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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.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Harley-Davidson 2026 First Quarter Investor and Analyst Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the call over to Shawn Collins. Thank you. Please go ahead. Shawn Collins: Thank you. Good morning. This is Shawn Collins, the Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are Harley-Davidson Chief Executive Officer, Artie Starrs; and Chief Financial and Commercial Officer, Jonathan Root. With that, let me turn it over to Harley-Davidson CEO, Artie Starrs. Arthur Starrs: Thank you, Shawn, and good morning, everyone, and thank you for joining us today for our Q1 2026 financial results as well as an introduction to our new strategic plan, which we're calling "Back to the Bricks". I'll begin with an overview of our Q1 performance. Jonathan will then provide additional financial commentary before we turn to our strategy. Before I get into it, I'd like to take a moment to acknowledge our deeply committed and passionate Harley-Davidson employees who work tirelessly to bring Harley-Davidson alive across the world. Thank you, Team HD. Starting with retail sales, we're pleased with our performance this quarter. North America delivered a 14% increase versus the prior year, contributing to global retail sales growth of 8% in what remains a challenging consumer environment. These results reflect the impact of the actions we've taken to drive demand and improve execution. As noted on the Q4 earnings call, dealer health and inventory levels remain a key focus for the company. During the quarter, we reduced global inventory by 22% year-over-year as we continued to prioritize dealer inventory sell-through and aligning wholesale shipments with retail demand. We'll share more detail on this in our strategy discussion. Strengthening dealer relationships has also remained a priority. We recognize the critical role our dealer network plays in the Harley-Davidson ecosystem, and we're encouraged by the renewed sense of partnership and momentum across the network. This will be an important driver as we move forward into our next chapter. During the quarter, we also formally reopened our Juneau Avenue headquarters in Milwaukee, Wisconsin, affectionately referred to by our Harley-Davidson community as the Bricks, with our employees at headquarters returning to the office for the first time since 2020. Finally, we've been encouraged by the early reception to our new marketing platform, RIDE. I'll speak more about the brand platform and the value we believe it will bring as part of our strategy presentation. With that, I'll turn it over to Jonathan. Jonathan Root: Thank you, Artie, and good morning to all. I plan to start on Page 4 of the presentation, where I will briefly summarize the financial results for the first quarter. Subsequently, I will go into further detail on each business segment. Let me start with our consolidated financial results for the first quarter of 2026. Consolidated revenue in the first quarter was down 12%, driven primarily by HDFS revenue being down 54% as it moved into a new capital-light model after the closing of the HDFS transaction, where we sold a significant part of the retail loan book and agreed to a forward flow in which we expect to sell approximately 2/3 of future originations. Consolidated operating income in the first quarter came in at $23 million compared to operating income of $160 million in Q1 of 2025. This was driven by a significant year-over-year decline in operating income at both HDMC and HDFS as we expected. The operating loss at LiveWire was $18 million, which was in line with our expectations and $2 million favorable to a year ago. In Q1, earnings per share was $0.22, which compares to $1.07 in Q1 of 2025. Now turning to Page 5 and HDMC retail performance. In Q1, North American retail sales of new motorcycles were up 14% versus prior year with approximately 24,000 motorcycles sold. In Q1, retail sales of new motorcycles outside of North America were down 4% versus prior year with approximately 10,000 motorcycles sold, resulting in Q1 global retail sales of new motorcycles being up 8% versus the prior year with a total of approximately 34,000 motorcycles retailed. While we are relatively pleased with the start to the year, particularly in the U.S., we remain mindful of the global consumer discretionary landscape, which remains uneven. We are aware that pricing continues to be on the top of customers' minds given the current global setup that includes inflationary pressures, interest rates that continue to run above recent historical lows and global geopolitical uncertainty. In North America, Q1 retail sales were up 14%, where U.S. retail sales were up 16% and Canada retail sales were down 8%. Results were driven by continued strength in our Touring and Trike models as consumers reacted well to our new 2026 motorcycle launch and targeted customer incentives. This translated into a significant market share gain with Harley-Davidson reaching 38% of the U.S. 601 CC+ market, up 2 percentage points year-over-year. Dealer inventory in North America declined 21% year-over-year, reflecting a more balanced setup as we enter the main riding season. In EMEA, Q1 retail sales posted a modest decline of 3%. In the quarter, performance reflected a subdued economic environment in Europe, although supported with early model year 2026 product momentum across the continent as evidenced by the quick sell-through of new units that began arriving later in Q1. The Rev Max platform continued to outperform the broader portfolio, led by Adventure Touring, which showed strong growth year-over-year. In addition, from a market share standpoint, we moved from 2% to 4% of share in the European market in Q1. In Asia Pacific, Q1 retail sales declined by 9%. In the quarter, we experienced modest declines in the core portfolio, including Touring, Trike and Softail, reflecting broad-based pressure across Japan, Australia and China, partially offset by positive results in our noncore motorcycle portfolio with strength in Adventure Touring. In Latin America, Q1 retail sales delivered another strong quarter with retail up 21%, where both Brazil, our largest Latin American market and Mexico were up, while other Latin American countries were down modestly year-over-year. Touring and Trike were the standout categories in the market. Dealer inventory at the end of Q1 of '26 was down 22% versus the end of Q1 of '25. Specifically, North American dealer inventory was down 21% and dealer inventory outside of North America was down 23%. This has allowed Harley-Davidson dealers to start the upcoming 2026 riding season with a largely appropriate setup. In addition, the quality of dealer inventory is healthier today than 1 year ago as it is more current from a model year standpoint. At the end of Q1, North America dealer inventory was comprised of approximately 2/3 of current model year 2026 motorcycles. In comparison, in the prior year period, a little less than 1/2 of all dealer inventory was current model year. We expect this improvement in healthy dealer inventory to pay dividends in future periods and believe it sets Harley-Davidson and our dealers up for greater success. Before we get into revenue, let's conclude with some information on wholesale shipments. From a wholesale shipment perspective, in Q1 of 2026, we delivered approximately 37,300 units compared to 38,600 units in Q1 of 2025, which is down 3% year-over-year. As we are now beginning the prime riding season in North America, we have recently heard from dealers that they could benefit from more inventory with regard to particular places, models and trim levels. This is a good sign, and we expect to ship more units on a year-over-year basis in Q2 and Q4, while running lower in Q3 in comparison to the prior year period. We expect this will get us to a more even shipment cadence across the quarters in comparison to what we have delivered in recent years. Now turning to Page 6 and HDMC revenue performance. In Q1, HDMC revenue decreased by 2%, coming in at $1.1 billion. We point out that from a business line standpoint, motorcycles came in at $836 million, D&A plus apparel came in at $200 million and licensing and other came in at $20 million. The drivers of overall revenue at HDMC included lower volume or shipments and lower net pricing and incentive spend. These were partially offset by favorable foreign currency. Now turning to Page 7 and HDMC margin performance. In Q1, HDMC gross profit came in at 25.3%, which compares to 29.1% in the prior year. The year-over-year decrease was driven by the unfavorable impacts of increased tariff costs of $45 million in Q1, which will be covered in more detail on the next slide, net pricing and incentive spend due to effective sell-through of prior model year dealer inventory. Product mix, lower volumes and higher-than-expected supply management costs as we work through a unique supplier situation. These were partially offset by the positive effects of tariff recoveries, settlement from prior years and favorable foreign exchange. In Q1, operating expenses totaled $248 million, which was $49 million higher compared to prior year. This falls into 2 broad buckets. The first piece is a restructuring expense of $15 million, driven by costs incurred related to strategic changes, including the company's decision to eliminate certain roles, resulting in onetime employee termination benefits and other restructuring charges. The second piece consists of $34 million of additional costs in the quarter, specifically due to higher warranty spend due to select product recalls, select people costs primarily related to executive team changes on a year-over-year basis, increased marketing spend as the marketing development fund matures and limited other discrete expenses to operate the business. In Q1, HDMC had operating income of $19 million, which compares to operating income of $116 million in the prior year period. Turning to Slide 8. In 2026, the overall global tariff regulatory environment continues to evolve. There are a number of factors at play in this space, including the potential for increased tariff recoveries, evolution in the application of IEEPA Section 122 and updates to Section 232 steel and aluminum tariffs. In Q1, we saw the most significant year-over-year impact in tariffs we expect to experience this year. This is a result of the increased tariff levels, which were initially put in place beginning in Q2 of 2025. In Q1 of ' 26, the cost of new or increased tariffs was $45 million. As tariff policy changes, there are lags associated with the various tariff levels as these adjustments work their way through our parts inventory imported prior to the current Section 232 pronouncement. We continue to pursue mitigation actions where possible and pursue tariff recoveries when applicable. We note that recent U.S. administration tariff regulation announced in early April included an exemption on certain motorcycles and for parts and accessories for the use in the manufacturing of motorcycles. We would note that Harley-Davidson is a business very centered in and around the United States. 3 of our 4 manufacturing centers are U.S.-based and 100% of our U.S. core product is manufactured in the U.S. This change will serve in helping mitigate the impact to tariffs to Harley-Davidson and enable us to strengthen our commitment to U.S. manufacturing. At this point in time, we expect the cost of increased tariffs to be in a range of $75 million to $90 million for the full year 2026, which is favorable to what we guided to in our prior quarter. From a cadence perspective, our expected tariff amount will decrease consecutively as we work our way across the remaining quarters in 2026. Turning to HDFS on Page 9. At Harley-Davidson Financial Services, Q1 revenue came in at $112 million, a decrease of 54%, driven by lower interest income due to the decline in retail receivables related to the sale of loan assets as part of the new HDFS transaction. Other income within HDFS revenue was favorable year-over-year due primarily to new servicing fees, investment income and new gains on third-party loan sales. HDFS operating income was $22 million, representing an operating income margin of 19.9%. On the expense side, interest expense and the provision for credit loss expense were both significantly lower, which was due to the decreased size of the retail loan portfolio and related debt on a year-over-year basis and as expected, with the change in strategy associated with the HDFS transaction. The HDFS team continues to manage expenses prudently with operating expenses decreasing by $1 million versus prior year. Turning to Page 10. In Q1, HDFS' annualized retail credit loss ratio on managed loans was 3.6%, which compares to 3.8% in the year ago period. We are pleased with HDFS loan origination activities as total retail loan originations in Q1 were up 14%, coming in at $671 million in Q1. Total gross financing receivables were $2.5 billion at the end of Q1, where retail receivables were $1.3 billion and commercial receivables were $1.2 billion. Now turning to Slide 11 for the LiveWire segment. For the first quarter of 2026, LiveWire revenue increased 87% over prior year, driven by increases in electric motorcycle and basic brand electric balance bike units. Consolidated operating loss decreased by 11%, resulting from improved gross profit and lower selling, administrative and engineering expenses. In turn, this drove an improvement of over 25% in net cash used by operating activities in Q1 of '26 compared to Q1 of '25. For 2026, LiveWire's focus is heavily geared around the imminent launch of its S4 Honcho products, in particular, continued network expansion, cost savings and improvements and product innovation and development focused on products that will be profitable and positive drivers of cash flow. Now turning to Slide 12, wrapping up with consolidated Harley-Davidson, Inc. financial results. We had net cash use of $228 million from operating activities in Q1, which compares to $142 million of operating cash in the prior year period. Operating cash flow was lower than the prior year due to reduced cash inflows at HDMC on lower wholesale shipments. Also at HDFS, the operating cash flow decreased due to reduced interest income and due to new originations of retail finance receivables under the forward flow arrangement that were classified as held for sale, which is classified as an operating activity under U.S. GAAP. As a result, the originations to be sold to our strategic partners or outflows reduced cash flow from operations as there were no comparative retail finance receivable originations classified as held for sale in the first quarter of the prior year. This was partially offset by the inflows from the proceeds from the sale of retail finance receivables classified as held for sale. This will remain a distinct year-over-year item as we move through 2026 as a result of the HDFS transaction, which concluded throughout the second half of 2025. Total cash and cash equivalents ended Q1 of 2026 at $1.8 billion compared to $1.9 billion a year ago. As part of our share buyback strategy, in Q4 of 2025, we entered into an accelerated share repurchase agreement to repurchase $200 million of shares of the company's common stock. As part of the ASR agreement, we received $160 million or 80% of the notional worth of shares or 6.3 million shares delivered to us before December 31, 2025, with the remainder expected to be delivered in early 2026. On February 12, 2026, our ASR was concluded, and we received an additional 3.1 million shares on February 13, 2026. These shares had a value of $64.7 million, considering the share price during the ASR's performance period. Beyond the ASR, the company also repurchased another 3.5 million shares on a discretionary basis for $63.3 million in the first quarter of 2026. Therefore, in Q1, we repurchased a total of 6.6 million shares worth $128 million on a discretionary basis. We note that since our Q2 of 2024 earnings announcement, where we also announced a plan to repurchase $1 billion worth of our shares through 2026 that we have repurchased a total of 26.8 million shares. That is a total value of $726 million of Harley-Davidson shares purchased. We are pleased with the performance and have decided to conclude reporting on this program as we look forward to aligning our capital allocation approach with the updated strategy that Artie and I will walk through shortly. Share buybacks remain an important part of our capital allocation strategy, and you will hear more on this, including a refreshed and updated approach to capital return to shareholders. As we enter the main riding season, we remain pleased with our dealer inventory levels and leading market share position in the U.S. new model year '26 motorcycle launch, including the new limited touring motorcycles and the all-new redesigned Trike models. We are also pleased with the reception to a number of new, more affordable motorcycles, which have a focus on critical price points to help stoke demand. While we are not changing our financial guidance, we would note that our optimism on the year has increased. This is due in large part to our retail results in North America, and we are also pleased with the early action of our cost reduction work. For the full year 2026, the company reaffirms its guidance and continues to expect at HDMC retail units of 130,000 to 135,000 and wholesale units of 130,000 to 135,000. We believe that global dealer inventory levels are healthy, and therefore, we expect retail and wholesale to have a largely one-to-one relationship in 2026. In line with my earlier comments versus prior year, we expect shipments to be higher in Q2, relatively flat in Q3 and then up again in Q4. At the same time, we continue to expect production units at HDMC to be lower than wholesale units shipped in 2026 as we work to prudently manage overall company inventory levels. For 2026, we expect this will have a deleverage impact, which will put pressure on operating leverage and operating margin, but we expect to come into alignment by next year. In addition, we still expect to face a greater overall cost for incremental tariffs in 2026 compared to 2025 and which we covered in detail previously. As a reminder, in full year 2025, we incurred a cost of $67 million in new or increased tariffs. And in 2026, we forecast a cost of between $75 million to $90 million of new or increased tariffs based upon current tariff levels and versus the '24 baseline. This is an update to the prior range we provided of $75 million to $105 million. At HDMC, we expect operating income of positive $10 million to a loss of $40 million. At HDFS, we expect operating income of $45 million to $60 million. As a reminder, the new business model at HDFS, given the HDFS transaction, where Harley-Davidson Financial Services now employs a capital-light derisked business model and has a significantly changed financial earnings profile relative to before the transaction. For LiveWire, we are forecasting an operating loss in the range of $70 million to $80 million. And with that, I'll turn it back to Artie to cover our strategic plan. Arthur Starrs: Now turning to our strategic plan for Harley-Davidson. On behalf of our Harley-Davidson community, Jonathan and I are excited to introduce our Back to the Bricks plan, designed to reignite brand enthusiasm with riders around the world while driving profitable growth for our dealers and shareholders. It is grounded in the work we've done since October. We've spent significant time assessing the business, engaging deeply with dealers and riders and most recently through a global roadshow where we connected directly with the majority of our dealer network and all of our global dealer advisory councils. The Back to the Bricks plan will restore Harley-Davidson and position the company for growth. First, we are intensely focused on leveraging Harley-Davidson's competitive advantages, specifically brand, diversified revenue channels and most notably, P&A and financing products and our dealer network. Second, we are leaning into a true win-win model with our dealer network. Our dealers are not only our retail channel, but the frontline builders of our rider community. They are the true source of strength and a competitive advantage. When our dealers win, the enterprise wins and so do our shareholders. Third, we have already taken immediate actions to recapture share by better serving the large and community of riders where Harley-Davidson has a clear right to win. Fourth, we're doing this from a position of strength and plan to leverage our balance sheet, bolstered by cost and restructuring actions to enable both investment in the business and returns to shareholders. We are executing against a clear path to strong and growing free cash flow and EBITDA margin. And lastly, we brought on some great leadership talent to support the business as we enter this new chapter for the company. Moving to Slide 3. There are really 3 things that define Harley-Davidson. First, we are a 123-year young brand that designs and manufactures the best motorcycles in the world, combining iconic design, precision engineering and a look, sound and feel that is unmistakably Harley-Davidson. Second, through our best-in-class dealer network, we serve a global community across segments we've helped define over decades. Our riders show up in powerful ways through HOG chapters, rallies, events and by giving back to their local communities. And third, maybe most importantly, is the culture of riding. Since starting at the company, I've spent time with riders and dealers at events, rallies and swap meets and what stands out is the emotional connection. Riders talk about their motorcycles, their rides and their community in deeply personal ways. For them, riding isn't just about getting somewhere. It's about the experience itself. The ride is the destination. Turning to Slide 4. We're in the midst of a bold restoration of the business to drive value for shareholders. What's clear is that our heritage remains a powerful advantage, not something to preserve, but something to build from. It starts with our portfolio. Taking a step back over the last several years, we leaned heavily into touring and electric. Going forward, we are shifting to a more rider-centric portfolio, one that is more accessible, more customizable and better aligned to the needs of the full spectrum of our riders. Touring will always remain our core. We're building clear pathways into the brand that support long-term touring growth while also addressing other riding occasions and styles. Importantly, we can do this using our existing platforms, moving from too many of too few to a more balanced lineup. We're also adopting an enterprise profitability model, recognizing that our success is directly tied to the success of our dealers. When dealers win, we win. By aligning Harley-Davidson and dealer economics, we can create more value for riders, stronger profitability for dealers and more dependable cash flow for shareholders. I'll come back to this in more detail shortly. Another key pillar is parts and accessories. Customization is at the heart of Harley-Davidson. It's how riders make each bike their own, what we often think of as freedom for the soul or more personally, freedom for your soul. We're reestablishing parts and accessories as a core growth driver, one where we have a clear right to win and in alignment with dealers as this is an important component of their profitability. We're also reinforcing motor clothes and apparel, growing from the core of the brand. On promotions, as inventory has normalized, we are shifting to a more targeted and disciplined approach, one that supports volume while protecting margins. An expanded portfolio will play an important role here as well. From an investment standpoint, we continue to see upside in existing platforms, particularly within touring, but our near-term focus is on executing better with the platforms we already have rather than introducing entirely new ones. By leveraging our existing platforms and powertrain to bring new motorcycles to market, we are operating with a more capital-efficient model. Finally, we've taken important steps to refocus our brand around our community as reflected in the launch of the RIDE marketing platform. Taken together, we believe these actions position us to revitalize the business by leaning into what has always made Harley-Davidson strong and executing with greater clarity and discipline. As you can see on Slide 5, we've experienced a decline in retail volumes, and that's had a direct and meaningful impact on both company and dealer performance. At the core of this is a loss of relevancy with riders, most notably with the exit of iconic motorcycles like the Sportster, which limited accessibility and contributed to lower volumes. Additionally, we are excited to introduce Sprint, the perfect entry for many to the Harley-Davidson brand. At the same time, as volumes declined, our cost base remained largely fixed, putting pressure on margins and driving a greater reliance on broad-based promotions, particularly on higher-priced motorcycles. And importantly, lower throughput has had a direct impact on our dealers, reducing traffic, compressing profitability and limiting the performance of key revenue streams like parts and accessories and service. All of this reinforces a critical point. Restoring profitable volume is central to improving overall performance. And that's exactly what our strategy is designed to address, making the brand more accessible through a combination of portfolio changes, more targeted pricing and promotions and improved operational execution. Moving to Slide 6. While recent performance has been impacted, the underlying market opportunity remains significant. We see meaningful white space in existing markets, areas where Harley-Davidson has strong legacy equity and a clear right to win. Across new motorcycles, used motorcycles, parts and accessories and apparel, there is share of wallet that we were capturing as recently as 2019 that we are no longer capturing today. That creates a very direct opportunity to regain market share and do so in segments where our brand is already strong. Importantly, this strategy is not about entering new categories where we lack a competitive advantage. It's about doubling down on the categories we know, where we have credibility, scale and deep rider connection. We believe this positions us to regain lost share while driving meaningful volume growth over time. Now turning to our strengths on Slide 7. The foundation of Harley-Davidson is its legacy, an unparalleled brand with unique American heritage as recognized recently by USA Today as part of their 50 iconic brands that shaped America Series, underpinned by a best-in-class dealer experience, deeply committed riders and craftsmanship that delivers something truly unique. When I first joined the company, those advantages were immediately clear. And as we've looked more closely at the data, they've only become more compelling. We are one of the most recognized and esteemed brands in the category, and in many ways, we help define it. Our dealer network is a true competitive advantage, consistently delivering a best-in-class customer experience and serving as the frontline of our brand. Our riders have an incredible affinity for Harley-Davidson. They don't just buy our products, they live our brand. It's a level of loyalty and engagement that is difficult to replicate. And all of this is anchored in superior craftsmanship and quality that continues to resonate strongly with our riders. Taken together, these strengths provide a powerful foundation as we execute our plan and move the business forward. Now turning to our strategic road map on Slide 8. Against the backdrop we've just discussed, we've developed a plan for the next several years that unfolds in 3 clear phases. First is the reset. This phase is already underway and focused on taking cost out, rightsizing dealer inventory, strengthening our dealer relationships and rolling out the ride marketing platform. We're making progress across all these areas, and today, we'll provide an update on that momentum. Second is the growth phase. Beginning next year, you'll see a more expanded and balanced portfolio designed around what riders want while leveraging the full life cycle of the motorcycle to unlock additional revenue streams. Parts and accessories will play a much larger role, both in dealerships and as a core revenue driver. At the same time, we're refining our promotional approach to be more targeted, driving traffic and volume while preserving profitability. And third is the acceleration of value creation. As the portfolio becomes more accessible and better aligned to needs of our full spectrum of riders, we see opportunity to deepen ridership engagement. This includes greater participation in the used motorcycle ecosystem as well as further driving adjacent areas like apparel and licensing. With the foundation established in the first 2 phases, we believe we are well positioned to drive more sustainable enterprise growth and wider economic enterprise benefits. Turning to Slide 9. What are we doing right now? We've already begun putting this plan into action, and we're encouraged by the early momentum. As part of Phase 1, our actions on cost and inventory have been swift and effective. We've moved quickly to reduce headcount and take cost out of cost of goods sales, creating room to reinvest in key growth areas like parts and accessories. As we've previously outlined, we expect to deliver at least $150 million in annual run rate cost savings that will impact 2027 and beyond versus 2025 levels. At the same time, we've made meaningful progress on inventory. Global retail inventory is now at a much healthier level, down significantly, 22% year-over-year. But we still see opportunity to improve assortment and allocation at the dealer level. Importantly, these actions are starting to translate into results. We're seeing sales momentum return with retail growth and market share gains, including an 8% increase in global retail sales in Q1 2026. Now turning to our dealers on Slide 10. The Harley-Davidson dealer network is a clear competitive advantage, and our strategy is intentionally designed to support and strengthen their profitability. I firmly believe this company will go only as far as our dealers take us. That's why dealer profitability is a central pillar of our plan. Since joining, I've spent a significant amount of time with dealers, along with the broader leadership team, listening and learning directly from them on the ground. Our focus is on earning their trust and ensuring they're confident and excited about the path forward. We've already taken action through inventory rightsizing, better alignment on promotions and structural improvements to dealer programs, and we're not done. There are additional actions ahead that we expect to further strengthen dealer economics. Our objective is clear, to materially improve dealer profitability over time, supporting a stronger, more stable network and enabling long-term growth. As shown on the slide, we are targeting a meaningful step-up in dealer profitability over the next several years. Moving to Slide 11. It's important to understand the role dealers play in the Harley-Davidson ecosystem. Dealer profitability is nonnegotiable and ultimately a win for shareholders. At the core, brick-and-mortar economics and frontline enthusiasm are directly linked. When our dealers are profitable, they can invest in their business, delivering a better rider experience at the point of interaction with our brand. Stronger dealer economics also reduced the need for discounting and OEM promotional support, helping preserve the premium positioning and long-term health of the brand. Dealers are not just our primary sales channel. They are a powerful marketing engine, building the brand in local communities at scale. When they are successful, we unlock the ability to invest more in rider growth through initiatives like Riding Academy, HOG engagement and events that deepen connection to the brand. And importantly, healthy dealer profitability attracts capital, bringing more investment into the network and supporting long-term rider-centric growth. Moving to Slide 12. I want to spend a moment on the lens through which we're now viewing growth and profitability. We've done significant work to better understand how we make money as one enterprise, Harley-Davidson and our dealers together. What's clear is that focusing solely on wholesale and retail motorcycle margins is an incomplete view. A motorcycle generates value over its entire life cycle across parts and accessories, service, finance and insurance and ultimately, the used market. And importantly, Harley-Davidson and our dealers participate in that value at different points in time across multiple revenue streams. So going forward, we're managing the business against this broader enterprise economic model. By increasing new motorcycle volumes, we not only drive profit at the point of sale, we also expand the base of motorcycles in the market, which fuels downstream revenue across all of these channels. We believe this will create a more stable, diversified and sustainable earnings profile over time. It also changes how we think about the portfolio. We intend to bring motorcycles to market in a way that supports the full enterprise profit model, not just the economics of an individual launch or motorcycle. We expect this to reduce pressure on any single product and lead to more balanced performance across cycles. And importantly, the portfolio changes we're making, particularly around accessibility and customization play directly into this model by supporting higher volumes and stronger life cycle value. Over time, we plan for this to become a compounding growth engine. The return of Sportster and the introduction of new models like Sprint are great examples of how this approach will create value across the system. We're really excited to announce that our iconic Harley-Davidson Sportster will be returning in 2027. This has been the most requested motorcycle from both our riders and our dealers, and we're bringing it back better than ever. Sportster is a perfect embodiment of Back to the Bricks, and it fits naturally within our enterprise economic model. For context, Sportster has historically been a middle-weight, highly customizable motorcycle with an air-cooled powertrain and accessible starting price point, making it an important entry to the Harley-Davidson brand. While it was discontinued in 2022, it has remained incredibly strong in the used market, often retaining value at or above original MSRP, which speaks to its enduring appeal. With its accessibility, we expect Sportster to drive higher volumes. And with its customization potential, we expect strong attachment to parts and accessories as riders personalize their motorcycles. Beyond the motorcycle itself, Sportster also creates opportunity across apparel, licensing and the broader rider ecosystem. Importantly, it demonstrates how our strategy generates value across the full life cycle from the initial sale to entry into the used market. Taken together, Sportster is a critical part of our plan to restore volume, strengthen our portfolio and drive long-term enterprise value. We look forward to sharing more specifics later this year. Additionally, we're excited to bring Sprint to market beginning in the back half of 2026. This lightweight, customizable and accessible motorcycle provides a great entry to the brand for many riders. We are excited to be returning to a space that we haven't been in since the 1960s, and we believe that the Sprint will provide a great starting point for riders to enter the brand as they progress through the portfolio. Over the coming periods, we will be providing more detail on how this aligns with our portfolio planning and lifetime value creation. Moving to Slide 15 and zooming out to a broader view of the portfolio, we are taking deliberate steps to realign the portfolio, making it more rider-centric and better positioned to replicate the value creation cycle we just discussed across more models. Over the past few years, pricing and portfolio decisions reduced accessibility for some riders, which contributed to lower volumes and ultimately pressure on profitability. We're addressing that directly. Going forward, you'll see a more balanced lineup across price points while still maintaining our premium positioning. We're also expanding the use of blank canvas motorcycles, which we know is a key differentiator for Harley-Davidson, giving riders more opportunity to personalize their motorcycles through genuine parts and accessories. These changes are informed by deep analysis of the used market, direct dealer engagement and what we've learned from recent promotional activity. Importantly, we see clear gaps in the portfolio that we can address efficiently without starting from scratch. We're leveraging our existing platforms in powertrain, where we see significant room for growth, allowing us to expand the lineup without incremental capital investment. Taken together, this positions us to deliver what riders want, improve accessibility and drive stronger volume and life cycle value across the portfolio. Now turning to parts and accessories on Slide 16. This is one of our most important revenue channels and a significant growth opportunity. We believe there is a potential to drive 20% to 30% sales growth over time. We also recognize that we've underinvested in this area in recent years. Customization is at the core of the Harley-Davidson experience and a key driver of dealer profitability. No two Harley-Davidson motorcycles on the road are the same, and that's exactly how riders want it. So we've laid out a clear road map to rebuild our leadership in parts and accessories, leveraging our dealer network and existing manufacturing and supply chain capabilities. That starts with expanding our assortment, including reinstating approximately 30% of SKUs that were previously eliminated. We're also refocusing on core categories where Harley-Davidson has historically been strong, like seats, exhaust, lighting, windshields and handle bars and pairing that with an increased emphasis on blank canvas motorcycles that are designed for personalization. Importantly, we're integrating parts and accessories into the motorcycle launch process, ensuring availability at launch, supported by HDFS financing and aligned dealer incentives. As we execute this, we expect stronger dealer performance, increased attachment rates and ultimately, both revenue growth and margin expansion over time. Turning to Slide 17. We're also refining our approach to promotions. Historically, our promotional activity has been broader and less targeted. More recently, we used promotions to help reset elevated dealer inventory, which, while necessary, put pressure on profitability. Now with inventory at healthier levels, we're shifting to a more disciplined and targeted approach, focused on driving traffic and conversion at a lower cost. An important enabler of this is our expanding portfolio, which allows for more value-based messaging across a broader range of products rather than relying on heavy discounting on a narrower mix. We're also strengthening our capabilities with recent hires who bring deep experience in performance marketing in automotive retail. And the launch of our marketing development fund in 2025 is a key step in better aligning scale with more effective localized dealer messaging. Together, these efforts are improving how we manage incentive spend, driving more predictable growth while recognizing that many riders don't require heavy promotion to convert. The result is a more efficient model, which we believe will support volume recovery while protecting margins. Now turning to our marketing approach on Slide 18. Last month, we launched our new brand platform, RIDE, which really brings everything together. It's built on a simple but powerful insight, joy and swagger. At its core, RIDE celebrates the experience of riding and most importantly, our riders themselves. They and their motorcycles are the stars of the show. This reflects a broader shift in how we show up as a brand. We're moving toward more authentic, rider-focused storytelling that reinforces the community and culture at the heart of Harley-Davidson. We're also reallocating our marketing investments, moving away from a heavier e-commerce spend and toward top-of-funnel brand-building efforts to drive awareness and engagement. You may have even seen us recently on Wheel of Fortune. At the same time, we're making better use of tools like the marketing development fund while upgrading our digital platforms and programs to support both global scale and local activation. And perhaps most importantly, the power of RIDE is that it gives us a single unified voice while still allowing flexibility for riders and dealers around the world to bring the brand to life in their own way. It connects all aspects of Harley-Davidson, from product to community to marketing under one cohesive platform. And as you can see on the slide, it creates a clear and flexible framework for how we bring the brand to life across riders, dealers and markets around the world. Over time, we expect this to drive stronger engagement, deeper relevance and ultimately, growth. Now I'll hand it over to Jonathan to take you through the financial section. Jonathan, over to you. Jonathan Root: Thanks, Artie. Now turning to our financials on Slide 21. All of the facets of the strategy we've just laid out support our financial growth trajectory over the next few years. We believe we have a clear path to achieving $350 million plus EBITDA in 2027. The path to get there is clear and execution-driven, anchored by roughly $150 million in fixed cost reduction, better alignment between wholesale and retail volumes, the full impact of Sportster and Sprint, targeted expansion in high-margin parts and accessories and more effective disciplined promotions. Beyond 2027, the story doesn't stop. We expect continued strong growth driven by further cost absorption, a broader P&A and motorcycle portfolio, incremental product improvements and smarter incentive execution. The bottom line is this is a structural step change in profitability with clear levers and meaningful upside ahead. Now on Slide 22, we'll take a closer look at how we get there. This bridge outlines the key initiatives that will drive EBITDA improvement. In the near term, the focus will be on cost reduction and operating leverage, which we see as the primary drivers of performance. With these actions already underway, we have a clear line of sight to achieving $350 million or more. Beyond 2027, drivers for continued growth will include, but not be limited to, improvements in motorcycle margins and volume, supported by growth in parts and accessories. Turning to our medium-term targets on Slide 23. We expect to return to sustainable growth across key metrics. We expect to achieve mid-single-digit retail unit growth over the medium term. As Artie discussed, this return to growth will be driven by the significant actions we are taking across our business. Furthermore, we expect the momentum in retail units and other enabling actions to drive mid-single-digit growth in P&A and A&L. Combined with the ongoing inventory rightsizing, we expect this return to growth to have a significant impact on dealer health. From a margin standpoint, we expect to drive significant improvement in gross margins approaching 30%, while operating expenses as a percentage of sales decreased to less than 20% from the 25% in 2025. Over the midterm, we expect CapEx to remain broadly in line with recent expenditure levels. In totality, we expect to deliver attractive top line growth and drive towards a 10% to 12% EBITDA margin over the medium term. These targets reflect a more balanced and resilient business model underpinned by the Back to Brick strategy. I'll now touch briefly on HDFS on Slide 24. We believe that the business remains a highly strategic asset. Following the transaction, we have transitioned to a more capital-light model while maintaining HDFS' role in supporting motorcycle sales and dealer financing. We recently held a call to discuss the HDFS business in greater detail, but at a high level, we expect HDFS to see improved returns while reducing capital intensity. We expect to continue to strengthen HDFS' leading position in powersports and intend to expand our high-value finance and insurance product suite with optimized offers supporting motorcycle sales. In connection with our enhanced P&A offerings, HDFS plans to leverage additional financing to drive P&A sales. Lastly, we are also better training dealers to maintain the best-in-class penetration rate of HDFS. With all this in mind, we are targeting $125 million to $150 million in operating income for the business by 2029. Turning to capital allocation on Slide 25. Our priorities remain consistent. We will reinvest in the business where we see opportunities to drive growth across the key initiatives of our strategy. We also remain committed to returning capital to our shareholders through share buybacks and dividends. Additionally, we remain open to opportunistic value-additive M&A. And with that, I'll hand it back to Artie. Arthur Starrs: Thank you, Jonathan. To conclude, Harley-Davidson is built on a strong foundation, an iconic brand, a deeply loyal rider base and a differentiated dealer network. We're excited about the path forward. Our dealers are energized, and we're seeing real enthusiasm from the rider community around Back to the Bricks. This strategy is intentionally grounded in our core strengths, and we're doubling down on what makes Harley-Davidson unique, especially our dealer network. Importantly, execution is already underway, and we're seeing early signs that our actions are delivering results. We're doing this from a position of strength with a solid financial foundation to support both investment in the business and returns to shareholders. And we have the right team in place, energized and equipped with the experience needed to deliver on this plan. We remain committed to working closely with our dealers every step of the way to create value for our riders and ultimately for our shareholders. Thank you for your time this morning. And with that, we'll take your questions. Operator: [Operator Instructions] We'll take our first question from today, and that is from the line of Robin Farley from UBS. Robin Farley: Great. Two questions, if I may. First is just wondering what medium term is, 2029 medium term, just to kind of put a finer point on thinking about the targets. And then the other question is a little bit trickier with tariffs. Some of the bridge to your 2027 EBITDA is from, I guess, lower tariffs lumped in with some other things. And so if you could just help us think about that what you're expecting, what's factored in, in terms of tariff refunds into that? And your full year '26 guide was unchanged, but tariffs seem a little better. So maybe there's an offset there. And then just -- I don't know if the manufacturing for Sprint, if there -- if you're assuming tariffs on that, that's going to be outside the U.S. and potentially tariffs. So I know that's a lot of tariffs balled up into one, but just whatever you want to address. Arthur Starrs: Great. Robin, thank you. It's Artie. I appreciate the questions. I'll take the first one, and then I'll let Jonathan handle the tariff specifics. When we say medium term, we mean 3 to 5 years. So hopefully, that helps. And on the tariff piece, Jonathan? Jonathan Root: Yes. So from a -- so thank you, Robin. From a tariff standpoint, I think when you look at our 2026 estimate, we obviously have a midpoint of $83 million. On that, if you look within the first quarter, we had $45 million in tariffs that were paid. That leaves $38 million, again, just using the midpoint for simplicity for the balance of the year. Our viewpoint is that, that tariff amount will consecutively decrease by quarter as we benefit from the current tariff structure that we laid out on our slides. So in effective Q2 as we got into April, there were some changes from an overall tariff