that we have seen some media reports -- my apologies if they're not final or official, that Bom has been designated as a head of the [ Jabil ]. For those of us who are not super familiar with this sort of thing in Korea. I don't know. Could you talk about like what does that mean? Does that mean anything different for shareholders for corporate governance if that matters at all? Gaurav Anand: Sure. We are aware of the recent designation in Korea and are carefully reviewing it. As always, we continue to be committed to complying with all regulatory requirements in all the jurisdictions where we operate. We'll continue engaging consecutively with all our regulators and work through all our obligations as needed. That's as much we can share at this time. Operator: [Operator Instructions] Our next question comes from Stanley Yang with JPMorgan. Stanley Yang: I have 2 questions. First question is, you mentioned already about the WOW members trend. So when do you expect your WOW users to be recovered to your pre-data bridge level? And what would be the normalized annual addition of WOW users after your full recovery? My second question is, is there any change in your Developing Offerings loss mix between Taiwan and Japan. When or at which scale do you expect Taiwan loss to pick up and start declining? I also would appreciate your comment on the operating trend of the Rocket Now in Japan? Bom Suk Kim: Stanley, thanks for your question. In terms of specific dates, I think we're focused more on the trajectory and the underlying customer behavior more than on any date for recovery. I think there are some very helpful and informative signals that we're seeing in the customer behavior that's worth noting around our WOW membership. And as we mentioned, not only is WOW membership numbers being driven by new sign-ups, but it's also driven by members who are returning. The vast majority of our WOW members never paused in the aftermath of the incident. They continue to compound at double-digit rates, the same way they have for years. And the minority who did pause are returning rapidly. And the majority of them have returned in a very short period of time. And just as importantly, they're resuming their prior levels of spend, not splitting that share of wallet with the alternatives. And we've now closed nearly 80% of the decline in WOW memberships that occurred after the event with a combination of those returning members and strong new sign-ups, which are along with churn back to historical levels. And I think what's helpful to know is that all of those patterns are consistent with an event-driven disruption working its way out, not with a structural shift in our position. And the fact that our -- the vast majority of the customers never paused, they continue to compound at double-digit rates, and the members who paused are returning rapidly and picking up their spend right where they left off and continuing to compound is confirmation of our view that we're returning to the same drivers that have been powering our growth for years in the past. Those customers continue to value the Coupang experience and are not finding that value proposition somewhere else. And that's what we believe will continue to power our growth in the years ahead. Gaurav Anand: And regarding your question on Taiwan and investment. Taiwan continues to grow at hyper growth rates. We are very excited about it and the future that it holds for us. The investments, we were not splitting out investments between different initiatives. Right now, we allocate capital, just based on where we see the opportunities are the strongest. And each initiative is at a different point in the life cycle. But... Bom Suk Kim: In Taiwan, as I mentioned earlier, we're prioritizing, building the foundation for an unparalleled customer experience. We're excited to be entering a lot of these very exciting foundational building -- foundation-building stage of the journey, such as network design, supply chain improvements. We now have provided access to our next-day delivery experience to a majority, a vast majority of consumers in Taiwan, and it already represents the vast majority of our volume, and we're continuing to strengthen that last-mile delivery network, not only to increase access, but to improve the levels of service that we provide. And we're also investing to expand aggressively the selection that customers can purchase on that network across more categories. Operator: Our next question will come from Seyon Park with Morgan Stanley. Seyon Park: I also have 2 questions. First is just on the macro picture overall. I think industry-wise, we've started to see a bit of the acceleration in e-commerce growth. And just given the K-shaped economy that we're kind of seeing, I kind of wanted to get your views as to whether we are seeing any signs of slowing for the e-commerce industry overall or whether it's some seasonal factors that are also impacting it, given Coupang is now a big chunk of that e-commerce. Clearly, the impact that we've seen from the data breach may also have impacted the growth of the overall industry as well. So I just kind of wanted to get management's view on how they see just the overall industry growth. There seems to be a lot of conflicting data. Obviously, GDP was also stronger. So any views there would be much appreciated. The second question is really on the buyback. You announced that another $1 billion has been approved. It does seem like the cadence of the buyback is starting to accelerate. And hence, just wanted to get some guidance or any comments as to whether we should see a higher cadence of buybacks in the coming quarters? Bom Suk Kim: Seyon. I think from our perspective, we're always much more focused and obsessed with our customers, how our customers are behaving. And we ultimately believe the biggest drivers of customer behavior are -- is the experience that we're providing. We've seen that consistently through ups and downs in the macro over the many years that we've served our customers and the markets that we operate in. I think there's some important, again, things to maybe point out again that we've always seen for years our customers compounding their spend, and the vast majority of customers who remain with us and did not pause continue to compound at double digits, very healthy rates. The customers who have returned, the majority of customers who -- of the minority that paused, who've returned have picked up exactly where they've left off and are now also compounding alongside them. So I think a lot of the behavior that we're seeing is still very strong on that front. I do think it's also important, maybe you are seeing some discrepancy also in the underlying behavior that I'm talking about and the numbers you may be seeing this quarter and -- because the year-over-year growth rate this quarter doesn't move in lockstep with that underlying customer behavior that I'm pointing out. And maybe I'll take this opportunity to explain also how growth at Coupang normally compounds. Each month, our existing customers grow their spend with us and new customers join and start building their spend over time. Both of those streams add to our base and keeps getting larger. That's the engine that has produced our historical growth rates. That's been remarkably consistent for us. And I think we've shared [ core ] data in the past. We shared it regularly. That's really an important health metric for us. And through again, ups and downs on the macro, that engine of existing customers continue to compound, new customers joining and building their spend over time, those 2 streams are really the engine that produces our growth rate. Now when an external event interrupts that cycle for a period, 2 things happen. First, the customers who pause stop adding to that base for the months that they've paused. And the new customers who would have joined during that period don't join at the usual pace. And second, this is the subtle part, we lose the months of compounding of that customer spend that we typically observe with both streams. And once a month is gone, you can't get it back. And now even if everything underneath fully recovers, past customers come back at prior spending levels, new acquisitions return to historical pace. The year-over-year comparison still carries the weight of those lost months. And this year's revenue is now missing the months of compounding that didn't happen during that affected period, while last year's revenue also included -- sorry, the last year's revenue included all 12 months of uninterrupted compounding. So the 2 sides of the comparison are no longer symmetric. And this effect works its way out as we've lapped the affected period. And after we've lapped the affected period, that's the point at which the comp returns to being apples-to-apples. And this also probably gets to a little bit to Eric's earlier question as well about our growth rate this year. While we see very encouraging and positive signs in our customers returning, picking up their spends where they left off, growing and compounding. We see very healthy compounding behavior underneath because of the lost months of compounding. You'll see our Y-o-Y growth lag and will be behind the demand curve that we projected for our fixed cost. And a lot of the -- that's the earlier point that I made about cost dynamics. So some of the things that Eric was asking about, I think, are -- can be gleaned from -- or some of the things that we want to point out can be gleaned from what I'm sharing here. But hopefully, this gives you a fuller picture of how we think about growth and the drivers of growth. Operator: We will now take our last question from the line of Wei Fang. Wei Fang: I have 2. First one is a follow-up on an answer to the prior question on your 2Q EBITDA guidance. I don't think you mentioned any impact from the fuel inflation. Just want to understand if that's included there and also if you can help quantify for us? And the second question is on competition. I understand that some Chinese e-commerce players are now growing their MAUs nicely in Korea as well. I think they combined maybe more than 10 million of already in terms of users. I know maybe the spending levels is not there yet, but can management give us some overview on the landscape, maybe today versus a year ago, anything has changed. And maybe anything -- any comment you can give in terms of like a 3P take rate in the business? Bom Suk Kim: Wei, thanks for your question. We've always operated in a in highly competitive markets. And we've had many new entrants, many players. It's one of the most dynamic spaces and industries that you can operate in. And over many years, what we've learned over and over again that kind of what matters most is the customer experience and staying relentlessly focused on customers and not what any set of competitors or individual competitor does. The markets that we're operating in are large. We represent just a small share in each of them, and there's room for many winners. I think what we believe ultimately drives growth is the differentiated value we provide to customers, the combination of selection, price and delivery that no one else offers. I think we're very encouraged, as I mentioned, that the customers who -- the vast majority of customers who stayed with us through the affected period over the last couple of quarters have continued to compound at double-digit rates as they have for years. The customers who've come back have not split -- have returned to their old levels of spend and have not split that spend with other alternatives. That's also, we think, a good sign that they really value what we're providing, the Coupang experience and not finding that value proposition elsewhere. And that value proposition is really the engine of our growth. It's really what we're focused on making even more valuable for our customers every day. And that's what we believe will really determine our success in the years ahead. Gaurav Anand: Yes, I'll take the -- I'll respond to your question on the impact of oil prices. So with the increase in fuel prices, not going really into effect until late Q1, we saw a very small impact on our operations this quarter in Q1. We benefit from the efficiencies created by our end-to-end owned supply chain and logistics infrastructure and processes. And looking into the near future, we keep our focus on continuing to create the best experience for consumers, while we also are driving operational excellence. We don't see this -- the oil prices having a significant or material impact in Q2 so far, and we'll continue to monitor it. On Q2, again, even though we guided our margins to where we did, there is no structural change in our entitlement and over time, what we see. Operator: This concludes today's conference call. Thank you, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lucid Group First Quarter 2026 Earnings Conference Call. Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker for today, Nick Twork, Vice President of Communications. Please go ahead. Nick Twork: Thank you, and welcome to Lucid Group's First Quarter 2026 Earnings Call. Joining me today are Silvio Napoli, incoming CEO; Marc Winterhoff, our Interim CEO; and Taoufiq Boussaid, our CFO. Before handing the call over to Silvio, let me remind you that some of the statements on this call include forward-looking statements under the federal securities laws. These include, without limitation, statements regarding the future financial performance of the company, production and delivery volumes, vehicles and products, studios and service networks, financial and operating outlook and guidance, macroeconomic, geopolitical, policy and industry trends, tariffs and trade policy, company initiatives, leadership changes and other future events. These statements are based on various assumptions, whether or not identified in this communication and on the predictions and expectations of our management as of today. Actual events or results are difficult or impossible to predict and may differ due to a number of risks and uncertainties. We refer you to the cautionary language and the risk factors in our annual report on Form 10-K for the year ended December 31, 2025, subsequent quarterly reports on Form 10-Q, current reports on our Form 8-K and other SEC filings and the forward-looking statements on Page 2 of our quarterly earnings presentation available on the Investor Relations section of our website at ir.lucidmotors.com. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as required by law. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the earnings presentation. With that, I'd like to turn the call over to Lucid's incoming CEO, Silvio Napoli. Silvio, please go ahead. Silvio Napoli: Thank you, Nick. Good morning, everyone, and thank you for joining. This is my first earnings call with Lucid and as already had the opportunity to share with many of you, I'm extremely pleased to be here and part of the Lucid team. With not even a month with the company, I'm still at a very early stage, so I'll keep my remarks brief. Let me start by reiterating why I'm here. Lucid brings together state-of-the-art technology, a premium product platform and a unique opportunity to build a strong, enduring position in a transforming industry. And that combination is compelling. That is the reason that brought me here. Today, 3 weeks into the journey, I'm even more convinced that this is the case. In my first days, I've had the opportunity to meet with our teams in Newark, our headquarters and in some of our key markets. In fact, on the very first day, I traveled to visit a factory in Arizona, the heart of Lucid. Last week, I traveled to Saudi Arabia to witness a strong brand recognition in this fast-growing market and to see firsthand the progress of our new factory under construction. As you know, this manufacturing center is an essential part of our commitment to drive scale, profitability and to position Lucid on the world stage. While there, I've also been meeting with employees, shareholders and with local stakeholders. And everywhere I go, I'm focused on listening and beginning to understand where we are strongest and where we need to improve. And what stands out immediately is the incredible domain competence and outstanding motivation of the Lucid team and the strength of our product. At the same time, it's clear that realizing Lucid's full potential will require sharper focus and consistent execution, particularly around simplification, prioritization and speed. My near-term priorities are straightforward: recenter all our activities around our customers, ensure the organization operates with clarity and accountability, focus resources on the highest impact areas and embed a stronger culture of cost and capital discipline across the business. A central objective over time is to build a more self-sufficient company, one that progresses towards funding its own growth. And that means being rigorous in delivering on our commitments and how we allocate capital to few vital priorities. In simple words, this means making clear choices on where to invest and just as important, where not to. At the risk of stating the obvious, I'm not in the position to comment on results reached prior to my joining. Accordingly, I trust you will understand that today I will not comment on any specifics, including the outlook. My goal over the coming weeks is to deepen my understanding of the business so I can engage more fully with you in the future discussions. With that, I'll turn the call over to the team to walk you through the Q1 results. Thank you. Marc Winterhoff: Thank you, Silvio, and good afternoon, everyone. Let me start with the key takeaways. We expanded our Uber partnership to at least 35,000 vehicles, raised over $1 billion in new capital and ended the quarter with a clear cost reduction program underway. The foundation is solid, and we are building on it. We have made meaningful progress on each of these fronts. Among the highlights. First, we expanded our partnership with Uber to provide a minimum of 35,000 robotaxis, up from 20,000 previously announced and increased their investment to $500 million, up from $300 million, improving our visibility into long-term demand and revenue in a new and growing market. Further reflecting the strengthening relationship between our companies, Sachin Kansal, Chief Product Officer at Uber, has been nominated for election to Lucid's Board of Directors. Second, we significantly strengthened our financial position, raising approximately $1.05 billion, including $550 million investment from the Public Investment Fund through a private placement, reaffirming their continued support and long-term commitment to Lucid. We maintained approximately $2 billion of undrawn commitment under the DDTL after drawing $500 million of cash in April, further enhancing our financial flexibility. Pro forma for the capital raise and the DDTL increase, liquidity at quarter end would have been $4.7 billion, providing ample flexibility to continue to support development of our Midsize platform and the continued build-out of M2. Third, we continue to execute to deliver scale and profitability, delivering $282 million in revenue. Despite the unforeseen geopolitical tensions and logistical obstacles in the region during Q1, our M2 construction never stopped, and we continue to install capital equipment and work towards start of production. The plan remains to ramp up Midsize vehicle production in 2027, and we launched an aggressive cost reduction program targeting cost savings across all areas of the organization in all geographies. Let me walk you through the key updates of the execution of our strategy in detail. Following the framework we laid out at our recent Investor Day, the Lucid Air and Gravity continue to anchor our near-term growth. And our focus here remains execution, quality, delivery and customer experience. Operationally, we produced 5,500 vehicles in Q1, up 149% year-over-year. Despite a temporary disruption, which elevated costs, we exited the quarter trending back toward our cost targets. We delivered 3,093 vehicles, which was flat compared to Q1 2025. When Gravity deliveries were temporarily impacted by a supplier issue, we acted quickly, resolved it and resumed deliveries with additional quality controls. As deliveries resumed, we saw improving momentum through the quarter, including the highest March deliveries in Lucid history, up 14% year-over-year. We also experienced a strong rebound in order intake, up 144% in North America in March from February, with Gravity driving the majority of demand. In March, we regained our position among the best-selling EVs in our segments. We also continue to make progress on our partnerships for our international distribution, including the official launch of our first retail partnership in Europe, which allows us to scale more quickly in a capital-efficient way. We expect the delivery trajectory to improve through the year. Near-term demand signals are mixed, but we see tailwinds building into the second half. Apart from seasonality, which historically drives greater deliveries in second half, there are numerous other factors which may deliver a lift, including high gas prices, which tilt demand towards vehicles with more attractive operating costs, competitive dynamics, including exits from the Air and Gravity segments, lease cycles, Lucid software updates, potential tariffs on European imports and potential improvements in macroeconomic and geopolitical conditions. As a result, we continue to expect a back-end weighted delivery profile for 2026, but are confident in the long-term trajectory of demand. Our priority now is consistent and predictable conversion of production into deliveries. Central to our framework to scale and drive profitable growth is the Midsize platform. The Midsize platform brings Lucid's signature range, efficiency and driving experience to a much larger TAM and broader set of customers and is key to unlocking scale, affordability and improved unit economics. At our recent Investor Day, we provided a clearer view of the future product portfolio with the expected pricing starting below $50,000, reinforcing Lucid's entry into a more accessible segment of the market. I'm pleased to be able to share that our BOM cost position remains favorable, still tracking below our initial cost estimates. During the quarter, construction on M2 and installation of capital equipment continued, and we remain on track for production ramp-up of the Midsize in 2027. Turning to our third priority, autonomy. In mid-April, we announced the expansion of our partnerships with Uber, increasing their total investment to $500 million and expanding the planned deployment to at least 35,000 robotaxi vehicles. This represents a meaningful increase in both scale and long-term visibility for the program, which generates a new revenue stream through a partnership approach that enables rapid speed to market in a new and rapidly growing market with minimal CapEx. I'm excited to share that we have met all milestones so far in our joint project with Nuro to provide autonomous Lucid Gravities to Uber for commercial launch by the end of the year, and remaining milestones are on track. We delivered 75 engineering vehicles and testing and mileage accumulation is ongoing in several cities throughout the U.S. Starting in mid-April, Uber and Nuro employees are now able to test the end-to-end customer experience, including ordering a robotaxi within the Uber app and choosing from select destinations for drop-off. Our partners at Nuro have also received approval from the California DMV