philosophy perspective that were put out there. You see the benefits of those. Obviously, that sort of accrues over time. We think that, that sets us up for 2027. We're not providing '27 guidance at this point. But a 2027 that is arguably more attractive than where we are from a 2026 perspective. So you can infer and use some of your own judgment on where that lands. From a tariff refund perspective, there's obviously a tremendous number of companies, large and small, across the United States that are working on tariff refund and approach to tariff refund right now. Obviously, we will be working and following all of the guidelines that we need to from a tariff refund perspective, but a little difficult for us to talk through some of the specifics on timing and when all of those dollars will hit throughout the year. We certainly have a little bit of benefit baked into our expectations, but it's not a tremendous driver for us. It's really more as we look what are the current tariff rules that are in place, how do we think that will accrue and you see the benefit that we've put in place from a guide perspective versus what we originally guided to for 2026. Operator: Our next question comes from the line of James Hardiman with Citigroup. James Hardiman: So 2 questions on sort of the Back to Bricks opportunity. I guess, first, when we talk to investors, the 1,000-pound gorilla, fair or not, is sort of the demographic backdrop, right? Specifically lower popularity of motorcycling, if you think about younger generations, maybe relative to their baby boomer counterparts. Artie, obviously, that's something that you've had to consider. How does the Back to the Bricks address that? Obviously, you've got some market share recapture goals that are pretty aggressive. Is there any concern that market share gains could be offset by category declines if those demographic headwinds persist? And I did have a follow-up if we could. Arthur Starrs: Sure. James, thanks for your question. I think the biggest thing in this strategy Back to the Bricks is we're prioritizing rider needs in a rider-centric portfolio. So we specifically called out 2 examples of how we're doing that. The Sportster, one of our most iconic motorcycles as recently as 5, 6 years ago, the market for that motorcycle is 35,000 to 40,000 plus on a global basis. Our riders and many younger riders and our dealers have expressed it is the #1 universal request from the Motor Company to deliver on a great Harley-Davidson Sportster and what we're talking about today is the 883. And so when I look at the demographics, how young people have always entered our brand over 123 years, it has been motorcycles like the Sportster. And over the last 30 or 40 years, the Sportster has been a critical entry point to the brand. The second motorcycle is the Sprint. We have not had a motorcycle like the Sprint in some time. We see it filling an important need in Riding Academy. As someone who recently went through Riding Academy, being able to get on a motorcycle and then buy that same or a similar motorcycle is a gap in our current portfolio, which we're extremely enthusiastic about what the Sprint is going to do. And I'd remind you that the number of M designations, at least in the United States right now, is quite strong, as strong as it's been. And we see the opportunity for us as we present the brand, as you look at the marketing campaign, this concept of joy and swagger is something that we believe is and will resonate with young people. It's core to bringing young people into the brand over many, many years, which the brand had done successfully. So I'm quite optimistic. And the portfolio of motorcycles we're bringing forward, I think, addresses this well. James Hardiman: That's great. And it's a great sort of dovetail into sort of my follow-up question. Obviously, as we think about your medium-term targets of mid-single-digit retail growth, most specifically. I think if investors felt comfortable with that number alone, this would probably be a $40 or $50 stock, right? But help us understand that target while factoring in the return of Sportster and the introduction of Sprint. How much of that retail growth is coming from those items? I'm just trying to understand sort of the organic versus the inorganic contributors to that mid-single-digit retail growth. Can you get to a place where the organic piece is also growing at a nice clip? Arthur Starrs: Sure. So thanks for the question. The Sportster is an important part, and Sprint obviously complements it as well. I referenced the volumes on Sportster historically. I'll go back to -- we feel that if we meet our riders where they're at, we can grow at these levels and beyond. I'm not going to give a specific number in terms of how much Sportster constitutes the amount of growth, but just based on historical numbers of Sportsters that have sold and a projected number of Sprint, we believe that a significant portion of the growth will come from there. In addition to that, this concept of decontented or blank canvas motorcycles that we referenced in the presentation is something our dealers have been asking for. And it does a couple of things. Number one is it leverages existing platforms and powertrains that we have and provides more accessibility across Touring and Softail, which is extremely exciting. And I'll remind everybody that some of these things where in Q4, we took action with things like our Solo introduction, they're already working. So some of the retail success that we saw in Q1, we've effectuated in these plans. So I'm very enthusiastic about growth in both cruising and touring with a more distributed and accessible portfolio of motorcycles. Sportster is a big part of it. And given what's sold historically in Sportster, I'm quite confident and what's happening in the used marketplace on Sportster, if you look up in some of the used market channels, it's extremely exciting to see residuals maintain, and it's difficult to get your hands on an 883 right now, which means there's a real need. Jonathan Root: James, the one piece that I would add too is, as you refer back to what was in the strategy deck, there's a page in there that talks through the multiyear view of motorcycle and the ancillary revenue streams. And so as you listen to Artie talk through changes to the portfolio, some of the kind of early wins that we've been seeing with Solo models and some of the benefits that our price point focus is beginning to drive, that obviously has showed up in the first quarter from a retail standpoint. So inside of Q1, we've demonstrated the benefit to the approach that has been laid out. And then from an overall strategy standpoint, as we think through a life cycle and lifetime view, we can really envision people moving through the portfolio. We can see the benefit that accrues to both Harley-Davidson and our dealers that aligns with what Artie talked through, and that's what gives us so much confidence in where we're going with the midterm targets and what's been laid out there. Operator: Our next question is from the line of Joe Altobello with Raymond James. Joseph Altobello: A couple of questions on the category expansion here. You talked about Sportster, talked about Sprint. It sounds like those are smaller bikes. Are there other sort of subcategories that you're looking to expand into as well just beyond smaller CC engines? And then the second question, there's a reason why Sportster was discontinued, right? It was hard to make money. So how has the economics of that bike changed? Arthur Starrs: Great question, Joe. Thank you. Let me take the second one first. So our team has done an extraordinary job over the last couple of years working on this project. And we have the cost at a place that we're extremely comfortable against the expected MSRP that we referenced. More importantly is this enterprise profitability model that has been just a fantastic way for us to communicate with our dealers. And when you think about the value that a motorcycle like Sportster brings to bear, it's very exciting when you look at the parts and accessories relevancy and opportunity. When you look at the service revenue that it brings through our dealerships, when you look at the used market that it feeds and maintains such strong residual values. So we're comfortable with the profitability of the motorcycle itself. However, we're extremely excited about how it juices the economics for the overall enterprise. To your first question, as it relates to other additions inside the portfolio, you can expect to see in the slide in the materials that references some of the current holes in the portfolio. Those are examples of where our dealers via our riders have specifically asked for motorcycles from us that they expect -- they expect from us and have gotten in the past. Some of these include maybe a little bit more content and many of them include less content. But once again, within existing families and with existing platforms and powertrains. And I can't give much more detail than that. I will share one tease with you, which you may have seen on social media, which you can expect from us to continue to do, and that's to get feedback from riders at the Mama Tried Show here in Milwaukee, subsequently at Daytona and then the MotoGP race in Austin, we teased a modern expression of our iconic Cafe Racer, and it's gotten extraordinary buzz and feedback from our riding community. And I think that would be the type of motorcycle that is still large in terms of large displacement powertrain that you can expect us to get feedback from riders, and you might see that from us in the market, but we're very excited about the response to it. Joseph Altobello: That's very helpful, Artie. And if I could just quickly follow up on that. The U.S. market for you has outpaced international for quite some time. Is the Sportster, is the Sprint part of that strategy to grow your international business? Arthur Starrs: The Sportster is #1 request from global dealers. If you walked into our dealership in Shanghai, if you walked into our dealership in Louisville, Kentucky, if you walked into a dealership in Frankfurt, Germany, and you asked the dealer or sales team lead in those dealerships, "What can Harley-Davidson do for you?" You would hear, "Bring back the Sportster." So yes, but it's global truth in terms of the enthusiasm around that bike. Operator: Our next question is from the line of Andrew Didora with Bank of America. Andrew Didora: Just kind of change gears a little bit onto HDFS, Jonathan, the $125 million to $150 million op income target. I guess what kind of -- I know the business has changed here. I guess what kind of receivables balance do you kind of anticipate growing to over through that time frame? And then more importantly, the revenue breakdown of HDFS, how should we think about maybe just interest income contribution versus the more kind of fee-based services income as the segment grows? Jonathan Root: Okay. Andrew, thank you for your question. So I'll start with a little session that we put out a couple of weeks ago on HDFS that really walked through that business, the different revenue streams of that business in a little bit more detail than obviously what we've covered here in earnings. That's probably a good refresher in terms of where that business goes as we move forward and what we're seeing. Obviously, from a revenue stream perspective in terms of where we are, we have -- we did at the end of last year, sell off the back book as we've covered. And then on a go-forward basis, we continue to service those loans. So important that we are continuing to make sure that we are retaining the customer focus on the interaction and then a lot that we think we can do as we think through how we move those customers through the portfolio over time in the way that we're marketing to them. On a near-term basis, we obviously will make sure that for any originations that we have from this point going forward, we retain 1/3 of those originations on our balance sheet and then 2/3 we have the ability to sell off to our partners. We continue to service all of those loans. So over time, the fee income associated with servicing is something that continues to grow. We also retain the revenue streams fully relative to protection products. We also retain the revenue streams fully relative to card products and what we do from a card perspective. And then we also fully retain everything from a wholesale and commercial loan standpoint. So dial in or tune into the recording that's available on our IR website that will walk through that in more detail. A couple of other pieces that I would call out from an HDFS standpoint. We're really pleased with what we're seeing on our managed annualized retail credit losses. So we have a page inside of the Q1 deck that highlights the year-over-year improvement in credit losses. So pretty excited that we have Q1 '26 kind of back below where we were not only in Q1 of '25, but Q1 of '24. So overall, I think the dynamics of the business are performing pretty well. We obviously have provided the $125 million to $150 million guide with the viewpoint that, that is a more capital-light model versus the way that we've run historically. So while the operating income is at a different level, we're really excited about the return that, that generates for our shareholders and obviously frees up a lot of capital for us to remain committed to the shareholder priorities that we put out there from a capital allocation standpoint. So I hope that helps. Andrew Didora: Okay. And then I know, Jonathan, you mentioned in your prepared remarks like interested in opportunistic M&A. Just curious kind of what could that entail? Is that more on manufacturing capability or brand side? Just curious there. Arthur Starrs: Yes, Andrew, it's Artie. I think we would look at any M&A as something that would accelerate the core areas of growth that we've laid out in the strategy. So anything that could drive dealer profitability would certainly be of interest. Parts and accessories would certainly be on the table. It was listed as the third thing right now. So it's not a top priority for us. But we do want to call out that anything that would make us stronger and allow us to drive the strategy faster, we would consider. Operator: Our next question is from the line of Molly Baum with Morgan Stanley. Molly Baum: I kind of wanted to ask maybe 1 or 2 about the affordability dynamics right now for your customers. You made a comment in the prepared remarks about how many buyers aren't requiring or don't require having promotions to convert. So can you maybe talk about [ U.S. ] specific for motorcycle buyers at present and what you were seeing from a promotional standpoint in 1Q and maybe even right after you cleared through some of the heavy inventory levels? And then just how you're thinking about affordability more broadly in the current environment and going forward? Arthur Starrs: Yes. Thanks, Molly. Yes. On affordability, I really look at it as accessibility. So it's certainly price is a part of it, but also meeting riders where they're at and filling their needs with our portfolio. So when we look at Q1, we were pleased certainly with how the promotions restored the dealer network to healthier inventory levels, and that was focused on model year '25 Touring. But we were also pleased with motorcycle sales that weren't promoted. And it demonstrated to us in some of the maybe more modest tweaks we made with the '26 launch in action in Q4. And going forward, having more options available to riders is important, certainly is price, but also features and benefits. The phrase I'm using internally is we've had too many of too few models on dealer floors. And by using and leveraging existing powertrain, existing platforms, we can have a much broader assortment of motorcycles to present across certainly Sprint and Sportster are good examples, but even within legacy cruising and touring. And what excites me about this is we're going to be more nimble as it relates to promotional activity. If you think about the promotions in Q1, we had a challenge. We actioned it on model year '25 Touring. But going forward, we will have more diversity within the Touring lineup where we can be a bit more surgical and segmented on which motorcycles we may have to promote at various points in time and maintain healthier margins on the balance, so to speak. It's something dealers have asked for, and we're going to be delivering on that as part of our go-forward plans. Molly Baum: Great. And maybe if I could ask one follow-up on the dealer profitability piece. You've talked a little bit about last quarter about some immediate changes you made with the fuel facility model adjustments, changes to e-commerce strategy. Can you kind of talk about how much of the doubling profitability by '26, doubling again by '29? How much of that is kind of improving the cost base, getting excess inventory out of the system versus how much is structural from these strategy changes that you're making? Arthur Starrs: What we put in place in Q4 and what is in place currently, we believe is appropriate. There's always the chance that there's small adjustments that we would align with our dealers on. But the Back to the Bricks plan and the targets that we put forward do not contemplate a change in the structural arrangement with our dealers. We -- the e-commerce strategy that we made tweaks to in Q4 as part of the go-forward plans, we instituted a marketing development fund, which is in place right now. So there's no structural change that -- no material structural change that's contemplated in driving the profitability. It's inventory. It's the right motorcycles at the right time with a rider-centric portfolio and certainly leaning into this marketing campaign, we think it's going to pay a lot of dividends. Jonathan Root: Yes. I think, Molly, the piece is worth adding on the dealer profitability side of the equation, too, is that obviously, volume and throughput makes a pretty meaningful change in their bottom line. So as we think through the -- again, going back to the strategy and the page that we built out that really helps you envision all of the different revenue streams for both Harley-Davidson and our dealers, that's a pretty important page to envision the way that we're running the business as we move forward. And so through that, the targets that we have on the mid-single-digit growth rates that you're seeing are really, really important for us and the benefits that accrue to our shareholders, and they are equally important for our dealers. And then in addition, as you see us really double down on our growth surrounding P&A, not only do you see P&A benefits from an overall revenue and margin standpoint. But inside of the dealer side of the equation, it does also drive some really nice service growth. So we're pretty excited about the way that we actually get our dealers back to something that we think is a much healthier and much better way to run their business. Operator: Our next question is from the line of Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: I just want to kind of circle back to 2 questions that were asked previously. First, just in terms of the Sprint, my understanding is it's being built overseas. So how do kind of recent tariff changes regarding imports potentially impact pricing on that? And then have you -- did you provide a breakdown of your medium-term retail CAGR like your expectations for U.S. versus global markets? Arthur Starrs: Sure, Tristan. I'll take -- I guess I'll take both of those. As it relates to Sprint, we're finalizing the specific production plans. We did call out that Sportster -- U.S. Sportsters will be made in York, in our York, Pennsylvania facility. And obviously, we're pleased with the revised guidance that we put forward on tariffs for '26. And we do contemplate based on current expectations that we have some favorability in tariffs going into '27 across the portfolio. And I'm sorry, the second question was CAGR. In terms of CAGR on U.S. versus international, we're not breaking that out. I will tell you that there's not a material change U.S. versus international, primarily because the motorcycles that we're talking about here and the rebalancing of the portfolio and filling in the holes are similar globally. So we generally have the same portfolio around the world right now. As I mentioned, the dealer request and enthusiasm around Sportster in particular, and motorcycles that are raw blank canvas and allow for parts and accessories, genuine parts and accessories additions to them are globally wanted. And so we don't have, I'd say, a material difference in the growth trajectory by market. Tristan Thomas-Martin: Okay. And just one follow-up on kind of the aftermarket plan. I'm not sure if I'm reading between the lines correctly. But are you -- is there going to be more focus on dealership kind of aftermarket add-ons versus factory aftermarket or kind of factory add-ons? Arthur Starrs: You mean parts and accessories in our dealerships and customization at the dealership level? Yes. Yes. So what we're saying is we expect to have more motorcycles in the portfolio that are maybe more approachable from a price perspective and have less accessories on them. And then our dealerships would be equipped with the P&A to personalize them for the riders, which is consistent with what the brand has done over many, many years. So it's frankly leaning into a legacy strength where P&A has maybe not been as focus for us with many of our motorcycles, in particular, large touring motorcycles, having a fair amount of content. Operator: Our next question is from the line of David MacGregor with Longbow Research. David S. MacGregor: I guess the question is on LiveWire and just the role that LiveWire plays in this product portfolio and vision. And just if it is sort of something you can start considering staying with, just how we should think -- thinking maybe that 3- to 5-year outlook you've expressed earlier, just the use of cash for that business over the next 3 to 5 years? Arthur Starrs: Yes, David, thank you. This is Artie. The first thing I'll say is we're excited about the LiveWire team's efforts this year and the pending launch of the Honcho Bike, which is, I think, an interesting and exciting addition to the portfolio, and we'll be monitoring that closely rest of the year to see how that does, but we're very excited to see how that comes to market. I'll repeat what I shared on previous earnings as it relates to LiveWire. We funded the loan in the back half of 2025. And that's our outstanding capital commitment, and we don't have intentions to fund the business directly from Harley-Davidson at this point in time. David S. MacGregor: Is there a way that you can influence demand? I mean you're talking about creating a higher level of interest back to James questions with demographics and -- and I'm just wondering if there's a way that you can shape demand as well on the electric front or you feel like there's steps you could take to maybe create a higher level of engagement. Arthur Starrs: Yes. We're focused on this Back to the Bricks plan and driving dealer profitability and getting the portfolio in a place that we think riders want from us. Karim and his team are focused on the electric side of the house at this time. Jonathan Root: Yes. And David, one piece that I would add, David, on the kind of demand influence is that through what you would have seen with what we delivered in Q1. We certainly believe that when we get the right alignment on marketing, promo and kind of how we run that. We can drive traffic to dealers, and we can drive higher close rates. You heard Artie talk about, I think one piece that always sticks with me from an Artie perspective is too many of too few, and you heard him reference that earlier on the call today. When we think through where the portfolio is going and some of the pieces that we have the ability to drive, we're really excited as the product portfolio becomes a little bit more nuanced in terms of what we're putting into market, we can lean into a lot of the strategies that we've really demonstrated some good success with and do that in a much more targeted way. So pretty excited about where we're going from the midterm as we think about both what we've demonstrated within Q4 of last year, Q1 of this year and then with what we've lined up from a strategy perspective, where we're going. So excited to see the kind of demonstrated ability that we've put in market so far and how that aligns with the strategy that's built out. David S. MacGregor: Do you have goals in place for building dealer support for LiveWire? Jonathan Root: The LiveWire team is certainly working on their approach to how they manage their dealer relationship. Operator: Our next question is from the line of Brandon Rolle with Loop Capital. Brandon Roll?: First, just on the dealer profitability improvement. Would you be able to size the headwind from maybe a more standardized rebate program to HDMC margins? Arthur Starrs: Thanks, Brandon. You're talking about H-D1 Rewards and the holdback? Brandon Roll?: Yes. I think under the previous management team, they had kind of made the rebate program or rewards program a little more difficult to pull back some margin into the company. So it seems like that's going back out to dealers. And I was wondering if you're able to size the headwind, if any, to HDMC margins. Arthur Starrs: Yes. I would characterize the headwind as modest over a medium-term period. The previous holdback was variable. So it was based on sales targets, and this is fixed. I wouldn't characterize it as -- it's not the primary driver of the profitability improvements that we're experiencing or forecasting. It's a small amount on a year-over-year basis, but it's not the primary amount. The larger impact which I heard consistently from our North American dealers, both in the fall and again on a recent road show was the predictability was so important. Predictability of having the fixed holdback was critical in terms of staffing levels, being able to project cash flow throughout the year. And I think it's just an example of us understanding our dealers' businesses and respecting what they need to run their business well and service our riders well. And so I'm pleased where we are and where we are today is precisely what we've modeled going forward. Brandon Roll?: Okay. Great. And just one last one. On your U.S. dealer network, how do you feel about the current size of the network? Obviously, there's been a lot of dealer consolidation over the last few years. Do you feel like the dealer network at the right size? Or are you going to continue to kind of, I guess, move away from inefficient dealers and I guess, not shrink the dealer network, but maybe make it stronger? Arthur Starrs: We're always looking for ways to make the dealer network stronger, and we love the fact that we have individual maybe smaller dealer owners, dealer principals in certain markets, and we also feel privileged to have some larger entities that own groups of dealerships. And I think the strength of our brand is a balance of both. One of the amazing things about Harley-Davidson dealerships is we have dealerships along these iconic rides where families, in some cases, have owned these dealerships for decades, in some cases, 70, 80, 90 years and extremely proud of that. And at the same time, we had recent acquirers in the market where some of our largest and some of our most profitable dealer owners are getting bigger in the system. And I love them all. We're committed to having a healthy dealer network, and we're not precious about size. We're precious about dealers that are enthusiastic about our brand and serve riders well. Operator: Ladies and gentlemen, we have time for a final question from the line of Jaime Katz with Morningstar. Jaime Katz: I will make it quick. I guess most of the profit improvement that you guys have, a lot of it looks like it's coming from leverage within SG&A. But can you talk a little bit more specifically about the top opportunities that are being targeted for cost reduction this year? Just so we can get a better idea of where that low-hanging fruit is coming from? Arthur Starrs: Jamie, thank you for your question. Yes. So it's obviously a balance of some headcount and then obviously some non-headcount-related costs and then also some cost of goods-related actions our teams are -- have done a fantastic job in Q1 at identifying areas. We've obviously done a significant amount of both competitive benchmarking, but also what's the right thing for Harley-Davidson and ensuring that we can grow going forward. We're not going to provide detail beyond that at this time, but we're very confident in the targets that we put forward and specifically the $150 million plus that we've earmarked for '27 and beyond. Jaime Katz: Okay. And then just quickly, I know there was some gross margin impact by pricing and mix. Is there any way to think about how those are trending over the remainder of the year just sort of from where you stand today? Arthur Starrs: Yes, Jamie, I'll let Jonathan take that one. Jonathan Root: Okay. Thank you, Jamie. So as we look at pricing and mix and sort of compare that to Q1 relative stability, I think, as we look through Q2, Q3 and Q4. You did hear in the Q1 financial comments a little bit more information relative to timing. So take a listen to that call in terms of how we talked about year-over-year quarters and what you see there. So from an overall pricing mix perspective, pretty flat to kind of a little bit of favorability in the balance of the year. As we look at what's coming, we're pretty excited about what we're going to be introducing, and you'll see some of the impacts from that. Please take a listen to what we talked about from a timing standpoint. That will be important as you're thinking through what our trajectory is going to look like for the year. And then you will see a little bit less of an impact from incentive-related activity. So as we've talked about, we were pretty aggressive in what we did from a Q1 standpoint. We're really pleased with where we landed dealer inventory. And so we think that really set us up for a very successful balance of the year. And hopefully, that sort of helps address your question. Operator: Thank you for your questions. And ladies and gentlemen, that will close down our Q&A session for today. Artie, I'd like to turn it back over to you for any closing comments. Arthur Starrs: Well, thank you, everybody. I appreciate you participating in today's call. And hopefully, you can tell how enthusiastic our team is, and I am in particular, about our path forward, and we look forward to updating you on our progress, and we'll talk to you at next earnings. Thank you. Jonathan Root: Thank you.
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 IPG Photonics' First Quarter 2026 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Senior Director, Investor Relations for introductions. Please go ahead with your conference. Eugene Fedotoff: Thank you, and good morning, everyone. With me today is IPG Photonics CEO, Dr. Mark Gitin, and Senior Vice President and CFO, Tim Mammen. On today's call, Mark will provide a summary of our first quarter results as well as the overall demand environment and then walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details. Let me remind you that statements made during this call that discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties are detailed in our Form 10-K for period ended December 31, 2025, and our reports on file with the Securities and Exchange Commission. Any forward-looking statements made on this call are the company's expectations or predictions as of today, May 5, 2026 only, and the company assumes no obligations to publicly release any updates or revisions to any such statements. During this call, we will be referencing certain non-GAAP measures. For more information on how we define these non-GAAP measures and the reconciliation of such measures is the most directly comparable GAAP measures as well as additional details on reported results, please refer to the earnings press release, earnings call presentation and the financial data were posted on our Investor Relations website. We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark. Mark Gitin: Thanks, Eugene. Good morning, everyone. First quarter revenue exceeded our expectations, increasing 17% year-over-year. We continue to see improved demand for our laser solutions, particularly in battery manufacturing and medical applications, which drove our strong performance in the quarter. We maintained a disciplined focus on our growth initiatives across all of our markets, delivering solid first quarter results and building momentum for future growth. Before looking more closely at our first quarter sales performance, I would like to highlight our updated revenue reporting framework, which better aligns with our strategic growth initiatives, making it easier to understand and track our progress. It also provides a clear separation between our industrial and nonindustrial revenue streams, giving better visibility into our focus areas and splitting the business into 2 distinct buckets, with unique performance and growth profiles. This reporting combines applications into 2 categories: Industrial Solutions and Advanced Solutions. Today, most of our business is in industrial solutions where we are building on our strong foundation, expanding our addressable market by displacing incumbent technologies and enhancing our value proposition by offering differentiated system and subsystem solutions. This includes applications such as cutting, welding, cleaning and additive manufacturing and other industrial offerings. In the first quarter, Industrial Solutions revenue accounted for 86% of total sales increasing 21% year-over-year as our design wins took hold and general industrial demand improved, welding, cutting, marking and cleaning applications drove higher revenue. Welding and cutting, our 2 largest applications posted double-digit growth benefiting from solid demand and new orders from battery manufacturing. Sequentially, Industrial Solutions revenue was relatively flat and outperform typical seasonality driven by business wins in cutting and additive manufacturing. In Advanced Solutions, which is another important driver of our future growth. We are applying our laser technologies and applications expertise, solving challenging problems for customers. Advanced Solutions serves markets such as medical, defense, micromachining, semiconductor manufacturing and others that present strong growth opportunities and collectively represent a $5 billion TAM. We've already established a solid presence in these markets and are excited about the opportunities that lie ahead. Advanced Solutions represented 14% of our revenue in the first quarter and declined modestly year-over-year. Revenue growth in medical and semiconductor applications was offset by lower micromachining sales due to cyclical demand in solar cell manufacturing. Sequentially, revenue declined due to lower medical sales following an exceptionally strong fourth quarter of 2025. We were particularly encouraged by increased sales in semiconductor applications as we gain traction with large equipment manufacturers. Total bookings were strong in the quarter with book-to-bill firmly above 1 for the second consecutive quarter. This gives us confidence in our outlook it points to robust demand for our solutions despite elevated levels of macroeconomic uncertainty. We see the strong demand to remain focused on executing our key growth initiatives across Industrial Solutions and advanced solutions, building upon our strong foundation and industrial innovation, expanding our leadership in laser technology into new high-growth applications such as medical, micromachining and defense. While our initiatives target a wide range of opportunities, our path to success is consistent, leveraging differentiated laser technology and deep applications expertise to deliver clear performance advantages that incumbent approaches cannot match. Together, these initiatives represent compelling opportunities to meaningfully expand our addressable market and support sustained long-term growth. In Industrial Solutions, welding revenue is growing, driven by our advanced capabilities for battery manufacturing across both electric vehicles and stationary storage applications. Global stationary storage deployment is growing rapidly to support data center energy requirements and is gaining increasing share of battery manufacturing. These batteries use larger cells with thicker bus bars, requiring higher power lasers, process monitoring. This aligns directly with our strengths. Our unique combination of adjustable mode beam lasers, advanced beam delivery and real-time process monitoring ensures well quality and sets us apart from the competition. Beyond lasers and subsystems, we continue to make meaningful progress in our systems business, which posted another strong quarter. We're moving up the value chain by integrating our fiber lasers into differentiated complete systems which, together with our applications expertise enables us to tackle complex problems that incumbent technologies cannot address. This approach allows us to deepen our partnerships with customers across a wide range of markets from welding to cleaning. Turning to Advanced Solutions. We continue to make progress with our growth strategy by targeting opportunities across defense, medical and micromachining applications. In February, we announced that Lockheed Martin placed a $10 million follow-on order for Crossbow our scalable, cost-effective, high-energy laser defense system for countering Group 1 and Group 2 drone threats. Shipments for that order are expected to begin in the second quarter. We also showcased Crossbow at the 2026 AUSA Global Force Symposium in Huntsville, Alabama, where we engage with defense industry leaders on how our solutions can address escalating drone threats at a significantly improved cost exchange ratio. Crossbow continues to generate interest from potential customers we're gaining traction on converting that interest into orders. In Medical, revenue grew significantly year-over-year driven by sales to a new customer as our solutions continue to deliver clinically meaningful outcomes. We are advancing our innovation road map and expect several new product approvals and introductions in 2026 and in 2027. We have a very strong backlog for 2026, giving us excellent visibility into full year revenue that points to another good year in medical. In semiconductor, revenue grew this quarter as we ramped up new lithography, metrology and inspection business with large semiconductor equipment manufacturers. This market is being driven by the accelerating adoption of AI, which is fueling demand for GPUs and high-bandwidth memory chips. We continue to advance our product development and are working closely with customers on design and opportunities, supported by the clear performance advantages of our solutions. Our strategic progress is enabled by the organizational changes and investments we have made. We have streamlined operations, strengthened decision-making and accelerated product development, translating into better performance and greater consistency across the business. While our entrepreneurial and innovative spirit remains at the heart of IPG, we are building the operating discipline required to scale these capabilities effectively. In summary, our team delivered another over-year growth. Customer demand for our differentiated laser solutions continue to strengthen across our markets. We are making meaningful progress on our strategic objectives, outperforming the market and creating lasting value for our customers and our shareholders. With that, I will now turn the call over to Tim. Timothy P.V. Mammen: Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation which is available on our Investor Relations website. I will start with revenue trends by application on Slide 5. Industrial Solutions revenue increased 21% year-over-year in Q1 and driven by growth in welding, cutting, cleaning and marking. This was partially offset by lower revenue in additive manufacturing. On a sequential basis, revenue was basically flat, down 1% and as lower revenue in welding and additive manufacturing was largely offset by growth in cutting and marking. Cleaning revenue is flat. Advanced Solutions revenue decreased 5% compared with last year as growth in medical and semiconductor was offset by lower revenue in defense and micromachining. Revenue is down 13% quarter-over-quarter on lower medical sales from a very strong fourth quarter. Micromachining, semiconductor and scientific revenue all improved sequentially. Sales of our emerging growth products continued to increase and accounted for 53% of total revenue in the first quarter, consistent with the prior quarter. Following our annual review, we made a slight adjustment to the product list. Many of these products are benefiting from growth in battery manufacturing and the medical market. Moving to revenue performance by region on Slide 6. North American revenue increased 27% compared with last year, driven by growth in welding, cutting, additive manufacturing and medical applications. Sequentially, revenue was down 4% due to declines in Cleaning and Medical, partially offset by strength in welding, cutting, additive manufacturing and micro machining. European sales were up 4% year-over-year, driven by cutting and down 13% sequentially versus a strong fourth quarter due to lower sales in welding, cleaning and additive manufacturing. Revenue in Asia improved 14% year-over-year driven by strong demand in welding, cutting, marking and cleaning applications, which primarily benefited from capacity additions for battery manufacturing. Revenue is flat quarter-over-quarter. Moving to the financial performance review on Slide 7. Total revenue was $265 million, up 17% year-over-year, marking our second consecutive quarter of double-digit sales growth. Foreign currency benefited revenue by approximately 4% this quarter compared to the same period in the prior year. GAAP gross margin was 37.5%, and adjusted gross margin was 37.8%. Adjusted gross margin came in close to the midpoint of our guidance range and improved sequentially. Gross margins benefited year-over-year from lower inventory provisions due to improved inventory management. While product margins have been stable over the last few quarters, we did experience headwinds from tariffs compared to the first quarter of 2025. We continue to target improvement in product margins based on pricing and cost reduction initiatives that are starting to take hold. Underabsorbed expenses continue to run at a higher level than we are targeting in the medium term. And we have specific initiatives underway to improve our operational efficiency. We expect the impact from tariffs to persist in 2026 and continue to work on ways to offset their impact, including cost reduction and pricing initiatives. Total GAAP operating expenses were $107 million. This includes a $13.5 million payment and license related to an agreement with TRUMPF Laser System technique, settling all parts of litigation between us worldwide. The license will have an immaterial impact on our future results. Excluding the settlement payment, litigation expenses, amortization of intangibles and other acquisition-related expenses, adjusted operating expenses were approximately $91 million, as we continue to invest in our strategic initiatives to drive future growth. GAAP operating loss in the quarter was $8 million, and GAAP net income was $2 million or $0.04 per diluted share. Excluding onetime items, FX and amortization, adjusted operating income was $9 million, and adjusted net income was $13 million, with adjusted earnings per diluted share of $0.29. Adjusted EBITDA was $35 million. Both adjusted EPS and adjusted EBITDA came in above the midpoints of our guidance ranges. Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with $813 million in cash, cash equivalents and short-term investments. We had $71 million in long-term investments and no debt. Cash used in operations was $5 million. The first quarter is typically weaker for cash generation, as it is impacted by annual bonus payments. During the first quarter, we spent $16 million on capital expenditures, below the expected run rate given our CapEx budget of $90 million to $100 million this year due to the timing of investments in our major fiber manufacturing facility in Germany. Excluding the German investment, underlying CapEx is running at about 5% of revenue and we expect to maintain this level going forward. Moving to our outlook on Slide 9. Orders remained strong with book-to-bill staying firmly about. For the second quarter of 2026, we expect revenue of $260 million to $290 million, and we expect adjusted gross margin between 37% and and 40%, including an ongoing impact from tariffs of about 150 basis points. We estimate adjusted operating expenses in the range of $92 million to $95 million in the second quarter and anticipate that these expenses will increase moderately during the year to support opportunities to further accelerate our key growth initiatives. For the second quarter, we expect to deliver adjusted earnings per diluted share in the range of $0.25 to $0.55 and with approximately 43 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $32 million and $48 million. In summary, we are pleased with our first quarter results with both bookings and revenue moving in the right direction. The underlying strength of the business is good to see, but we'd like to remind you that we do face tougher comparisons in the second half of 2026 relative to a strong second half in 2025. Although first quarter gross margin was a little light given the level of revenue, we continue to strive for margin increases through cost reductions, pricing initiatives and reducing underabsorbed costs. While we are monitoring freight costs that may be influenced by geopolitical developments in the Middle East, our direct exposure to petrochemicals and energy markets is limited and our vertical integration provides resilience against potential adverse impacts arising from conflicts in the region. I will now turn the call back over to Mark. Mark Gitin: Thanks, Jim. As Tim said, we are pleased with the strong start to the year, reflecting robust demand for our solutions despite elevated macroeconomic uncertainty. While we are closely monitoring current geopolitical events and have yet to see an impact on demand for our solutions, we remain cautiously optimistic in our outlook. We focus on what we can control executing on our growth strategy, supported by operational excellence and an innovation engine that continues to unlock significant areas of incremental opportunity. This foundation gives us confidence in our ability to achieve above market growth and deliver lasting value for our customers and shareholders. With that, we will be happy to take your questions. Operator: [Operator Instructions]. Our first question comes from Ruben Roy with Stifel. Ruben Roy: Tim, I guess I'll start with one of your last comments on the margin structure. And maybe if we just think about sort of medium to longer term, you've sort of talked about mid-40s as a structural area that the business can run from a longer-term perspective. And if you think about the tariff regime, higher input costs, sort of the puts and takes on product improvements, et cetera. I'm just wondering if you still think that mid-40s target is valid on a multiyear basis? Or has the structural feeling moved around at all based on what you're seeing at this point? Timothy P.V. Mammen: In general, that's a target we're still striving to get to. We are starting to see some of the cost reduction initiatives and some of the pricing that we talked about last year paid through. The other critical aspect of that, Ruben, is really balancing the fixed cost manufacturing structure with the total level of capitalized absorbed costs so that we can get absorption down as a percentage of sales, and we've certainly got room to drive overall gross margins up. I think relative to the mid-40s when we gave that guidance, the only real headwind at the moment is the tariffs impacting that by 150 basis points or so. But that tariff regime is obviously pretty fluid right now. And I think, overall, for Q2, the guidance at the top end of the range reflect some of that momentum on gross margin that we want to continue to drive forward with. Ruben Roy: Right. Okay. That's helpful. And then I guess a higher-level question for Mark. I get the new framework here with Industrial Solutions and Advanced Solutions, I think that makes strategic sense the way you've been sort of managing the business and looking at the business. So glad to see that. Maybe, Mark, if you could maybe talk through in a little more detail some of the drivers across some of the businesses that you discussed in your prepared remarks. As you think about Q2 and maybe the rest of the year, that would be helpful, given that you're bringing this out differently. So I mean, -- if we think about some of the moving parts in medical, for instance, which you've been pretty excited about, it sounds like there is a little bit of a sequential decline with unevenness and customer ordering. Is that a scheduling dynamic? Is that related to product timing? And maybe if you could talk about some of the other bigger parts of the business, cutting and welding and how you're seeing sort of backlog against those big pieces of the business playing out now? And sort of do you have any extended visibility, that would be helpful for us. Mark Gitin: Yes, absolutely. Good to talk to you, Ruben. So first of all, we continue and we expect to see continued growth in both of the areas, both Industrial Solutions and Advanced Solutions. And of course, we saw overall the business strongly quarter -- year-over-year, we saw a 17% growth. We saw that across a wide range of areas in both the -- in both the industrial as well as the advanced. If we look at the particular areas in industrial, we saw growth and continue to see growth in in Welding, specifically in the battery area. We've seen good growth actually in cutting as we also start to start to impact some of the plasma cutting area with our new RAC integrated lasers at very high powers, with new cutting heads. We're also making good progress in additive manufacturing and cleaning all of that Industrial Solutions area. And then as we look at the areas of advanced -- we've seen year-over-year strong medical. We've also seen growth in semiconductor, an area that we're starting to make impact on, as I mentioned in the call, in some of the areas of inspection, metrology, lithography areas. And then you specifically asked about the quarter-on-quarter about on medical. We just had a very strong quarter in medical -- we have a strong backlog in Medical in the year 2026. So we continue to expect to see growth in that specific area as well. Ruben Roy: Got it. Mark, if I could just sneak in one follow-up question. Congrats on the Lockheed Martin follow-up order. Can you just help me think about the revenue recognition profile on that cross program? Is this sort of spread over multiple quarters, I would assume it would be. And it sounds like you're going to be shipping for revenue in Q2. So is that starting this quarter for sort of the initial orders that you had -- or does that just reference the follow-on order and you've been shipping for revenue. Maybe you could just help us frame the scale production ramp for that program that I all had. Mark Gitin: Yes, sure. Sure. No, we're making great progress in Crossbow -- as we've talked about, obviously, we launched that at the end of last year. We brought that to a number of key shows -- we have a very strong pipeline. Lockheed was a first mover in that area. And yes, we did ship initial systems to them. So they have done a considerable amount of work with that. And then we got the $10 million follow-on order. And yes, we are beginning to ship that here in Q2, and that will be delivered over multiple quarters. And I can tell you that we have great interest from a number of key customers that we're working through the funnel, very excited about it. The they're really understanding the benefit of the IPG system. The Crossbows, as we mentioned in the past, this is based upon our high-power single-mode lasers, which IPG is the strongest at. We've demonstrated and shown lasers up to 8 kilowatts single mode, which is tremendous, and we have we're making very, very good progress with customers as we launch this forward. Operator: [Operator Instructions]. Our next question comes from James Ricchiuti with Needham & Company. James Ricchiuti: Something to get maybe some additional color on the booking strength that you saw, whether there's much variability by geography perhaps in the 2 business categories that you're now presenting to us. Mark Gitin: Yes. Jim, I'm happy to talk about it. I can talk about it for you regionally. We're not breaking it out by the 2 areas for bookings. But in the regional standpoint, we were very strong in North America and Asia, especially in China and Japan. Europe was a bit more stable. James Ricchiuti: Okay. And Mark, just on the strength in China. I wanted to -- it looks like you had a pretty good quarter in China, yet there seems to be a couple of moving pieces in China. I think Tim alluded to Ablative being a little weaker, but is the strength that you saw year-over-year or you're seeing in China, is that coming from the battery side of the business? Mark Gitin: So Jim, we're actually seeing strength across the board. Sometimes there's a little bit of movement quarter-to-quarter, but we've been quite strong in welding, especially in the battery area because we have very strong differentiation there, as you know, with our adjustable beam lasers, combined with the combined with the scanning and beam delivery as well as the process monitoring that we have. And that's very critical in that battery area, we're seeing significant growth and that's not just EV, but actually the bigger grower right now or a similar grower is actually the stationary storage for for the data center work. And those take the thicker bus bars because they are higher capacity batteries and that really zeros in on our solution. So that area of battery plus the additive and there are some areas of micromachining also where we're strongly differentiated in China, and we've seen some of that growth. And actually, when I talk about the battery, I can tell you also that, that's happening, we're seeing some of that globally. In fact, in the U.S., we're actually seeing some of the battery factories convert from EV to stationary storage, which is good for us as well. James Ricchiuti: Got it. And maybe a related strong growth in systems the last couple of quarters. And I know there are a couple of moving pieces in that as well. Anything in particular stand out? Mark Gitin: We've had some -- yes, thanks for the question. We've seen strong growth in cleaning is one of the key areas, the whole area of systems is a strength for us now because, again, it combines the laser capability plus the applications capability that we have and the ability to deliver that in subsystems and systems and really deliver a solution and cleaning is 1 of those key areas, and we're bringing out some new products in that area as well. So excited about the growth in systems. James Ricchiuti: Got it. And just one final quick one for Tim. Tim, any way to think about OpEx as we look out to the back half of the year? Any major changes that we would assume. Timothy P.V. Mammen: Yes. We sort of got maybe a moderate pickup in OpEx in the second half of the year with continued investments in the organizations and really driving these growth initiatives forward. But pretty moderate from where we are today. We know we need to we know cognizance of having invested significantly in OpEx to get the company turned around and we need to manage that cost base as we go forward and ensure getting the growth coupled with those investments. Operator: [Operator Instructions]. There are no further questions at this time. I'd like to turn the call back over to Eugene Fedotoff for closing comments. Eugene Fedotoff: Okay. Thank you for joining us this morning and for your continued interest in IPG. We will be participating in several investor events this quarter. And I'm looking forward to speaking with you again soon. Have a great day, everyone. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good afternoon, and welcome to the Latham Group, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Casey Kotary, Investor Relations representative. Please go ahead. Thank you. This afternoon, we issued our first quarter 2026 earnings press release, which is available on the Investor Relations portion of our website. Casey Kotary: On today's call are Latham Group, Inc.'s President and CEO, Sean Gadd, and CFO, Oliver Gloe. Following their remarks, we will open the call to questions. During this call, Latham Group, Inc. may make certain statements that constitute forward-looking statements, which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward-looking statements due to risks and other factors that are set forth in the company's Annual Report on Form 10 and subsequent reports filed or furnished with the SEC as well as today's earnings release. Latham Group, Inc. expressly disclaims any obligation to update any forward-looking statements except as required by applicable law. In addition, during today's call, the company will discuss certain non-GAAP financial measures. Reconciliations of the directly comparable GAAP measures to these non-GAAP measures can be found in the slide presentation that is available on our Investor Relations website. I will now turn the call over to Sean Gadd. Sean Gadd: Thank you, Casey, and thank you all for joining us today to review our first quarter results and discuss our business outlook. Our first quarter results represent a good start to 2026. We are especially pleased with our performance given the adverse weather conditions that plagued most of North America. There are several key takeaways from the quarter that are worth noting. First, this was another quarter in which we saw year-on-year sales growth in each of our product lines. Latham Group, Inc.'s category leadership position across our product portfolio and our geographic diversification are key competitive advantages for us. Secondly, we continue to effectively execute our Sand States strategy, showing double-digit sales gains in fiberglass pools in our priority Florida market. We are taking further actions to accelerate our growth in this region. Third, we expanded our margins, benefiting from operating leverage inherent in our business model and from the lean manufacturing and value engineering initiatives that continue to yield very positive results. Oliver will provide additional detail on this later on in the call. And lastly, we are pleased to confirm our 2026 guidance, which anticipates significant sales growth and even stronger growth in adjusted EBITDA within a challenging macro environment, where pool starts will be about flat to last year. Our guidance includes a moderate increase in transportation and commodity costs due to today's high oil prices, which we are mitigating with temporary fuel surcharges. We are closely monitoring the dynamic situation in the Middle East and the potential impacts on costs and consumer demand. Taking a closer look at our first quarter results, in-ground pool sales increased 3.5%, and virtually all of that growth can be attributed to the one-month contribution from the Freedom Pools acquisition. Adverse weather was definitely a factor in our organic performance, keeping organic in-ground pool sales steady year on year. However, April sales trends were in line with our expectations, and we are on track for fiberglass pools to approach 80% of our full-year in-ground pool sales in 2026. The Freedom Pools acquisition we completed on February 26 is integrating as expected. As we have noted, the acquisition expands our presence in Australia and New Zealand, markets where fiberglass pool models have a strong foothold, and broadens our reach into new markets in Western Australia, including Perth, which is the fastest-growing city in the country. We recently spent a week in Australia bringing together the Narellan and Freedom teams. In addition to this transaction being immediately accretive to Latham Group, Inc., giving us a market-leading position in the country, we anticipate achieving considerable revenue synergies from this combination over time, as well as gaining firsthand experience from the direct-to-consumer business model. Cover sales advanced 6% in the first quarter, driven by growth in auto cover demand as consumers increasingly recognize the safety and economic benefits of this excellent product. Our industry-leading auto covers are compatible with all in-ground pool types. In many parts of the U.S., they provide the homeowner with an alternative to fencing while delivering additional cost savings from reduced evaporation and chemical usage. Educational marketing campaigns, including our partnership with Olympic Gold Medalist and pool safety advocate, Bode Miller, and his wife, Morgan, to promote pool safety are surging consumer awareness and increased attachment rates of auto covers to new pool installations. First quarter liner sales were up 9% year on year, reflecting increased demand and buying in advance of the pool season. We continue to gain traction with our Sand States strategy in the first quarter and are moving forward with plans to accelerate our growth in this important region. Many of the investors and analysts who I have met since taking on the CEO role in January have asked me where I see the major growth opportunities ahead for Latham Group, Inc. and what our playbook is for capturing that growth. Let me start by saying that the opportunity is substantial. We do not need to wait for the recovery in the U.S. pool markets to drive growth. There are enough pool starts for us to go and attack the Sand States now, given our relatively low penetration in that region. The key here is that fiberglass is a growing category, and we are the number one player in it in the U.S., and so we are best positioned to gain share. Fiberglass pools are an excellent fit for the Sand States for many of the same reasons that the category is growing nationally: fast and easy installation, lasting durability, low maintenance, and we have an exceptional design range of sizes and options to choose from, many of which are smaller, rectangular-shaped pools with attached spas that are perfect for our target community. Latham Group, Inc. has laid a good foundation for growth in the Sand States. There is definitely increased brand awareness among consumers and dealers in Florida, thanks to several high-profile marketing campaigns paired with local activations. In 2026, we plan to build on that foundation to set the stage for accelerated long-term growth. As you know, I have many years of experience successfully selling against the standard in the building products industry. When I apply that experience to Latham Group, Inc.'s current position in the Sand States, I have identified several actions to capture consumer demand and provide additional value for our dealers. First, we are building out our commercial organization, with the key pillars being sales strategy, sales operations, and sales execution, with responsibilities to design and drive sales plans, product leadership, and sales effectiveness. Our goal is to provide a world-class commercial organization that supports our growth not just in Florida, but across all the Sand States and all of North America. Second, we have introduced a new market development framework and approach at Latham Group, Inc. that I believe will make us even more effective in capturing share. The key element of this framework is segmentation, meaning that we will be very selective with our targeted Sand State markets, determining the specific sections and neighborhoods that offer the greatest opportunity for us. In essence, it is all about neighborhoods. We are looking for neighborhoods with a large number of homes with home values, lot sizes, and household incomes that fall within our parameters. These can be in, adjacent to, or outside of master-planned communities. Third, we will be adding sales resources in the field to make sure we stay close to the consumer throughout the pool-buying process. In this way, we will be able to assist our dealers in converting more leads into sales and gain greater understanding of the consumer journey. We know that consumers are looking for designs that fit their lifestyle. We believe that Latham Group, Inc. has the best range of products to meet those needs. In 2026, we are increasing our investment in branding and marketing in a very targeted way to capture greater consumer awareness. Together with our network of trusted dealers, we are able to fulfill the demand we generate. In support of all this, we are revamping our marketing and advertising campaigns to give homeowners a full understanding of the true benefits of fiberglass, and why it is the right solution for their backyard to enable their dreams of creating wonderful memories to come true. With that, I will turn over the call to Oliver Gloe, our CFO, for a financial review. Oliver Gloe: Thank you, Sean, and good afternoon, everyone. I am pleased to report on what was a solid start to 2026. Please note that all comparisons we discuss today are on a year-over-year basis compared to 2025 unless otherwise noted. Net sales for 2026 Q1 were $117 million, 5% above $111 million in 2025, of which 3% represented organic growth and 2% represented the one-month benefit of the Freedom Pools acquisition we completed in February. Organic growth was led by the continued strength of auto covers and increased demand for our pool liners. By product line, in-ground pool sales were $60 million, up 4% from Q1 2025, with virtually all the year-on-year growth coming from Freedom's fiberglass pool sales. Cover sales were $33 million, up 6%, and liner sales were $24 million, up 9% compared to 2025. We achieved a first quarter gross margin of 32%, reflecting a 220 basis point increase above last year's 30%. This performance is primarily due to volume leverage, along with production efficiencies driven by our lean manufacturing and value engineering initiatives. SG&A expenses increased to $37 million, up 20% from $31 million in 2025. This was largely tied to strategic investments in sales and marketing to accelerate fiberglass adoption, digital transformation initiatives, and acquisition and integration-related costs, which include $2.3 million of performance-based compensatory earnout expenses related to our Coverstar Central acquisition in 2024. Target synergies have been realized for Coverstar Central, and we are pleased with the contribution from the acquisition, which has exceeded our initial expectations. This earnout will total roughly $9 million over the course of the year, with a similar impact in each remaining quarter in 2026. Net loss was $9 million, or $0.07 per diluted share, compared to a net loss of $6 million, or $0.05 per diluted share, for the prior year's first quarter, primarily due to the aforementioned increase in SG&A expenses. First quarter adjusted EBITDA was $12 million, 9% above $11 million in the prior year period, primarily resulting from volume leverage and efficiencies gained through our lean manufacturing and value engineering initiatives. Adjusted EBITDA margin was 10.4%, a 40 basis point expansion compared to last year's first quarter. Turning to the balance sheet, we continue to maintain a strong financial position, ending the first quarter with a cash position of $27 million, in line with our expectations. Net cash used in operating activities was $48 million, reflecting a seasonal increase in working capital needs ahead of peak pool selling season. We ended the quarter with total debt of $311 million and a net debt leverage ratio of 2.8, also in line with our expectations. Capital expenditures were $23 million in Q1 2026, compared to $4 million in the prior year period. The increase is primarily due to the purchase of four key fiberglass manufacturing facilities in Florida, Texas, California, and West Virginia for $18 million, including a $12 million deposit made in 2025 that was settled in Q1 2026. Additionally, we incurred $5 million of CapEx relating to ongoing projects in line with our expectations. As a reminder, we expect CapEx to range between $42 million and $48 million in 2026. This includes $25 million of maintenance CapEx expenditures related to the purchase of the fiberglass manufacturing facilities that I just mentioned, and investments to upgrade our newly acquired Freedom Pools manufacturing facilities. While the beginning of 2026 was affected by adverse weather conditions across North America, we are encouraged that April sales trends have been in line with the historical seasonal ramp. We continue to monitor geopolitical developments and their potential impact on our freight and raw material costs, but we believe we are well positioned to manage effectively through this pool building season. We are pleased by the steady progress we are seeing from our fiberglass awareness and adoption initiatives, highlighted by strong consumer engagement with our branding and marketing campaigns, and continued gains in Florida, our initial Sand State target market. Based on our performance to date and our current visibility into the remaining season, we are pleased to reaffirm our guidance for 2026 revenue growth of 9% and adjusted EBITDA growth of 13% at the midpoint, amid expectations for new U.S. pool starts to be flat with last year. With that, I will turn the call back to Sean for his closing remarks. Sean Gadd: Thanks, Oliver. In summary, we are pleased with our first quarter performance, encouraged by recent order trends, and excited by the growth opportunities we see on the horizon. Latham Group, Inc. is firmly on track to outperform the market for new U.S. pool starts again in 2026, and we intend to take advantage of soft markets to accelerate our Sand States strategy and strengthen our execution. I see tremendous opportunity for Latham Group, Inc. to drive market penetration in the Sand States as well as the rest of North America, Australia, and New Zealand. With that, operator, please open the call to questions. Operator: We will now open the call for questions. If you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ryan James Merkel with William Blair. Please go ahead. Ryan James Merkel: Everyone, appreciate the question. I wanted to start off with the fiberglass backlog and orders as you enter season. How is that looking, and then have you seen trends pick up now that the weather has cleared? Sean Gadd: Yes. Thank you for that question. We are seeing what we would have expected to see coming out of the first quarter. The order file in April looks strong to us, and it looks like it is picking up for the season. We feel good enough that we have reaffirmed guidance. Generally, we are seeing the pickup in orders and feel pretty good about the trend. Ryan James Merkel: Got it. Thanks for that. And then my second question: the fiberglass conversion is key to the story, and you are adding a bunch of resources. What are the biggest tweaks that you are making to the strategy, and then any early results, or is it a little too early? Sean Gadd: We are definitely making some tweaks. It is too early for definitive results. The main thing, as I talked about earlier, is we are segmenting the market a little bit differently than we have in the past. We have criteria now built up where we feel like if a neighborhood fits that criteria, the likelihood of them going to Latham Group, Inc. and then to fiberglass is higher. We like that. We are starting to test that, and if we get those right with the right dealers, we will be able to start building out more and more neighborhoods. We are early, but that is on a good path for us. The second thing we are doing is adding heads, and really I am organizing commercialization into three areas: sales strategy, which is understanding where to play, doing more of the segmentation, becoming a little bit smarter around sales; sales operations, which for me is about converting what we think about the market into real game plans that the sales team can execute and then measuring that team; and then sales execution, to go and execute. We are getting a little bit more organized so that we get the most out of our sales organization across the whole U.S., including the Sand States. Operator: Thank you. Our next question comes from Gregory William Palm with Craig-Hallum Capital Group. Please go ahead. Gregory William Palm: I wanted to piggyback on the first question a little bit since a lot has happened in the last couple of months since we were all on the phone together. It does not sound like the demand environment has changed all that much, relative to what you would have thought a couple months ago. Can you confirm that? And from an input cost side of things, you mentioned freight. I wanted to get your sense on how you are dealing with that and anything else on your radar, whether it be increasing resin prices. Are you seeing any availability shortages of key inputs like that? Anything else that should be on our radar? Sean Gadd: Thanks, Greg. I will start by talking about the market a little bit. We still see the market overall for this year likely to remain flat, so our assumption for that has not changed. But we are seeing some green shoots, and we feel good about that. Our order trend for April looks strong and into May, so we feel good about that. PK data would have indicated some growth starting to occur with cheaper pools. We like that. Pools are getting smaller, so that is good. The volatility is not helping, but I know we have a sound approach, and we will work through that. From a dealer perspective, when we catch up with dealers, they will tell us it is pretty competitive — four or five quotes per job, which is generally up. My take is it is certainly uncertain, but I believe fewer people will be traveling — the price of gas does not help — and so they are staying at home. I think that is the opportunity and what the green shoots are that we are seeing: that people would rather spend time at home and hopefully let us help build a pool. Oliver Gloe: Let me address the second part with regards to the conflict in the Middle East and updates on input costs. We do not see availability to be an issue as of today. Partially that is due to our supply diversification coming out of COVID. We aimed to be multisource and as diversified as possible. But we are seeing headwinds in freight. That comes in two forms. One is transportation — the price at the pump. Especially in the world of fiberglass, we are incurring transportation costs. It is expensive to ship those fiberglass pools across the nation. In terms of mitigation, we have introduced temporary fuel surcharges that we plan to fully mitigate us on transportation costs. I think it is too early to tell what the impact will be on the commodity side. We are exposed to oil derivatives in the world of resins, HDPE, and so forth. It is too early to tell. We are in discussions with suppliers and making the first purchase orders as we speak under slightly higher price levels. We will have to see how the very dynamic situation evolves. But I am confident in the playbook that we have. We applied that playbook during COVID and last year, and we have confidence that the playbook could also work this year as we work through commodities. Gregory William Palm: On some of these initiatives that you talked about — resegmentation, adding sales resources — how do you feel about your current dealer network, and how important of a lever can that be, not just adding new and more dealers, but also leaning into some of your more successful ones? Sean Gadd: Dealers are very important. They are the extension of us as they sit across the kitchen table, and we need them to represent us well. I believe we have the opportunity to get more out of our current network, which is goal number one. In our core markets — Midwest, Northeast, Canada — that is really about account management. We are defining what account management looks like for Latham Group, Inc. and making sure our organization is trained around good account management. I expect to get more out of our current network. Then we will add where we have white space. We will always look for dealers to take on white space if our current dealer network does not get us there. That is part of the strategy. In the Sand States and material conversion, we have a good network of dealers there right now that we will be feeding as we go into these neighborhoods, and they will benefit from referrals and everything else that comes out of those neighborhoods. We feel good about the network in the Sand States, particularly Florida, and our intention will be over time to grow it. Operator: Thanks, Greg. Our next question comes from Timothy Ronald Wojs with Baird. Please go ahead. Timothy Ronald Wojs: Good afternoon. First question on the resegmentation of some of the sales force and things like that. Is the plan that there are incremental investments in terms of dollars going into some of the initiatives, or are you just reallocating what you have? Sean Gadd: A little bit of both. We are definitely going to get ahead a little bit because we need more people on the ground and people thinking about the game plan. That would be additive, but our intention is that SG&A as a percentage of sales should stay the same over the medium and long term. We will continue to fund that as we grow. We will also look at opportunities to trim back on the back side of the business to give us some space to spend on the front side of the business and invest. Timothy Ronald Wojs: And, Oliver, on the price/cost question, is higher resin in the guide, or is it more of a wait-and-see approach? If you do see higher resins, do you have the ability to take cost out or improve efficiencies or pass them on price? Is that the main message? Oliver Gloe: It is probably more the latter. Transportation cost is relatively foreseeable, and that is in the guide. Commodities are too early to tell. Timothy Ronald Wojs: Sounds good. Thank you. Operator: Our next question comes from William Andrew Carter with Stifel. Please go ahead. William Andrew Carter: I wanted to double click to make sure we understand exactly what the pricing is for the year. You are putting in temporary fuel surcharges — can you give a magnitude of how much that is incremental to the old guidance? You are not taking any price increases on products for resins — just want to triple check that. And you said we are well prepared for materials during the season. Is that a comment that everything is good for now and you take a price increase later? Finally, if you have to take a price increase, can you take one mid-season, or does that mess things up? How do those dynamics work around when you have to make a decision on pricing? Oliver Gloe: Perfect. For transportation cost and the temporary surcharge, for the year it is probably worth about 60 basis points. Again, it is very dynamic and volatile, and as the headwinds change, the temporary surcharge can change over time as well — but that is the order of magnitude. For commodities, it is too early to tell. We are just about to start ordering materials that would be subject to a change in pricing. Materials get shipped to our sites, work their way through inventory, and ultimately into the P&L as they are consumed. We have our playbook, and we will react in time if necessary. As a reminder, last year we did a mid-season price increase in June. It is not preferred, but it is not unheard of. Operator: Thanks. Thank you. Scott Stringer: Our next question comes from Scott Stringer with Wolfe Research. Please go ahead. The adverse weather mentioned in Q1 — did that push some sales into the second quarter? The guidance implies some acceleration through the rest of the year, so it would be helpful to know the tailwind from sales being pulled into Q2, if that is the case. Oliver Gloe: I would say the adverse weather really means we had a lot of snow and ice on the ground in January and February. If you think of our annual organic growth of 6%, we certainly did not quite achieve that in Q1 — it was probably half of that — and I would attribute that to weather. If you translate that to shipping days, that equates to about one shipping day in today’s seasonality. I am not reading too much into that. The season is young; Q1 is a comparatively small quarter. Translating our under-proportional organic growth in Q1 vis-à-vis the annual guide into shipping days, it is one day. Another way of saying it: April trends have been as expected. We are seeing the seasonal ramp. Whether we catch up on that one day in Q2 or Q3, nothing we have seen in Q1 and in our ramp in April would make us change our view on 2026 and the guide. Scott Stringer: Got it. And then on visibility into Q2 and Q3 for in-ground pool installs — is that pretty much set, or how much variability is there over the next two quarters? Sean Gadd: For Q2, we are all but set based on our current lead times. We started the quarter really well. For Q3, while we have orders that fall into Q3, it is probably too early to tell, but from what we are hearing in the market and what we are seeing, we remain very confident in what the order file looks like and will continue to hold guidance. Oliver Gloe: If I compare today’s order book versus prior years, there is really nothing that would cause us to think differently about the seasonal pattern vis-à-vis last year — all confirming the guide. Scott Stringer: That is helpful. Thanks for the time, guys. Operator: Our next question comes from Analyst with Barclays. Please go ahead. Analyst: Good afternoon. For my first question, what are the top concerns you are seeing from buyers today? Between rates, economic uncertainty, and the need to step up consumer awareness of fiberglass pools, what is the biggest challenge today? Sean Gadd: The number one thing tied to interest rates is financing — basic financing is difficult to get. Anyone who does not have the cash or a strong FICO score is unable to get financing. We are hearing that a fair bit, similar to last year. Dealers are saying they are having to fight for the sale a little harder than previously. When I mentioned four to five quotes, it is typically two to three quotes, so everyone is fighting for the business. In an environment where things are tough, I actually feel good about fiberglass pools because pools are getting smaller — that fits our trend. Fiberglass pools have low maintenance, so the ongoing cost is lower than alternatives. The expenditure on chemicals and evaporation is lower, especially if you have an auto cover. And the composite pool means there are no ongoing resurfacing expenses. While we see the market as a little tough, we do not see it adversely affecting us relative to last year. Analyst: Got it. In terms of your increased branding and marketing spend, can you walk us through the cadence through the year and its impact on SG&A? And what does this look like — a targeted program for dealers, more salespeople on the ground, or more on ads and marketing? Sean Gadd: It is a bit of both. We are running a national campaign — that lifts all markets, which is great. With the trend of people moving from the Midwest and Northeast into the Sand States, we like that because fiberglass is the standard in those markets, so they know us. The timing for the national campaign is set for the pool season — we started mid-to-late February and are running through July/August. For the neighborhoods, that will be much more tactical — digital marketing, door hangers, localized marketing around homes, and events to inspire the neighborhood. Those are tactical, smaller expenses that we will run city by city, neighborhood by neighborhood. Oliver Gloe: On the increase and cadence, over the foreseeable future, SG&A as a percent of sales will be flat. It was 22.5% last year; we expect a similar amount this year. The majority is spent as-you-go in the sales organization and marketing. There is a little bit of digital transformation and also inflation on core G&A. Additionally, we have about $3 million of SG&A from Freedom. I would like to remind you that in addition, we have the earnout expenses for Coverstar Central — about $9 million — tied to 2026, so it will not recur in 2027; it did not occur in 2025. With regards to cadence, it is roughly the same as usual. Q1 and Q2 are a little bit heavier because we are running our national TV campaign earlier and longer in 2026 versus 2025. Operator: Our next question comes from Charles Perron in for Susan Maklari with Goldman Sachs. Please go ahead. Charles Perron: First, I would like to shift gears and talk about auto covers and the opportunities you see in this market. Considering the changing macro dynamics, is there any impact you are seeing in terms of adoption, and any efforts you can undertake to further expand penetration over the coming years? Sean Gadd: We are not seeing a decrease in adoption. We had a pretty good quarter in auto covers and covers in general. We had very large growth last year; we expect it to grow this year and in the coming years as well. It is really about awareness. The reality is most people still do not know that auto covers are available. Auto covers can fit on every pool, so the market is very large for us. We have our value-added resellers set up to take advantage of that. We are also getting our licensed sales organization focused around that product, and it is still early. We see that as more upside as we go. It is a good product; it does what it needs to do; consumers who have it love it, and we just need to continue to drive awareness. We do not see that trend changing. Charles Perron: And on input costs and inflation, should we see more unfavorable dynamics, can you further lean on lean manufacturing and value engineering initiatives to protect margins? Oliver Gloe: Lean and value engineering continue to be key contributors to our P&L. The contribution is about $2.0–$2.5 million per quarter. In Q1, it was $2.0 million — Q1 is a light quarter and value engineering programs move with volume. As programs mature, you see the tailwind becoming part of our DNA — how we lead our plants and factories — as part of the everyday cadence. You will see a lot more programs, maybe not all of the same magnitude, because the low-hanging fruit in lean manufacturing has been largely addressed. In value engineering, we are in the beginning of the journey; there are still some low-hanging fruits our team is pursuing. Both initiatives are under full steam and in Q1 delivered what we expected, with no change in our thoughts for the rest of the year. Operator: Our next question comes from Sean Callan with Bank of America. Please go ahead. Sean Callan: Hi, thank you for taking my question. First, the double-digit growth in Florida was quite impressive. What do you think has led to the success in Florida versus the other Sand States, and what lessons can you take from Florida to apply to the other Sand States? And then one cleanup question on the surcharges — are you aiming to offset the higher transportation cost on a dollar basis or a margin basis? Sean Gadd: Florida is our largest focus of all the Sand States. We are set up quite well from a sales headcount perspective. We have worked on dealers for the last eighteen months, so we have dealers that are really the right partners to help fulfill the demand we are creating. We have been running a marketing campaign for eighteen months, so we are seeing the flow of that. We have a strong value proposition relative to concrete, and we are getting deeper into the market and communicating it better. We feel that if a homeowner understands the benefits of fiberglass over concrete, there is a high chance they go with fiberglass. We are still early in the adoption curve. Our mission is to drive awareness and connect that awareness to our dealers’ positioning at the kitchen table. While we are pleased with the numbers, we intend to accelerate from here, and we are still working off relatively small numbers in Florida. Oliver Gloe: On the surcharges, we are aiming to offset transportation cost on a dollar basis. The headwind we incur is being passed on with temporary surcharges. Operator: Our next question comes from William Andrew Carter with Stifel. Please go ahead. William Andrew Carter: Hey, thanks. I wanted to double click and make sure on that incentive cost — you are not backing that out. So if you were to put that back in, the incremental here is still $28–$38 million in investment year? I just want to understand that. No — sorry, the earnout around Coverstar. My fault. Oliver Gloe: The earnout is included in SG&A and will be sitting on top of roughly 22.5% of revenue as it is an expense tied to an acquisition. For EBITDA purposes, it is backed out. William Andrew Carter: Okay, so it is not excluded — it is within guidance, that expense. Just double checking. Oliver Gloe: Correct. It is an add-back to EBITDA, and it is in the ceiling. William Andrew Carter: My fault. Sorry about that. Thank you. Operator: This concludes our question and answer session. I would like to turn the call back over to management for closing remarks. Sean Gadd: Thank you very much. I want to thank everybody for joining the call. We felt like we had a strong quarter — mildly impacted by weather — but the momentum is there. April looks strong, and we feel confident about our guide. With that, I want to conclude the call. I look forward to seeing you over the coming weeks and months at different events, and again, thank you for attending. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Afternoon. My name is Trevor, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradata Corporation 2026 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would like to hand the conference over to your host today, Chad Bennett, senior vice president of investor relations and corporate development. You may begin your conference, sir. Good afternoon, and welcome to Teradata Corporation's first quarter 2026 earnings call. Chad Bennett: Steve McMillan, Teradata Corporation's President and Chief Executive Officer, will lead our call today, followed by John Ederer, Teradata Corporation's Chief Financial Officer, who will discuss our financial results and outlook. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in today's earnings release and in our SEC filings. Please note that Teradata Corporation intends to file the Form 10-Q for the quarter ended March 31, 2026 within the next few days. These forward-looking statements are made as of today and we undertake no duty or obligation to update them. On today's call, we will be discussing certain non-GAAP financial measures which exclude such items as stock-based compensation expense and other special items described in our earnings release. We will also discuss other non-GAAP items such as free cash flow, adjusted free cash flow, and constant currency comparisons. Unless stated otherwise, all numbers and results discussed on today's call are on a non-GAAP basis. A reconciliation of non-GAAP to GAAP measures is included in our earnings release, which is accessible on the Investor Relations page of our website at investor.teradata.com. A replay of this conference call will be available later today on our website. And now, I will turn the call over to Steve. Steve McMillan: Thanks, Chad, and thanks to everyone for joining us today. I am very pleased to report that Teradata Corporation is off to a strong start in 2026. With solid execution globally and our pivot to AI-led value, we outperformed against expectations in a number of key metrics. Recurring revenue grew 12% as reported year-over-year. Total revenue grew 6% as reported year-over-year. And non-GAAP earnings per share was $0.88, an increase of over 30% versus Q1 2025. We continued to see solid retention in the quarter, and customer interest in our hybrid capabilities drove a healthy growth rate in both total ARR and cloud ARR. We see that security-driven demand for sovereign AI is accelerating. For example, financial services and health care customers are increasingly concerned about shared infrastructure for AI workloads, and this is driving traction with our AI Factory offer. The most demanding regulatory workloads in the world run on Teradata Corporation. These are workloads that are least susceptible to disruption. The trend we see is AI moving closer to the data, not data moving to AI, and that plays directly to our architecture. Every organization is grappling with the same challenge: putting AI to work for them and becoming truly autonomous enterprises. One thing is clear. To win with AI, organizations need to operate at speed and scale that was once unattainable. This is a core competence of Teradata Corporation. Our customers have governed data estates with years or even decades of data in their Teradata Corporation environment, including codified industry knowledge, entity models, and business rules specific to financial services, health care, telecommunications, and beyond. This is their institutional memory. The analytics and reporting workflows built on top of that data have been refined over decades. The value of those workflows vastly exceeds the cost of the platform. AI multiplies the value of that institutional knowledge, and our platform is designed to execute at the speed AI requires. Our product organization is relentlessly focused on providing the strongest execution engine—reliable, high performance, and always on. Agents never sleep, and mission-critical automation requires a platform that never slows down. In 2026, we are executing against an aggressive product roadmap and are already taking new innovations to customers. We are seeing market interest in our MCP Server. It is an on-ramp to enterprise AI, providing semantic access to the enterprise data and context that can activate real business outcomes. It eliminates friction through a natural language interface that leverages AI agents. Together, the MCP Server and our agentic framework are designed to enable querying, analysis, and management of data with full context. To address the challenge organizations face of moving from isolated pilots to production-grade agents, we are making it easy for customers to build, deploy, and manage AI agents with our Agent Stack announced earlier this year. This new comprehensive platform is designed to simplify the life cycle of enterprise AI agents. Our Teradata Corporation Agent Stack can help customers reduce the complexity of finding and integrating trusted data and applying enterprise knowledge and context. It can also aid in enforcing governance and maintaining compliance across hybrid environments. In March, we added new capabilities to our enterprise vector store. We added multimodal data spanning text, images, and audio from our partnership with Unstructured, and we added more agentic features powered by LangChain integration. These announcements demonstrate another significant evolution in our enterprise AI infrastructure, unifying structured and unstructured data within a single governed platform capable of supporting billions of vectors and thousands of concurrent queries from AI agents. In April, we announced the availability of our enterprise-grade Teradata Corporation Analyst Agent on Microsoft Marketplace. This brings AI-assisted conversational analytics directly into customers' existing Azure environments. We also recently participated in the Google Distributed Cloud Air Gap Center launch. Our platform runs natively on GDC, enabling organizations to operationalize Google's AI capabilities and our own analytics entirely within the air gap perimeter. No data leaves, no sovereignty is compromised. This capability is designed to be a real value for defense, intelligence, and public sector organizations that require air-gapped sovereign AI. One of our differentiating capabilities is helping customers leverage and get value out of their environments, and that is even more important as they work to get business value from their AI investment. Here is where our AI services shine. Our AI services momentum is growing as we see customers looking to take advantage of the depth of experience that our forward-deployed teams have gained from the successful early AI engagements we have executed. We recently issued a press release outlining how our AI services helped a sample of customers from the travel and transportation industry. Every enterprise has data, and that data is the basis of their institutional memory, yet few can turn that institutional memory into action compliantly across varied environments and efficiently at scale. Here, our expertise is driving successful engagements to help customers move from experimentation to production quickly. Third-party validation this quarter reinforces our leadership position. Nucleus Research ranked us as a leader in their 2026 Data Science and Machine Learning Platform Technology Value Matrix, ahead of platforms that have built their reputation on data science. Our hybrid capabilities are also getting noticed. Constellation Research named us to their 2026 ShortList for Hybrid and Multicloud Analytical Data Platforms. We were one of only three vendors selected from a field of more than three dozen, reflecting a breadth that competitors structurally cannot match. More broadly, ISG recognised us as Exemplary, their highest designation, across seven categories in their 2026 AI and Data Platforms Buyer’s Guides. That breadth reflects that we are meeting enterprises wherever they are in their AI journey. This recognition reflects something that takes decades to build: the trust of the world's largest enterprises running workloads that simply cannot fail. Now I will walk through a few examples of the outcomes we are already helping customers achieve. One of the largest pan-European banks renewed and expanded its Teradata Corporation relationship. The goal was to address business-critical workloads like financial reporting and regulatory data model convergence, underscoring Teradata Corporation's crucial role in the bank's operations. It also launched a customer journey transformation leveraging Teradata Corporation AI capabilities, including augmented agent work, enterprise LLM integration, and AI Studio. This positions Teradata Corporation as its emerging enterprise AI platform. The engagement reflects how large financial institutions increasingly rely on Teradata Corporation as a long-term strategic platform for both regulated analytics and AI. A leading global retailer based in EMEA—a win-back for us—selected our platform to replace its existing on-prem platform. After evaluating competitors, the customer concluded that Teradata Corporation delivered the best price-performance for its analytic workloads. This reflects the durability of our value proposition for mission-critical retail analytics at scale. A leading Latin American financial institution added our AI services to encompass its enterprise AI operations. The customer recognizes they will now get continuous oversight, governance transparency, and life cycle management of AI models and agentic applications in a regulated environment. The engagement positions Teradata Corporation as this bank's long-term operational partner across the full AI life cycle. A large government agency in India committed to Teradata Corporation as it enters a new phase of digital transformation. We help unify structured and unstructured data at massive scale to deliver real-time comprehensive profiles through its online portal. Our native object store capability was chosen to simultaneously bridge structured block storage and unstructured object storage at scale—a requirement no competing platform could meet. This example underscores our differentiated position in mission-critical, high-concurrency government analytics environments. Market data reinforces what we are seeing and hearing directly from customers. In a third-party research survey of 1 thousand senior technology and data leaders sponsored by Teradata Corporation, every single organization—100%—is actively pursuing AI; 17% have deployed it beyond pilots; and 99% have already had infrastructure scaling challenges in the attempt to move from pilot to production. The barriers are not abstract: performance at scale, cost predictability, always-on agent demands, running new workloads along with existing production systems, and deploying across cloud, on premises, and regulated environments. Enterprises are not facing one infrastructure problem; they are facing all of them, all at once. That gap between ambition and execution is something we believe we are uniquely positioned to solve. On Thursday, we will be announcing a significant and broad set of innovations that address these challenges, helping our customers move into the next phase of enterprise intelligence while bringing autonomous AI and knowledge to organizations globally. We invite you to join our livestream on May 7 at 10:30 AM Eastern time. You can join directly from our teradata.com website. We are confident that our new unified platform and integrated AI workspace will help enterprises rapidly move into production AI. We are quite excited about what is coming on Thursday and hope you can attend. As I pass the call to John, I will reinforce that we are very pleased with our Q1 results. Even with the current global uncertainties, our business model is robust, demand continues for our capabilities, and we see tremendous opportunity to create incremental value for our shareholders. We have sales momentum, customer interest, and an engaged partner ecosystem. And we have a great start to our product innovation pipeline and more coming very soon. We remain focused on driving execution, increasing our differentiation, and delivering products and services that lead customers to rapidly deploy agentic AI into production. Now, John, over to you. John Ederer: Thank you, Steve, and good afternoon, everyone. We were expecting Q1 to be a strong start to the year, and it proved to be even better than we anticipated, with total revenue, recurring revenue, and non-GAAP earnings per share all exceeding the top end of our guidance ranges for the quarter. Additionally, we got off to a fast start with strong free cash flow in the first quarter. The revenue upside was driven primarily by recurring revenue and, more specifically, the upfront portion of our on-premise subscription term license business, reflecting continued interest in our hybrid platform. Non-GAAP operating margin also improved significantly by more than 500 basis points year-over-year, driven by higher recurring revenue and a continued focus on operating leverage to deliver profitable growth. During Q1, Teradata Corporation entered into a settlement agreement with SAP. From the settlement, Teradata Corporation received a gross payment of $480 million in late March. After accounting for legal fees and other expenses related to the SAP litigation and resulting settlement, the pretax net amount was $359 million, which benefited both operations and free cash flow. On an after-tax net basis, this is expected to provide a $302 million benefit to free cash flow in FY 2026. The settlement also positively impacted GAAP diluted earnings per share by $2.90. Tax payments related to the settlement totaling $57 million are expected to be paid from Q2 through Q4 2026, with approximately half expected to be paid in Q2 and the remaining half expected to be split between Q3 and Q4. For the remainder of the year, we will also refer to adjusted free cash flow to provide a normalized free cash flow measure for the business. Adjusted free cash flow will reflect adjustments for the impact from the SAP settlement by excluding gross proceeds, legal and other expenses, and taxes specific to the settlement. In terms of our detailed financial results for the first quarter, total ARR grew 3% as reported and 2% in constant currency, while cloud ARR grew 13% as reported and 12% in constant currency. First quarter total revenue was $444 million, up 6% year-over-year as reported and 4% in constant currency, which was three points above the high end of our outlook due to higher recurring revenue. First quarter recurring revenue was $400 million, up 12% year-over-year as reported and 9% in constant currency, which was four points above the high end of our outlook. The outperformance was primarily due to higher upfront revenue from term license subscriptions, which contributed five points to the year-over-year growth rate. First quarter consulting services revenue was $43 million, down 14% year-over-year as reported and 15% in constant currency. Looking at profitability and cash flow, please note that I will be referencing non-GAAP numbers for expenses and margins, and a full reconciliation to GAAP results is provided in our press release. For the first quarter, total gross margin was 63.7%, which was up 340 basis points year-over-year, driven by a higher mix of recurring revenue and improvement in consulting gross margin. Recurring revenue gross margin was 70%, which was flat with Q1 last year, but up sequentially from Q4 FY 2025. The sequential improvement was driven by the incremental upfront recurring revenue, but we are also continuing to make progress improving our cloud gross margins. In Q2, we expect lower upfront revenue to be a headwind to our recurring gross margin. Consulting services gross margin was 4.7%. This was down from a recent high point in Q4 FY 2025, but it did improve by over 600 basis points on a year-over-year basis. Operating margin improved significantly on a year-over-year basis, coming in at 27.3% versus 21.8% in Q1 last year. The margin expansion was driven from recurring revenue outperformance and favorable gross margin benefit from upfront revenue. For 2026, we continue to anticipate approximately 100 basis points of operating margin expansion. Non-GAAP diluted earnings per share were $0.88, exceeding the top end of our outlook range by $0.09. The outperformance was largely driven by higher recurring revenue and total gross margin. We generated $390 million of free cash flow in the first quarter. This amount includes a $359 million benefit due to the pretax net proceeds from the SAP settlement. On an adjusted free cash flow basis, we generated $31 million. We now have $816 million of cash and cash equivalents at the end of Q1, up from $368 million in the prior-year period. This also returns the company to a positive net cash position of $269 million for the first time since Q4 FY 2021. Finally, we continue to return value to shareholders, repurchasing approximately $34 million, or about 1.2 million shares, in the first quarter. We continue to target using 50% of our adjusted free cash flow for share repurchases, which excludes the benefit from the SAP settlement. Before turning to our financial outlook, I would like to provide some additional context regarding the use of the net proceeds from the SAP settlement. We plan to strengthen our balance sheet by deleveraging. This will maximize our optionality to make future strategic investments in AI, as well as continuing our stock buyback program. On total ARR, we continue to expect our typical seasonality, with total ARR stabilizing in Q2 and expanding over the course of the year, showing modest sequential dollar growth from Q1 to Q2. For recurring revenue, we expect upfront recurring revenue and currency to be headwinds to the growth rate in Q2. We anticipate over a 10-point impact to the recurring revenue growth rate on a sequential basis from Q1 to Q2 due to upfront revenue. And based on the foreign exchange rates at the end of March, currency is anticipated to be approximately a three-point headwind to recurring revenue growth. Now turning to our annual outlook for 2026, we reaffirm our ranges for total ARR, total revenue, recurring revenue, and non-GAAP earnings per share. For the non-GAAP earnings per share range of $2.55 to $2.65, we anticipate being at the higher end of that range. For adjusted free cash flow, given the strength of Q1, we are increasing our outlook and now anticipate being in the range of $320 million to $340 million. And to reiterate, our adjusted free cash flow range excludes the after-tax benefit from the SAP settlement of $302 million. For 2026, recurring revenue is expected to be in the range of minus 2% to flat year-over-year, total revenue is expected to be in the range of minus 4% to minus 2% year-over-year, and non-GAAP diluted earnings per share is expected to be in the range of $2.53 to $2.57. In terms of some other modeling assumptions, for the second quarter, we expect the non-GAAP tax rate to be approximately 24% and the weighted average shares outstanding to be 96.3 million. Using the currency rates at the end of March 2026, we now expect minimal impact to the full-year revenue growth rate. Also, we now anticipate FY 2026 other expenses to be approximately $22 million. In summary, we were very pleased with the start of the year and believe that we are tracking well towards our full-year targets. We significantly improved our balance sheet and generated strong free cash flow, and we are continuing to pursue our profitable growth strategy by finding margin improvement opportunities across the business while at the same time preserving investments in R&D to support future growth. Thank you all very much for your time today. We will now open the call for questions. Operator: At this time, I would like to remind everyone that in order to ask a question, press star and then the number one on your telephone keypad. In the interest of giving everyone an opportunity, we appreciate if you would limit yourself to one question and one follow-up. Your first question comes from Radi Khalid Sultan with UBS. Your line is open. Radi Khalid Sultan: Awesome. Thanks so much. First for Steve, just now that the business is skewing more heavily towards expansions versus cloud migrations, can you walk through how you position the business, both product and go-to-market, to reflect that? And maybe just how do you expect that to impact overall sales productivity throughout 2026? Steve McMillan: Yeah. Thanks for the question. We are seeing really strong interest in terms of the AI that we launched last year and also the AI capabilities that we are going to talk a little bit more about at our product launch on Thursday this week on May 7. And that is certainly driving expansion for us. I think last year, we saw the trend in terms of a headlong rush to the cloud really starting to decline as an indicator in the market for us. What we have started to see is a real interest in expansion. We focused our sales force on total ARR growth, and they can get that growth from either on-prem or from the cloud. Our strength in a hybrid environment is a real differentiator for us and is providing a growth lever when we combine that with some of our AI capabilities and the ability to operate and execute AI workloads on-premise. And that is what really some of the examples in the prepared remarks were pointing to. As we execute against that, we see sales productivity continuing to improve as well, as the sales teams have more and more things to sell and an increased value proposition to take to our customers. Thanks for the question. Radi Khalid Sultan: Awesome. And maybe just a follow-up for John. I know it is early with AI services and the forward-deployed engineering practice. Just as you think about the P&L impact from both a top line and margin perspective, in both the near and long term from that growing services practice on the AI side, thank you. John Ederer: Yeah. Sure. No, thanks for the question. You know, in terms of the AI services and the P&L impact for 2026, I would say it is pretty minimal. This is a new offering for us and something that we are ramping up this year. Longer term, I could see it contributing more to the P&L, but still, ultimately, it is going to be a services component. It is going to be complementary to what we are trying to do on the software side. I would say that I see it as a critical connection point, though, and it helps us further develop our proofs of concept that we have been doing with customers, move them into production, and then ultimately drive AI-related ARR. Radi Khalid Sultan: Awesome. Thank you. Operator: Your next question comes from Yitchuin Wong with Citibank. Your line is open. Yitchuin Wong: Hi. Good evening. Thanks for taking the question. Great to hear the team navigate the quarter across a variety of crosswinds that we saw over the past couple of months. Historically, this kind of uncertainty elongated enterprise IT cycles, as we heard from a couple of the larger customers that reported last week. However, the enthusiasm that we are seeing with agentic AI and with your recent GA vector product, agentic, and tons of new AI product announcements with autonomous event Thursday—excited for that. Are you finding the strategic urgency to deploy AI capabilities is overriding the localized macro caution, and what are you seeing around those cost screens and on your deal cycle in the quarter? Steve McMillan: Yeah. Thanks for the question, YC. I think AI is in every strategic conversation that I and my team have with customers. And we can see that with some meaningful data points. If we look at our pipeline, we see a growing proportion of our pipeline today has AI attached to it. And so that reflects that every strategic conversation has that AI or analytics edge to it. Second thing is, as we look at customers, they are having a real challenge deploying AI in production, and they see the Teradata Corporation platform, along with the announcements we have already made and the roadmap that we are going to deliver, as a platform that can deliver AI into production for them. And then third, as John was just talking about, even though we are always going to be a technology company primarily, we do have a capability in our services organization, and the set of AI services that we have launched is enabling customers to move from those pilots into production. I am not going to pivot the company towards services. It will just be a part of enabling our technology value proposition in the marketplace, but we are certainly seeing that pivot. Everybody wants to get the business outcomes from AI, absolutely focused on doing that as quickly as possible. We intend to capitalize on that. Yitchuin Wong: That is good to hear. I have a follow-up for John. The quarter sounded like hybrid continued to be a bigger driver, especially with sovereign AI—sets of things that could be driving higher demand for hardware—and we have a refresh cycle upcoming in 2H. I just want to touch on that. In Q4, we talked about you being able to stop the memory pricing impact given the long-dated contracts. Memory prices have continued to ramp significantly over the last few months. Could you walk us through any incremental impact that you are expecting, especially going into next year as well? Are you seeing customers respond to this memory crunch differently? Thank you. John Ederer: Yeah. Thanks for the question. I would say that this is definitely a dynamic that we are watching very closely and evaluating near daily, and it is becoming quite pervasive in the marketplace. I would say that for us, from a financial standpoint, it is probably more of an FY 2027 challenge and opportunity as opposed to FY 2026. We will talk a little bit more later this week about some of the new products that are coming out, including the hardware refresh. Those will become available this year, but we would really expect more financial impact to occur in FY 2027. Having said all that, from a pricing standpoint, that is the piece that we are looking at the closest. And the thing that we will focus on is to make sure that we protect ourselves from a margin standpoint as we go to market with that. Yitchuin Wong: Thank you. Look forward to seeing everyone out there. Thanks. Operator: Your next question comes from Erik Woodring with Morgan Stanley. Your line is open. Ralph Firaoli: Hi. This is Ralph Firaoli on behalf of Erik. Good evening, and thank you for taking my question. I just wanted to ask: Are we at the start of an improving recurring revenue gross margin trajectory, given you just posted 70% for the first time in a year and the strongest quarter-over-quarter recurring revenue gross margin improvement in years? Steve McMillan: Thanks for your question. I will start, and then I will hand over to John. Certainly, from an ARR perspective, we returned the company to ARR growth in 2025, and we set the expectation that we would continue and accelerate that percentage of ARR growth into 2026. We see a good path and opportunity for that to continue, based both on the expansions that we generate inside the customer base and the incredible interest that we have gotten using the platform for AI-type workloads. And then from an operating margin perspective, we have a number of initiatives in the business that we are looking at to improve operating margins as we continue forward. John. John Ederer: Yeah. Thanks for the question. So gross margins are a little complicated on the recurring side for us. You have got different dynamics at play with both the cloud side of our business as well as the on-prem. In Q1, we did see a nice spike up in gross margin at least relative to the last couple of quarters, at 70% for the recurring, and that was largely driven by the upfront revenue that we also saw in Q1. And so this was a factor of revenue recognition and ASC 606 and getting more upfront revenue related to the on-premise piece of the business. So that had a spike in margins for this quarter. As we look out over the remainder of the year, we would expect them to be a little bit more consistent with recent quarters that we saw in 2025. Now, underneath that, we are seeing improvement in our cloud gross margin, and that is a critical factor for us. I know we do not disclose that publicly, but we have been making good, steady progress on that, and we saw some nice improvement in Q1 on cloud gross margins as well. Ralph Firaoli: Great. Thanks. And if I could just ask a follow-up. Could you help us better understand demand and sales linearity in the quarter, and maybe how the Middle East conflict is impacting sales cycles versus what you are hearing at the micro level as it relates to demand for data prep, unstructured data, etc.? Just any sense of how these factors are impacting your business? Thank you. Steve McMillan: I think we are still seeing a very solid demand environment. The challenges in the Middle East have not substantially impacted our business at all, really. And the demand patterns that we are seeing really reinforce the value that organizations want to get out of the investment they are making. As I mentioned in the prepared remarks, the survey that we did showed that despite 100% of the customers that we spoke to in that survey wanting to deploy AI and get the benefit from AI, the vast majority—99%—are having their problem getting from pilot to production. So that really is altering the conversation that we are having with customers as they look at Teradata Corporation as a platform and a knowledge platform that can deliver the agentic AI workloads that they need. So that is resulting in an environment where we can deliver on the expansions that we need to deliver to make our outlooks and actually take advantage of the market opportunity that is in front of us. Ralph Firaoli: Great. Thank you. Very helpful. Operator: Your next question comes from Matthew George Hedberg with RBC Capital Markets. Your line is open. Matthew George Hedberg: Steve, as a follow-up to that earlier question, it really does seem like there is a lot of momentum in AI, and I think we will hear more about that later this week. The MCP Server interest is high. I guess I am curious: Is there a way for you to determine what the actual ARR benefit you are seeing is from these increases in AI workloads within your base? Steve McMillan: Yeah. I think what we are seeing is that helping those customers cross the chasm from pilot to production is certainly driving usage and capacity usage of the Teradata Corporation platform. One of the benefits that we have in terms of the Teradata Corporation platform is that agentic AI workloads with always-on agents are driving a tremendous volume of queries, driving a huge concurrency of queries, and complexity of queries into the respective data platforms. That is Teradata Corporation’s sweet spot in terms of how we execute and the technology that we have got. And I think we are seeing customers really take advantage of that, and there is a little bit of a shift from standard BI workloads towards more agentic-type workloads, but we also see the opportunity opening up to serve both in the cloud and on-premise those agentic workloads. And we see it as an opportunity for us to drive incremental ARR growth, especially with the new products that we will be announcing on Thursday of this week. Matthew George Hedberg: That is great. And then maybe for John, it was great to hear that retention was solid in the quarter. I guess I am curious, is there anything we should keep in mind regarding large renewals for the balance of this year? John Ederer: No. I do not think there is anything particular on that front. In general, we are seeing improved retention rates. We actually started to see that in fiscal 2025, and we are carrying that through here in 2026, and started off on a good note in Q1. So I think in general, we have done a nice job of getting closer to the customers, understanding that process better around key renewals, and making sure that we are in a good position to do that. Matthew George Hedberg: Got it. Thanks. Operator: Your next question comes from Raimo Lenschow with Barclays. Your line is open. Joe McMinn: Hi, this is Joe McMinn on for Raimo. Thanks for taking our question. During the prepared remarks, you talked about the strong start to the year. You definitely have some tailwinds—security-driven demand, accelerating sovereign AI. AI interest seems to be healthy, and I completely understand we are operating in a very dynamic environment, but could you help us understand the puts and takes and maybe any balancing factors that motivated you to maintain the full-year ARR guide? John Ederer: Well, I think that if you look at the total ARR number for Q1, on a reported basis, 3%, that is right in line with what we had guided for the full year of 2% to 4%. So I guess I view Q1 as being very consistent with our outlook for the year. And then in general, we are seeing decent demand across the product lines, and we are optimistic about some of the things that we will start to introduce later this week. Now, those will not have a material impact on FY 2026, but in general, we are seeing better demand. Joe McMinn: Understood. Congrats on a solid quarter. John Ederer: Thanks. Operator: Your next question comes from Patrick Walravens with Citizens. Your line is open. Patrick Walravens: Oh, great. Thank you very much. Could I start by asking—your comments about the trouble that clients have getting from pilot to production—can you drill down on that a little bit? Specifically, what gets in the way of moving to production? Steve McMillan: Yeah. Pat, I think it goes to the characteristics of the workload and the data platforms that organizations are using. I have used the term before that our competitors solve complexity with incremental compute. We solve complexity with great software. And that enables us to address some of these challenges that our customers are having in terms of spiraling compute costs for their data platform. They have regulatory challenges in terms of making sure that data is well governed. And across all of these different types of data problems, we have been solving them for customers for years, as they have built out some of the most comprehensive enterprise data warehouses, and then making sure that those solutions have the right context. And context is built on industry knowledge, industry data models, the codification of business rules, and we have helped customers and organizations span those challenges for years now. It is just another reinvention of that from an AI perspective to ensure that these AI agents have the right context to get the reliable answers in a production context to really solve business problems today. And that is what our whole new series of offerings and capabilities over the past few months, and including what we are planning to launch over the next couple of weeks, really brings together in terms of delivering that context to our customer organizations. Patrick Walravens: Okay. Great. And can I ask, Steve—or maybe John, I do not know who wants to pitch in on this—so other than the financial aspect of the SAP settlement, can you remind us what this whole thing was about? And is there any fundamental benefit in having resolved this dispute? Steve McMillan: Look, I think, Pat, it is always good to clear the deck from a legal perspective and make sure that we are looking forward and looking forward to what we are actually going to do strategically with that cash. It certainly is on the balance sheet now, and it gives us a lot of strategic optionality as we move forward in terms of how we deploy that. Certainly, it solidified the balance sheet, as John pointed to, but it gives us strategic options moving forward. And we certainly see it as a vehicle that is going to enable us to increase our return to shareholders as we move forward. So we are pretty excited about it and glad to put it behind us. Patrick Walravens: Okay. Thank you, guys. Operator: Your next question comes from TD Cowen. Your line is open. Analyst: Hi. This is Jared on for Derrick. Thanks for taking my questions. First, could you comment on domestic and international revenue in the quarter and maybe pick apart some of the drivers for each of those markets? John Ederer: Yeah. So in general, if I look back over the last few years, we have seen some differences in domestic versus international. And if you go back a couple of years, the impact of some of the churn was really more felt in the United States as opposed to the international markets. We have also seen some improving trends, even from a new logo standpoint, in some of the international markets. And so I think that that is one area where the hybrid story resonates even more so than perhaps in the United States. Analyst: Awesome. Appreciate that color. And off of that regulated industry commentary, can you just talk to some of the different trends you have been seeing in your regulated base versus nonregulated base? Steve McMillan: Yeah. I think—and it reflects as well in some of the workloads that we have been winning—certainly governments, financial services organizations, and health care organizations are highly regulated. We see that as a great competitive moat for us. We are uniquely differentiated to enable those organizations to run agentic AI workloads against that data, and they can do it in the cloud or they can do it from an on-premise perspective or in a hybrid environment. You know, more than 50% of our customers in the cloud also operate on-prem Teradata Corporation systems. So being able to span data across those environments, not move data into different types of solutions, has given those regulatory workloads some real benefit in terms of how they can leverage AI and agentic AI against those datasets. Analyst: Thanks for taking my questions. Operator: That concludes today’s Q&A session. I will now turn the call back over to Steve McMillan for his final remarks. Steve McMillan: Thank you very much, operator. Thanks for joining us today. We are really proud of our strong start to the year and the value we are creating for shareholders. We have the technology, the expertise, and a really strong partner ecosystem. And we believe we are bringing real differentiation to the market with our autonomous knowledge platform. We intend to keep that momentum up as we help organizations build for their edge future, moving decisively from AI ambition to sustained business impact. We look forward to updating you again next quarter. Operator: That concludes today’s conference call. You may now disconnect.
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 morning. My name is Vincent, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SOPHiA GENETICS First Quarter 2026 Earnings Conference Call. [Operator instructions] Kellen Sanger, SOPHiA GENETICS VP of Strategy, you may begin. Kellen Sanger: Thank you, and good morning, everyone. Welcome to the SOPHiA GENETICS First Quarter 2026 Earnings Conference Call. Joining me today to discuss our results are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; Ross Muken, our Company President; and George Cardoza, our Chief Financial Officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meanings of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release issued by SOPHiA GENETICS today and in the documents and reports filed by SOPHiA GENETIC from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I'll now turn the call over to Jurgi. Jurgi Camblong: Thanks, Ken, and good morning, everyone. I'm pleased to report that SOPHiA is off to a strong start in 2026. In the first quarter, we delivered revenue growth of 22% year-over-year. We also performed a record 108,000 genomic analysis as demand for SOPHiA DDM accelerates across the globe. In addition to processing more data volume than ever, we also achieved adjusted gross margin of 75.4%, demonstrating the unique scalability of our hyper-efficient analytics platform. Ross and George will walk you through the commercial and financial details in a few minutes. But first, let me step back and frame why this quarter matters strategically. The precision medicine landscape is at an inflection point. Sequencing costs are declining, data per patient is exploding, and AI is becoming essential for delivering the highest standard of care. As a result, hospitals and labs around the world are increasingly looking to scale their genomics testing capabilities. With the right partners, turnaround times become faster, economics become profitable and data generated becomes invaluable for performing research and making discoveries. SOPHiA DDM was built for this moment. Our platform streamlines testing and allows any institution anywhere in the world to quickly scale their own world-class precision medicine capabilities. SOPHiA DDM provides customers with not just a tool, but an AI native service that delivers workflow outcomes, generating highly accurate insights and faster speeds while also unlocking profitable economics for institutions. But that's not all. SOPHiA DDM also makes patient care more intelligent by breaking data silos and allowing clinicians to tap into a collective intelligence of the smartest minds in health care. As hospitals use SOPHiA DDM to generate insights and treat patients, they also contribute a stream of data and knowledge back into the platform. As more data flows through the platform, our algorithms become smarter. This in turn enables boost and clinicians to get better insights, building trust along the way. Deeper trust, smarter insights and better outcomes ultimately accelerates new platform adoption, creating a virtuous loop with compounding growth effects. As of Q1, this adoption loop has enabled us to connect 537 institutions across the globe who use SOPHiA DDM every day for genomic analysis. In the quarter, this institution uploaded real-time real-world genomic data for 108,000 patients. And in March, we set a new company record with more than 40,000 patients analyzed in a single month. This diverse real-time real-world data stream includes patient data from 75 countries worldwide, creating breadth and globe exposure and is unmatched in our space. Over the past 2 years, our rich diverse data set, which includes nearly 2.5 million genomic profiles since inception has enabled us to build some of the most sophisticated AI in health care. New applications in liquid biopsy, solid tumor, MRD for AML and enhanced exams are impressing our users with their accuracy, flexibility and AI-powered insights. And the good news is we're just getting started. Our top innovation priorities going forward will focus on deepening clinical relationships and getting closer to the patients. To accomplish this, we will expand platform capabilities to new areas as the market evolves. This includes supporting larger, more complex NGS applications like all transcriptome and methylation, tracking patients longitudinally with MRD, mastering data compute at scale, optimizing the end-to-end workflow and developing increasingly regulated products. It also includes expanding capabilities beyond genomics into multimodal to support clinical decision-making and accelerate the future of data-driven medicine. Our planned innovations are also designed to resonate with biopharma. Throughout the year, we will invest in evolving our data sets into durable commercial assets for real-world evidence. In addition, we are working hard to create a global decentralized companion diagnostics offering that brings life-saving therapies to patients across our network. In short, our unique positioning and data set are enabling us to build for the future. We have been a technology company since day 1, building real AI to solve the world's most difficult biological challenges. The market is coming to us, and I couldn't be more confident in our ability to deliver products for future growth. As we continue to invest in the future, we also must remain committed to growing in a sustainable way. Across the organization, our teams are hyper focused on continuous improvement, efficiency and operational excellence. We benefit from a young, agile and tech-centric workforce that has been quick to adopt and deploy emerging productivity tools, including the new AI technologies in the market. Early results from our internal rollout of these AI tools has been overwhelmingly positive. In Q1, we materialized the benefits of recent efficiency gains and took a series of targeted cost actions, which modestly reduced headcount and nonlabor spend across the business. These actions, which mostly focused on support and operations functions have allowed us to invest even more in high-growth areas while also ensuring that we meet our profitability commitments going forward. As the year continues, we will look forward to updating you on our progress in showcasing the impressive operating leverage that is inmates to our business model. In closing, Q1 was a strong quarter for SOPHiA. The market is reshaping itself around intelligence, and we are perfectly positioned to accelerate this movement. Our network is compounding and our data is unmatched. We continue to scale and our path to profitability is becoming increasingly clear. As I close out my final earnings call as CEO before I transition to Executive Chair in June, I'm happy to transition leadership of a business that is in excellent shape to a capable leader who will propel SOPHiA to its next stage of growth. With that, I will now turn the call over to Ross, who will provide a more detailed update on the business and growth drivers for the year. Ross Muken: Thanks, Jurgi. I certainly share your excitement about the business. And today, I'm pleased to share an update on our progress to start the year. In the first quarter, 3 major themes defined the quarter. First, the U.S. business continues to gain momentum. Decentralized testing has always been a widely accepted characteristic of the European and global market. However, in the last 12 months, demand for decentralized testing has materially increased in the U.S. as reimbursement rates become more established and denial rates improve, hospitals and labs are waking up to the benefits of scaling their own testing capabilities. Central labs have proven that testing is profitable and that genomic data has significant value. Now U.S. hospitals and labs are making testing part of their core strategy, and those who move are seeing significant benefits. In the first quarter, we announced an expanded partnership with Mount Sinai, one of the leading academic health systems in the U.S. who is using SOPHiA DDM to bring haemato-oncology and solid tumor testing to the New York market. They joined a growing number of New York area institutions to partner with SOPHia, including NYU Langone Health and Memorial Sloan Kettering Cancer Center. As more institutions adopt SOPHiA DDM, the cost of not having our platform becomes real. Regional density causes patients, providers and even payers to push testing volumes towards sites which offer the best insights at the lowest cost with the fastest turnaround times. We're proud to work with our partners to bring these positive structural changes to the New York testing market and welcome a decentralization revolution to the New York City area. The second key theme for the quarter was continued growth of new applications such as the MSK Impact and MSK Access test. In Q1, less than 2 years after decentralizing and deploying these tests globally, we have already reached a total of 100 customers worldwide who have signed on to adopt the applications. A few of these include prestigious Q1 signings such as Master UMC, a leading Dutch academic medical center, Hospitalia Niguarda, one of Italy's leading hospitals in Milan and Rural University Bulcum in Germany. These customers, along with half of the 100 signed accounts are currently implementing SOPHiA PBM, which means they should begin generating revenue over the next 12 months. Among those who have completed implementation, we are pleased to record 3,000 liquid biopsy analysis in Q1, up more than 100% year-over-year. We look forward to this number continuing to grow as more customers finish their implementation, and start using the sophisticated high SP application. New applications such as liquid biopsy and enhanced exomes help our sales team expand within accounts. As a reminder, we landed a large amount of new customers in 2025 with 124 new signings throughout the year. As we turn to 2026, a major focus will be expanding across these customers by encouraging them to adopt additional applications. I'm proud to say that our expand engine is off to a strong start in the first quarter. Net dollar retention, or in other words, same-store growth increased to 117%, up from 103% in the prior year period. Moreover, forward-looking indicators show no signs of stopping. In Q1, we signed many notable expand deals, including 3 in Europe that were each valued at over $1 million in annual contract value. This serves as another impressive proof point for the virtuous loop fueling our platform's growth. It also shows that hospitals are excited to consolidate their data strategies with trusted partners in a market where winner take most dynamics are forming. The final theme for the quarter was substantial increased momentum with biopharma. In the first quarter, biopharma revenue growth was positive and contributed modestly to overall growth as some of the recent new contracts we signed began to generate revenue. We continue to make progress with a growing number of biopharma partners and momentum is strong. Coming out of AACR and World CD and CDx Summit Europe 2026, it is clear that biopharma customers are looking to develop comprehensive AI investment strategies with trusted partners. It is also clear that every biopharma company we speak to recognizes that SOPHiA provides differentiated value across the drug continuum. They recognize that our diagnostic network is unmatched in global reach and that the data streaming through our platform has incredible value. They also appreciate our deep AI expertise in the field of biology. Our offering is continuing to resonate as one of the only companies in this space that could support a drug across its entire life cycle from companion diagnostics to post-launch monitoring with real-world evidence to patient selection and trial design. In the last 6 months, increasing momentum has materialized in the recent signing of contracts with major biopharma such as AstraZeneca and Johnson & Johnson as well as biotechs like Kartos and others. Moreover, our partnerships with Myriad Genetics in the U.S. and added innovations in Japan continue to progress as we work on building out the infrastructure for a hybrid global CDx offering. We look forward to updating you more on these items over the coming weeks and months. Looking ahead to the remainder of 2026, our pipeline across clinical and biopharma remains strong and healthy even after strong bookings conversion. Deal size continues to grow and the number of opportunities in our pipeline above $1 million are becoming even more numerous. The market is moving in our direction, and we are excited to continue capitalizing on our opportunity. With that, I will now turn it over to George, who will provide a more detailed look at our financial results and the outlook for 2026. George Cardoza: Thank you, Ross. As Jurgi and Ross highlighted, Q1 results were strong and our outlook remains positive. Total revenue for the first quarter was $21.7 million compared to $17.8 million for the first quarter of 2025, representing year-over-year growth of 22% I will note that year-over-year revenue growth would have been slightly stronger if not for a onetime benefit in the prior year period from a customer true-up. Platform analysis volume was approximately 108,000 in Q1 compared to 93,000 in the first quarter of 2025, representing solid growth of 16%. From a regional perspective, U.S. volumes continue to expand at healthy levels, growing 28% year-over-year in Q1. APAC also outperformed with 31% volume growth. In EMEA, revenue grew 30% year-over-year, impressively above the company average, mostly driven by great performance in the U.K., Belgium and Switzerland. In Latin America, revenue remains soft, and we have made changes there to turn around our performance. From an application standpoint, Hem/Onc revenue grew 24% year-over-year. Rare and inherited growth also picked up in the quarter with volumes growing over 20% as our enhanced exome product begins to come online. As Ross mentioned, liquid biopsy, which carries a higher ASP, continues to ramp and contribute to our revenue growth as well with more growth expected for the second half of the year. Core genomic customers were 537 as of March 31, up from 490 in the prior year period. Annualized revenue churn remained world-class at less than 1% in Q1. As Ross mentioned, net dollar retention for the quarter was 117%, up from 103% in the prior year period. Gross profit was $14.7 million compared to $12.2 million in the prior year period, representing growth of 21%. Gross margin was 68.0% compared to 68.7% for the first quarter of 2025. Adjusted gross profit was $16.4 million, an increase of 22% compared to adjusted gross profit of $13.4 million in the prior year period. Adjusted gross margin was 75.4% compared to 75.7% for the first quarter of 2025. Total operating expenses for Q1 were $32.0 million compared to $28.2 million in the prior year period. Some specific items temporarily impacted reported operating expenses and are worth calling out directly as they do not reflect the company's underlying operating performance. First, foreign exchange headwinds continue to negatively impact reported results, primarily due to the strengthening of the Swiss franc. The Swiss franc strengthened approximately 14% against the U.S. dollar from Q1 2025 to Q1 2026, meaningfully increasing the dollar translated costs of our Swiss payroll and facilities. This is a pure translation effect as our underlying cost structure in local currency remains disciplined. Second, as previously disclosed, Guardant Health filed patent infringement claims against us in the United Kingdom and at the Unified Patent Court in Paris during Q3 last year, alleging that our MSK access application infringes their patents. We incurred approximately $1.4 million in related legal expenses during Q1, which is reflected as a litigation adjustment in our adjusted EBITDA reconciliation. Importantly, in January, the UPC rejected Guardant's request for provisional measures and ordered them to pay us $700,000 in interim costs, $500,000 of which we received in mid-March and an additional $200,000, which we received in mid-April. Net of this recovery, litigation impact on Q1 operating expenses was approximately $700,000. Operating loss for the first quarter was $17.3 million compared to $16 million in the prior year period. Adjusted EBITDA was a loss of $9.2 million compared to the prior year loss of $9.5 million. Lastly, cash burn, which we define as the change in cash and cash equivalents, excluding cash received from borrowings and stock sales as well as FX impacts, was $19.5 million compared to $11.7 million in the prior year period. This year-over-year increase reflects 2 expected dynamics. First, coming off a strong 2025, annual bonus and commission payouts were meaningfully higher than the prior year, and these were paid in March. Secondly, we also invested in the build-out of a new lab at our Swiss headquarters with increased capacity to support revenue growth for years to come. This impacted our cash burn by approximately $1 million in the quarter. Third, we continue to vigorously defend ourselves against the patent infringement lawsuit filed by Guardant Health, and we paid several bills for expenses incurred in the first quarter of 2025. The $500,000 from Gardens in Q1 and the additional $200,000 received in April only cover a portion of our total litigation costs. We ended Q1 with cash and cash equivalents of $65.4 million as of March 31, which includes $14.5 million in ATM proceeds received in the first quarter of 2026. In January, as previously disclosed, we also expanded our credit facility with Perceptive Advisors, increasing total available liquidity by $25 million. We remain confident in our current capital position with respect to the achievement of our long-term goals. I'll now turn to the 2026 outlook. Given the promising revenue growth in Q1, SOPHiA GENETICS is reaffirming our full year revenue guidance for 2026 of $92 million to $94 million, representing 20% to 22% growth on a reported basis. We still expect 2026 growth to be mostly back half weighted as new business signed in 2025 comes online in the second half of the year and as more MSK ACES, MSK IM PACFLEX and enhanced exome business ramps up to routine usage. We also expect that exchange rates will remain volatile due to macro uncertainties, which may have an impact to reported results. Beyond revenue, we are also reaffirming our full year adjusted EBITDA loss guidance of $29 million to $32 million compared to $41.5 million in full year 2025. As demonstrated this quarter, we continue to make targeted investments in our platform to further optimize cloud compute and storage costs and expect gross margins to slightly expand beyond 2025 levels. As a global company, we are monitoring the ongoing conflict in the Middle East closely, particularly with respect to shipping and customer activity in the region. So far, the conflict has not materially impacted our results, and we do not believe it will have a material impact this year. In Q1, as Jurgi mentioned, we took a series of cost actions and realized benefits of adopting AI across our teams. These actions reinforce our conviction to grow revenue without increasing headcount. They also give us confidence that we will be able to continue holding the line on operating expenses in local currencies and reach our profitability guidance. All said, we continue to believe that we are on track to be approaching adjusted EBITDA breakeven by the end of 2026 and crossing over to positive adjusted EBITDA in the second half of 2027. With that, I would like to turn the call back over to Jurgi for closing remarks before we take your questions. Jurgi Camblong: Thank you, George. As I wrap up my last earnings call as CEO of SOPHiA GENETICS I feel confident as ever in our long-term trajectory. Forward-looking indicators remain strong across the business. We continue to see a steady stream of customer signings across new and existing customers. Biopharma interest is growing and our pipeline is expanding across regions and applications. At the same time, we continue to be laser-focused on optimizing costs and delivering sustainable growth. Thank you to the SOPHiA team, customers, partners and investors for your continued trust and partnership. 