for driverless testing of the Lucid Gravity in the state, making it one of the only a handful of vehicles that have received such approval. This is a key step in paving the way for launching commercial autonomous operations later this year. Looking forward, we are targeting the following milestones as we track toward commercial robotaxi operations in late 2026. This quarter, Lucid will start our production validation builds, which are intended to reflect our production intent design and some of the key robotaxi features like exterior beaconing for customers, interior cameras and consumer interfaces. This build is expected to be completed in Q3 and allows us to begin more comprehensive end-to-end testing with our partners as well as homologation testing and validation. And following the completion of testing in Q3, we anticipate starting regular production of robotaxi vehicles for commercial sale in early Q4 at M1. As you can see, we are well on our way to achieving our goals with our robotaxi program and commercial launch is on track for late 2026. In parallel, we continue to expand advanced driver assistance features across our consumer vehicles. Over time, we expect these features to become an increasingly important source of recurring revenue with subscription-based offerings being launched starting in 2027. In closing, Q1 highlighted areas where we still need to improve execution, and we are taking clear actions to address them. I'd like to close with a few personal words. It has been a privilege to serve as Interim CEO. We delivered 2 years of consecutive record quarters when it comes to deliveries until the end of 2025. We ramped the Gravity throughout 2025, resulting in a production increase of about 100% last year. We've navigated real headwinds and the team's ability to keep moving through them is something I'm proud of. We sharpened and expanded our strategy with a clear and capital-efficient approach to provide leading autonomy solutions, both for robotaxis and personally owned vehicles. We made meaningful progress across our partnerships, including expanded commitments from both PIF and Uber. I'm confident in this team and Silvio's leadership and in where Lucid is headed. And I'm looking forward to continue to contribute as Chief Operating Officer. With that, let me hand over to Taoufiq. Taoufiq Boussaid: Thank you, Marc. I will walk you through the financial results for the quarter, the structural drivers behind them and how recent actions position us to execute against the framework we laid out at the Investor Day. Q1 was disrupted by a temporary stop sale, but the underlying business held and in March, orders and deliveries rebounded. With roughly similar units delivered and lower regulatory credit sales, revenue grew by approximately 20% year-over-year to $282 million in Q1, driven primarily by mix and pricing effects from Gravity. Let me give you the context that makes this number more useful for thinking about Q2 and the rest of the year. We produced 5,500 vehicles in the quarter but delivered 3,093. This gap reflects a combination of the impact of the temporary Gravity stop sale during which finished vehicles sat in inventory pending validation rather than converting to revenue and segment contraction. A key highlight of the quarter was Uber's expanded vehicle commitment and increased investment in Lucid. It matters for 3 reasons. It improves long-term revenue visibility. It derisks the volume ramp into the Midsize era, and it validates our vehicle platform as the reference point for commercial autonomy deployment. This is a durable addition to the capital structure and to the revenue outlook, not a onetime transaction. Gross margin for the quarter was negative 110.4% versus negative 80.7% in Q4 and negative 97.2% in Q1 a year ago. I want to be precise about the walk because the composition matters more than the headline. Three factors drove the sequential decline, lower delivery volume against a largely fixed manufacturing cost base, underabsorption of fixed cost and large regulatory credit revenue in Q4 that didn't repeat in Q1. Partially offsetting these were IEEPA tariff refunds and the lower inventory write-down versus the prior quarter. These costs were tied directly to the stop sale. With that resolved, they don't carry forward. What remains and what we are focused on is the structural trajectory, which includes, as shared at Investor Day, an average of 50% to 60% reduction in unit cost over the coming years. While we saw unit cost spike during the quarter driven by temporary disruption, it trended back towards the targeted trajectory in March. As volume scale into the second half and with the launch of the Midsize vehicle platform, we expect continued structural improvement in unit economics. I want to be clear, the underlying midterm trajectory of unit cost improvement that we described at Investor Day remains intact, and Q1 does not alter it. Turning to operating expenses. This totaled approximately $678 million for the quarter. R&D was $336 million, down sequentially from $361 million, reflecting program level sequencing even as we continue to fund the Midsize platform and our autonomy stack. SG&A increased $22 million sequentially to $304 million, primarily driven by discrete items, including a prior quarter provision reversal. Excluding these items, underlying SG&A was broadly stable. Year-over-year, SG&A increased $92 million with the comparison impacted by a $35 million noncash benefit in the prior year related to the reversal of stock-based compensation. These numbers also don't yet capture the $500 million in savings expected from our recently announced headcount actions over the next 3 years with the near-term impact most significant. Taken together, our posture on operating expenses is straightforward: protect the investments that build long-term competitive advantage, Midsize, autonomy, software and drive discipline everywhere else. Net loss for the quarter was approximately $1 billion compared to $366 million in the first quarter of 2025. The increase reflects the gross margin dynamics we discussed, continued investment in the business, particularly the Midsize platform and higher SG&A with the year-over-year comparison impacted by a discrete benefit in the prior year. Importantly, a significant portion of the year-over-year change is driven by noncash and nonoperating items, including a $274 million unfavorable change in the fair value of derivative liabilities related to movements in our stock price as well as lower interest income and higher interest expense. And as mentioned, it does not reflect the benefits of our recent headcount actions no more recently launched cost takeout initiatives. Net loss in any quarter reflects noncash and nonoperating items that move significantly with our stock price. The operating loss and cash consumption metrics give a cleaner read on trajectory. Our focus remains on improving operating leverage as we scale volumes and continue to drive cost discipline across the business. Turning to liquidity and capital structure. We ended the quarter with approximately $700 million in cash and cash equivalents and total liquidity of approximately $3.2 billion. Subsequent to quarter end, we executed a series of transactions that strengthened our balance sheet, $200 million of equity investment of common stock from Uber, $300 million from a registered common stock offering and $550 million in convertible preferred stock from PIF. In addition, PIF and Lucid announced an amendment to our delayed draw term loan, providing greater flexibility and approximately $2 billion of available liquidity following a $500 million draw on April 1. Giving effect to the capital raise and DDTL increase, total liquidity would have been approximately $4.7 billion at quarter end. This extends our operating runway into the second half of 2027 and gives us the flexibility to fund Gravity ramp, M2 construction and launch preparation and continued investment in the Midsize program and autonomy stack. On the question of dilution, which I know is on investor minds, the recent financing was structured deliberately to balance liquidity needs against dilution considerations. The convertible preferred structure with PIF reflects that balance as does the sizing of the common equity component. We will continue to evaluate all financing options, including the public markets when the appropriate conditions materialize. And our bias is toward disciplined capital deployment and with opportunistic raises. The strategic stockholder base around this company, anchored by PIF and now meaningfully reinforced by Uber gives us a structural advantage in how we think about capital over the medium term. Now on working capital and inventory. We also expect to see benefits to cash flow driven by improvements to working capital. Inventory stood at approximately $1.47 billion at quarter end, up from approximately $1.1 billion at the prior quarter and elevated by the stop sale buildup. As deliveries normalize through the year and we draw down that inventory, you should expect a higher conversion into cash. Beyond the stop sell normalization, we are tightening production to delivery alignment as an ongoing operating discipline. The new production reporting methodology, which I will cover in a moment, supports that by improving transparency on the conversion step. We took over $200 million in inventory impairments in Q1. Going forward, we expect those to decline. And as inventory reduces through the year, we expect to benefit from impairment releases. Now I mentioned our new production reporting methodology. I want to take a moment on this change to how we report production. Starting this quarter, we are moving our production metric to a process complete definition, meaning we count a vehicle once it has completed the factory gating process, regardless of whether it ships as a complete unit or in a semi-knockdown form. This change better reflects true quarterly production and reduces the volatility that the prior methodology introduced due to shipment logistics. It has no impact on inventory or days on hand reporting, both of which remain based on finished deliverable vehicles. The effect for investors is greater comparability with peers and a cleaner signal on underlying operational cadence. Under the new methodology, the normal auto industry seasonality, Q2 strongest based on working days, Q1 and Q4 softer due to holidays and planned shutdowns will appear more visibly in our reported numbers. Now let me address our outlook and guidance. With Silvio now on board and conducting his review of the business, we are suspending our prior guidance and we provide a full updated outlook at our Q2 earnings call. I want to be clear, this is a governance decision. Near-term demand conditions remain uneven, and we are managing our production cadence accordingly. Our 2026 objective is unchanged. We continue to work to closely align production with demand to avoid excess inventory. We are not constrained on capacity. We are constrained by our own discipline not to build inventory ahead of demand. As market conditions develop, we will scale production accordingly. We have launched a company-wide program to sharpen operational efficiency, reduce costs and concentrate capital on the highest-return opportunities. Q1 cash performance was affected by the stop sell action and the associated inventory reset, which we expect to normalize as we move forward. We are focused on restoring consistent cash generation and building a more durable operating foundation. Production of our first Midsize vehicle is expected to ramp throughout 2027. And our Lucid Gravity robotaxi program in partnership with Uber and Nuro remains on schedule for launch in late 2026. In closing, to put the quarter in perspective, we strengthened our balance sheet, expanded the strategic partnership that improves long-term visibility and are implementing reporting changes that improve transparency. A temporary stop sale in February was resolved, and we have taken action to address the root cause. The Investor Day framework holds. The path to profitability runs through scale from Midsize cost reduction through M2 and improved mix and operating leverage. Q1 does not change that trajectory. It reinforces the importance of disciplined execution, and that is where our focus is. The fundamentals of this business, the technology, the product and the strategic position we have built are intact. We are managing this period with discipline, and we intend to emerge from it in a stronger competitive position. With that, let me turn it over to the operator for your questions. Operator: We will now begin the question-and-answer session by taking questions submitted through the Say Technologies platform. Nick Twork: Our first question comes from [indiscernible]. How does management plan to restore shareholder confidence and address concerns about bankruptcy or potential take-private scenario? Marc Winterhoff: First, I want you to know that we hear your frustration and restoring your confidence is of our utmost importance to us. We are focused on rebuilding your confidence through disciplined execution, transparency and measurable progress against key operational and financial milestones. The business is moving from a period of heavy investment toward a phase where we can begin to leverage those assets at greater scale. We ended 2025 having scaled production, improved unit economics and maintained liquidity. And yes, we've been hit with an unforeseen operational disruption in Q1, which we solved and deliveries and orders have rebounded towards the end of the quarter. We are focused on translating operational progress into more predictable financial profile. To your specific concerns, we do not speculate on market rumors or hypothetical strategic alternatives. Our focus is on executing the plan we laid out, strengthening the company and creating long-term value for our shareholders. Nick Twork: All right. Our next question comes from Robbie S. When is Lucid going to turn a profit? What is the plan? Taoufiq Boussaid: At our Investor Day, we laid out a clear path to profitability. The target is gross margin breakeven in the midterm, building towards the mid-teens by late decade. And on cash flow, we expect to reach positive free cash flow on a similar horizon. The levers to get there are straightforward. It starts with improving fixed cost absorption as volume grow, continuing to bring down bill of material and manufacturing costs, scaling Gravity, launching the Midsize platform and developing higher-margin recurring revenue from software, ADAS and autonomy. On the Midsize platform specifically, this is a meaningful expansion of our addressable market. And importantly, it has been designed from day 1 with cost, scale and manufacturability at its core. Nick Twork: All right. The next question comes from Crystal M. Based on your current cash burn rate, how many quarters of runway does Lucid have without raising additional capital? And what specific milestones must be met before then to avoid dilution? Taoufiq Boussaid: Based on our current cash burn and the recent financing activities we have taken, including the capital raise and the extension of the DDTL, we have funding runway into the second half of 2027. That gives us adequate flexibility to support the Gravity ramp, progress M2 construction and continued targeted investments in both the Midsize platform and our autonomy software. During this period, our focus is on executing the operational milestones that moves us towards breakeven and reduce our reliance on dilutive capital. That means disciplined execution of the Gravity launch, continued manufacturing efficiency gains, measured advancement of M2 aligned with demand and sustained momentum on the Midsize program. At the same time, we are actively pursuing top line diversification through higher-margin software and services particularly around ADAS. On dilution, we are deliberate in how we approach capital raising. We have consistently favored structures that limit near-term dilution and preserve optionality. The use of preferred convertibles being a good example of managing both timing and impact. But ultimately, the strongest answer to dilution is accelerating our path to breakeven because this is what opens up a much broader range of financing alternatives. Nick Twork: That concludes the questions from the Say Technologies platform. Now I'll turn it over to the operator for live questions. Operator: [Operator Instructions] Our first question comes from the line of Michael Ward with Citigroup. Michael Ward: Can you share any volume targets for M2 for 2027? It sounds like it's going to be a gradual type launch throughout the year. And I'm just wondering if the launch is better than expected, does that liquidity take you into 2028? Marc Winterhoff: The targets on the volume, we actually revealed at the Investor Day, and they have not changed. They have not changed. No, no. We are really laser-focused on that ramp. Michael Ward: Okay. And then the second thing I would ask is, as it relates to the robotaxis, are the volume deliveries to Uber depending on them getting certified? Or is there some sort of a schedule for those volume numbers to start to accelerate? Marc Winterhoff: Well, it's basically actually Nuro getting the certification. As we just mentioned, we make very good... Michael Ward: Nuro? Marc Winterhoff: Yes, very good progress on that. So we are on track with this. I mean still we have to have final certification to be able to do this, for instance, when we start in the Bay Area here in California. But so far, even all the development and the certifications are moving as we expected. Operator: Our next question comes from the line of Andrew Percoco with Morgan Stanley. Andrew Percoco: Maybe if I can start out on the free cash flow expectations and just your general commentary around having sufficient liquidity through or at least until the second half of 2027. Can you just maybe help provide a little bit more context around what some of the underlying assumptions are within that? I understand that you guys are pulling the delivery guidance for the year for some governance reasons, but there's anything you can kind of provide in terms of what your underlying assumptions are around demand, that would be super helpful. Taoufiq Boussaid: Andrew, I think that the first answer to your question is that you need to recall that there is a typical seasonality in the company and that we see a significantly improved cash flows during or on the back end of the year. So we shouldn't do any read-through of the cash performance as of Q1 because of 2 specific events. The first one is the stop sales, so which has led to higher cash burn, and we are saying that we will be recovering that. And the second element that you need to take into account is the typical seasonality with a step-up in the sales towards Q3 and Q4, which is helping us to manage the cash burn. So we haven't guided specifically for the cash burn. We have guided for the runway. The statement still remains unchanged. So we will be providing more visibility on that when we reaffirm the guidance in Q2. Andrew Percoco: Okay. Understood. And maybe just my follow-up is just around the commodity cost environment. A lot of your OEM peers are continuing to highlight some pressures there this year and into next year. Can you just maybe provide an update in terms of what you're seeing? I think you guys in the past have said that you've at least hedged or contracted out some of that commodity exposure. But to what extent are you seeing any kind of incremental pressure there? And might that impact that path to profitability? Marc Winterhoff: Actually, right now, that is very limited. I mean yes, there have been increases over the last couple of months on certain raw materials like aluminum. But very recently, for instance, we haven't actually seen an increase. And the other topic is the DRAM, which hits the whole industry. But even that, I mean, is compared to the rest of the BOM cost of the vehicle, a small amount. So we don't see a major impact compared to where we ended end of last year right now. Operator: Our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Just maybe the first one, could you maybe talk more about the sales partnerships, which I guess will be very important, especially as you introduce the Midsize vehicle. You mentioned one in Europe. Marc Winterhoff: Yes. I mean what we're doing there is we're basically extending our approach there from a pure direct-to-consumer model into also partnering either with dealerships in an agency model, for instance, within Germany, so in areas where we already have a D2C network or with importers in new markets that we are entering right now. And we are in the midst of all this process and recently launched the first agent in addition to our D2C outlets in Germany, which gives one day to the other 2 additional cities to cover. And we have numerous LOIs. I think the recent number is like 12 LOIs that are -- we're pushing forward and hopefully get to a contract situation and launch very soon. But it allows us to much faster grow within the areas and the countries we are already in, for instance, in Germany or in the Netherlands or expand into new countries through an importership where you then use existing infrastructure and existing business relationships of those importers to scale much faster. Ben Kallo: Great. And then just on the review, Silvio's review, could you maybe talk, if possible, just about the timing or when we should expect another update? Or is there not a lot of certainty in that for now? Silvio Napoli: Thank you, Ben. I think at the moment, I'm getting to the position. I would say, as of Q2, we should start somehow getting a sense of where we are. Now in terms of by when I'll be ready to give a plan, et cetera, this, I think, is something I'll discuss with the Board at the earliest opportunity. Operator: Our next question comes from the line of Andres Sheppard with Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on the quarter and just wanted to maybe take a brief moment to thank Marc and congratulate him on all his great efforts over the past 2 years. First question, I just wanted to clarify on the guidance. So just to be clear, you'll give us an update in Q2 regarding the production guidance as well as the CapEx guidance. But just to be clear as well, the Midsize timing, robotaxi timing and also the medium-term goals, those are all on track and unchanged. Just wanted to clarify. Marc Winterhoff: On the Midsize, this is also what we guided before. So that is also subject to the suspension right now. But I think what is important to understand is that what really counts is the ramp-up in 2027, and that's what remains unchanged. As I said in the beginning, the volumes that we're looking at is unchanged. On the start of production, that's something that we will guide after review with Silvio and the team then by the end of Q2. I also want to point out that when we talk about the start of production, that is less impactful actually than the ramp. I mean we've seen this, you probably remember with the Gravity where we had an SOP, but then we weren't able to ramp as we intended to. And that is something that we definitely absolutely want to avoid, and that's why we want to review everything and make the right decision for the business. Andres Sheppard-Slinger: Wonderful. Okay. That's super helpful. And maybe just as a quick follow-up. I wanted to touch again on the second production facility, the one in Saudi. Just given the geopolitical conflict still going on, do you