15 years ago, we had an ambitious vision to transform health care through data and AI. Today, we operate the most widely used AI-driven platform in precision medicine, impacting 40,000 patients per month and 2.5 million patients since inception. I'm so proud of what our team has accomplished over the past 15 years, and I know we are just getting started. Operator, you may now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Mark Massaro from BTIG. Mark Massaro: Congrats on the quarter. Jurgi, I appreciate the network that you've built globally to decentralize this testing and look forward to working with you as you move to the Executive Chairman role. Sure thing. Yes. So moving into my question, I guess, the adjusted gross margin of 75% was certainly a key highlight of this print. Can you just give us a sense, guys, for your degree of confidence to maintain or how do you think about this gross margin profile going forward? I know that you are planning to onboard some higher mix applications. So is this something that you think you can build on here? Or were there some onetime items that might be lumpy on the gross margin line? Jurgi Camblong: Ross? Ross Muken: So Mark, we've really spent quite a lot of effort modernizing the platform over the past 24 months as we've talked about our Gen 2 transition, and I think you're seeing the benefits of that. And I think there's a lot more scalability left even as we bring on more complex solutions that require a lot more compute. And so in general, I'm super happy with how the team has executed here. I think fundamentally as well, we're seeing positive pricing dynamics in our environment. So you have both the mix of trade up to more complex solutions as well as more value realized for solutions like ours as a percentage of total cost of diagnostic or as a percentage of revenue. So I think on both of those parameters, this is quite constructive for us. And so I'll let George comment on what's contemplated going forward. But for me, I still think there's some room to go, but certainly, we're very pleased with how we've executed. George Cardoza: Yes. No, Mark, as Ross said, I mean, we're very pleased with the performance of our tech team, and we were pleased with where gross margin came in for the quarter. We do have some pharma business. And if anything could be lumpy on the margin side, it would probably be more of the pharma business. Our full year guidance was modest improvement in gross margins, and we're still holding to that. But certainly, we were pleased with where Q1 came in. Mark Massaro: Okay. Great. And it looks like you guys took some cost reduction actions in the month of April. It looks like it's a small action, but can you just speak to which regions were impacted? Anything in the U.S. that was material? And how should we think about that in terms of headcount? Ross Muken: So a couple of things, Mark. So one, the action was quite small, right? So it was a very modest change to the cost structure. We are an organization very focused on continuing improvement. We've also seen some gains in parts of the business from -- and so we wanted to be able to drop some of that down and then reinvest other parts. So I would say, in general, again, this was quite isolated and generally, I would say, in the G&A functions where we gained efficiency. And so this was our ability to show that, obviously, we're an organization very committed to our profitability targets. And also as a software and AI business, we're one that could not only obviously deploy games to our customers, but also utilize some of that on our own operations, which will help us again, as we scale as growth continues to reaccelerate here. George? George Cardoza: Yes. No. And again, we've -- in our guidance for the year, we said EBITDA -- adjusted EBITDA of $29 million to $32 million. And this was an important part is maintaining that cost discipline across the organization. And like Ross said, that's just part of what we're doing and making sure that we continue to have that discipline going forward. And as mentioned, Mark, regionally, most of it was G&A. So I would say probably a bit more concentrated in the Swift operations. But honestly, no real geographic bias to it. And actually, the U.S. is where some of the headcount redeployment, particularly on the commercial side will go. It will be modest. And that's because we're seeing really great characteristics in that business and really are confident in our ability to continue to grow market share in the territory. Mark Massaro: Great. And maybe just my last question. You alluded to the fact that you signed a lot of new customers in 2025, many of which are planning to turn on to the DDM platform in the second half. I just wanted to get a sense for -- obviously, you did reaffirm the revenue guidance, but I just want to get a sense for whether or not you believe that you're tracking to initiating the go-lives for many of these customers and wanted to test your degree of confidence on these folks coming on to the platform. Ross Muken: So Mark, we came in ahead of our plan in the first quarter. So we're very happy with our performance. You know we're conservative. And so given it's early in the year, despite we're really pleased with the signals and we remain extremely confident in sort of the customer onboarding and progression. We want to make sure that we're well set up for the year. So I would say stay tuned. But ultimately, we're feeling very good around delivering on our commitments and ideally, obviously outperforming. I would say, overall, on the onboarding side, I'm really pleased with our implementation team on our tech side and our bioinformatics group as well as in services. We've seen the pacing of some of the large customers pick up. We have quite a number of them coming online, including some that came on late in March, which helped with that record month that you saw. and helped us have a record quarter. And so my expectation is that we will -- that cadence will continue to improve. Again, a lot of the AI and other initiatives we have are focused on speeding up that time to revenue. And so again, as George talks about the back half ramp, a good portion of that is highly visible and is obviously tied somewhat to some of those customers, particularly some of the large U.S. ones coming online, and we remain super confident on our ability to execute on that. And ideally, if they ramp consistent with what we've seen historically, that may provide some cushion for upside as we tend to initially guide fairly conservatively for the on-ramp of new business. So again, a lot to look forward to on our side as that growth ideally continues to move in a favorable direction. Operator: Your next question comes from the line of Dan Brennan from TD Cowen. Kyle Boucher: This is Kyle on for Dan. I wanted to jump into your net dollar retention, which accelerated again this quarter to 117%. Can you just discuss some of the drivers a little bit more? I mean is this more driven by customers expanding into multiple applications on DDM? Or is it more a mix of the uptake of higher ASP tests like MSK ACES that's driving that performance? Ross Muken: Thanks, Kyle. Obviously, we're happy to see that metric get back to, I would say, really high-quality standard among software businesses. So we're quite pleased with the organic growth. As you mentioned, it's coming from a mix, right? So we were very intentional this year versus the last 2 years of really focusing on the expand -- and so that obviously will benefit the NBR line. And ideally, this will continue into next year. This is a very high ROI acceleration as well as it carries with it very little incremental cost. And so it helps as we think about our shift to EBITDA profitability. I would also say, and you can see it by the strong EMEA results, the underlying growth in our industry, I think, has become healthier. You see it in one of the large equipment vendors numbers relative to clinical consumable growth. But I think overall, customers are healthy. New technologies are coming online. For us, that would be things like liquid biopsy or exomes. And in general, pricing remains, as I mentioned, favorable. So I think the component of all of that with incredibly low churn all of that comes together to give us confidence that the improvement in sort of that organic underlying growth rate will sustain. Kyle Boucher: Got it. And then maybe just on your Latin America business. You noted it was soft in the first quarter. I think in your 6-K, it said it was down over 30%, but I believe you had a really tough comp there year-over-year. Can you just dig into some of the trends that you're seeing in Latin America and just expand upon that a bit? Ross Muken: Yes. So thank you for the question. Obviously, we've been disappointed in that region, albeit it's a small one, but it's strategically important for the last number of quarters. So we did make a change there in leadership. I was actually just there myself very recently as was our CSO in Brazil and Colombia and Argentina, all 3 critical countries. I would say Brazil at the moment is where some of that softness is kind of isolated. And so we've got some ideas and thoughts of how we're going to reaccelerate the territory. I would say I'm quite optimistic on Mexico and Colombia and to a lesser degree, Argentina. But I think overall, we expect the region to return to growth. We think we're going to make the necessary changes there, and we think the portfolio is also well positioned. It's also a region that's highly pharma sensitive. And so sometimes as well, it's dependent on where pharma pipelines are, and there are a few key new drugs coming online that will be highly relevant for Latin America. And so we would expect that as well to drive an increase in testing in some of the geographies. And so overall, I would say we're cautiously optimistic, but certainly, we've taken actions to ensure that we get back on track in this strategic territory. Operator: Your next question comes from the line of Bill Bonello from Craig-Hallum. William Bonello: A couple of questions here. First of all, I want to follow up on one of the questions that Mark asked just about implementation time. But more specifically to MSK ACES. I'm just curious what you're seeing these days in terms of sort of typical onboarding time once a customer has said that they want to adopt MSK Access? And then what you're kind of seeing as a typical ramp once they're up and running the test? Ross Muken: Bill, it's a great question. Thank you. So obviously, as you know, MSK Access is incredibly important to us. We're really proud of the 100 accounts that have come online, if you just put that in context. the world didn't really have liquid biopsy testing outside of the United States. And so we're really pleased to see it adopted at this great rate. And we're also really proud to have great pharma partners in that journey that have helped us in that adoption rate. And so I would say, overall, I wish I could tell you that there's a pattern on some of the adoption. I would say several accounts have come online and oncologists have really, I would say, understood how to utilize the technology, and we've seen volumes ramp. I think others take more education. And so again, there's varying degrees of sophistication and understanding on different sort of cancer types dependent on where we look around the world. But at the moment, about half of the accounts are online. I would say they're all ramping. We continue to believe this will be a very material part of the incremental growth. And so overall, I would say we're pleased. But certainly, you start to see some of that impact the revenue line, but I would say more is to come over the next several quarters and into 2027. And so far, it's hitting our internal expectations, but we'd obviously like to see that inflect more materially. And we think we, again, better doctor education or oncologist education in some of the territories. And then if you see some of what's going to be presented at ASCO as well as at ESMO, our expectation is all of this will help drive with that utilization to much higher levels over time. But it's been pretty broadly adopted, right? And so you should expect to see different adoption curves in each of the different nations. William Bonello: That's helpful. And then just a follow-up on the pharma side. And you touched on this just slightly in your response to that question. It's great to see the recovery there. It does seem like typically pharma revenue might capture a lower multiple just because it's not seen -- it is seen as potentially less recurring. Could you maybe talk to us about how you think about the pharma business vis-a-vis the clinical business? In other words, how does pharma drive clinical if it does? Ross Muken: Bill, it's another great question. So -- and it ties, frankly, into your first question because a product like MSK ACES, which is really a platform for pharma, does have a fantastic flywheel between biopharma and clinical usage, as you alluded to. So I would say, overall, we're very pleased finally with where our pharma business is performing. We've now gotten back into the green, and we're starting to see some nice momentum where I think over the next several quarters, you'll see that acceleration play out in the total revenue performance. So certainly, quite a different picture than where we were 24 months ago. As you know, we made some tough decisions in that business, and we really refocused and we're seeing the benefits now of that play out in the numbers. And so I would say, again, one of the key things we've strategically decided to do is less kind of large one-off project type business that doesn't yield strategic and/or recurring revenue benefits. So we're much more confident that the type of business we're bringing online is recurring, can be repeated and can be scaled. And as you think about, again, some of the types of CDx projects even that we do, much of that is done with the intent of not only being able to serve pharma through the CTA and CDx portion, but obviously, on the clinical side thereafter. And the idea that you can have one harmonized global solution in all markets, right? Think about that in liquid biopsy that doesn't require large bridging studies that doesn't require some hybrid mix of 7 or 10 laboratories around the world solving for a geographic or a global picture. I think it's a super compelling offering. And it's also different in that for us, we're already embedded in so many of these accounts. And so once we flip the switch from some of the pharma work into the clinical market, it's the same solution, right? And we can start relatively quickly serving customers in that market post approval for a drug. So I think for us, again, that flywheel is hypercritical. We're really happy with the progress pharma has made. And I would say, overall, you can hear from us our confidence is up. Again, we're not declaring victory. We're just starting to show kind of the right level of performance here, but it's certainly materially better than where we were even 12 months ago. Operator: Your next question comes from the line of Subu Nambi from Guggenheim Securities. Subhalaxmi Nambi: This is Ricky on for Subu. So in the slides, you have the average price per analysis ranging from $100 to $500. And for the first quarter, just some back of the envelope math here, it comes in around $195 per sample analysis -- per analysis. So what is your expectation for the ASP trend through the remainder of the year? And what are you assuming for this in guidance? Jurgi Camblong: George? George Cardoza: Yes. If we exclude the pharma business and just look at the clinical business, our price sequentially was up $2. So as Ross said, we're building in terms of selling more higher-value tests. So our expectation is to continue to see that lift as the quarters go on during the year. And we continue to see the access clients, the 100 clients that we booked ramp up. So we're optimistic about ASP. Now there's a balance there because, obviously, we are expecting growth now in our Latin America business and some emerging markets like India and Turkey. But still, in terms of modeling, we do expect the ASP to have lift in it for the remaining quarters of the year. Subhalaxmi Nambi: Got it. That's helpful. And a lot has been asked on biopharma, but maybe just a slightly different approach of the question. You mentioned how this is a modest positive contributor to growth in the quarter, and there was lots of positive color on signings and outlook. But did the quarter turn out the way you expected? Or was it above your expectations? And did it change what you're expecting for the remainder of the year? Ross Muken: Yes. So as I mentioned before, we're quite conservative, Ricky. So despite the fact that pharma performed quite well, and I would say we're optimistic for continued sequential improvement and a step-up in the second half of the year as well. We did not change our expectation in the guide. I'll let George give some color. But I think just fundamentally there, since we're early in that reacceleration, we want to remain conservative. But what we're trying to convey is if we look at the picture in terms of -- and even for myself, I was at two large conferences during the quarter. If we look at the level of interactions we're having with pharma and what we're discussing and the comprehensive nature of that, if we look at the RFPs we're responding to, if we're looking at what's in the pipeline and what's late stage and then what we've now executed on over the last several quarters in terms of new pharma customers as well as new contracts with our existing customers. It's a much better mix than what we've seen in the past, both across, frankly, diagnostics and data. And we haven't talked about data or our evidence generation business in a while, but we're actually seeing as well there subtle improvements. And so I think overall, what we're trying to kind of point to is our increased confidence that, that will improve, but we remain conservative, right, George, in terms of how we factor that into the forecast. George Cardoza: Yes. We're very pleased with the performance of the Pharma business. As Ross said, I mean, it's really been building momentum. It's tangible. We can see it. And again, I think in 2026, it's going to be an accelerator, but it's really going to be an accelerator in 2027 and beyond as that business just continues to build and build. Operator: There are no further questions. Please continue. Jurgi Camblong: Well, thank you so much for joining us today and for joining us and me in a journey of 15 years. I'm very happy to basically let the driving seats to a fantastic leader who sits next to me here in Switzerland today, surrounded by a very talented team and with a technology that is better than ever to be able to capture even more opportunities in the market. So I'm very, very pleased with what we have achieved, and please continue following us. As you will see, we will continue to transform precision medicine over the next years. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Alkermes First Quarter 2026 Financial Results Conference Call. My name is Carrie, and I will be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Sandra Coombs, Senior Vice President of Investor Relations and Corporate Affairs. Sandy, you may now begin. Sandra Coombs: Good morning. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended March 31, 2026. With me today are Richard Pops, our CEO; Joshua Reed, our Chief Financial Officer; Todd Nichols, our Chief Commercial Officer; and Blair Jackson, our Chief Operating Officer. A slide presentation, along with our press release, related financial tables and reconciliations of the GAAP to non-GAAP financial measures that we'll discuss today are available on the Investors' section of alkermes.com. We believe the non-GAAP financial results in conjunction with the GAAP results are useful in understanding the ongoing economics of our business. During the quarter, we closed the acquisition of Avadel Pharmaceuticals plc. The financial results announced today reflect the mid-February closing of the transaction and the integration of Avadel into our business, including 6 weeks of contribution from LUMRYZ, Avadel's once-at-bedtime sodium oxybate for the treatment of narcolepsy. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation, our press release issued this morning and our most recent annual report filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we'll open the call for Q&A, and I'll turn the call over to Richard for some opening remarks. Richard F. Pops: Thank you, and good morning, everyone. So, we had an excellent financial first quarter with another strong period of commercial execution and business performance. The quarter was consequential in other ways. Perhaps most significantly, we completed the acquisition of Avadel, a key element of our strategy to become a leader in the sleep medicine space. With LUMRYZ, we add a new differentiated medicine to our portfolio, one that's early in its commercial life and has significant potential for growth. LUMRYZ addresses a clearly defined patient need and fits logically into our portfolio, consistent with our focus on medicines delivering meaningful clinical benefit to patients. From a financial standpoint, the acquisition further enhances our financial growth and provides additional resources and flexibility to advance our development portfolio. Beyond the financial consideration, the acquisition allows us to establish a commercial footprint in sleep medicine now, well in advance of the potential approval and launch of Alixorexton. This early presence enables us to engage directly with sleep specialists and other key stakeholders critical to ensuring access to prescribed medications. Building these relationships now provides a strong foundation to accelerate our potential launch trajectory for Alixorexton. Another consequential event occurred at the very end of the quarter with the announced entry of Eli Lilly into this therapeutic space. This is an important external validation of the breadth of the scientific and commercial potential in developing new medicines targeting the orexin pathway. I think it underscores important aspects of this emerging therapeutic class, namely the limited number of competitive entrants and the scarcity of available intellectual property around the chemistry as well as the broad potential clinical and commercial opportunity. It starts with diseases of hypersomnolence and extends beyond that to a range of potential conditions in neurology, psychiatry and other rare diseases. For Alkermes, we believe Alixorexton and our other development candidates represent substantial opportunities to advance patient care and drive significant value for shareholders. We have a clear strategy, and we're well positioned to advance these programs. Blair and I will provide an update on our development efforts at the end of the call. But first, I'll turn to Todd and Joshua to review our commercial and financial performance for the first quarter. Todd? Todd Nichols: Thank you, Rich. Good morning, everyone. I'm pleased to report that we're off to a strong start to the year with first quarter performance ahead of our expectations and solid execution across the commercial organization. It is exciting to note the evolution of our commercial team as our portfolio of commercial products expands. We now have commercial capabilities in 3 distinct categories: in addiction with VIVITROL, in psychiatry with ARISTADA and LYBALVI and now following the closing of the acquisition of Avadel and sleep medicine with LUMRYZ. The integration of Avadel commercial team is progressing well, and we entered the second quarter with the combined team fully in place. Looking ahead with clear strategic priorities, a seasoned commercial team and a portfolio of important medicines in addiction, psychiatry and sleep disorders, we are in a strong position to deliver on our performance goals for 2026. Turning to our first quarter results. Net sales from our proprietary product portfolio increased 38% year-over-year to $338.1 million, reflecting solid demand across our psychiatry and addiction portfolios and certain favorable gross to net adjustments during the quarter and 6 weeks of commercial contribution from LUMRYZ. Starting with VIVITROL. Net sales in the quarter were $112.4 million. VIVITROL performance continued to be driven by our ability to capitalize on highly localized market dynamics in certain states and payer systems. Looking ahead, we continue to expect VIVITROL net sales for 2026 in the range of $460 million to $480 million. For our psychiatry franchise, in the first quarter, net sales for the ARISTADA product family were $93.8 million, reflecting solid underlying demand. In 2026, we continue to expect ARISTADA net sales in the range of $365 million to $385 million. LYBALVI net sales grew 32% year-over-year to $92.4 million. Underlying TRX growth was 21% year-over-year, driven by sustained momentum in new patient starts and continued expansion of prescriber breadth. Gross to net adjustments were approximately 33%, which we expect will continue to widen into the mid-30s during the course of the year as we continue to build on our market access profile. For the full year, we continue to expect LYBALVI net sales in the range of $380 million to $400 million. The first quarter results for these products benefited from gross to net favorability of approximately $14 million, driven primarily by favorable patient mix. Approximately 2/3 of this favorability related to VIVITROL and the remainder related to ARISTADA and LYBALVI. Across the brands, inventory levels in the channel were relatively stable in the first quarter of 2026. As a result, we expect Q1 to Q2 growth trends to generally track end market demand. Turning to our sleep franchise. We are now 10 weeks post close of the acquisition of Avadel. As we build on our commercial presence in this space, we are pleased with feedback from the sleep medicine community regarding the LUMRYZ commercial organization, the utility and expected durability of the oxybate class and the differentiation of LUMRYZ within this category. The LUMRYZ team is off to a strong start since joining Alkermes. For the first 6 weeks following the close of the acquisition in mid-February, we recorded LUMRYZ net sales of $39.5 million. For the full quarter, LUMRYZ generated approximately $72 million of net revenue. We exited the quarter with approximately 3,600 patients on therapy and with solid momentum in new patient enrollments, which we expect to build on as we move through the year. For the full year, we expect LUMRYZ to generate total net sales in the range of $350 million to $370 million. Of this, we expect Alkermes to record $315 million to $335 million, reflecting the period since the mid-February close of the transaction. In sleep medicine, our near-term focus is on driving growth and executing against the LUMRYZ opportunity while advancing our broader strategy in the space, including preparation for the potential launch of Alixorexton. Narcolepsy and idiopathic hypersomnia represent multibillion-dollar market opportunities. And our goal is to establish Alkermes as the leader in sleep medicine based on deep expertise in this disease area and differentiated and competitively positioned product portfolio. With solid performance from our established franchises and the recent addition of LUMRYZ, we are operating from a strong position of increasing scale and diversification. As we move forward, our focus remains on disciplined execution, driving demand across our brands and advancing our strategy in psychiatry, addiction and sleep medicine. The first quarter was a strong start to the year, and we are well positioned as we work toward achieving our 2026 objectives. With that, I will pass the call to Joshua to review the financial results for the quarter. Joshua Reed: Thank you, Todd. In the first quarter, we delivered financial results that reflect continued growth across our proprietary product portfolio and the initial contribution from LUMRYZ following the close of the Avadel acquisition. Post acquisition, our financial profile is further enhanced and diversified. We manage the business to drive significant operating cash flow and maintain a strong balance sheet, and we do so now with increased scale and flexibility. We are in a strong position to invest in the expanding development pipeline that will shape the future of our business. Turning to our financial results. During the quarter, we generated total revenues of $392.9 million. These results provide a solid foundation for the year. Today, we are updating certain noncash elements of our 2026 financial expectations to reflect refinements to the purchase price accounting for the acquisition of Avadel. These adjustments improve our full year expectations for GAAP net loss and EBITDA. For our portfolio of proprietary products, we generated net sales of $338.1 million, ahead of the expectations we outlined on our fourth quarter call. As we move into the second quarter, we expect Q2 net sales from our proprietary portfolio, including a full quarter of revenues from LUMRYZ in the range of $385 million to $405 million. Manufacturing and royalty revenues were $54.8 million for the quarter, including revenues of $27.3 million from VUMERITY and $18 million from the long-acting INVEGA products. Turning to expenses. Cost of goods sold were $61.6 million, which includes the purchase price accounting of LUMRYZ inventory. Recall that at closing, LUMRYZ inventory held by Avadel was marked to fair market value. Net of the LUMRYZ inventory step-up charge, cost of goods sold would have been $48.9 million in Q1 of this year compared to $49.2 million in Q1 of the prior year. In the second quarter, we expect COGS to be in the range of $85 million to $95 million, reflecting a full quarter of LUMRYZ sales and associated inventory step-up charge. R&D expenses in the quarter were $103.3 million compared to $71.8 million in Q1 of the prior year, reflecting the initiation of the Alixorexton Brilliance Phase III clinical program in narcolepsy, which began in the first quarter, the ongoing Vibrance-3 Phase II study of Alixorexton in idiopathic hypersomnia and the Phase I studies and development efforts for our next Orexin 2 receptor agonist candidates, ALKS 7290 and ALKS 4510. In the second quarter, we expect R&D expenses to be in the range of $110 million to $120 million. SG&A expenses were $264.6 million for the quarter, which included approximately $55 million of costs associated with the closing of the acquisition of Avadel, including transaction expenses and share-based compensation. Excluding these onetime expenses, SG&A would have been $209.4 million compared to $171.7 million in Q1 of last year, primarily reflecting the addition of the Avadel commercial infrastructure mid-quarter. As we look ahead to the second quarter, we expect SG&A expense to be in the range of $210 million to $220. During the quarter, we also recorded amortization of intangibles of $11.7 million and net interest expense of $12.4 million. In Q1, we generated GAAP net loss of $66.5 million and EBITDA of minus $30.1 million. We also generated positive adjusted EBITDA of $80.3 million, well ahead of our prior Q1 expectation of adjusted EBITDA of $30 million to $50 million due to higher-than-expected revenues and the timing of R&D expenses. Looking ahead to the second quarter, we expect adjusted EBITDA to be in the range of $100 million to $120 million. Turning to our balance sheet. We ended the first quarter with approximately $538 million in cash and total investments. To finance the acquisition of Avadel, we used approximately $775 million of cash from our balance sheet and entered into term loans totaling $1.525 billion due in 2031. We expect to pay down this debt quickly with cash flows from the business. During the quarter, we also deployed $28 million to repurchase approximately 1 million shares at an average price of approximately $28 per share. We continue to have $172 million of remaining share repurchase authorization. As I mentioned, in connection with the purchase price accounting related to the Avadel acquisition, we have refined our expectations for several noncash expense items, including the inventory step-up charge, which flows through cost of goods sold and the amortization of intangible assets associated with LUMRYZ. These changes have a net positive impact on our 2026 expectations for GAAP net loss and EBITDA. We now expect to expense approximately $105 million of LUMRYZ inventory fair value step-up in 2026 compared to a prior estimate of approximately $150 million. As a result, our 2026 cost of goods sold is now expected to be $320 million to $340 million, an improvement from our prior estimate of $365 million to $385. For amortization of intangible assets, we now expect full year amortization expense in the range of $75 million to $85 million compared to our previous estimate of $95 million to $105 million. For income tax, we now expect no income tax expense or benefit for the year from our prior estimate of an income tax benefit of $20 million. Taken together, these purchase price accounting adjustments improved our expectations for GAAP net loss, which is now projected to be in the range of $70 million to $90 million as well as for EBITDA, which is now expected to be in the range of positive $105 million to $135 million. All other components of our 2026 outlook, including adjusted EBITDA, remain unchanged. Taking a step back, with a strong start to the year, and we look forward to carrying this momentum into the second quarter and beyond. With that, I'll now hand the call back to Rich. Richard F. Pops: Thank you, Joshua. So, the commercial and financial elements of the business are strong. With expected revenue of more than $1.7 billion and adjusted EBITDA of more than $370 million, we have the financial resources to invest aggressively in our pipeline and generate significant cash flow. I think it's becoming increasingly clear that our orexin program has brought us to the threshold of substantial value creation. To date, we've developed and shared with you comprehensive clinical data sets across the first area of focus for this therapeutic class, disorders of hypersomnolence. That data set reflects the design and execution of a broad Phase II program, randomized, controlled, multicenter, multiweek across multiple doses and indications using established clinical endpoints as well as additional measures such as fatigue and cognition that relate specifically to the brain circuitry that we're activating. At the same time, we're broadening our development efforts beyond disorders of hypersomnolence, leveraging our portfolio of Orexin 2 receptor agonist candidates. In this area, more than most, we believe that chemistry-based intellectual property represents an important strategic asset. Blair will speak in more detail about our expansion strategy and development plans. But first, I want to update you on where we are with Alixorexton. This year, our focus is on continuing the momentum we built in Phase II to enroll the Phase III Brilliance studies in narcolepsy. Phase III for us is all about execution. We're on the path now to potential registration. The Brilliance Phase III program is now open for enrollment in narcolepsy type 1 and type 2 with site initiation and patient screening underway. Because of the strength of the Phase II results, investigator interest in the studies is strong. We're working to enroll these studies quickly with a sharp focus on quality and execution to support the strongest competitive positioning. From an operational perspective, the duration and scale of the Vibrance Phase II studies generated important and proprietary data that inform the design of our Phase III program. With Alixorexton, we're building a broad and robust clinical data package across narcolepsy and idiopathic hypersomnia. In June, we'll present data from the Vibrance-2 narcolepsy type 2 study at the Annual Sleep Meeting in Baltimore. We reported the positive top line in November, so much of the data set will be familiar to you. Along with the positive outcome of the study, Vibrance-2 is important because it's one of a very small number of clinical studies ever conducted exclusively in patients with NT2. As such, it provides a depth of insight into the characteristics and variability of this population that is largely absent from the existing literature. The Sleep Meeting gives us an opportunity to share the data with a broader sleep community. One-on-one engagements with clinicians and investigators over the last several months have already given us a clear sense of the treatment community's high level of interest and excitement about these data. For idiopathic hypersomnia, or IH, our Vibrance Phase III -- I'm sorry, our Vibrance-3 Phase II study is ongoing and on track to be completed in the fourth quarter of this year. We've initiated enrollment of a split dose cohort of approximately 30 patients across sites in both U.S. and Europe, with patients randomized to Alixorexton or a matching split dose placebo. As a reminder, in IH, the Epworth Sleepiness Scale and the idiopathic hypersomnia severity scale are the established and preferred clinical and regulatory endpoints. In addition to those measures, Vibrance-3 also includes mean sleep latency assessed by the maintenance of wakefulness test, which will help us to characterize the durability of wakefulness over the course of the day. The clinical development program for Alixorexton has been deliberately designed to support strong competitive positioning, both in the quality of the clinical data generated and the breadth of potential dosing options and regimens being evaluated to address individual patient needs. We believe this approach positions Alixorexton, if approved, to become the orexin of choice across both narcolepsy indications. Importantly, Alixorexton has the potential to be the first-in-class in narcolepsy type 2, and our lead in development in NT2 continues to widen. In the meantime, while the orexin development story in narcolepsy continues to mature, with LUMRYZ, we now have an important new medicine being used in current clinical practice. Later this quarter, we expect to announce top line data from the LUMRYZ Phase III REVITALYZ study in IH. Data from this double-blind, placebo-controlled randomized withdrawal study, which enrolled approximately 150 patients would serve as the basis for an sNDA submission with a potential launch in early 2028, if approved. This represents a potential growth opportunity for LUMRYZ in an underserved patient population, and we look forward to data this quarter. So now I'll turn the call over to Blair to provide an update on our expanding development work in orexin portfolio. Beyond central disorders of hypersomnolence, there are many adjacent disease areas that may benefit from modulating the orexin pathway. We identified this opportunity early on, and we're moving aggressively with new molecules. Go ahead, Blair. Blair Jackson: Thank you, Rich. As we outlined earlier in January, this year, we are expanding our orexin development programs into disease areas outside of sleep medicine. We are doing so with 2 new molecules from our portfolio, ALKS 7290 and ALKS 4510. Each of these Orexin 2 receptor agonists has been advancing through single and multiple ascending dose cohorts in healthy volunteers, and we're pleased with the profiles we have observed to date. This year, our development plans take us into patient populations in ADHD and fatigue. Early on, based on our emerging data and feedback from clinical investigators, we identified attention deficit hyperactivity disorder as one of the most compelling initial opportunities for Orexin 2 receptor agonists outside of sleep medicine. ADHD is a common neurodevelopmental disorder characterized by persistent difficulty in maintaining attention and concentration and is frequently accompanied by hyperactive and impulsive behavior. Despite the availability of some treatment options, many patients continue to experience residual symptoms: functional impairment, tolerability issues and adherence challenges even when receiving current standard of care treatment. Against that backdrop, Alkermes is working to advance the evidence base supporting the potential use of Orexin 2 receptor agonist in ADHD. We have established a foundation of data from validated preclinical behavioral models, assessment of neurotransmitters and human EEG that support our conviction in this program. Based on this foundation, we are initiating our first clinical studies of ALKS 7290 in adults with ADHD this year. The first is a Phase Ib randomized placebo-controlled proof-of-concept study designed to enroll approximately 50 adult patients. Participants will receive 2 weeks of treatment with ALKS 7290 or placebo. In this study, we will assess the safety and tolerability of ALKS 7290, along with the effects of treatment on translational measures where we expect to see more rapid changes, including quantitative EEG and certain neuropsychological performance measures. These assessments are designed to evaluate sustained attention, vigilance and impulse control in a shorter duration study. For exploratory purposes, we'll also assess changes from baseline on established clinical ADHD scales. Results from this Phase Ib study are expected in the fourth quarter of this year, and we will provide the first clinical data generated with the Orexin 2 receptor agonist in patients with ADHD. Enrollment in that study is already underway with the first patients dosed in April. As enrollment in the Phase Ib study progresses, we plan to initiate a well-powered Phase II study in adult patients with ADHD this summer. This randomized double-blind study is expected to enroll approximately 300 patients and will evaluate ALKS 7290 versus placebo over a 4-week treatment period. The primary endpoint will be change from baseline in the adult ADHD investigator rating scale. Data from this study, which we expect to complete in 2027 may serve as the foundation to advance to a potential registrational program in ADHD. We are excited to be the leaders in this exciting area of clinical development, and we look forward to updating you on our progress. For ALKS 4510, we are advancing in single and multiple ascending dose studies in healthy volunteers and plan to initiate a multi-dose Phase IIa study later this year in patients with fatigue associated with multiple sclerosis and Parkinson's disease. Fatigue is one of the most common and burdensome symptoms in neurodegenerative disorders and remains a significant unmet need in MS and Parkinson's. Our interest in fatigue in these populations is also informed by observations from our Phase II narcolepsy studies, where we saw improvements in patient-reported fatigue that appeared distinct from effects on sleepiness or wakefulness alone. Fatigue represents a novel area of pharmaceutical development, and we'll provide more details regarding the design of the development program as the Phase II study opens later this year. As we advance through the development program, our strategy will be stepwise, data-driven and informed by interactions with regulatory authorities as we seek to make a meaningful contribution to patient care. Taking a step back, the potential utility of Orexin 2 receptor agonist across a broad range of indications is a significant and striking opportunity. This will be the year that we generate a substantial new increment of data to the clinical evidence base supporting these potential opportunities. With that, I'll turn the call back to Sandy to manage the Q&A. Sandra Coombs: Thanks, Blaire. We'll now open the call for Q&A. Operator: [Operator Instructions] And our first question will come from David Amsellem with Piper Sandler. David Amsellem: So, on the orexin programs beyond sleep wake, in ADHD, can you talk about your thought process regarding development as monotherapy versus adjunctive therapy in ADHD? And how you -- what preclinical data you can point to that gives you confidence that a monotherapy approach makes sense? And then regarding the fatigue program, it might be a little early to talk to this, but can you talk about endpoints that you're exploring? And I realize this is going to be informed by your discussions with regulators, but what are you going to be looking at in terms of early outcome measures on fatigue? Blair Jackson: Sure. David, it's Blair. So, with regards to ADHD, we have a substantive amount of data with regards to orexin agonist in this space. And in fact, it's probably the most