foresee any bottlenecks or any issues to the time line for the construction there? Or is that on track? Just any update there would be helpful. Marc Winterhoff: Well, so far, I mean, it is going and we have never stopped doing it. I mean we had a few delays when it comes to arrival of equipment to be installed, but our team was able to mitigate that. And so yes, on that as well, we will update at the end of Q2. But so far, we haven't seen any impact. Operator: [Operator Instructions] Our next question comes from the line of James Picariello with BNP Paribas. Thomas Scholl: This is Jake on for James. First, could you give us some idea of the split between the Gravity and Air deliveries in the first quarter? And approximately how many units were pushed from the first quarter into the second by the stop sale? Marc Winterhoff: I mean as we said in the past, so the majority of our deliveries are now the Gravity. We don't give a direct projection on that. I mean on the average selling price, you maybe can reverse engineer the math somehow. When it comes to how many sales are being pushed into the second quarter, that's actually a number that I don't have handy right now. I mean the numbers of deliveries and orders rebounded in March significantly. But that exact number, I don't have handy. Thomas Scholl: All right. And then thinking a little bit longer term, you guys are targeting breakeven free cash by the end of the decade. Right now, your $4.7 billion in liquidity gets you into the second half of 2027. Is there any way to think about your total liquidity need to get from the second half of 2027 until 2029 or 2030? Taoufiq Boussaid: James, you asked us the same question during the Investor Day. I understand that it's a very important point for you. So again, the key data points that we have. So we have a trajectory of how we will be rebuilding the gross margin and how we'll be progressing over the years. So it's a very important data point for you to assess. We have also communicated the details around the different levers for us to reach the breakeven and the rough timing to get there. I think that our historical and future delivery of the key milestones will allow you to do a calibration of what it would mean, and it will help you estimate the additional capital requirement, which is required. Having said that, I would like to reemphasize 2 very important points. So what we have said is that the important component of the cash burn is related to the CapEx in M2. So we have also shared our trajectory in terms of CapEx reduction. We will have a steep decline after 2027. And as a consequence of that, we will see a significant reduction of the cash requirements that will be needed for the plan. So over time, the cash burn profile in itself will have to change and evolve. So again, I'm sharing some of the important data points. We have not historically been in a position to provide the exact quantification. We obviously have a plan. What is really important is the milestones and how we're executing against some of these important targets, milestones, be it in gross margin, be it in terms of reducing the CapEx and accelerating the trajectory to the breakeven. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham. Graham Stanley: Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the first quarter of 2026. With me on today's call are Fred Lowery, Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that is forward-looking. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading and they're also in our quarterly earnings presentation posted on the Investor Relations website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 5, 2026. And Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q&A session, please limit yourself to a single question so that we can accommodate questions from as many of you as possible. And with that, I'd like to turn the call over to Fred Lowery. Frederick Lowery: Thank you, Graham, and good morning, everyone, and thank you for joining us today. I'm honored to lead Henry Schein as a CEO, and I look forward to building on the strong foundation and proud heritage that define this company. While at the same time, taking a fresh look at people, process and technology to advance the culture of continuous improvement. I'm also pleased to report our strong financial results for the first quarter. But before we turn to these I want to highlight some key observations that I've had as I progressed through my 100-day plan. First, I am impressed by the strong competitive advantages Henry Schein has built over the years. Globally, we successfully serve hundreds of thousands of independent private practices with responsive, consistent overnight delivery. In the U.S., we are the primary distributor for most national DSOs a position that reflects years of being a trusted and reliable partner. Our reach provides us with supply chain flexibility and sourcing advantages as well as access to a broad global customer base for our suppliers. Secondly, pursuant to our BOLD+1 strategy, we deliver an extensive integrated offering, which includes a broad portfolio of quality corporate brands and specialty products, software, equipment products, technical services and business solutions, this differentiated offering makes us the platform of choice for office-based practitioners. And third, our ability to deliver an excellent customer experience really sets us apart. Our field sales consultants, they really know their customers deeply and are genuinely and invested in their success, and they're supported by our equipment service technicians. And when you put that together, we provide a service that is difficult to replicate. When you put all these things together, our technology, our products, our value-added services, and our people, we create a significant competitive advantage, which we will continue to enhance over time. So over the last 2 months, I've immersed myself in the business, and I've spoken with lots of customers and suppliers and employees and a few things that I've heard. One thing is clear from customers, the dental market remains healthy. with demand continuing to outpace supply. Therefore, efficiency and workflow optimization are important for our customers to be able to see more patients. What's encouraging is how well our strategy aligns with our customers' needs through the development of open architecture integrated solutions that create a platform allowing our customers to deliver better care while running more productive and more profitable practices. Turning to the medical market. procedures continue to shift to nonacute care settings, which also aligns well with our unique capabilities to supply the right quantities to all nonacute settings, including ambulatory surgical centers, community health centers, private practices and home solutions. I also received feedback that our dental and medical supplier partnerships remain another source of competitive differentiation. And I'm committed to providing a broad product offering to our customers supported by strong national brands as well as through our own value-added owned brand products. Suppliers recognize that our deep customer access and trusted relationships make us the partner of choice for driving growth in their businesses. Through exclusive and targeted promotional programs, we create value for suppliers and customers alike. Now while it's still pretty early days for me, I intend to sharpen our operational execution, build a stronger performance culture and create a leaner, more agile Henry Schein, allowing us to respond faster to customer needs and translate our market strength into accelerated growth and improve financial results. As I continue to dive deeper into the business, I expect to identify opportunities to drive growth, to streamline processes and to enhance execution. I'd like to highlight a couple of examples for you today. The first is to enhance the cadence of new products and service offerings. This includes AI solutions, which are transforming the industry rapidly. And Henry Schein has a tremendous opportunity to develop further value-enhancing solutions. I think you're starting to see this with some of the recent product launches from Henry Schein One. The second is to align our commercial efforts to accelerate overall growth across each of our businesses. This is contemplated in accelerating the leverage priority of our BOLD+1 strategy, and we've already started. It's clear that Henry Schein has great assets with a differentiated platform to serve as a trusted partner to health care practitioners worldwide. As we look ahead, I'm excited by the significant opportunities to accelerate growth through the use of technology, improved operational excellence and becoming a more agile company. Now let's turn to the first quarter results. I'm pleased with our strong first quarter results that reflect continuing momentum from the second half of last year as we grow market share and expand gross margins. Sales strengthened in the U.S. dental and global technology businesses overcame softness in the medical business. The dental markets remain stable and healthy, and we are gaining market share. While merchandise prices have increased, particularly in the U.S., procedure volumes are holding steady. We anticipate further merchandise price increases in the second quarter as a consequence of higher oil prices. Dental practices and, in particular, DSOs are continuing to invest in equipment, and we are seeing DSOs gaining market share in the overall dental market. The nonacute care U.S. medical market remains strong, and our Home Solutions business continues to grow well. Our medical business had good underlying growth. However, the quarter was impacted by a decline in demand for point-of-care diagnostic test products related to respiratory illness, resulting from a light flu season. Our specialty products underlying markets remain healthy, with European volumes ahead of the U.S. Demand for premium implants is being driven by strong clinical engagement, most recently demonstrated at our BioHorizons Global Symposium last month where over 40 internationally recognized speakers presented the latest innovations in tissue regeneration, digital workflows and implant-based tooth replacement therapies to more than 1,100 clinicians from around the world. Growth in value implants driven by our S.I.N. and biotech dental businesses continues to outpace premium implants. Our Global Technology business again posted really good growth, reflecting continued demand for our cloud-based software technology solutions. The development pipeline of AI solutions has increased, and these are mostly integrated into our global suite of practice management software solutions. Last week, I had the opportunity to attend our Thrive Live event in Las Vegas which brings together dental professionals to get really hands-on training and education and to showcase our range of equipment and software solutions. This year, we had over 1,000 attendees and we launched our next-generation AI clinical workflow at the event, which generated significant excitement. The broad level of interest in our AI solutions was a clear signal that our customers are ready to embrace these tools and that Henry Schein is well positioned to lead that transition. Now let me give you a few highlights into the initiatives that advanced our strategic plan during the quarter. As I mentioned, our overall operating margin expanded, and we stabilized margins compared to a year ago. Our high-growth, high-margin businesses are now approaching 50% of our total operating income, and we remain on track to exceed our goal of 50% by the end of our strategic planning cycle in 2027. We are just beginning to unlock value from our value creation initiatives. These not only provide a clear path to both cost efficiencies and margin expansion, but I expect them to fuel our growth and further support an enhanced customer experience. Execution is really well underway. Let me give you a couple of examples. We've appointed an outsourced partner to centralize, select back-office functions and we expect to see benefits beginning later this year. We continue to strategically buy out minority partners to unlock integration opportunities across the specialty products business. We are starting to generate additional savings from our indirect procurement processes by leveraging our scale advantage. And finally, we are implementing gross profit initiatives, including value pricing and enhanced growth of our corporate brands. Therefore, I am committing to the company's goal of achieving greater than $200 million of annual operating income improvement within the next few years with $125 million run rate by the end of 2026. These initiatives, along with continued execution of our strategic plan will contribute to us achieving high single-digit to low double-digit earnings growth in the coming years. We have also successfully rolled out our global e-commerce platform, henryschein.com to our Canadian and U.S. laboratory customers. We are well advanced in implementation across the U.S. with over 80% of our U.S. dental e-commerce sales now transacted over henryschein.com. We expect to complete the U.S. rollout by the end of August and to extend the platform to new customers after we plan to shift our focus to the broader international deployment. Over the past several weeks, I have worked through the details of our financial plan. Our growth outlook, combined with the progress made on value creation initiatives and a strong start to the year reinforces my confidence and my commitment that we will deliver on our 2026 financial guidance. Looking ahead, I plan to continue learning more about the business and identify opportunities to accelerate our momentum. I look forward to sharing updates in our next calls. Now with that, I'll turn the call over to Ron to review in more detail our first quarter results. Ron? Ronald South: Thank you, Fred, and good morning, everyone. Today, I will review the financial highlights for the quarter. Starting with our first quarter sales results. Global sales were $3.4 billion, with sales growth of 6.3% compared to the first quarter of 2025. This reflects local currency internal sales growth of 2.5%, a 3.1% increase resulting from foreign currency exchange and 0.7% sales growth from acquisitions. Our GAAP operating margin for the first quarter of 2026 was 5.41%, a decrease of 12 basis points compared to the prior year GAAP operating margin. On a non-GAAP basis, the operating margin for the first quarter was 7.53%, up 28 basis points compared to the prior year, driven by gross margin expansion within the global distribution and global technology products groups as well as business mix. First quarter 2026 GAAP net income was $107 million or $0.92 per diluted share. This compares with prior year GAAP net income of $110 million or $0.88 per diluted share. Our first quarter 2026 non-GAAP net income was $153 million or $1.32 per diluted share. This compares to prior year non-GAAP net income of $143 million or $1.15 per diluted share. Foreign currency exchange favorably impacted our first quarter diluted EPS by approximately $0.03 versus the prior year. Adjusted EBITDA for the first quarter of 2026 was $289 million compared to first quarter 2025 adjusted EBITDA of $259 million or 11.6% growth. During the first quarter, we successfully completed a transaction that provides us a controlling interest in S.I.N. 360, the U.S. distributor of S.I.N. Brazil's value implant systems. We are excited about this transaction as it provides us with greater control over our U.S. implant product portfolio, especially in the faster-growing value implant market. and allows us to unlock growth and back-office integration efficiencies across these businesses. As we had previously held a noncontrolling interest at S.I.N. 360, the transaction did result in a remeasurement gain of $11 million this quarter or approximately $0.07 of diluted earnings per share. We will continue to evaluate strategic opportunities to further integrate some of our joint ventures to unlock growth and efficiencies. Some of these opportunities may result in additional reregimen gains. However, further gains from such transactions, if any, are not expected to be recognized until the second half of 2026. Turning to our sales results. The components of sales growth for the first quarter are included in Exhibit A in this morning's earnings release. We will now walk through key sales drivers for each reporting segment. Starting with our global distribution and value-added services group, whose sales grew by 6.1%, reflecting continuing strong momentum in the U.S. Looking at the components of that growth, U.S. dental merchandise sales grew 5.6% or 4.1% internal sales growth, reflecting ongoing acceleration of sales growth. Data from our Henry Schein One eClaims activity indicated signs of modest procedure growth in the U.S., and we believe that in general, patient traffic remained stable to leaning positively in the quarter. Our sales volume growth resulted in market share gains and prices increased further with the introduction of some additional price increases in January. U.S. dental equipment sales growth of 3.4% was driven by sales of traditional equipment as practitioners, particularly DSOs, remain confident in investing in their dental practices, and we expect this solid growth to continue. U.S. equipment growth was supported by some exclusive supplier initiated opportunities as our suppliers continue to view Henry Schein as their best opportunity to expand market share. This helped drive sales in the traditional and digital imaging categories. Overall, digital equipment sales were essentially flat due to continued softness in sales of Interroll scanners and treat printers. This was driven by lower average selling prices from new market entrants despite higher sales volume. U.S. medical distribution sales grew 1.3% or 1.2% internal sales growth. with strong growth in Home Solutions and dialysis, partially offset by lower sales of point-of-care diagnostic test products related to respiratory illness as a result of the light flu season. This category represents roughly 15% to 20% of our medical business. Excluding the impact of the diagnostic test products category, sales growth would have been in the mid-single-digit range. International dental merchandise sales grew 12.5% or 1.8% LCI sales growth driven by sales growth in the U.K., Italy and Brazil. International dental equipment sales grew 13.4% or 3.6% LCI sales growth, with solid growth in traditional equipment. Equipment sales growth was especially good in Germany, U.K. Canada, Australia and New Zealand. Finally, global value-added services sales grew 10.6% or 7.8% LCI sales growth. Turning to the Global Specialty Products Group, sales grew 8.1% or 1.7% LCI sales growth. Our implant sales were driven by high single-digit growth in value implant systems. The sales mix of value to premium implants also resulted in a lower gross margin compared to the prior year. We expect to achieve improved growth in the Specialty Products Group going forward this year. Our Global Technology Group continued to post solid results, with total sales growth of 7.0% or 6.9% LCI sales growth. In the U.S., we had strong revenue growth in our Dentrix Ascend practice management software business. Internationally, sales growth was driven by our Dentally cloud-based practice management software product. The number of cloud-based customers increased by roughly 25% year-over-year, primarily from new accounts, and we now have more than 13,000 Dentrix Ascend and Dentale subscribers. Regarding our restructuring program, the company recorded restructuring expenses of $12 million or $0.07 per diluted share during the first quarter of 2026 as we advance our value creation initiatives. With reference to capital deployment, during the first quarter of 2026, the company repurchased approximately 1.6 million shares of common stock at an average price of $77.64 per share for a total of $125 million. At the end of the quarter, we had approximately $655 million authorized and available for future stock repurchases. Turning to cash flow. Operating cash flow was negative $97 million in the first quarter of 2026 due to a normal seasonal decrease in accounts payable and accrued expenses from the year-end. Cash flow is typically lower in the first quarter than the rest of the year, and we still expect operating cash flow to exceed net income for the full year. Turning to our 2026 financial guidance. At this time, we are not able to provide about unreasonable effort and estimate of restructuring costs related to ongoing value creation initiatives. Therefore, we are not providing GAAP guidance. Our 2026 guidance is for current continuing operations and does not include the impact of restructuring expenses and related costs and other items described in our press release. Guidance assumes stable dental and medical end markets during the year that foreign currency exchange rates will remain generally consistent with current levels and that the effects of changes in tariffs and higher oil prices can be mitigated. We have implemented a number of measures designed to offset the potential financial impact of rising oil prices at this time, which affect both freight costs and cost pricing. Our 2026 full year guidance remains unchanged. Total sales growth is expected to be approximately 3% to 5% over 2025. We expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5.23 to $5.37. We are assuming an estimated non-GAAP effective tax rate of approximately 24%. We expect benefits from value creation programs to be weighted towards the second half of the year. Adjusted EBITDA is expected to grow in the mid-single digits versus 2025 adjusted EBITDA of $1.1 billion. and we continue to expect remeasurement gains recognized in 2026 to be less than recognized in 2025. So with that overview of our business and recent financial results, we're ready to take questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: I've got a couple, and I'll just ask them both upfront or somewhat connected. When I look across first quarter performance, I guess, what really stood out to me was that gross margin result, a really nice start to the year. Can you unpack maybe a bit some of the drivers there? Is that a function of value creation benefits that we can expect to persist through the year? You're already seeing some of that? And then how do we think about this result in the context of these rising shipping costs that are just better obviously happening just with where oil has moved. And Ron, just if you could maybe unpack some of those comments you made near the end of your prepared remarks on mitigation actions, any rules of thumb we should have in mind on what oil above $100 a barrel or a one kind of barrel means for your margin profile, just so we can have a little bit of an idea on sensitivity to this metric just in, I guess, last thing here, too. Just what's -- if you can help us what's included in guidance around what you're assuming for oil. Ronald South: Sure, Jason. I think on the -- with reference to the gross margin, yes, we are pleased with the improvements that we were able to get in gross margin the year-over-year is about 25 basis points and then the gross -- the total gross margin improvement versus the fourth quarter is about 86 basis points. So you are seeing a little bit -- some of the early benefits perhaps of the gross profit initiative from value creation to more -- we have, I would say, a slightly more dynamic pricing environment that's allowing us to react in a more timely basis. But it