tangential of the indications out there for the next place for us to go. We did a lot of preclinical work looking at neurotransmitter release, looking at behavioral models, EEG. We saw increased levels of acetylcholine in the prefrontal cortex, which is a high indication of activity and attentiveness. We also use what's really a highly translatable model within the preclinical testing where it's called the 5-choice serial reaction test. And our initial hypothesis was exactly where you started was what if we did an adjunctive therapy perhaps with a non-stimulant, would that provide a really beneficial outcome. But when we did that model, what we found is across all our studies, we were performing as well as or better than stimulants themselves as a monotherapy. So, we feel that both in the attention and the impulsivity aspects of those programs that we have a really good opportunity here. And our clinical studies that we're kicking off are actually designed to look at just that. So, we'll be looking at monotherapy across a broad population, both intention and impulsivity. And I think the 2 studies that we've set up are going to be really well positioned to give us a full idea of how this could proceed moving forward. With regards to fatigue and that program, we're moving into the clinic with a drug called ALKS 4510. And that's a really interesting area. And we are looking very carefully at the scales to be used within those studies. So, we're going to be testing this in MS fatigue patients and Parkinson's disease patients. And one scale that we're going to use is the PROMIS Fatigue Scale. This is a scale that we used in our NT1 study, where we showed a really strong benefit within the NT1 patients, taking them really from severe to normal on that scale. And that hasn't been shown very widely within clinical literature. We also saw similar outcomes as we moved into the NT2 patient population. So that bodes well as we go to an intact orexin tone system. But the other thing to keep in mind is a lot of these disease areas, they also have their own scales that have been developed as part of that patient population. So, we're going to be testing those 2 and trying to understand best how the different characteristics of the scales work and also how these drugs perform within different subcategories of fatigue. Operator: Our next question will come from Umer Raffat with Evercore ISI. Umer Raffat: I have a 2-part question. And clearly, there's been a ton of interest, strategic interest in the orexin space. And what I'm wondering is twofold. Number one, can you lay out time lines for indications beyond narcolepsy? Because I feel like that aspect of the value has not been captured by much of the valuation numbers that have been thrown around so far. And I ask that in particular because it seems like Lilly's early interest in Centessa was perhaps not even on the lead program. And number two, more importantly, is Alkermes and the Board open to the idea of asset sale rather than a whole company sale if that were to be a possibility at any point? And I'm thinking back to examples like Biohaven. Richard F. Pops: Maybe I'll start and then I'll hand over to Blair as well. Yes, I think Blair just referred to it in the prepared comments, which is the 2 most immediate adjacencies to the hypersomnolence are fatigue and ADHD. We're enrolling patients right now in the first ADHD study, that translational study in adult patients. So that will be a 50-patient study. We'll get data this year on ADHD. So, give us our first sense. And we won't even wait for those data before we light off a bigger proper Phase II program, which we'll light off this summer in ADHD because we feel like the preclinical evidence in that space is quite compelling. And the enrollment in the fatigue studies in Parkinson's and whatever, that starts this year as well. So, we're right on the threshold of new data sets that expand the understanding of the pharmacology in patients without demonstrable orexin deficits. And as you know, the first hints of that come from our NT2 data and our IH data that we've already developed. So, with regard to the second question, our company and our Board, we are a public company. We react to whatever circumstances present themselves. But we feel like right now, we're right on the threshold of major valuation changes as we mature this program. And I think Lilly coming into the market underscores the fact that there's more than just hypersomnolence here at play. This circuitry is directly associated with human wakefulness defined broadly. And I think that opens up a whole bunch of adjacencies. And we start with hypersomnolence and we go from there. Blair, any other thoughts? Blair Jackson: No, I'd just reiterate what Rich said, which is we're in a process right now. We're going to be turning over a lot of cards with regards to a number of these clinical areas, and we're looking to really execute and drive value over the next couple of years. So, I think it's a little premature to talk about any potential sale process. Operator: And moving next to Paul Matteis with Stifel. Julian Pino: This is Julian on for Paul. And I guess just to piggyback again on the orexin program and the pipeline, it would be great to hear about, for this larger Phase II that you're kicking off this summer, what types of patients are you hoping to enroll? And can you just talk a little bit about the translatability of what you'd expect based on past clinical data literature in terms of success on the primary endpoint and how may that translate to a larger randomized Phase III? And I guess, in comparison, how large are Phase III studies relative to the Phase II that you plan on kicking off? Blair Jackson: Yes. Thanks for the question. I think with regards to the ADHD, as we said -- as I said earlier in the call, we saw pretty broad activity in some of our early models with regards to this asset and this mechanism. And so, as we look to enroll our patients in the Phase II study, we think a broad base of patients will be beneficial from this. So, we're not going to look at individual subtypes. Our key primary endpoint for this is the [ ACERs ], which is the adult tool that's been used widely in the industry. And what we're really looking to do is see the relative effect size across the patient population. And just to give an idea of what people have seen in the past, there's typically -- it kind of breaks into 2 main areas. You typically see the nonstimulants and they typically have Cohen effect sizes that are kind of 0.3 to 0.45 or so. And then what you see is a very different result with stimulants. Stimulants typically can be 1 and above with regards to Cohen's d, but it comes with trade-offs. And so, what we're really looking to see is how we perform on that over a 4-week period. That study, as we said in the prepared remarks, is going to be about 300 patients. And that's roughly the size that you see in some of the Phase III programs. And you go a little longer. Usually, you're looking at 6-plus weeks on the primary endpoint. But we'll determine that, and we'll indicate more of that after we see the data in the Phase II. Richard F. Pops: I just want to add a couple of things on that. Number one, what we did in narcolepsy is what we want to do in ADHD, i.e., have a significant amount of clinical data before we launch the Phase III program and run a Phase II program that almost mimics the Phase III program. That's a major risk mitigator in the program. Second thing is we're going to start using the tools that exist, just like we did in narcolepsy. But what's interesting about this pathway is it is activating the brain in different ways than the stimulant activates the brain. And I think with the benefit of additional clinical data, we'll be able to dial into some of the differential efficacy potential of an orexin agonist compared to just a stimulus, which is revving up the brain in a more general way. Julian Pino: And sorry, just one quick question, if I may as well. I think you said you'd be completing the IH study in 4Q, Rich. Are we expecting data this year? Or could it potentially run into next year? Richard F. Pops: That's the translational study, the first study where we're looking at more -- I'm sorry. I'm sorry. Yes, the IH Orexin study, we'll complete that in Q4, and we'll get the data as fast as we can thereafter. It could be right at the end of the quarter or right in the beginning of the second quarter according to the current plan. Operator: And moving next to Jessica Fye with JPMorgan. Jessica Fye: Just a question on LUMRYZ and your guidance for that product this year. Can you just talk about what's embedded as it relates to your expectation for any potential net price pressure as non-AG generic sodium oxybate gains traction in the marketplace? Todd Nichols: Yes. Yes, sure. I'll take that one. So, at this point right now, as I stated, we're guiding to $350 million to $370 million. We had a really solid first quarter, and so we feel really good about that heading into Q2 and for the remainder of the year. At this point, we haven't seen any impact on multisource generics for Xyrem. Again, the most important point is this is a multisource generic for Xyrem, not for LUMRYZ. So, we haven't seen any impact on demand, any impact on physician behavior, any change in payer behavior at this point. A really solid part about the LUMRYZ story is really the diverse patient mix. We get a sizable portion of patients from new to oxybate, from returning oxybate and from the switch market. So, it's a very durable product. So, it's something that we're watching very closely. We're going to have to see how it plays out. But with our full year guide, we do incorporate a range of gross to net scenarios. Operator: And our next question will come from Ben Burnett with Wells Fargo. Benjamin Burnett: I wanted to ask about the Vibrance-3 data that you will provide in the fourth quarter or thereabouts. I guess what dose cohorts will be included in the update? And will this include split dosing at therapeutically relevant doses? Sandra Coombs: Yes. We expect to have top line results from the entire study when we read out the data from that, which would include the split dose arm. Benjamin Burnett: Okay. Fantastic. And can I ask, the split dosing that's being tested, how is that split? Are they evenly split? And are you testing sort of higher total doses in the split dosing cohorts relative to the single-dose cohorts? Richard F. Pops: We haven't disclosed the specifics on the split dose strategy either for the IH study or for the other studies as well, partly because we feel like we've learned so much from our clinical program that is proprietary that we're going to keep that close to our vest until we have the data. Operator: We'll go next to Marc Goodman with Leerink Partners. Marc Goodman: Yes. On LUMRYZ, can you talk about the net patient starts that got you to the 3,600 patients that ended the quarter? And then now that you own the asset, can you give us an update of how you plan to develop valiloxybate? Todd Nichols: Yes. Mark, I'll take the first part of that. So overall, as I said in my prepared remarks, the brand in Q1 realized 3,600 patients on therapy. We actually think that total patients on therapy is the best metric. That's a 28% year-over-year growth overall. That's really the durable part of the brand. That really incorporates any type of demand perspective, access and also persistency. So, our focus is really on total patients. We're always going to be focused moving forward on growing net patient adds, and we feel really good about the enrollment trends we saw coming at the end of the quarter, which is going to set us up very well for Q2 and beyond. And that's really based upon just the overall strength of the mix between new to oxybate switch and also returning. So, we feel good about the patient mix that we're seeing. Blair Jackson: Mark, this is Blair. I'll take the valiloxybate question. So that's an asset that came over as part of the Avadel acquisition, and that's an opportunity for us to potentially develop a no-salt once-nightly product for patients. And so, our plan for that is to take multiple formulations into the clinic and really try to assess a rapid development program. And this is really right up our wheelhouse. As you know, we're a formulation company at our roots and especially when it comes to PK/PD relationships. So, we right now have multiple formulations that are in the clinic and being assessed. And as we have more data later in the year, we'll share that. Marc Goodman: Blair, do you think you're going to have to do a full -- like a full Phase III study? Or will you be able to do like some type of bridging study that is quicker? Blair Jackson: Well, that will really depend on the clinical data that we generate. So, our hope is that we can do some bridging. But again, we'll have to see how this asset performs in the clinic. Operator: And Rudy Li with Wolfe Research has our next question. Rudy Li: Can you talk about your current understanding of the competitive landscape for orexin agonist? And specifically, what key endpoints being measured in your Brilliance Phase III trial that could provide additional label differentiation? Richard F. Pops: I think the major differentiating feature in the orexin space now is the fact that Alkermes has the only program that has a range of doses that have been credentialed in large randomized Phase II studies. And in so doing, we've been able to explore other domains other than just the classic maintenance of wakefulness test and the cataplexy scale by extending into fatigue and cognition. So, while we don't expect fatigue and cognition data to be in our initial label, what we do expect to have a clinical data set that encompasses all those features of the treatment. So when we come to market, if the drug is approved, we expect to come to market for NT1 and NT2, which differentiates us from the first market entrant as well as a range of doses across NT1 and NT2 both as once a day as well as in split dose formats, which further differentiates us from the first market entrant. And I think following the acquisition of Centessa, I think our lead in NT2 as well as NT1 continues to grow. So, we're really happy with the competitive positioning, and we think this is going to open up the beginning of a brand-new class of pharmaceuticals that will continue to grow from the diseases of hypersomnolence. Operator: And we'll go next to Luke Herrmann with Baird. Luke Herrmann: One on 7290 in ADHD, you laid out the effect sizes we've seen across different standards of care. So based on the preclinical data, do you think the more likely outcome as a monotherapy is sort of a more tolerable asset that sits in the middle of stimulants and nonstimulants in terms of efficacy? Or do you think efficacy could actually exceed what we've seen with stimulants? Blair Jackson: Well, again, what we've seen in our preclinical data is we performed as well or better than stimulants in our early models as monotherapy. So obviously, if we're able to achieve that clinically with the tolerability profile that we see with this class of drugs, that's a great outcome for us. But I think there's a wide range of market opportunities regardless of what we see in the clinic, but our goal will be to get the strongest efficacy possible. Luke Herrmann: Great. And then just one follow-up on the Alixorexton Phase III studies. I believe you commented on the high level of patient interest. Has this exceeded what you anticipated? And would this maybe lead to more expeditious enrollment? Richard F. Pops: The difference between Phase III and Phase II for us is that when you go into Phase II, no one's used your drug before. And now we go into Phase III with a major data set that's been presented at major meetings and a buzz about this program. What mitigates against the rate of enrollment, though, is the control and the rigor that we learn from Phase II about which sites to use and how to select patients and how to make sure that you're not just enrolling for the sake of enrollment numbers, but to enroll the finest cohort you can over the period because those data become your label. So, the quality of that study is sacrosanct. So, we expect to enroll the study correctly at the rate that we'll determine as we activate sites, and we'll keep you guys posted as we go on that. Operator: We'll hear next from Joseph Thome with TD Cowen. Unknown Analyst: This is Jacob on for Joe. I was wondering if you were planning on studying LUMRYZ in combination with an OX2R agonist in the future? And if so, what would a trial for that look like? Richard F. Pops: Yes. Jacob, it's something we're hearing so frequently from clinicians now that we've completed the acquisition. And we'll go to the sleep meeting in Baltimore, representing both once-nightly oxybate with extended efficacy as well as the Alixorexton program. And so we will be harnessing that energy into a clinical program over time. We won't -- we're not going to start that right away. We need to finish some other things first, namely the registration program for Alixorexton as monotherapy. But I think there's increasing interest in understanding both the nighttime and the daytime aspects of the disease. Operator: We go next to Ami Fadia with Needham & Company. Ami Fadia: I've got 2. Just with regards to Vibrance-2 that's going to be presented at the sleep meeting in Baltimore. What additional data on top of what you had announced at the initial data readout that we can expect at the meeting? And with regards to the LUMRYZ study that's expected to read out in the second quarter, maybe talk about your expectations for what that profile is likely to look like, the market opportunity and what you're doing in terms of preparing for a potential launch of that indication? Richard F. Pops: Ami, it's Rich. I'll start. As I mentioned, we presented most all of the data on the Vibrance-2 study in November, and that's available on the website if people want to look at that again. But we will give a bit more sleep in 2 principal domains. One, we'll try to give a little bit more dimensionality to the efficacy effect that we saw. And the other is we do have data from the extension phase now that we can tack on to the double-blind phase. And that's always instructive to see what happens as patients stay on therapy for a longer period of time. And of course, at the sleep meetings, those data are presented by investigators and you have the ability to talk to people who actually have hands on in the use of the drug. Your second question was about LUMRYZ in IH and the market opportunity for that. I'll start and then I'll ask Todd to comment on that. What's interesting is that the competitive product is Xywav the principal growth of that drug now is driven by the IH indication. And part of the reason we went into IH for Alixorexton was talking to patients and patient advocacy groups, there's a huge unmet need for new medicines in IH. And we just had a thought leader here at the company yesterday saying that he thought oxybates at this moment are probably the best treatment for idiopathic hypersomnia, which is interesting. I think that's underappreciated. So, we will be able to enter this market with LUMRYZ in 2028. So, we have some time to prepare for that type of launch if it's approvable. But we're quite excited about that as a life cycle growth tool for LUMRYZ. Todd, do you... Todd Nichols: Yes. The only thing I would just add a couple of things. We continue to validate all of the research that we've done, listening to the community, listening to HCP. We believe it's a really underdeveloped category right now. There's 40,000 patients that are diagnosed. We think that's underrepresented. And there's only one FDA-approved product on the market. We think that LUMRYZ has an opportunity to be the second product. And we know how well LUMRYZ is received in the community now for narcolepsy. So, our expectations are very high on what the opportunity is for LUMRYZ in IH. As Rich said, as the data is presented, as we go through the approval process, we'll be continuing to build what our launch plan looks like, but it's something that we are very excited about. Operator: And we'll go next to Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. Just on ADHD, can you talk about what's unique about the molecule PK or dosing profile that could help you mitigate insomnia or urinary frequency, the class of adverse -- class adverse events you have observed in narcolepsy patients? And would you expect the ADHD patients to be more or less sensitive to these class AE so far? And just a quick follow-up on Vibrance-2. Would you provide any sort of kinetics on weekly MWT data to better contextualize data comparison relative to a key competitor of yours, which had 2-week data, and you've talked about observation of tachyphylaxis in the past with Vibrance-2. Blair Jackson: Chi, it's Blair. I'll start with ADHD, and then I'll get Rich to answer you on the Vibrance-2 stuff. So, with regards to ADHD, I think a couple of things I want to make sure we're clear on. One is the adverse events that we typically see with this class of orexin agonist. It's a very wide therapeutic window. As you saw from our programs in NT1 and NT2, we have a really nice AE profile overall. There's -- the main effects associated with this class are really [ polyuria ] and some transient insomnia that we see at the beginning of the study. As we talk about the ADHD program and the PK dosing profile, I think with regards to any of the new programs that we move outside of narcolepsy, we're developing them with new drugs. So ALKS 7290 is its own unique molecule. It's been designed by itself specifically. It's optimized for the patient populations that we're going after. And so, it will have its own unique PK and dosing profile that will match that patient population. As you know, what we saw in our NT2 program is that patients who have an intact orexin system, so who have natural orexin tone, we tend to see a very mitigated overall AE profile due to that fact. And so again, I think we're well positioned to test a wide range of doses within that patient class. Rich, do you want to do... Richard F. Pops: Yes, the Vibrance-2 data at sleep, you will see time course data on a multi-week basis for the ESS score. And I just want to make the point that there is no competitive data that's been presented so far. There's only one company that's shown multi-week successful data in NT2 and that's Alkermes. Operator: And we'll hear next from Akash Tewari with Jefferies. Anastasia Parafestas: This is Anastasia on for Akash. So, when you previously talked about NT2, you've kind of segmented the pop into a couple of buckets of patients. You have the ones who would benefit from BID dosing and then the ones with kind of a more modest effect size. So how are you thinking about that dynamic as you consider orexins working in other indications where patients have more normal hypocretin levels at baseline like ADHD or fatigue? Richard F. Pops: We just think overall, dosing flexibility will be a really important thing because people have different physiologic set points for their base orexin tone and they have different lifestyle expectations, whether they want to stay up until 10:00 at night or they want to go at 7:00 p.m. So, our feeling is that we've established in data so far in NT2 patients as well as IH in early stage that patients with normal orexin tones can benefit from an orexin agonist. So then that degree of that benefit will be determined by each individual set point, as I just described. So, the prerequisite for addressing that commercially is just a range of doses with data supporting those -- that range of doses in the label, which is exactly why we've designed the pivotal study, the Brilliance study to include once-daily dosing, split dosing across that range of doses that we elaborated in Phase II. Operator: Moving next to Ash Verma with UBS. Unknown Analyst: This is [ Ho ] on for Ash. Our first question is for the pending LUMRYZ IH study. How do you think about the placebo arm here given the patients may have some bias knowing that sodium oxybate works in IH? And our second question is, so it's good to see the decent beat on VIVITROL. Can you help us understand your latest thoughts on how the VIVITROL revenue trajectory could be in 2027 and beyond as Teva Generic enters? Richard F. Pops: I'll take the first and Blair and Todd talk about the second. The LUMRYZ -- just understanding the LUMRYZ IH Phase III study is a randomized withdrawal study. So, patients would have all been on the oxybate. So, there's no blinding issue. And then it's withdrawn on a blinded basis. So, this is the same design that Jazz used with their Xywav study. Blair Jackson: Yes. And I think with regards to VIVITROL, as we move into 2027, there's a number of interesting scenarios in front of us. Obviously, we have the potential entrant of Teva into the space in the beginning of 2027. And we're looking at a lot of scenarios related to that, including some scenarios where Teva actually doesn't -- isn't able to make it into market. What we don't expect, though, is to have a really dramatic impact on VIVITROL as these -- as the new entrant comes into the place. VIVITROL is a unique asset. It requires a lot of manufacturing capability. It requires a lot of commercial infrastructure and handholding with patients and physicians. And Todd can give you a little more on that. Todd Nichols: Yes, absolutely. Just to kind of reiterate, we have really 2 key priorities right now, and that's delivering for 2026 for VIVITROL. We're right on track to be in the range of our full year guidance, really driven by the alcohol dependence indication. And to reinforce what Blair said, we've been working on this for a number of years. We have a range of scenarios that we're playing through, and our research continues to reinforce that we don't see this as a typical erosion if Teva were to make it into the market, it's a durable product. And so, we'll be prepared regardless of what those scenarios are to flex our resources if we need to and also be prepared to compete. Operator: Our next question will come from Uy Ear with Mizuho Securities. Uy Ear: So maybe -- apologies for missing this, I dialled in a little bit late. Could you maybe just help us understand if there's a reason or not on why the patient mix may change going through the year given the nice patient mix that led to better-than-expected gross to net? And the second question is on ADHD, is there anything else in terms of potential differentiation other than efficacy? Todd Nichols: Yes. I'll take the first one regarding patient mix. We did see some favorability, some Medicaid favorability in the first quarter of the year. We don't expect -- we don't actually forecast on favorable patient mix. We do expect that for the full year that we would see the access profile for LYBALVI expand. So, we do have better line of sight to what that profile would look like. We're always in active negotiations with payers and our full year range actually assumes that, that could play through. But that's the real logistics of the business right now. We're just not forecasting any additional favorability for the remainder of the year. Blair Jackson: And then with regards to ADHD, look, we're looking for differentiation both on efficacy and tolerability. I think if you look at the ADHD market and how it's evolved, it really was started around the stimulants and the amphetamine use within adults and children. And that comes with significant trade-offs. It comes with side effects. It comes with potential abuse. And I think people have been really looking for more tolerable agents that are maybe nonstimulant for a long time. And up until now, really the efficacy of those agents really just hasn't matched what you've seen in the stimulant class. So, I think the really holy grail for this indication in this area is to create an asset that has the efficacy of a Vyvanse or something like that, but also is really well tolerable. And the orexin agonist class has the potential for that. It's a new mechanism of action. It operates on the alertness centers in the brain. We've seen attention and impulsivity benefits in preclinical models. We've seen the right neurotransmitter release and profile as we look at these assets. So we think there's a real opportunity here to really thread that needle and provide a new benefit to this patient population. Operator: And our final question will come from David Hoang with Deutsche Bank. David Hoang: I just had 2. Maybe first with the Vibrance-3 IH study. When we do get that data for the split dosing arm, I guess, ideally, what would you like to see for that split dose versus a single dose to help validate your hypothesis? And I guess do you just have any sense of in the real-world setting if a split dose or a single dose would be preferred? And then on the LUMRYZ opportunity in IH, if LUMRYZ is approved for IH, how do you think about where your patients may come from? Do you think that would be mostly oxybate naive in IH? Or would you think that there'd be a good proportion of switches from Xywav as well? Richard F. Pops: David, it's Rich. I'll take the first. The hypothesis for the split dose in IH is driven by the observations that we saw in the NT2 study. And so the simple readout would be to look at the MWT and see whether we're extending the later time points and elevating the latencies in the later time points, recognizing that it's almost a laboratory measure that we're using in the IH population because the MWT is not a preferred endpoint for IH, but it's simply a way for us to demonstrate the pharmacodynamic effect of the split dose and to confirm our dosing assumptions. In the real world, we've talked to a lot of different folks in the course of market research. I think that the once daily will continue to be probably the modal approach that patients use. But over time, as the category continues to mature, I think we analogize it's the ADHD space where there's a whole range of dosing alternatives and people can tailor their dose to their lifestyle. And that's why we think there will be a real virtue to having a suite of once-daily doses as well as accompanying split doses that people can then dial in to the level of wakefulness that matches their lifestyle and their disease. Todd Nichols: Yes. And in terms of the IH opportunity for LUMRYZ, we clearly see a high unmet need here, and we think there's a significant opportunity for expansion potential as we think that the market right now is very modest, even with one product approved, there's only a very modest penetration. So, we see market expansion opportunity, which will be a new patient start opportunity that LUMRYZ will have the ability to tap into. That's what we've seen with narcolepsy. But at the same time, it's also going to create another market, which is a switch market. And that's what we've seen with narcolepsy. So, we think that it will mimic kind of the patient patterns that we've seen in narcolepsy, which is new to oxybate patients, switch patients and returning patients. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Sandra Coombs for closing comments. Sandra Coombs: Great. Thank you, everyone, for joining us on the call today. Please don't hesitate to reach out to us at the company if we can be further helpful. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Shoals Technologies Group's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Matt Tractenberg, VP of Finance and Investor Relations. Matt, please go ahead. Matthew Tractenberg: Thank you, Christine, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties and should not be considered guarantees of performance. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investor Relations section of our website at investors.shoals.com. With that, let me turn the call over to Brandon. Brandon Moss: Thank you, Matt, and thanks to everyone joining us on the call. First quarter revenue was above our guidance at $141 million, up 75% over the prior year period. Our commercial team continued their strong performance by adding approximately $151 million of new orders in the period. This resulted in another company record backlog and awarded orders, or BLAO, of $758 million, an increase of almost 18% year-over-year. As of quarter end, approximately $628 million of our BLAO has shipment dates in the upcoming 4 quarters for Q1 of 2027. For adjusted gross profit percentage came in slightly below our expected range at 29.6%. This was driven by product mix, tariffs, increased freight costs and some temporary labor inefficiencies as we train additional employees to meet the strong demand on new business lines in our factory. We believe that this is the low point of gross margin and that it will improve as we make our way through the year. SG&A, including all legal expense, was $31 million, representing 22% of revenue, a 500 basis point decline as compared to 27% last year and highlighting the operating leverage inherent in our business model. First quarter adjusted EBITDA of approximately $21 million came in at the high end of our guided range and grew 56% year-over-year. We've also seen some positive movement on our IP infringement case against Voltage. Last week, the International Trade Commission declined to review any contested issues in the ALJ's initial ruling. The commission is still expected to issue its final determination in early June, but it's encouraging news for our shareholders and U.S. manufacturers in general. We are pleased with how the market is evolving and our competitive position of strength and as a result, are increasing both our revenue and adjusted EBITDA guidance for the year. Dominic will step through the updated guidance later in the call. Briefly turning to our various business lines. The first quarter was another strong period of growth within our core utility-scale solar market. Our quote volume in the quarter exceeded $1 billion of unique projects, adding to our strong pipeline. I'm also encouraged by the progress we are making in key international markets like Australia, as evidenced by our increased quote activity and customer engagement. International BLAO now totals almost $100 million, driving continued growth and diversification in 2027 and beyond. Our community, commercial and industrial, or CC&I, business, which remains a small piece of our overall mix, continues to perform well. Our OEM business continues to provide a stable and visible revenue stream, growing at 33% on a year-over-year basis. And finally, we added approximately $9 million to BESS BLAO in the quarter, which ended the period at $75 million. You may recall that we announced a recent partnership with ON.energy in the last quarter. ON.energy is rapidly assuming market leadership in AI data center power infrastructure with its first-of-a-kind medium-voltage AI UPS. That architecture is being deployed in what will be the largest battery project of an AI data center in the U.S. Shoals is very proud to be a partner in this project. In Q1, we celebrated the first of these units produced in our new facility, recognizing more than $1 million in revenue and paving the way for a healthy ramp through Q2. We're excited about increasing production and gaining visibility as we continue to build this business. Overall, the quarter played out as expected, but the year appears to be stronger than we anticipated on our February call. New orders in Q1 for 2026 delivery were very strong, and we have not seen significant project delays thus far. We are executing well, finishing the move into our new facility and expanding capacity and capabilities. The underlying demand drivers remain intact, and our competitive position has strengthened. Our business is in a great place today. Dom, I'll hand it to you for a deeper dive into our financial performance and guidance. Dominic Bardos: Thanks, Brandon, and greetings to everyone on the call. Revenue increased by approximately 75% year-over-year to $140.6 million. The increase was largely driven by strong demand from both new and existing customers within our core U.S. utility-scale solar market. Gross profit was $41.0 million compared to $28.1 million in the prior year period, an increase of 46%. Our GAAP gross profit percentage was 29.2% and adjusted gross profit percentage was 29.6%, slightly below our expectations and impacted by product mix, higher freight costs, tariffs and temporary labor inefficiencies as we start new lines and train new employees to meet the very strong demand we see ahead. Product mix, freight and tariffs accounted for approximately 200 basis points of margin compression versus our anticipated outcome. As Brandon stated, we believe this quarter is the low point for gross profit percentage and that it will improve as we make our way through the year. As a reminder, our product mix plays an integral role in the gross profit percentage, and that may vary from quarter-to-quarter. The same mix that is driving higher revenue growth and contribution dollars negatively impacts the margin percentage but delivers higher profit dollars. Ultimately, we are focused on driving incremental profit dollars through the P&L as that strategy will create shareholder value. Selling, general and administrative expenses, or SG&A, was $31.0 million or $9.3 million higher than the prior year period, driven by an additional $6.2 million of ongoing legal expenses. This breaks down to $4.1 million related to our ITC litigation, $1.2 million related to our case against Prysmian and a little under $1 million related to the shareholder class action suit. As you may have seen last week, we have announced a proposed settlement to the shareholder class action suit. The vast majority of the settlement is covered by insurance. Income from operations or operating profit was $7.7 million or 5.5% of revenue, growing at 79% year-over-year. This compared to $4.3 million during the prior year period. Net loss was $297,000 compared to a net loss of $282,000 during the prior year period. The net loss was driven by the class action settlement net impact of approximately $5 million. Adjusted net income was $12.1 million, an increase of 112% as compared to $5.7 million in the prior year period. Adjusted EBITDA was $21.1 million compared to $13.5 million in the prior year period, representing 56% growth year-over-year. Adjusted EBITDA margin was 15% compared to 16.8% a year ago, driven primarily by the impact of product mix. Adjusted diluted earnings per share of $0.07 was $0.04 higher than the prior year period. Operationally, we consumed $41.4 million of cash in the first quarter, driven by the higher inventory balances needed to satisfy the strong demand signals we are seeing in our markets. We have taken inventory positions to protect our customer delivery time lines for the next 2 quarters, and we intend to reduce inventory levels throughout the back half of the year. As such, we do not currently anticipate interruptions to project delivery schedules due to the conflict in the Middle East or projected trade policies. We ended the quarter with cash and equivalents of $1.9 million and net debt to adjusted EBITDA of 1.6x. Our net debt was $179.9 million, an increase over the prior quarter, driven by an increase in inventory in both our new BESS business and our core utility scale solar market. As we enter this period of exceptional demand, our intention is to moderately expand the capacity on our revolving credit facility. Over time, as collections normalize with production, we will resume deployment of excess cash towards reducing the outstanding balance and maintain leverage below 2x adjusted EBITDA. Backlog and awarded orders ended the first quarter at a record $758.0 million, a sequential increase of $10.4 million. Backlog constitutes $390.3 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming periods can be achieved. The strength of our book of business supports our decision to increase both our full year revenue and adjusted EBITDA expectations. As of March 31, $627.6 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters through Q1 of 2027, with the remaining $130.4 million beyond that. Turning to guidance. For the quarter ending June 30, 2026, the company expects revenue to be in the range of $150 million to $170 million, representing 44% year-over-year growth at the midpoint. And adjusted EBITDA to be in the range of $28 million to $33 million, representing 25% year-over-year growth at the midpoint. For the full year 2026, we now expect revenue to be between $600 million and $640 million, representing year-over-year growth of 30% at the midpoint. And adjusted EBITDA to be in the range of $118 million to $132 million, representing year-over-year growth of 26% at the midpoint. In addition, for the full year, we still expect cash flow from operations in the range of $65 million to $85 million, capital expenditures in the range of $20 million to $30 million and interest expense in the range of $8 million to $12 million. With that, I'll turn it back over to Brandon for closing remarks. Brandon Moss: Thank you, Dominic. The U.S. market appears to be extremely resilient, and our capacity expansion could not have come at a better time in our history. We are preparing Shoals to be ready and agile in our production capabilities in a growing demand environment. We are in an exceptional position today from both a commercial and operational perspective. The strategic plan that we constructed and the process improvements we've implemented have begun to yield tangible results. We want to thank our shareholders and our customers for their continued trust in our employees for their hard work and dedication. Operator, we are now ready to take questions. Operator: [Operator Instructions] Your first question comes from the line of Philip Shen with ROTH Capital Partners. Philip Shen: Congrats on the strong result. I wanted to talk through the tax equity pause that we've read a fair amount about. I was wondering if you guys are seeing that flow through any of your business or any of your conversations and then maybe talk through with the healthy bookings from this quarter, do you expect that booking strength and greater than 1 book-to-bill to sustain in the quarters ahead? Brandon Moss: Phil, thanks for the question. Related to the tax equity piece, well aware of what's going on in the market with some of the larger banks financing projects. I would say that we have not seen that trickle down into our order book. I think there is available financing for projects that still exist in the marketplace, and we are not seeing an impact to that as evidenced by a really strong quote log again in Q1 of over $1 billion, and that's been really consistent with the quoting strength we've seen for the last few quarters, honestly. As it relates to future book-to-bill and booking strength, it is always our goal to have a positive book-to-bill. We see a lot of strength in the marketplace. The market is accelerating and not slowing. We have fortunately strung together a number of quarters now with positive book-to-bill, and that's always our intention to do so. Philip Shen: Great. And coming back to margins for a bit here. Q1 was a little bit lower. I know you guys talked about that being the low point in the year. I was wondering if you could share what like Q2 and Q3 might be heading towards with your guidance raise, the EBITDA margin for Q1 was 15%, but full year is 20%, suggesting you really have to drive that much higher later in the quarters or later this year. And while maintaining the EBITDA guide, you also kept cash flow from operations unchanged. So I was wondering if you might be able to address kind of some of the situation there. Brandon Moss: Yes. Thanks. So multipart question there. I'll tackle the front end and maybe turn it to Dominic. As it relates to gross margin, again, we commented we had about a 200 basis point impact in the quarter versus our expectations. The biggest driver of that for us is always product mix. And then obviously, we had -- as we're moving our facility from our former 3 sites into our new factory, we've got some disruption related to that move, a little bit more so that is anticipated. We moved about 250 pieces of equipment or slightly more over a 60-day period in the quarter. And obviously, that led to some level of disruption. Dom, maybe pass it to you to expand upon that. Dominic Bardos: Yes. So I think, Phil, one of the things you asked was also a little bit of the pacing of what we might see from margins. And we do expect that the first half as we're still moving into the facility. So Q2 will still have lower margins. We just don't believe it's the low point that we saw in Q1 as we've been communicating. And then there will be a ramp in the back half as we move into the -- we're going to be completely move into the facility, and we will also have the ability to start realizing some of the efficiencies of being in one vehicle new facility. So the pacing will still be a little bit lower on the margins in Q2 and then improving, but everything should be sequential improvement quarter-over-quarter. And with regards to the cash flows from operations, our working capital, we took very specific inventory positions to make sure that we can meet the demand that we see in the coming quarters. But we will have the ability to reduce that. So I would characterize that as a timing issue. We do see very strong business. We see very positive cash flows this year and our ability to drive that cash is heightened this year because we're not doing some of those large things like the warranty remediation, which is largely in our rearview mirror at this point. So I would characterize that as a timing issue. We're very confident in the year and very excited at the book of business that we have in front of us. Operator: Our next question comes from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Look, maybe just to kick things off, I would love to hear a little bit more about the battery BESS adoption trends as well as any other end market adoption here. Again, I know the Street is very fixated to hear on your quarterly BESS trend. Obviously, stronger start to the year here overall. But I'm curious on how you would suggest cadence and adoption is going given what we're seeing in that end market. Brandon Moss: Julien, I appreciate the question. We are very excited about our BESS business. As we indicated in the prepared remarks, we started our BESS line in Q1 and recognized about $1 million of revenue. Those specific units, again, are going to the data center market, which we're very bullish about, and we will be on the largest battery paired AI data center site in the country, which is very exciting for us here at Shoals. What is also exciting for us in the first quarter is we added $9 million to our book of business related to BESS. Maybe to peel that back a little bit, as you may recall, we've got 3 specific end market use cases for our recombiner products, one being data centers, 2 being grid firming and 3 being your common solar and storage paired applications on our traditional solar sites. About 2/3 or more of our bookings in the quarter came from grid firming and solar plus storage applications, which is exciting for us as we are seeing penetration across all 3 markets. As we've talked about in the past, we see the data center AI space as being probably the strongest and largest driver of the product line, but it's also great for us to show strength in the other markets as well. Julien Dumoulin-Smith: Got it. And then not to needle too much on this margin backdrop, but you lowered the margin guide here slightly here. What's driving that here? Can you comment on the logistics side of things, the tariff angle? I know you commented a little bit here, but I just want to make sure I'm hearing that right, especially given the ramp that my peer who was talking about a second ago. Can you just comment about what you're seeing on that margin guide? I think people are very fixated here on the cadence of the year and ensuring that you see that overall recovery materialize. Dominic Bardos: Yes. There's a few things that I want to point out, Julien. And first is that we're still moving into the facility, and we did have some disruptions and inefficiencies in Q1. They were a little bit worse than we anticipated with the disruption of all the movement. But we're completing that move in Q2. And also with the unrest in the Middle East or the conflict, we are seeing pressure on oil prices and the derivative products from oil. Freight charges are certainly higher, and some of our cost of goods are certainly going to have the potential to be impacted. And some of the pricing has already been set. Some of those things -- it's kind of like when things change in a rapid fashion, once we've already agreed to a price, we might have some times when we can't quite recover the full cost of goods increases. So we want to just be cautious and give a prudent guide with margins. We do see improvement every quarter, as we mentioned, sequentially, and we're very optimistic that the product mix will be favorable for us for the balance of the year. Operator: Our next question comes from the line of Praneeth Satish with Wells Fargo. Praneeth Satish: Maybe not to belabor the margin question too much, but I guess, so you mentioned 200 basis points in Q1 from product mix, tariff and freight. And then you also had this impact from moving equipment to the new facility. Maybe if you could just kind of isolate how much of the margin was weighed down because of that transition to the new facility? And then also on product mix, is that -- of the 200 basis points, how much is product mix? And kind of what's the outlook there? Because I assume the tariff and freight, those will kind of persist potentially for a few more quarters, but just kind of trying to isolate the variable pieces. Dominic Bardos: Yes. So Praneeth, that's a pretty packed question there. So let me break it down a little bit. So of the 200 basis points that we saw, we kind of bucketed into about 1/3, 1/3, 1/3 of some of the major drivers. We definitely had some tariff impact that was still a carryover, but the IEEPA reduction is certainly going to help us. The 232 tariff environment, we've now actually encompassed that into our pricing. So that shouldn't be as big of a drag going forward. We do still have some inventory that has capitalized tariffs in it. We do still have to burn through that in the second quarter. Once again, that informed our second quarter margin guide. With regards to the freight, we did have some air freight and the cost of fuel for freight has gone up. So we had some surcharges there. But fundamentally, these things are largely transitory or at the point where we can now factor all that into the pricing. As I mentioned with Julien's question, sometimes when things change rapidly, we may already have guaranteed pricing or contract pricing, and we can't quite go back and recover all of that. So the margin issue aside, we're very pleased to be raising our EBITDA guide for the year. We're going to continue to get the leverage on our OpEx, and we're very excited about our book of business. Praneeth Satish: Got you. That's very helpful. And then maybe just switching gears, your other kind of product in development here, the data center BLA product. Has anything changed there in terms of timing for UL certification? And I know we're not going to see sales this year, probably next year. But I guess, when should we anticipate potentially seeing some bookings? Do you think it's possible we could see something towards the end of this year? Just trying to get an update on that. Brandon Moss: Yes, Praneeth, great question. We did a market launch of that product at Data Center World a few weeks ago, which we are very excited about. We have filed our patent portfolio for that particular product, which is also very exciting for us. There's a lot of interest in the product right now. As you mentioned, we do not expect to recognize revenue in calendar year '26. Our goal this year is to have proof of concept operating live in a facility, and we are working towards that. So bookings in '26, potentially, we're talking to a variety of developers about including that product in their portfolio of projects, but nothing on the books as of yet. I would probably say in '26, bookings would be minimal for that product line as we begin to ramp it in 2027. But exciting product and really strong market feedback thus far. Operator: Our next question comes from the line of Colin Rusch with Oppenheimer & Co. Colin Rusch: Could you give us an update on sales traction outside of the U.S. on both US solar and BESS? And then if there's anything in particular that you guys see you can optimize from an OpEx perspective, I'd love to get a little bit more detail on that side. Brandon Moss: Yes. Thanks, Colin. We are excited about our prospects internationally. Our backlog and awarded orders continues to rise. We reached $100 million now to date after actually deploying 3 projects last year. So we are continuing to generate bookings to offset not only shipments, but grow that order book, which is exciting for us. Our prospects in Australia seem like a fantastic opportunity for us. The pipeline is very strong, and that's where some of the additions to the order book have come from. So that has been a key priority for us to diversify end markets, not only product, and we're pleased with the progress thus far. Your other question was around operating expenses, I believe. Dom specifically, what are you looking for... Colin Rusch: Yes. So we're seeing a number of folks able to optimize using some AI for just cleaner, more efficient OpEx. And just wondering if there's some of that, that you're going to be able to start flowing to the organization over the next year or 2. Dominic Bardos: Yes. It's a great question. So we absolutely are engaged with some trials of artificial intelligence and what we're trying to do to improve some of our systems and operations. Our focus initially is actually with manufacturing and commercial as our process flow. We have some opportunities there that we're working with. We are in discussions with our Board all the time about how the next -- where we can improve our processes, which are largely manual as a small company is growing. So we are looking to that. I would suggest that our SG&A is relatively lean. We don't have a tremendous number of salaried headcount. As you see in our filings, it's less than 200 people that are salaried in this business. So I'm not looking to AI to truly rip out SG&A expense as much as I am to enable growth going forward. We see significant growth going forward for this company. We want to make sure that we're positioned to scale, and that's truly where we're going to focus our AI efforts, at least initially. Operator: Our next question comes from the line of Mark Strouse with JPMorgan. Mark W. Strouse: I think on the last call, you talked about there were some -- I believe they were BESS projects that you weren't sure if they were going to hit in late 4Q or maybe early 2027. Has that timing now firmed up? And is that part of the guidance raise here? Or should we think about that as a potential catalyst for further upside if that does firm up as we go along here? Brandon Moss: Mark, I appreciate the call. Yes, we do have project visibility in '26 and '27 that is incorporated in our current backlog and awarded orders. As mentioned earlier, the significant driver for our growth in that business is going to be around the data center AI landscape. And obviously, we've got visibility to a quote funnel and are confident in our ability to add to our order book in that particular use case. So we are very excited about the future of battery energy storage products here at Shoals. We have built a manufacturing line to handle and provide a significant amount of capacity for us. So more growth to come in that space for us in the future. Dominic Bardos: And Mark, I may just add that as we gave the guide last quarter, we did talk about there are some projects in Q4 that still have to be firmed up. But what I would characterize our raise on the revenue side is really due to book and turn business in the core solar markets. We've seen some incredible strength in demand, and that's truly what's driving that. And that's -- I just want to position that one because it's a fantastic market for us. We do still have some potential for projects to hit in Q4 from the BESS side, but that wasn't a preliminary driver of the raise. Mark W. Strouse: Okay. Very helpful. And then you've had several questions already about kind of the margin trajectory this year. Dom, I just want to give you the opportunity to kind of talk about beyond this year. Are you still viewing 2026 as the trough here? Dominic Bardos: Yes. Well, certainly, it is because of all the move disruptions and starting the BESS line from scratch and training all the new employees. I mean those are some transitory headwinds that will get done in this year. We think we're a very attractive business, driving gross margins in the 30s like we are. It's a fantastic business. We're going to continue to get OpEx leverage. We'll see EBITDA margin expansion and much higher cash flow contributions next year. So I'm very excited about next year. While we're not fully guiding to that, we do believe this is a trough year on the gross margin side, but really looking forward to expanding operating profit margins and EBITDA margins in 2027 and beyond. Operator: Our next question comes from the line of Sean Milligan with Needham & Company. Sean Milligan: So to start off, I was curious, Brandon, if you could provide some more context around like your BESS quoting pipeline in terms of sizing of projects, specifically on the AI data center side. I guess you've been in the market now for a few quarters there. And I was curious if there's any change to what you're seeing in terms of the size of projects you're quoting. Brandon Moss: Yes. Thanks, Sean. I think we've communicated in the past that, I guess, first, bookings for this particular product line will be a bit lumpy because of the size of the projects, right? I don't think our assumptions have changed at all, where we look to use our 4000 amp recombiner product line and data center AI applications. That market is probably about $50 million to $60 million per gigawatt. We've got great visibility to pipeline and also future projects. And again, very bullish about our prospects to penetrate that market and very excited about our partnership with ON.energy, who we believe has taken market leadership in pairing battery storage with these large-scale AI centers. So couldn't be more excited about the prospects of that business. Sean Milligan: Okay. And just a follow-up on revenue contribution in the quarter. With C&I, international BESS, you kind of gave the BESS number, but I'm curious like how much revenue is now coming from kind of outside the core BLA business? Dominic Bardos: Yes. So we have -- the OEM business was second to our domestic utility-scale solar projects in the quarter. BESS, we were very pleased to have started the line early. As you recall from last year, we were guiding that we didn't expect to have revenue in Q1 at all because of our time line. So we're very pleased to have gotten that line stood up and operational as quickly as we did. But largely, the Q1 revenue stream was utility scale solar that's domestic, followed by our OEM business, which had 33% growth, I believe, year-over-year. So other than that, we did not have a lot of international revenue and the CC&I still remains a relatively small portion, but we do have CC&I sales every quarter. Brandon Moss: Dom, maybe to add to that, just the focus on our domestic solar markets. Just to reiterate, we believe we are operating in an unbelievably strong market environment. And I think our market leadership position as a preferred solution continues to be proven by our record backlog and awarded order growth. A lot of our growth, I know there's a tremendous amount of focus on battery energy storage. But as we've communicated in the past, our goal is to diversify both products and markets, and we're doing that. What is very exciting for us in 2026 is about 1/5 of our revenue will come from new products. BESS is obviously included in that number, but many of the new products are in our traditional solar space. So we've put a big focus on accelerating innovation here at Shoals. And that is playing out with increased bookings and obviously, revenue recognition for 2026. So again, a lot of focus on BESS, always a lot of questions about BESS. I want to reiterate the strength of our domestic utility scale solar business. Operator: [Operator Instructions] Our next question comes from the line of Vikram Bagri with Citi. Vikram Bagri: I have sort of like a 2-part question. I think last quarter, you mentioned spooling had a meaningful impact on margins. I was wondering if you can share what the run rate impact of spooling was on this quarter's margin? And what percentage of customers have requested spooling? And related to that, obviously, tariff, logistics and commodity prices have changed a lot since last quarter. Our understanding was that tariffs baked into the previous guidance were conservative. I was wondering if you can also identify where you see some puts and takes in this ever-changing environment in terms of tariff, logistics and commodity prices, if the current environment is fully baked in? Or do you see some level of sort of like downside or upside from these 3 factors? Brandon Moss: Vik, great question. We have talked about spooling in the past, probably more generally just packaging in general. There are different packaging requirements for some of our newer customers and also product mix related to those specific to our long-tail BLA product. That is adding significant revenue potential for us in the future and is being recognized still in 2026. It adds $0.005 to $0.008 a watt to our projects, which is exciting for us to be able to expand our wallet share. So we do have some packaging costs that are baked into the guidance for the year. I'll let maybe Dominic expand on that. But before I do, just I'll comment on your question about tariffs. Obviously, the tariff landscape has changed dramatically in the last, I don't know, 18 months now. And for us to try to predict what that's going to look like in the future, we would be fools to try to do so. Having said that, the change with IEEPA and Section 232, we view as a net neutral to positive change for us. And that is being baked into our thoughts about margin and guidance for the rest of the year. Dom, maybe I'll turn it to you for specifics around packaging and margin. Dominic Bardos: Yes. As Brandon mentioned, Vik, it's largely -- when I talk about product mix, that's where it's coming from. Not all of our products require spooling, but the longer-run products do. And things like the long-tail BLA is incorporated in the margin. And so when I talk about product mix and a large percentage of customers now preferring the long-tail solution to centralize their low-grad disconnects by the inverters, that is something that increases our share of wallet, but it carries a lower margin percentage. The spooling cost, the packaging, the handling of all that is incorporated into that, but that's why the product mix is so important to the margin percentage. It is driving increased flow-through dollars, which is fantastic. We're going to keep doing that business. We're responding to the changing environment of our customers, what they're looking for, and we now have a full suite of products to really meet those needs. Things like our SuperJumper, which may have been originally developed for international markets are really showing some popularity here in the United States as well. But once again, you have much longer run. So we've factored all that in. It's part of our product mix, and that's why I always caution folks when we talk about a percentage of margin, we need to kind of consider where the mix is going as well. Operator: Brian Lee with Goldman Sachs. This will be our last question. Brian Lee: Sorry, I dialed in a little bit late, so not sure if you covered some of these things. Maybe just on the guidance, kudos on the strong execution here to start the year and for the revenue and margin uplift. But adjusted EBITDA guide is up a bit less than revenue guide at the midpoint for 2026 in the new outlook. Is that conservatism? Or are you seeing more mix shift issues or incremental tariffs than originally expected? Just curious, maybe this is nitpicking, but the EBITDA uptick in the guidance is a little bit more tempered than the revenue outlook. So any color there would be appreciated. Dominic Bardos: Sure, Brian. Yes, we've covered a little bit of this. So -- but I'll repeat a few of the things that are driving that. First and foremost, product mix is certainly driving that. We are seeing popularity of some of the new products which do have a lower margin percentage and flow-through. So while revenue is going to be increased, the margin percentage is not going to be quite as high. We are seeing a little bit of disruption in our move into the new facility here. It was a little bit more than we anticipated and allowed for as folks are moving -- as we moved over -- I don't remember, Brandon, 200 machines. Brandon Moss: 250-plus machines in 60 days. Dominic Bardos: Yes. And we're still moving into the facility this quarter. So a little bit of disruption there, and we are expecting to see with our mix anticipation for the rest of the year, some uptick in gross margin as well. But there were some reasons why we did that. We also have 2 trials set for later this summer in August. With legal expenses, I've learned to be a little bit cautious on the estimations. We want to make sure we represent the shareholders properly in our cases. And if that means experts and additional legal expense, we're going to cover that. And one of those cases is not adjusted out. It's our IP case as part of our earnings. So we just want to make sure that we give a good cautious number that allows us to meet our expectations for. Brian Lee: Yes. Fair enough. Makes sense. And then I'm sure you covered a little bit in this and maybe you covered all of it. Just with respect to tariffs, can you level set us as to what tariffs you are specifically subject to starting the year off 232 copper, steel, aluminum, et cetera? And then does the April 3 ruling on kind of the changing thresholds impact you? And again, maybe level set us as to are you importing copper from foreign sources and what percent of the [ indiscernible ]? And is that impacting your margin outlook for this year? Or are you contemplating any mitigation efforts this year or into next year? Just trying to get a level set on the copper exposure here, if you could speak to that a bit. Dominic Bardos: Sure. Sure, Brian. I'll jump in on that one. There's a few questions in there, so let me unpack it. Yes, for the first couple of months of the year, we still had IEEPA. And those, of course, were stopped collected at the end of February, around the 24th or so of February. And so that right now is going to be a favorable tariff environment. With regards to 232, yes, there was a couple of things. We do have a very wide book of suppliers, approved vendors and some of which are international in nature and are subject to 232 import tariffs, both on the aluminum and copper side. We do work with customers on some things. If they have a preference, we can certainly go for certain domestic suppliers. If they have a preference for international, we can do that as well. So we are subject to 232. Now as the rules change and the tariff rate went down, it's also now on the full purchase price. But net-net, it should be slightly favorable for us in terms of how these tariffs are calculated. So it is a very dynamic situation. We certainly appreciate your question. It makes it very difficult to truly know how to operate that. And Brandon, is there anything else you want to add? Brandon Moss: Yes. Just maybe something to point out. As it relates to the tariff landscape, those tariffs impact even our domestic supply base, right? Like us, most suppliers have a very diversified and international supply base themselves. And so those tariffs may be getting -- may be impacting our raw material inputs even on domestic supply sources. So obviously, as you guys know, it's been a challenging, again, 18 months or so with the tariff landscape. I think we're navigating it quite well. And I think what is probably most important is with the repeal of the IEEPA tariffs and now the change to Section 232, we do see that as a net neutral to positive impact for Shoals in the back half of the year. Obviously, caveating that with unless something else changes. So I think we're navigating it well, Brian, and I appreciate the question. Matthew Tractenberg: Thanks, Brian. Christine, I think that that's going to be the last question that we take today. Operator: Absolutely. We have reached the end of the Q&A session. I will now turn the call back to Matt for closing remarks. Matthew Tractenberg: Yes. Thank you, Christine. So I want to note to our audience that we have a very active IR calendar through June. Those events are listed on our Investors section of our website. So if you're attending conferences, you want to meet with us, please let us know. We're happy to. If we can help further, let just reach out to investors@shoals.com with any questions. Thanks for joining us today, everybody. Have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning and thank you for standing by. Welcome to Dorman Products First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead. Alexander Whitelam: Thank you. Good morning, everyone. Welcome to Dorman's First Quarter 2026 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chairman, President and Chief Executive Officer; and Charles Rayfield, Dorman's Chief Financial Officer. Kevin will begin with a high-level overview of the quarter and share our segment level performance and market trends. Charles will then walk through our first quarter financial results in more detail, discuss capital allocation and then turn it back to Kevin for closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I would like to remind everyone that our prepared remarks, earnings release and investor presentation include forward-looking statements within the meaning of federal securities laws. We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q, 10-K and earnings release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found in the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves with one question, one follow-up, and rejoin the queue if they have additional questions. With that, I'll turn the call over to Kevin. Kevin Olsen: Thanks, Alex, and good morning, everyone. Thank you for joining us today. I'll begin with a brief overview of our first quarter results and then provide commentary on the performance and key trends we're seeing across our business segments. Turning to Slide 3. We delivered solid performance in the first quarter with results that were largely in line with our expectations. Consolidated net sales were $529 million, representing an increase of 4% compared to the first quarter of last year. The year-over-year growth was primarily driven by pricing actions implemented across the business, partially offset by lower volumes compared to the exceptionally strong first quarter we experienced in 2025. Adjusted operating margin for the quarter was 12.1%, down 490 basis points compared to the prior year period. This margin performance reflects the highest levels of tariff-related costs that we expect to see in 2026. Again, due to our use of FIFO, the costs recognized in this year's first quarter are associated with the inventory we purchased last year when tariff rates peaked in the earlier stages of the tariff implementation. Similarly, the sourcing, productivity and automation initiatives that we executed over the last several months and continue to drive today are expected to support improved margin performance as we move through the balance of the year. Adjusted EBITDA margin, a new metric we've included this quarter was 15.2%, down 440 basis points compared to the same period last year. This decrease is driven by lower operating margins, as I just covered. Please see the reconciliation in our appendix for details on this metric. Adjusted diluting earnings per share for the quarter was also in line with expectations at $1.57, down approximately 22% year-over-year. As we've discussed over the last several quarters, this decline was primarily driven by higher levels of tariff-related costs that were recognized in our cost of goods sold during the quarter. Cash generation continued to improve sequentially as expected with operating cash flow in the quarter of $44 million. We also invested in opportunistic share repurchases, deploying $51 million in the quarter, a record for our company. Charles will cover this in more detail shortly. Overall, we began the year with solid performance and met our expectations. Combined with our positive outlook for the remainder of the year, we have reaffirmed our 2026 guidance. Turning to Slide 4 in our Light Duty segment. Net sales increased approximately 4% year-over-year, driven primarily by the pricing actions we undertook in 2025. Volume was lower compared to last year's first quarter, but let me highlight a few driving factors. First, this year's performance was up against a difficult comparison to last year's first quarter, where we drove exceptionally strong 14% year-over-year growth in net sales. Looking back over the last 2 years combined, we delivered 18% growth in net sales. Second, ordering patterns with the customer we discussed on our last call began to normalize during the quarter. Lastly, I'd call out that we estimate POS with our large customers was up mid-single digits in the quarter. While there was inflation embedded in that growth, we remain confident in the non-discretionary nature of our portfolio, and we'll continue to monitor the overall economic conditions of our end users and the impact that the ongoing geopolitical tensions are having on the broader economy. Operating margin performance in the quarter was consistent with our outlook as Q1 2026 reflected the highest level of tariff expense. As the ongoing benefits of our supplier diversification, productivity and automation initiatives are recognized, we expect Light Duty's margin performance to improve as the year progresses. From a market perspective, underlying Light Duty fundamentals remain positive, with vehicle miles traveled increasing year-over-year in the first quarter. Also, higher used vehicle values are impacting consumers' buying decisions, which we believe will result in extended vehicle life and support sustained aftermarket demand for repair and replacement parts. In addition, Light Duty trucks and SUVs continue to represent a growing portion of the VIO, providing further opportunity for product portfolio expansion with higher average selling prices. A good example of how our innovation strategy supports this opportunity is our OE fix air suspension compressor for a broad set of GM SUV models. This product addresses a common OEM failure mode caused by overheating, which can lead to cascading failures throughout the air suspension system. Our patent-pending design improves heat dissipation by approximately 25%, incorporates thermal protection and utilizes proprietary software to optimize performance and reliability. By delivering an upgraded repair solution designed to last longer and at an attractive aftermarket price point, products like this not only create value for installers and end users, but also reinforce Dorman's leadership in product innovation. Just an excellent job by our Light Duty team to deliver another OE fixed solution. Turning to Slide 5 in our Heavy Duty segment. Net sales increased approximately 12% compared to last year's first quarter, driven by pricing initiatives and the year-over-year impact of certain commercialization initiatives we have installed in the business. While the dollar change is relatively small, operating margin improved 110 basis points versus the prior year. I'll also point out that the lower overall margin reflects tariff-related costs that were elevated in the first quarter of 2026. With the impact that tariffs will have on our margins this year, along with the infrastructure investments we've made in the business, we're not expecting significant year-over-year incremental operating margin improvement in 2026. That said, we'll continue to appropriately manage the business in the short term while executing on our strategy to drive a significantly improved operating margin profile for Heavy Duty over the long term. On the broader sector, market conditions remain challenged. The great freight recession continued through the first quarter and geopolitical tensions created further economic uncertainty for consumer demand. As a result, near-term visibility remains limited, and we are not expecting meaningful growth in freight tonnage throughout the year. However, we continue to capture market share in certain channels such as the OE dealer network, where there has been an increased appetite for aftermarket solutions. Overall, we continue to see opportunities for growth. We remain focused on balancing our approach with cost discipline and strategic investment that will allow us to continue capitalizing on these opportunities when the market improves. As a great example, we are encouraged by the opportunity we see within our diesel aftertreatment portfolio, which we believe represents a meaningful long-term growth driver for the Heavy Duty segment. Modern diesel engines rely on diesel exhaust fluid or DEF systems to meet increasingly stringent emissions regulations. These systems are subject to high failure rates due to harsh operating conditions, temperature extremes and sensor degradation, making reliable aftermarket solutions critical for fleet uptime. Through our Dayton Parts brand, where we offer one of the most comprehensive portfolios of replacement parts for diesel after treatment, including DEF, headers and pumps. Our solutions provide plug-and-play installation and meet or exceed OE performance at an aftermarket price. These products are built with durable materials, subjected to extensive testing and incorporate best-in-class sensor technology designed for long service life. As the installed base of DEF-equipped vehicles continues to age and fleet acceptance of aftermarket solutions increase, we believe our leadership in after-treatment systems positions us exceptionally well to serve fleet customers and capture incremental share over time. Congratulations to our Dayton Parts team for bringing this opportunity to market. Turning to Slide 6 and our Specialty Vehicles segment. Net sales were flat year-over-year as pricing actions in certain categories offset slightly lower volume year-over-year. Keep in mind that from a seasonality standpoint, Q1 is typically the slowest quarter of the year. Operating margin performance was in line with our expectations, reflecting higher tariff-related costs. We're also investing in our expanded dealer network to drive more wallet share and optimize our footprint. From a market perspective, we are seeing early signs of stabilization as we enter the 2026 riding season with new vehicle sales increasing year-over-year in the first quarter. We also continue to see strong engagement with our ridership as attendance at the national UTV-ATV events remain high. Additionally, we're seeing new lower-cost entry-level vehicles entering the market that offer improved opportunities for aftermarket enhancements. One new product that illustrates this opportunity well is the power steering kit developed for the new Polaris RANGER 500 platform. As many of you know, Polaris recently introduced the RANGER 500 as a more stripped-down cost-effective utility vehicle designed to appeal to a broad customer base, including fleet users, recreational riders and first-time buyers. By design, this platform ships with more basic features, which creates an attractive opportunity for the aftermarket to enhance functionality and performance to accessories and add-on components. Power steering is a good example. While the RANGER 500 does not include power steering as standard equipment, demand for steering assist remains high, particularly among users operating in rough terrain or using the vehicle for work applications. Super ATV power steering kit provides a bolt-on solution that significantly reduces steering effort and feedback, improving control and reducing operator fatigue. This system is engineered for easier installation and features sealed input and output shafts along with water tight connectors designed to withstand harsh riding environments. Congratulations to the team at Super ATV for being the first to bring this solution to market. With that, I'll turn it over to Charles to cover our results in more detail. Charles? Charles Rayfield: Thanks, Kevin. First, let me say it's been great getting to know a number of our analysts and investors since joining the company in January, and I'm looking forward to spending more time with all of you in the future. Turning now to Slide 7. I'll walk through our consolidated financial performance for the first quarter. Total net sales for the quarter were $529 million, up 4% compared to the prior year period. The increase was primarily driven by pricing actions across our segments, partially offset by volume declines versus last year, where we had an exceptionally strong quarter from a volume standpoint. As Kevin mentioned, compared to Q1 of 2024, our 2-year net sales growth rate was a strong 18%. Adjusted gross margin was in line with our expectations of 36%, down 490 basis points compared to last year's first quarter. As the company has previously covered, our pricing initiatives have been implemented to address a range of incremental costs, including tariffs, while considering the competitive dynamic of our parts in the marketplace. This has resulted in a negative impact to our overall margin profile in the short term. That said, we expect our margin profile will meaningfully improve as the year progresses for 2 main reasons. First, as we discussed previously, this first quarter had the highest level of tariff expense we'll see in 2026, given the inventory we sold was associated with the highest level of duties that were levied in 2025. Second, we anticipate that our supplier diversification, productivity and automation initiatives will make significant contributions to our margin profile as the year moves forward. While our teams did an excellent job managing discretionary costs during the quarter, our adjusted operating income margin was 12.1%, down in conjunction with our gross margin. Adjusted diluted EPS was $1.57, driven by lower operating income, partially offset by lower interest expense and lower shares due to repurchases. Turning to Slide 8. Operating cash flow for the quarter was $44 million and free cash flow was $35 million. As you can see on this slide, our cash flow improved sequentially from Q4 2025 and has rebounded nicely from this time last year when our cash payments for tariffs peaked in the middle of 2025. I'll add that we've reduced inventory significantly year-over-year, and we remain on track to generate a more normalized level of free cash flow for the year. On the capital allocation front, we deployed more than $51 million in the quarter to retire approximately 435,000 shares at an average price of approximately $118 a share. This represented a quarterly record level of repurchases for our company and also our view that there was a dislocation in the market valuation for our stock, which prompted us to utilize our strong balance sheet to return capital to our shareholders. We currently have $408 million remaining in share repurchase authorization, which extends through 2027. Turning to Slide 9. Our long-term capital allocation strategy remains unchanged. We first review our debt levels and leverage ratios, then we deploy capital on internal initiatives as this is where we see our greatest returns. Next, we invest in M&A, which continues to be a key component of our growth strategy. Finally, we will continue to return capital to our shareholders through opportunistic share repurchases. With this consistent approach, we've deployed $1.8 billion of capital since 2020 and expect that our overall strategy will continue to drive long-term growth. Turning to Slide 10. Our balance sheet remains a significant strength for Dorman. We ended the quarter with net debt of approximately $413 million and total liquidity of $627 million. Our total net leverage ratio at the end of the quarter was 0.99x our adjusted EBITDA, demonstrating our ample flexibility to support the business, manage through tariff-related working capital demands and continue investing in strategic growth opportunities. As we highlighted on the previous slide, our target net leverage ratio is less than 2x adjusted EBITDA and approximately 3x for the 12 months following an acquisition. Turning to Slide 11. We are reaffirming our full-year 2026 guidance. We continue to expect net sales growth in the range of 7% to 9%, driven by the full-year impact of our pricing initiatives, along with a modest level of volume growth that we expect to be primarily in the back half of the year. Looking across the segments, we expect all 3 segments to directionally perform within this range. We also continue to expect adjusted operating margin to be in the range of 15% to 16% for the full-year with a more normalized high teens rate as we exit the year. Adjusted diluted EPS for 2026 is expected to be in the range of $8.10 to $8.50. This guidance includes the expected impact of tariffs enacted as of May 4, 2026. Due to uncertainty around the recovery of IEEPA tariffs previously paid, our guidance excludes any impact from the potential IEEPA tariff refunds. Additionally, our guidance does not include any potential tariff changes after May 4, 2026, future acquisitions or divestitures or additional share repurchases. Lastly, we continue to expect a full-year tax rate of approximately 23.5%. With that, I'll now turn the call back over to Kevin to conclude. Kevin? Kevin Olsen: Thanks, Charles. I'll just reiterate what we've said throughout the call. Our first quarter performance was solid and in line with our expectations. While uncertainty persists in the broader economic landscape, we remain confident in our strategic positioning, our ability to navigate near-term challenges and our long-term growth opportunities driven by innovation, operational discipline and our leadership position in the aftermarket. We appreciate your continued interest and support. With that, we'll open the call up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from the line of Jeff Lake with Stephens. Jeffrey Lick: Kevin, I was wondering if you could maybe just elaborate a little more, provide a little more color as the year plays out. Obviously, this is probably one of the trickier quarters you're going to face selling the most tariff-affected inventory from last year with the FIFO and then obviously, you had the added wrinkle of the major customer disruption. I was wondering as you just think through as you step Q2, Q3, Q4, how that's going to progress? Then maybe if you could weave in anything with regards to complex electronic parts and product innovation, that would be great. Kevin Olsen: A lot there, Jeff, but let me give that a shot. Good questions. Jeff, let me start with the sales progression. You mentioned the dislocation we had with a large customer that we mentioned in the fourth quarter. I'll just comment that as we entered the quarter, we saw some dislocation continued, but as we exited the quarter, it was more normal rates and ordering patterns kind of fell more in line with the out-the-door POS sales. When you look at the overall growth rate, you got to keep in mind that last year, particularly in the first half was an extremely strong volume growth period for us. Light Duty grew 14% in the first quarter last year, so a very difficult comp. The first half of the year was up about 12% in light duty. We know that growth from a year-over-year perspective will be challenged in the first half. As we exit the back half, we're still very comfortable with our 7% to 9% full-year guide as we have a full-year of the pricing initiatives in play. We also have a lot of new business coming online as well as continued new product launches. We still feel very comfortable with that guide. In terms of the margin progression, as we've said multiple times that Q1 was going to be our most difficult quarter as the tariff rates coming through our P&L because of FIFO will be the highest. As we move through the year, those tariff rates reduce because they were the highest when they first implemented starting back in April of last year. Also, all the initiatives that we undertook since April of last year in terms of further diversification, productivity initiatives, dealing with our supplier community, those also have to go through FIFO. We have very good visibility to what that looks like going forward because of FIFO. We feel confident that we'll continue to see margin progression as we move through the quarters. As we said in the guidance, operating margin should be in that 15% to 16% for the full-year, and we expect to exit Q4 at a higher rate in the high teens area, which is kind of back to normal levels. Jeffrey Lick: Then anything further on just the complex parts and innovation? Is the environment just moving along at a linear pace? Or are you seeing it maybe step up a little more exponential? Kevin Olsen: Yes. Great question, Jeff, and I didn't address that first time through. Complex electronics in the first quarter met our expectations. It's a category that continues to -- the growth continues to outpace our overall portfolio, and we expect that to continue. We did highlight a few new products that we launched in the quarter that have complex electronics embedded in them. Yes, it's a category we're going to continue to invest in, and it will continue to grow at an outsized pace in the overall portfolio. That is our expectation. Operator: Our next question comes from the line of Scott Stember with ROTH Capital. Scott Stember: Maybe talk about the Heavy Duty. We've seen granted coming off of a low base, but we've seen a nice recovery here in sales, but the margins -- you talked about the margin recovery just really not being there for the most part for this year. Maybe just give us an idea of when you're putting through price increases for tariffs, are you able to get all of it in this segment like you are in light duty? Then maybe just talk about the level of investments that we should expect in new product development there. Kevin Olsen: Yes. Good question, Scott. I'd tell you that the tariff -- we continue to pass tariffs through in all 3 of our segments. Heavy Duty is no different. We will see early on in the process of passing through some margin dilution as we continue to -- we have to continue to be competitive where we have competitors. You just get some margin percent compression if you pass through dollar for dollar. In general, that's been our approach. We're able to recover the tariffs, but you do see some margin compression, and we did kind of call that out in the prepared remarks. Growth in the quarter was very strong, up 12%. Some of that was due to tariff pricing, but we also did see some nice share gains in the quarter. We expect that to continue. However, as we also said in our prepared remarks, we're not expecting the market to recover at this point just based on some of the freight indexes that we're looking at. We don't have any major expectation. We're going to continue to focus on taking share where we can take share and working on driving productivity initiatives throughout the business and driving new product launches and commercialization through that channel, which we've had some good success, but we still have a long road ahead of us there. Scott Stember: Then related to tariffs, a lot has changed in the first quarter with the IES going away, the 232s changing and the 122s coming in. It sounds, at least from the tenor of your comments regarding guidance that the changes there were essentially net neutral. Is that correct? Kevin Olsen: Yes, Scott, that's correct. When the IES went away, the Section 122, which is essentially 10% across the board came into play. There just wasn't a major change either way just based on how the HTS codes are applied. Most of our codes now are Section 232, whether that's the steel and aluminum tariff or the auto parts tariff on top of the 122 tariffs. Now, as everyone knows that there will be a new tariff regime coming into place when the Section 122s expire later in the summer. We don't know what that's going to look like. Our assumption is basically it's going to be roughly in the same neighborhood as it is today. Operator: Our next question comes from the line of David Lantz with Wells Fargo. David Lantz: POS for large customers grew mid-single digit in Q1, but curious if you could talk about how that trended through the quarter, what you're seeing quarter-to-date and expectation through 2026? Kevin Olsen: David, I'd say the progression was very similar of POS, up mid-single digit in the quarter. Frankly, it's been very similar to what we saw in Q3 of last year and Q4 of last year, so not a lot changed. This continues to be very solid out-the-door growth at our customers. No real change in progression. I'll say that April is very much in line with what we saw in the first quarter. To answer the second part of your question, our expectation is similar as we move through the rest of the year. David Lantz: Then considering the really healthy balance sheet, curious how you're thinking about M&A through the balance of 2026 with potential tuck-ins or geographic expansion? Kevin Olsen: Yes. I mean M&A, as we talk quite a bit about, it continues to be a large part of our strategy, our growth strategy. I would tell you that as we look at our pipeline today across all 3 segments, it continues to be very healthy. I would say that deal activity was muted or has been muted since liberation day, at least in our industry. I think we're now starting to see that loosen up a little bit as there's more understanding of the impact of tariffs on different companies, different parts of the industry. We expect deal activity to pick up as we move through 2026 and into 2027. Our strategy in terms of the segments has not changed. I mean when we look at Light Duty, we're very interested to continue to geographically expand our business there and continue to enhance our technological capabilities. In Specialty Vehicle, we continue to look to expand geographically. We also look to grow our portfolio of brands through a series of tuck-ins, still very highly fragmented space. In Heavy Duty kind of similarly where there are opportunities in the Heavy Duty market. We're a very small player in a very large market for us to enter different segments of that space via tuck-in acquisitions. Operator: Our next question comes from the line of Bret Jordan with Jefferies. Bret Jordan: On the single-digit POS, could you sort of carve out what is actual price versus units? I guess, specifically within units, could you comment on the chassis category? Did it benefit from any seasonal demand creation this winter? Kevin Olsen: Bret, I'll first answer. I mean, we don't -- historically, we've never broken out price versus units for competitive reasons. I will say, look, the POS, there is certainly inflation embedded in those numbers just based on the tariff impact across the industry. There's no question about that. I would say that it's remained relatively steady the last 3 quarters and into April. We don't specifically comment on any specific category, but I will say in regards to chassis question, look, it was a good solid year in terms of the weather. Weather, as you know, does impact certain categories more than others and undercar. -- chassis is certainly one of those. That season really starts late in the first quarter into the second quarter, and so far, we feel really good about that category. I think we had certainly a good winter with a lot of precipitation that helps that category from a growth perspective. Bret Jordan: Could you give us a sort of idea of what you paid in IEEPA last year just in case we could get a windfall out of that this year? Kevin Olsen: Yes. Look, I'll tell you that we've just started the process of recovery on IEEPA, and it's still too early to tell how everything is going to settle out and whether or not there'll be any appeals. It doesn't appear that there's going to be at this point. At this point, we're not going to disclose it because we need to work through the process, and we don't want to get ahead of ourselves because it's just such an unprecedented situation. More to come, Brett, as that plays out. Operator: Our next question comes from the line of Justin Ages with CJS Securities. Unidentified Analyst: This is Will on for Justin. A lot of my questions have been asked, but you noted light trucks and SUVs is a growing portion of prime vehicles in operation. Can you give us some more color on how that breaks down further with electric vehicles? Kevin Olsen: Well, let me just clarify for electric vehicles, are you talking about in heavy and specialty or light duty? Unidentified Analyst: Light duty. Kevin Olsen: Light Duty, yes, certainly. Light Duty right now, from a VIO perspective in North America, Light Duty is still less than 2% of the VIO, slightly larger portion of that we would consider alternative drivetrains like hybrid. The vast, vast majority is still ICE, and it's going to take a very long time for that mix to change substantially. Irregardless, we continue to be drivetrain agnostic, right? Our technologies and our capabilities can address any drivetrain. We see a lot of opportunities across the new drivetrains. Obviously, in a hybrid, there's 2 drivetrains. There's a lot more addressable content. We're comfortable with whatever drivetrain becomes prevalent in the future from a BIO perspective. Operator: Ladies and gentlemen, this concludes our Q&A session and today's conference call. We would like to thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 DENTSPLY SIRONA Inc. Earnings Conference Call. 