also reflects, I believe, the fact that our own brand products continue to -- the growth of those products continues to outpace the rest of the portfolio. where we do get better margins with those products as well. So we're seeing some mix benefit. We're seeing some strategic benefit and just, I think, a greater consciousness of how well we can work with our suppliers to assure that we get competitive costs and improve our margins accordingly. With reference to the price of crude oil and what's happening in terms of some of the disruption in the energy industry, I mean, it's an area where we're watching closely. It does impact a little bit some of the freight costs coming in. We are working closely with our customers. We're not just defaulting to increasing prices or looking at fuel surcharges but there are some things that -- some measures we're trying to take to try to protect the margins a little bit as our -- as we see those costs go up. Nothing that we're seeing out there yet that we believe is creating a significant issue. We have some plans in place that we could initiate if we think we need to. But right now, like we're seeing in our guidance, we feel like based on the current situation, we are able to mitigate any related cost increases. Jason Bednar: Okay. And sorry, just to clarify, your guidance assumes oil stays where it is or you have some error bars around where oil currently is? Ronald South: It assumes that we can mitigate rising. Obviously, there's a tipping point out there, right? But it assumes that we can mitigate the changes in the cost of oil. Operator: Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I was wondering about how to think about the cadence of specialty growth over the course of the year? Just in terms of anything to call out seasonality-wise, or some of those pricing changes, Ron, that you mentioned? And then, Fred, one for you. Maybe can you talk about some of the biggest sort of positives that confirmed your sort of expectations coming into Henry Schein and then maybe some of your biggest surprises? Ronald South: Certainly. Elizabeth, I'll start, and then I'll have Fred answer your second question. I think that -- on the specialty side, the results in the quarter were in line with our expectations. There was some timing of some buys from customers that we knew would impact Q1 somewhat. But we do expect improved growth in specialty going forward in terms of what the -- what we saw in the first quarter. I think that the products there, like we still remain very positive on what we're seeing on the value implant side and the high single-digit growth we're seeing in the sales of value implants. I think gives us the confidence that we can continue to improve that growth going forward. Fred, I'll let you to answer the second one. Frederick Lowery: Yes. Elizabeth, great to hear you. Thanks for the question. When I just take a step back and think about the positives, the biggest positive to me, and I sort of said it in the script, has been the confirmation that the set of assets that Henry Schein owns that we own are incredibly important to customers. And the ecosystem that we've built here through these assets really do help customers improve their practices. And that has been confirmed from the many custom business that I've been on. And I think that's incredibly exciting. I would say it's also an opportunity because I don't think it has been exploited to the extent that we can. I think we can do a better job of improving our customer value proposition so that our customers really understand what we can do for them. and that it's not just about us helping them save costs but about helping them have more profitable practices by driving productivity and helping them with their own pricing and seeing more patients. So that's quite exciting. I would say surprises, I don't know that I would characterize anything as a major surprise, but maybe things that I was quite encouraged by would be as it relates to our team Schein members, it's been a very consistent feedback, as I've talked to many, many different employees. The feedback has been 3 things. One, we love the company. We love the culture, the strong culture in the company; two, we love Stan, and we hate to see Stan go. But three, we know that we need to change in order to be better. And that has been like a really great starting point to see people leaning in and excited about the future of the company. I would say from a customer standpoint, without a doubt, every customer visit I've been on, customers enjoy doing business with Henry Schein, and they want to do more business with Henry Schein. And they think that we can help them more and they're depending on us to help them more, which really plays into our opportunity set as we develop new products and services that support them managing and running more profitable and higher growth practices. And then the third will be with our suppliers. Without a doubt, I talk to all of our top suppliers and they all see Henry Schein as a great place for them to grow their business. So those will be the things that I would say I was -- I've been most encouraged by and excited. It gives me some confidence in the future. I'm excited about a bright future for the company. Operator: Our next question comes from the line of Jeff Johnson with Baird. Jeffrey Johnson: Welcome, Fred. So I know it's only been a couple of months in the job now, and I'm sure you're going to get a lot of focus today on the 3-year profitability improvement plan, good to see that you're reiterating that $125 million run rate by the end of this year. But I'd love to hear your thoughts on how Schein gets back maybe to delivering stronger earnings growth in the absence of these one-off kind of restructurings we've been seeing every couple of few years out of the company. How do you think about building and investing in the muscle memory of this company so we can get back to kind of that upper single, low double-digit EPS growth longer term without having to go through kind of these bigger programs every couple few years. Frederick Lowery: Jeff, thank you for the question. And I'd first start with just characterizing the value creation not as just a one-off. We're building real capability that will stay with us over a long period of time. For example, our gross profit programs are -- will be ongoing. So we will be better at value pricing in the future than we are today. We have new techniques and new capabilities there that will stay with us. So I think you'll see that continue over time. We'll continue to benefit from that. The same with the programs that we're focused on driving our own brand products or our corporate brand products. So those things will continue over time. So I would start with that. Secondly, my focus is on developing a continuous improvement process here where we don't have an episodic approach to taking cost out, but where we continue to streamline our processes really for the benefit of our customers, streamlining our process so we become easier to do business with, so we support our customers better, so we grow our business faster. And as we do that, we will actually take some cost out and become more productive. So those are the 2 ways that I think about the question. And then as we do take costs out of the business, over time, we'll be able to reinvest into areas that are going to drive greater growth and thinking about the Henry Schein One portfolio where we're investing in AI capabilities that will help us grow over time. And then finally, our high-growth, high-margin products are growing faster. As I said during the prepared remarks, we're approaching the 50% mark for operating income from those products, and we expect to reach that as expected by 2027 at the end of our strategic plan period. So I think those things will support us getting back to continuing to deliver margin expansion over a period of time. Operator: Our next question comes from the line of Michael Cherny with Leerink Partners. Michael Cherny: Maybe if I can just go into the mitigation efforts a little bit more. You've obviously had situations in the past on a macro basis, I'm thinking back to COVID, where price increases were a component to offset your business. I know you said -- I think it was Ron that you don't want to just do price increases, but how much do you preview some of those dynamics? I can't imagine your customers would be surprised if there are price increases, short-term price increases, surcharges put in place. But how do you think about going through those conversations, the engagement to make sure that if and when you do have to push price increases as an offset, that it's taken in a way that's not necessarily deleterious to the customer relationship? Frederick Lowery: Listen, I'll take that one, and thank you for the question. So just to clarify, listen, we're taking the appropriate pricing actions based on what's happening in the macro, whether that's fuel surcharges, whether it's increasing the price of a particular product that may be oil-based like gloves, for example. And so we'll have those conversations with customers where it makes sense and give customers visibility as to what's driving the change. We also will offer customers alternatives. That's part of what makes us a really great partner and to say, hey, listen, there's some other alternatives that can help you without receiving such a high price increase by looking at the entire portfolio that we have. So we'll take the appropriate actions with our customers and have those direct conversations as we see things materialize in the market. Operator: Our next question comes from the line of Jonathan Block with Stifel. Joseph Federico: Joe Federico on for John. Maybe just to look at implants a little bit closer. I think that the specialties internal growth was low single digits and implants is the majority of that. I think you mentioned high single-digit value implant growth to an earlier question. So does that mean that premium was more flat to down? And is that possibly a function of the consumer? I think premiums heavier weighted to the international business. So any color on some of those dynamics would be great. Ronald South: Yes, Joe. So I think that -- yes, like we said, the value implants did experience higher growth, keeping in mind that of the mix within implants is about a 2:1 mix premium to value for us, right? We did see some flatness in the premium implants. And I would say more so in the U.S. versus Europe, but both were in the, say, lower single digits to flat. And so I do think that there is a -- there is some -- whether it be a little consumer pressure there or whatever it might be. But like I said, there was also some timing on some transactions that where the quarter itself came in, in line with our expectations within that segment. And we do believe that we'll see improved growth within that segment as the year progresses. Operator: Our next question comes from the line of Daniel Grosslight with Citi. Frederick Lowery: Daniel, you may be muted. We can't hear you. Matthew Miksic: Sorry about that. Global Dental growth was relatively strong across both merchandise and equipment. You mentioned a couple of times that you're taking share here, but also the underlying market seems to have recovered somewhat. So I'm curious how much of the dental strength is due to share gains versus just the overall market improving? And what your visibility is into the sustainability of that momentum through the remainder of the year? Ronald South: Certainly. I think that most of our market commentary is really fairly U.S.-centric because it's difficult to kind of talk to the international markets as a whole. Within the U.S., we think there was -- we said a slightly more positive tone to the market, still relatively low market growth. But what we're seeing is that we -- our data indicates that we are taking market share there. So we got a little bit of volume growth. We got a little bit of pricing favorability within the quarter within merchandise. And in the end, in the U.S., with a local internal growth of greater than 4% is a number we're pretty happy with. Outside the U.S., you do get a little bit of some pressure that has occurred in some countries, but we had I would say, especially outside of Europe, when you look at the growth we had in Brazil and in Canada, we had very good merchandise growth there. So there's a lot of pockets of positive whether it be from the market or from us taking market share, and I think it's probably more from us taking market share in those countries where we're getting this, seeing the growth in dental. Operator: Our next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: I want to follow up on that last question around the sources of share gains in dental. The U.S. merchandise sales were a little bit better than we expected and specialty was a little bit softer. Can you talk about where you're gaining share. Ron, I think you mentioned that you're gaining share in the merchandise sales. But have the pockets where you've been gaining market share in general? Have they -- in the U.S. market, have they changed or evolved over the past year or the past couple of quarters between merchandise and specialty? And then how do we think about what you expect for share gains or the sources of share gains for the remainder of 2026? Ronald South: Well, I mean, I don't know if there's any one -- when you say pockets, I don't know if you mean product categories, but I don't think there's anything like any specific product category I would point to. I think it's broader than that. I would say if you're looking for something specific, we are seeing better growth of our own brands than we are with the -- versus the balance of the portfolio. So that is an area that has I think, given us some opportunity to provide some growth that exceeds that of the market. We're also kind of continuing with I think some of the success of the promotional activity we did last year, and that has provided us with some momentum, and we've been able to retain a lot of those customers that we picked up and that increased share of wallet that we picked up with some existing customers that -- so some of that growth you saw in Q3 and Q4 has continued into Q1. Operator: Our next question comes from the line of John Stansel with JPMorgan. John Stansel: Just following up on that point around maybe DSOs in particular. I think you've said over the last couple of months that they're gaining share or growing faster than the market. Is there anything particularly driving their growth above market growth rates? And then maybe just for Fred, as you've had discussions with them, particularly, what are they looking for that you see as opportunities for Schein to provide to the DSOs. Frederick Lowery: Yes. I'll take maybe -- I'll start, and Ron, you can add to this. But one thing to consider about even the last question on market share is that we're growing with DSOs. We have a strong position with all the national DSOs, the most of the national DSOs, almost all of them and they're growing faster. And so we're seeing the benefit of that growth. But when I've spoken with the DSO leaders and I've spent quite a bit of time with them. They appreciate the fact that we're able to support them nationally. They appreciate the fact that we're able to help them improve their efficiency. They appreciate the fact in many cases, that they're leveraging our technology to improve their profitability. And we've got access to some of the best exclusives in the market that are helping to drive their growth. So I think that total platform that we've built to support, particularly in this case, dental, that DSOs are benefiting from that. And so those are the kind of the feedback points that I've received from DSOs. Operator: Our next question comes from the line of Glen Santangelo with Barclays. Glen Santangelo: Fred, I want to talk a little bit about the organic sales growth at a high level. I mean, as you sort of highlighted in your prepared remarks, the second half of the year was particularly strong. And looking at the fourth quarter, we exited at a pretty robust rate. Now you obviously moderated a little bit from that trend and you spoke about medical. And I'm just kind of curious, can you give us some color about how the quarter maybe played out sequentially kind of thinking about the fact that other companies have sort of commented that weather may have impacted January we have the war now in March. And I'm kind of curious if you could give us any early view on sort of April and how things have played out. Frederick Lowery: Yes. Thanks for the question, Glenn. Looking at the quarter sequentially, we saw better performance sequentially through the quarter. So March was stronger than February. Part of what you're seeing in Q1 is the softness related to our respiratory business or because of the light and flu season. And maybe there's a little bit of weather, I would say it's more of the flu season than weather for us. But sequentially, we saw that get better and even that continued in April. So April continues to be strong. Operator: Our next question comes from the line of Kevin Caliendo with UBS. Kevin Caliendo: The remeasurement -- excuse me, not the remeasurement, the cost savings program, what -- can you just give us a little bit of a cadence? I understand the exiting of the year at $125 million is great. Can you size what the costs were in 1Q? When do you think it's going to be breakeven within the P&L? Just trying to understand the cadence. I know you don't like to give quarterly guidance, but just this part of the of the business would be really helpful to understand. Ronald South: Yes, Kevin, I think that the financial impact, at least with reference to the G&A portion of this was, I would say, was relatively nominal in the first quarter because we incurred some costs associated with the programs. We saved some costs associated with the program. we're going to start seeing that savings begin to accelerate as we get into the second quarter and then even more so in the third and the fourth quarter. So that's the root of our of our comment when we say we expect to see better earnings in the back half of the year than the first half of the year because it will be largely driven by some of those G&A cost reductions. I think equally, but it's -- I don't want to forget about the gross profit optimization as well because we do think that there were some benefits in Q1 from it. We think that those benefits can continue to grow as we get into the year. and we'll continue to accumulate into the -- especially into the back half of the year. So in terms of the quarterly cadence, it's really more to what's the back half versus first half, and we still expect the back half of the year to have better earnings in the first half. Kevin Caliendo: Got it. If I can ask a quick follow-up just on the remeasurement stuff. So there's $11 million this quarter and your guidance assumes that from an operational perspective, it will be less than last year, right? So that would imply single digits the rest of the year. Is that -- am I thinking about that the right way? Ronald South: Single digits in terms of EPS? Kevin Caliendo: No, in terms of dollars, in terms of EBIT impact or EPS, however you want to describe it. I'm just trying to understand what's sort of embedded for the rest of the year. Ronald South: Yes. I mean we're -- like I said, we're contemplating a range. And I believe in the prepared remarks, we said any remeasurement gains, if any, I mean there's no guarantee we will have any more remeasurement gains this year, but that's the -- we look at the opportunities there. We look at the strategic initiatives we're taking and which of these joint ventures would it make sense for us to consolidate, and that is contemplated in the overall guidance that we've provided. Operator: Our next question comes from the line of Brandon Vazquez with William Blair. Unknown Analyst: It's Max on for Brandon. Just one quick one for me. On the medical supply side of the business, are you guys seeing any impacts from noise around ACA or Medicaid work requirements or do you have any concerns about this impacting procedural volumes going forward? Ronald South: I would say that clearly, there's going to be -- I'm sure there's some impact, but we -- we're not seeing it as having a material impact at all really on the business. I mean, I think that at the end of the day, the more people who have access to care, the better off we are on the medical side. But this is really a, I think, a relatively small part of a lot of our customers' business, and we don't expect it to be that -- have a significant impact. Operator: And now we have time for one last question coming from the line of Michael Sarcone from Jefferies. Michael Sarcone: I was hoping you can just elaborate a bit more on what you're seeing on the equipment demand side, particularly for the digital equipment? Ronald South: Yes. On the digital side, we're still seeing very good demand for intraoral scanners. That's really the -- to me, that's the key product in digital. But we continue to see lower-priced entrants to the market, which is actually helping drive demand of intraoral scanners. And the beauty of intra-oral scanners, and I've said this before, is once a practice is investing in intraoral scanners, they become a digital practice, and then they are now they become a customer to buy other digital equipment. So while those prices have depressed a little bit and do hurt a little bit of that top line growth, it does give you an opportunity to sell additional digital equipment to those customers going forward. Traditional equipment still had very good growth in the quarter, and that's a very good indicator of the confidence and practices who are investing in their practices, either adding a chair or renovating a chair. And we continue to feel like the backlog on our traditional side is healthy and will help gives us the confidence that we can continue to see growth in equipment as the equipment sales as the year goes on. Frederick Lowery: Well, thank you, again, for joining us today. And I'd like to maybe just give a few concluding remarks. First, we delivered a strong first quarter. Sales momentum continues and the U.S. Dental and Global Technology businesses delivered strong sales growth, more than offsetting the softness in medical. Margins are also expanding, driven by favorable business mix and some early impact from value creation. Secondly, I'm encouraged by the progress we've made on our value creation initiatives. I do remain very realistic about the work that's ahead but we are committed to achieving the $200 million target and the $125 million run rate by the end of the year. The early progress gives me confidence that these initiatives will be a meaningful driver of operating margin expansion over the next several years and will contribute to achieving future high single-digit to low double-digit earnings growth. And third, I believe the full year 2026 financial guidance is appropriate. It assumes stable end markets and takes into account potential macro uncertainty. While our fundamentals are strong, I see meaningful opportunities to enhance our operational execution and performance culture. This will take time, but the work is actively underway, and I'm confident it will drive sustained value creation. I'm optimistic about what lies ahead, and I look forward to updating you on our progress throughout the year. Thank you for your interest in Henry Schein, and enjoy the rest of your day. Operator: Thank you. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.