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 hand the conference over to your first speaker today, Wade Moody. Please go ahead. Wade Moody: Thank you, operator, and good afternoon, everyone. Welcome to the DENTSPLY SIRONA Inc. First Quarter 2026 Earnings Call. Joining me for today's call are Daniel T. Scavilla and chief executive officer and Michael Pomeroy, interim chief financial officer. I would like to remind you that an earnings press release and slide presentation related to the call are available on the Investors section of our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements on certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updated information in subsequent Form 10-Q or other SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. On today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance, and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Dan. Daniel T. Scavilla: Thanks, Wade, and good afternoon, everyone. Q1 marked the start of executing the DENTSPLY SIRONA Inc. return to growth action plan. Our results reflect a business in transition, and do not yet capture the actions underway intended to drive sustained profitable growth. We are strengthening execution, investing in key growth areas, positioning the company for improved long-term performance. From my perspective, we are where we expected to be at this early stage. We are executing the plan as intended and remain focused on improving speed and accountability. As I said last quarter, we are going deeper, moving faster, and being bolder to improve our business while placing the customer at the center of all we do. That mindset is taking hold across the organization. Near-term performance is still being affected by external pressures and the timing of our investments, while the underlying market remains stable. We are monitoring geopolitical and macro factors closely while making strong progress on the areas within our control. Regardless of market conditions, we will remain focused on executing our plan and improving our performance over time. We are engaging with our customers more, accelerating innovation, and optimizing our cost structure. These actions are already gaining momentum and are expected to contribute more meaningfully as the year progresses. During the quarter, we advanced our commercial restructuring in the U.S., expanded clinical education and sales force training, and continued to drive innovation across the portfolio while implementing a restructuring to redirect funds to fuel commercial and innovation growth. We are also seeing early encouraging traction with our distribution partners and I will share more detail on that shortly. We remain confident in our strategy, and are maintaining our full-year 2026 outlook. On today's call, Michael will review our first quarter 2026 financial performance and key drivers. I will then provide an update on our strategic progress, including the actions we are taking to support the five pillars of our return to growth action plan. With that, I will turn the call over to Michael. Michael Pomeroy: Thanks a lot, Dan, and good afternoon, and thank you all for joining us. As Dan noted, first quarter results are in line with what we anticipated at this stage as we execute on our plan to continuously lean down our OpEx structure and drive sustained profitable growth. Before we begin, we announced today a change to external reporting for our regions from U.S., Europe, and Rest of World to Americas, EMEA, and APAC. This update creates a more efficient reporting structure and better reflects how we manage and evaluate the business internally. The results being reported today reflect this change. A recast of prior comparative regional information has been provided along with today's press release. Let's move to Q1 results on Slide 4. Our first quarter revenue was $880 million, representing an as-reported sales increase of 0.1% over the prior quarter. On a constant currency basis, sales declined 6.7%, based in part on the impact from Byte and a strong Q1 2025 treatment center sales comparison not repeated in 2026. Adjusting for these one-time headwinds, Q1 2026 sales on a constant currency basis were down 4.5%. On a constant currency basis, sales highlights in the quarter included double-digit growth for EDS and APAC, favorable SureSmile performance in EMEA, and growth in Wellspect Healthcare. These improvements were offset by declines in EDS outside of APAC, CTS, and OIS. Adjusted EBITDA margins declined 430 basis points, resulting from a 560 basis points decline in gross profit, driven by lower volumes, sales mix, and tariff impacts. While OpEx experienced a headwind on an as-reported basis, from a constant currency perspective, OpEx was down $20 million, reflecting benefits from our return to growth OpEx restructuring and overall cost control management. In line with what we communicated in our last earnings call, we increased our spend in R&D year over year as we support the return to growth action plan and invest in bringing innovation to market. Adjusted EPS in the quarter was $0.27. In the first quarter, operating cash flow was $40 million compared to $7 million in the prior year quarter. The year-over-year increase is primarily attributable to improvements in working capital with lower accounts receivable. This is an early sign of progress as we focus on improving working capital over the balance of the year. We finished the quarter with cash and cash equivalents of $190 million. Our Q1 net debt to EBITDA ratio was 3.3x. During the quarter, we retired $79 million of debt. We continue to prioritize debt reduction over time and remain committed to maintaining investment grade credit metrics. Let's now turn to the first quarter segment performance on Slide 5. Starting with CTS, constant currency sales declined 2.9%. We saw a high single-digit decline in E&I, as declines in imaging equipment and treatment centers were driven by a tougher comparison versus the prior year quarter. When adjusting out the one-time institutional installation, CTS was flat in constant currency. Our global CAD/CAM business was flat year over year, with growth in APAC offset by a decline in EMEA, which was driven by softness in the Middle East and Central Europe, partially offset by double-digit growth in the UK, Spain, Turkey, and Denmark. We saw increased demand for mills in the U.S., along with bright spots in APAC. Overall, U.S. distributor levels for CAD/CAM and imaging products remain below historical averages. They are a trend we expect to continue. Turning to [inaudible], sales declined 7.2%, driven by lower volumes in Americas and EMEA, partially offset by growth across all three product categories in APAC. Moving to OIS, sales in constant currency declined 13.5%. Adjusting for the year-over-year impact from Byte, OIS declined 7.6%. IPS declined high single digits in the quarter, driven by lower implant volume across all three regions. SureSmile, our clear aligner offering, declined low single digits in the quarter, with a high single-digit decline in the U.S., partially offset by 11% growth in EMEA. Wrapping up with Wellspect Healthcare, constant currency sales increased 3.4%, led by 4% growth in EMEA and the continued strength of new product and execution of the business. Now let's move to Slide 6 to discuss our outlook for 2026. As Dan shared earlier, we are maintaining our 2026 outlook for net sales of $3.5 billion to $3.6 billion and an adjusted EPS in the range of $1.40 to $1.50. With the uncertainty and fluidity of the current macro and geopolitical environment, we are applying a thoughtful, risk-aware approach to our guidance while remaining focused on executing initiatives to drive sustainable growth. With that, I will turn the call back to Dan. Daniel T. Scavilla: Thanks, Michael. As I mentioned in my opening comments, our focus remains on disciplined execution, and we are making progress against our plan. The management team and board are closely aligned. Priorities are clear, and the organization is engaged and motivated. I also want to recognize the strength of our leadership team, particularly our U.S. commercial leaders. Several competitive hires joined recently who bring deep dental experience and are already making meaningful impact. While it is still early, what we are seeing gives me continued confidence that we are on the right path. My leadership team and I have been spending more time in the field and at local customer events, gaining valuable firsthand perspectives. Customers are noticing a shift in how we show up. Most importantly, we are consistently putting the customer at the center of our decisions and actions with a clear focus on improving both the experience and outcome for the dental practitioners we serve. We are in the early stages of expanding our clinical education and sales force training programs with increasing structure and scalability. Early feedback is encouraging, and the teams are responding well to greater clarity, investments in their development, and increased accountability. This work is strengthening our foundation as we prepare for more consistent execution in the second half of the year. At the same time, we are strengthening our processes to ensure solutions are grounded in real-world customer needs. As part of this effort, we are establishing a CEO advisory board comprised of dentists to provide direct and ongoing customer insights. Returning the U.S. to growth remains our top priority. The actions we are taking to strengthen talent, execution, expand distribution, and improve customer engagement are beginning to show early traction. At the same time, we are reinforcing the key drivers of our long-term growth. A central priority is sharpening our focus on the implant business. While recent performance in this segment has been challenging, we continue to benefit from strong underlying assets and a deep heritage in the space. To build on this foundation, we initiated a disciplined set of actions to improve performance and position the business for sustainable growth. I will provide more detailed updates in future earnings calls. Innovation also remains central, supported by increased R&D investment with a clear focus on our highest value opportunities. Let me share a few of our recent launches as seen on Slide 7 in the earnings presentation. We just announced the launch of SmartView Detect, the first FDA-cleared and CE-marked AI-enabled diagnostic aid that automatically identifies potential inflammation at the root tip in 3D scans. Integrated into the DS Core platform, the solution works with both new and existing systems, enabling seamless adoption. In clinical evaluation, SmartView Detect increased detection sensitivity by approximately 46% relative to unaided review, helping reduce the risk of overlooked findings while improving workflow efficiency. This innovation not only enhances diagnostic confidence, but also supports clearer patient communication, reinforcing our commitment to advancing connected, high-quality dental care. In endodontics, we introduced the Reciproc Minima File System and the X-Smart Go cordless endomotor, both designed to simplify workflows and improve efficiency. Reciproc Minima enables treatment of narrow and complex canals with a one-file approach, while X-Smart Go enhances mobility and performance through cordless operation and integrated intelligence. Together, these solutions reflect our focus on practical, evidence-based innovation. In imaging, we announced FDA clearance of our dental-dedicated MRI, representing an important step forward in expanding our capabilities in soft tissue diagnostics. The system has been validated in clinical settings, and is expected to support broader collaboration with leading academic and research institutions, consistent with our strategy to build clinical evidence and drive adoption. It also complements our existing imaging portfolio. Beyond dental, Wellspect continues to show solid momentum. Adoption of Sureti for females is expanding, supported by ease of use, discretion, patient comfort, and encouraging feedback from both patients and clinicians. Building on this, the recent launch of the male version extends the portfolio to a broader patient population. Finally, we are making progress in expanding and strengthening our U.S. distribution network. As announced yesterday, we signed an expanded agreement with Atlanta Dental Supply, adding our connected technology solutions portfolio effective August 1. This marks our fourth new distributor agreement this year and enhances our regional coverage, improving access and service levels in an important market. The other distribution agreements announced in the first quarter are beginning to build traction and expand our commercial reach. Early traction includes Benco installing its first CEREC system under the new agreement, an important milestone achieved ahead of schedule. To lead DENTSPLY SIRONA Inc. into its next phase, we are strengthening our foundation with better tools, more integrated systems, and increased automation. This builds on the strength of our existing teams, while enhancing capabilities in transformation, operations, and financial performance. Our transformation office continues to drive execution of the return to growth action plan, with a focus on embedding lean operating principles, simplifying processes, and improving how work gets done across the organization through the customer's lens. In parallel, we are advancing our enterprise AI strategy to drive efficiency and support innovation across both commercial and operational areas. In Q1, we began deploying AI-enabled tools in select workflows to improve productivity, with a broader rollout planned throughout the year. Within finance, we are strengthening capabilities while maintaining continuity as we actively progress on our search for a permanent CFO. Michael continues to be a strong partner in his interim role, ensuring stability and focus on execution. We are simplifying and optimizing the operating model to improve efficiency and scalability. The restructuring program remains on track to deliver $120 million in annual savings, with benefits building through 2026 and becoming more meaningful in the second half of the year. Key actions include cost optimization, organizational simplification, and supply chain efficiencies, along with reducing complexity across legal entities and IT systems. Through these actions and by driving lean principles further into the organization, we will improve our speed, competitiveness, and the customer experience. Early proof points are visible, including a reduction of approximately $20 million in operating expenses during the first quarter. These savings are being reinvested into growth areas such as R&D, clinical, and commercial capabilities, while we continue to manage external headwinds. A disciplined approach to capital allocation and balance sheet management remains a priority. During the quarter, we reduced debt by approximately $80 million, reflecting our commitment to deleveraging. Capital allocation priorities remain focused on debt reduction and share repurchases, supported by improving working capital and free cash flow. With the dividend eliminated during the first quarter, we have increased flexibility in how we deploy capital, and as performance improves, we expect to be in a position to evaluate the timing of share repurchases later this year. In closing, progress is encouraging, execution is improving, cost discipline is in place, and we are building the capabilities needed to drive sustainable growth. Early proof points are emerging across the business, and visibility should continue to improve as the year progresses, particularly in the second half. We remain confident in the strategy and focused on delivering long-term value for shareholders. I believe the potential for DENTSPLY SIRONA Inc. has never been greater, and we have at our fingertips everything we need to achieve this. Thank you. Now let us turn to Q&A. Operator: 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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We kindly ask that all attendees limit their questions to one primary question and one follow-up question. Our first question comes from the line of Allen Charles Lutz of Bank of America. Please go ahead. Allen Charles Lutz: Thanks for all the details, Dan. On the return to growth action plan, there is a lot of good steps there. You talked about new distribution relationships and expanding ones you have already had, investing in clinical education, and then new product investments. So there is a lot of things on the plate. How do you think about the timing of these benefits? I think at the top of the call, you alluded to maybe some benefits happening toward the second half of the year. As we think about all those things that you are spending time on or that you have done so far, is this something where we should start to expect more material benefits in the back half of this year? Or is this effectively more of a two- or three-year roadmap? We would love if you could just give us a sense of how you are thinking strategically about the timing of some of these investments you are making in that return to growth plan. Thanks. Daniel T. Scavilla: Thanks, Allen. I appreciate the question. And I think you kind of answered it, right? When we first rolled out the return to growth plan, we called it a 24-month plan, recognizing that you cannot move fast enough, but at the same time, cannot change this in the speed that all of us would wish. Q1 was the beginning where we established the plan, built the teams, and did all the reorganization. This is really us out of the gate in the first quarter. As we begin some of the restructuring that is occurring in the first and second quarter, you will see some of those cost benefits come through more in the fourth quarter than you would in the first half of the year. As you look at the commercial cadence and what we plan to drive, again, I would think we will begin to see some things in the fourth quarter, but I really do believe that more of the improvements will be seen as we get into 2027 and certainly into 2028. Allen Charles Lutz: Appreciate all the color there. And then we would love to hear an update on some of your early conversations with DSOs. Where within your portfolio is the most interest, and how can X-ray benefit help you at those? Daniel T. Scavilla: Thanks. Again, great question. There is a lot of great activity currently occurring with DSOs. It is something we had begun into the last quarter of last year. If you look at who we are and what we offer, you have this incredible strength of a broad portfolio. Whether you want to actually build out new dental suites—we can provide all of that—or you want to get into longer plans for consumables and pull-throughs, we can do that as well. We are really talking with several concurrently, and we are looking to have a more active plan again toward the second half of this year and into next year. I think the strength is in the broad offering we can give them as a one-stop shop, and therefore bring all of the leverage bundling together for the best impact for them and ease of doing business with us. Operator: Our next question comes from the line of Jonathan David Block at Stifel. Please go ahead. Jonathan David Block: Maybe just the first one. I would say the trends with the consumer are certainly a watch with the geopolitical backdrop, and you guys are so global in nature that I figured I would take the opportunity. When you look across your book of business, anything to call out between Americas and EMEA and APAC when we think about March or April trends, whether that would be weakening or maybe even something to call out in terms of more resilience than maybe you expected considering what is going on in the world? Daniel T. Scavilla: Great question, Jonathan. There are certainly a lot of moving parts here. We did not really call out the Middle East. We will keep our eyes on that. It is a low single-digit impact for us right now. The continued struggle in Central Europe with Russia certainly has its weight, something that we have built into our forecast. As of now, we stay with what we planned in our initial business plan, and should we see some of these risks changing or shifting, we will take more action after we get through the second quarter. Jonathan David Block: Fair enough. And maybe the second question—and maybe a half question here—can you talk to us on where you are with the drop-ship model with the distributors? You talked to more distributors coming on board, but what more needs to be done there? Maybe if you want to talk to the receptivity. I mean, I think for them, it is not tying up their cash. And if you feel like it is giving you a greater voice with the distributors. And then admittedly, a completely unrelated question would just be the cadence throughout the year—do we think about the exit EBITDA margin in 4Q, which might help us bridge from 1Q to 4Q? Thanks. Daniel T. Scavilla: No problem. A couple of things. The transition into the new capital model really applies to some of the existing dealers, not necessarily new ones. We will provide this for everybody, but when we talk about the inventory build or the change in inventory that you were referring to, that is a little more of a Patterson and Shine dynamic than all of the new players who would start at zero anyway. The first quarter did not include any of that burn-through of the inventory. We expect to see that from Q2 through Q4. It is well received. It is built into all of our agreements. It is honestly not a negotiating point with us because the benefits are for both sides and pretty easily accepted that way. I will refrain right now from giving you what we think Q4 guidance is. It is not something we do. We want to get a couple of quarters under our belt with all of the moving parts we have, and it will really help you determine what is the best way to set up your 2027 model. Operator: Thank you. One moment for our next question. Our next question comes from the line of Jeffrey D. Johnson with R.W. Baird. Please go ahead. Jeffrey D. Johnson: Yes, thank you. Good evening, guys. Dan, I wanted to start with Wellspect. That business showed through very consistently and nicely this quarter. OIS and CTS, we know there is a lot of moving parts there. On the EDS side, I think that was probably the biggest surprise to me from a segment performance, just the down 7%. The comp got a little bit tougher, but the switch from plus to minus this quarter—what was driving that shift? The markets seem like they have held in fairly consistently. What was the underlying driver of that fall off? Thanks. Daniel T. Scavilla: I would tell you we looked at a little bit of softness in the fourth quarter, and we saw that carry into the first quarter. I trace that down to specific markets. I will not call them out right now. While we believe some of it is destocking of dealers, especially those that may have gone into a little more PE-based approaches, we are working through the program for a better understanding of where that is. Right now, it really looks like there was a bigger shift in Europe than we would have anticipated. The U.S. is kind of in line where we thought. Even within Europe, there are probably about five different markets that we are taking a look at to understand what is being driven there. Our current estimates and assumptions are there is some continued destocking that we felt in the fourth quarter and in the first quarter. As you noticed, we have not called off of our number. We think that this is a timing issue as we stand today, but we will look to see how we can prove that true. Jeffrey D. Johnson: Understood. And then as my follow-up question, you mentioned again tonight returning the U.S. to growth by maybe later this year. Europe is actually a bigger segment for you guys geographically. Maybe the consumables thing you were just referencing there drove that European number down to down 5.6% this quarter. But as you focus on the U.S., I would assume you also plan or hope or are working towards getting that European number more consistently to growth as well. Help me understand how you are thinking about Europe over the next few quarters and eventually getting that return to growth as well. Daniel T. Scavilla: Of course we want Europe to get back into growth. It is foundational. The U.S. stays on track; we are happy with that. In Europe, you talked about EDS, which I would agree with. Keep in mind that treatment centers were fairly large last year as well. As Michael called out, that is an academic-type thing where they come in blips, not really something you can easily forecast and see. We want to make sure we do not overstate the change because of that one-time headwind. A strong Europe and APAC are needed as well as continued growth in the Americas, and we are focusing on it. The vast majority of what we are doing to return the U.S. to growth is applicable throughout the world. Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Anthony Sarcone of Jefferies. Please go ahead. Michael Anthony Sarcone: Just wanted to start on gross margin. You talked about 550 basis points of contraction. Maybe you can give us a little more color on what is driving those in 1Q and then how we should think about the cadence of gross margin through the year? Michael Pomeroy: A big piece of the headwind in gross margin is tariffs. When you are looking year on year, tariffs did not exist to the extent they do now, so that is a pretty big piece. We talked about EDS 2025, which comes off the balance sheet. It is inventoriable, therefore capitalized, and that was a negative hit as well. As far as going forward, everybody knows what is happening with tariffs. We will start seeing the adjustments from the SCOTUS decision and then down to the Trump 10% in Q2. So that piece is going to look a lot better. Dan talked about what we are working on as far as Europe—getting the destocking behind us, which we believe it is. And the third piece is tariffs down the road. But just pure apples to apples, I would think we should be gaining 300 basis points at a minimum back in the Q2–Q3 timeframe. Michael Anthony Sarcone: Okay. That is helpful. And on macro and geopolitics from an input cost standpoint, what are you seeing in terms of higher oil and freight prices? Daniel T. Scavilla: You were breaking up a bit, but I think I got it. Yes, we are seeing some headwinds with freight and oil. We will continue to monitor that and understand if it is something we can offset, absorb, change, or have to adjust. I want more than one quarter under the belt before we make that decision. Operator: Thank you. One moment for our next question. Our next question comes from the line of Analyst from Piper Sandler. Please go ahead. Analyst: Hey, guys. This is Joe Donahue on for Jason Bednar. Thanks for taking the questions. Starting on consumables more broadly, we are seeing a continued mix shift toward private label. Strategically, how are you thinking about navigating this shift? And do you read the private label trend as still having runway, or is it starting to plateau in the current environment at all? Daniel T. Scavilla: It is a fair question. Private label is something that has been around and will continue to be around. It is something that we will obviously look at and, where it makes sense, compete against. We have several programs in development to make this a meaningful and worthwhile approach with customers. I am not going to lay those out just yet for competitive reasons. I want to get them launched before we discuss them. But it certainly has our attention and the need for us to penetrate the market with more creative ways to get our products into the hands of dentists. Analyst: Thanks. And then to push a little more on pricing with input costs here—do you feel you have incremental ability to pass through price to offset these pressures? What is your appetite throughout the year and what might be included in the guide for pricing versus how much more you could possibly take? Daniel T. Scavilla: We took some minor pricing last year, more on capital than anything. Our intent is not to change that right now, and I do not see anywhere where we would benefit from price increases of any significance. Right now, it is really about us staying focused on return to growth and executing in a way that is beneficial to the customer. I do not think there is a significant price play that would get us where we need to get to. Operator: Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Hammell Anderson with Evercore ISI. Please go ahead. Elizabeth Hammell Anderson: Hi, guys. Good afternoon. Given the R&D spending in the quarter and your focus on new products, and at some recent dental shows, can you talk about the new product contribution in the quarter and how you are seeing that progress over the course of the rest of the year and maybe 2027? Daniel T. Scavilla: Thanks, Elizabeth. We do not disclose that level of detail. We do monitor it, and it is something that we have our eye on. I will hint that we need to see those metrics improve for our investment in R&D, and I think there is an execution plan that should allow us to do that. It is not something I would put out publicly in terms of contributions for this year or next. Elizabeth Hammell Anderson: But would you agree that it is a ramping contribution as we go into next year, really starting to step up maybe in 2027–2028? Daniel T. Scavilla: I would agree with that. Operator: One moment for our next question. Our next question comes from the line of Michael Aaron Cherny with Leerink Partners. Please go ahead. Michael Aaron Cherny: Afternoon. Thanks for taking the questions. I know we have touched on a lot of the different segments. I just want to dive in a bit on implants. As you think about the next couple of years of go-to-market, where do you think you are in your combination of product reboot, sales reboot, and how to factor that into that component contributing to the return to growth opportunity? Daniel T. Scavilla: It is a fantastic question. While we talk about geographically focusing on the U.S. as a return to health—which it is—implants are one of the top priorities. I have commissioned a team of dental KOLs to work with us and get the voice of the customer. We are working on several approaches with the team to come back with more holistic programs. I want to get them formed and launched before I speak about them. Implants are an area of focus. We are not happy with our performance to date. We recognize we have some of the best offerings in the market, and we simply need to execute in a better way and utilize those assets more strongly. Michael Aaron Cherny: And relative to your comments about the buyback, as you think about the evaluation to the end of the year, what are the moving pieces that are going to impact your decision on a go/no-go evaluation? Daniel T. Scavilla: Not many, to be honest. There was an opportunity by removing the dividend and redeploying it. We had some near-term debt coming due that made sense to retire. I wanted to put the funds there first because it will help us deleverage, especially as EBITDA gets stronger. It did not make sense to carry that forward. In the second half of the year, we will look at the option to remove stock. At this price, I am anxious to do it. I think it is going to be a great one to remove. I am going to get the debt in line first. I want to preserve our credit ratings the way they are, then move into removing shares in a way that makes sense not only in the second half of the year but ongoing thereafter. Operator: One moment for our next question. Our next question comes from the line of Lilia-Celine Lozada at JPMorgan. Please go ahead. Lilia-Celine Lozada: Maybe I will start with guidance. You beat by quite a bit on the top line on a reported basis, but reiterated the guide. I appreciate it is still early, but what is the thinking behind that? Why not flow through the beat? And are there any offsetting dynamics in Q2 through Q4 that we should be keeping in mind? Daniel T. Scavilla: It is a great question. It is my style that I am bringing into DENTSPLY SIRONA Inc. I did the same thing back at Globus. I am not going to make a call after one quarter. I like to see at least two before we do. Regardless of it, I would not have brought it up or down. It is not a concern. It is just more of a style. I would rather be appropriately conservative than anything else right now. That is all it reflects. Lilia-Celine Lozada: Got it. Makes sense. Then I was hoping you could dig into CTS a little bit more. That came in nicely higher than what we were thinking. Can you talk a bit more about what drove that strength and what you are seeing in terms of appetite for capital in this environment? Daniel T. Scavilla: There are a lot of moving parts. Having expanded the dealers and working on programs with them—we called out through Michael’s script—we are seeing some strength in the U.S. Again, one quarter does not make a trend. We will continue to execute and, after a couple of quarters, see how that is shaping up. I would attribute the CTS strength more to activity occurring in the U.S. through our partners. Operator: Thank you. One moment for our next question. Next question comes from the line of Analyst at UBS. Please go ahead. Analyst: Thanks for taking my question. Dan, I appreciate the lift that you have here operationally and all the things that you have initiated internally. When you think about the growth initiatives, which segments or geographies do you think catch up or get to growing faster than the market? What products do you think you can get to quickest? Can DENTSPLY SIRONA Inc. grow faster than the market, in line with the market, or better than market in implants or something to that effect? What are you most excited about, or where do you think you can return to market growth or better, and what segment is fastest? Daniel T. Scavilla: I will refrain from giving segment-by-segment growth expectations. We have been working on that, and there will be an investor day probably toward the end of this year or beginning of next, and we will do that along with the strategic plan. I believe that this organization, with the right structure and focus, can grow at or above market over time. We need to work our way through that in 2026 and into 2027, but that is the target. The U.S. has to return because of its size. Within that, through the actions we have taken with dealers, it has to be about the right placement of capital. It has to be, in my mind, implant-focused, EDS-focused, and with our enhanced R&D, we need deeper penetration into the ortho market. All of those are in play. I want to get them functioning first before I commit anything in particular. Among those, we should be at or above market as we get into a healthy cadence. Analyst: And a quick follow-up. You are talking about capital deployment and share buybacks. Presumably there is not likely a focus on M&A, but if there was, in Wellspect or in dental, is there an area where a tuck-in or something more material might enhance the product portfolio or be more synergistic or needed? Daniel T. Scavilla: I do not think there is anything needed. I am looking at M&A because even if we decide not to do it over the next few quarters, we are going to go back to that and sustain. We have a plan in place already. We have established an independent board with Wellspect and will announce that as we finalize. It is going to focus on hypergrowth within Wellspect so that we drive way above market and penetrate deeper. Should we find adjacencies there that are bolt-on or can be fast in closing out a gap, that would be one area of interest. In the non-dental area, we have several conversations currently with longer-term potential. Within dental, I want to refrain from specifics right now. I am looking for an accelerated way to differentiate ourselves in certain areas. Some of it would be CTS to help penetration. As far as implantable products themselves, there is nothing we are chasing down at this time or have interest in. Operator: Thank you. One moment for our next question. Our next question comes from the line of Steven James Valiquette at Mizuho Securities. Please go ahead. Steven James Valiquette: Great. Thanks. Good afternoon. We heard one of the global dental distributors today talk about some lower industry pricing trends on scanners or other digital equipment, primarily from newer market entrants. I am curious what you are seeing on the competitive landscape front in IOS, and what this might mean for PrimeScan or your other offerings. Daniel T. Scavilla: I think your data is correct. There are new entrants at low cost. We have to look at our current model versus what could be market appropriate in this changing dynamic, and that is where our size and breadth of portfolio come into play. We are doing a few things. One is looking to become more competitive in that area, probably through more structured programs that not only have a scanner but the pull-through effect of it—things some of the lower-cost entrants will not be able to compete with without bundling up. We are going to use our portfolio in a bundle strategy that will allow us to accelerate some of the penetration we are seeing and be more market appropriate today. Operator: Our next question comes from the line of Erin Wilson Wright at Morgan Stanley. Please go ahead. Erin Wilson Wright: Great, thanks. You highlighted in the deck as well as your prepared remarks a lot on innovation in terms of specific products and areas of focus. What could really move the needle? Would you call out a couple that could be significant that we should pay attention to going forward from an innovation perspective? Daniel T. Scavilla: Only among the ones discussed on the call, I like the AI detection as a way to further enhance the DS Core offering to our current and future customers. That one excites me. I have been a fan of Wellspect, and I see the potential of this business. The Sureti launches into an entirely new area for them and into new geographic markets. Both of those are exciting. I think the MRI is a much longer, more clinical long-term play. I do not see that as a large revenue generator over time, but rather something that will lead to future products or approaches that can be very interesting. Reciproc Minima using one file is a great approach that can reduce cost and speed up time, with what appears to be great outcomes for patients. I like them all. I think they all have potential to move us forward. Erin Wilson Wright: And on macro and input costs, you did say you are seeing an impact now. Can you quantify that? Is it material right now? And just remind us—do you have anything embedded in your guidance, or do you think you can mitigate it? Why not make any changes on that front just to be conservative? Daniel T. Scavilla: I will make it simple. We are not going to disclose specifics. I am creating freedom to move if we see escalation or unforeseen things. If something material occurs, we would have to react and share adjustments, whether we can absorb them or not. There is nothing material today; otherwise we would have disclosed it. In a changing world, should that change, we will come back and update your assumptions. Operator: One moment for our next question. Our next question comes from the line of Analyst at Citi. Please go ahead. Analyst: I want to go back to implant volume. You mentioned that across all regions, implant volumes were a little bit lower than expected. Curious if you can bifurcate between premium and value demand, realizing that the significant majority of your portfolio is premium. Is there any significant differentiation by region? And you kind of alluded to this in your prepared remarks, but can you provide a little more detail on the strategy to stem some of that lower demand and the timing of those benefits? Daniel T. Scavilla: We are down in both value and premium for the quarter. For value—MIS in particular—it is simply underutilized. To stem that, we need to position it differently as a brand that can really drive, which I feel has not been fully implemented by the company. We are working on that. Astra is still one of the best products out there. Clinical education and rep education are all parts of that to drive improvements. I feel implants are more of an execution issue than a product issue. We have the right portfolio. We have to improve education to execute better. We will have market-appropriate or competitive programs forming in the second quarter, but I will refrain from details until we get them implemented. Analyst: As a follow-up, last quarter you guided to a $30 million headwind in the first half of this year due to the inventory sell-through underneath the new drop-ship model. Was much of that realized this quarter? And can you quantify on a basis point basis how it impacted gross margins? Michael Pomeroy: None of it was realized this quarter. It still is in our line of sight to happen, consistent with our previous guidance, but it is going to be more of a late Q2 and then second-half impact. Operator: Thank you. One moment for our next question. Our next question comes from the line of Brandon Vazquez at William Blair. Please go ahead. Brandon Vazquez: Great, thanks for the question. Maybe I can ask a portfolio question from the opposite side. As you are in the seat another quarter here, as you are looking at the portfolio, is there anything you think that maybe DENTSPLY SIRONA Inc. is not the right home for? Anything on the rationalization side that might help improve the P&L? Daniel T. Scavilla: Great question, Brandon. My answer is no, not yet. I want to see how the market responds to our return to growth plan. I want to look at these from a different light. I do not like the position we are currently in, and I want to stabilize and get them growing. Then we say what makes sense or not. We announced the creation of the Growth and Value Committee. With that, I have the board working with me to look at potential M&A and whether it makes sense for something to be set up as a divestiture. My ask of them—and right now everybody is aligned—is to get through the execution phase before we evaluate where that makes sense. I am not afraid to do it. I just do not have the right facts or positioning to do that in what I think is the best interest of all of us. Brandon Vazquez: Makes sense. And as a follow-up, within CTS and EDS, APAC was highlighted as an area of strength while there are some other pockets of weakness. Could you spend a minute on APAC and why things are doing relatively well there for this portfolio compared to the other regions? Daniel T. Scavilla: I would point to the leadership and structure. They are strong and well educated, and they spend well on clinical education. Everything I am saying I am bringing into the U.S. was started there, and I think that is one of the drivers. With APAC as well, we are looking at doing a similar thing. It is more of a long-term investment growth. Again, I would point out the strength really based on the execution of a team with a good plan, and one that we can learn from and spread throughout the world. Operator: This concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Innovative Industrial Properties, Inc. First Quarter 2026 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Eli Kanter, Director of Finance. Eli, please go ahead. Eli Kanter: Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; David Smith, Chief Financial Officer; and Ben Regin, Chief Investment Officer. Before we begin, I'd like to remind everyone that some of the statements made during today's conference call, including statements regarding our capital raising activities and those regarding potential lease transactions that are subject to letters of intent are forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and subject to risks and uncertainties. Actual results may differ materially, and we refer you to our SEC filings, specifically our most recent report on Forms 10-K and 10-Q for a full discussion of risk factors that could cause actual results to differ materially from those contained in forward-looking statements. We are not obligated to update or revise any forward-looking statements, whether due to new information, future events, or otherwise, except as required by law. In addition, on today's call, we will discuss certain non-GAAP financial information such as FFO, normalized FFO and AFFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC. I'll now hand the call over to Alan. Alan? Alan Gold: Thanks, Eli. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. First, I'd like to touch on the rescheduling of cannabis from Schedule 1 to 3, a significant regulatory development impacting the cannabis industry. In our view, the administration's recent action with respect to the medical cannabis market represents a major milestone for the industry and a clear sign of continued progress at the federal level. Although it does not yet extend to the broader adult-use market, it reinforces momentum toward a rational regulatory environment. Against that backdrop, the first quarter represented a strong start to the year, and our team remained focused on disciplined execution across the business. While persistent inflation, elevated interest rates and broader macroeconomic headwinds continue to challenge the operating environment, our team has worked tirelessly to optimize our portfolio, allocate capital thoughtfully and maintain a strong and flexible balance sheet. Now we have been active on the debt and equity capital raising front, raising $128 million of gross proceeds year-to-date. In addition, we are working on several secured and unsecured financing transactions that have not yet closed totaling nearly $130 million. including a $56.5 million financing at a rate of 8.75% that we expect to be funded today. If completed, we expect to use the net proceeds of these financings to address our unsecured bond maturity this month and to provide additional capital to support future growth and the execution of our strategic priorities. This approach reflects our continued focus on disciplined capital management and maintaining balance sheet flexibility. As for the quarter, we generated total revenues of $69 million and AFFO of $53.4 million or $1.88 per share, which was the same as last quarter. Operationally, we made meaningful progress across our portfolio as we continue to execute on our leasing strategy. During the quarter, we signed new leases at 4 properties totaling approximately 331,000 square feet, underscoring the progress we are building across the portfolio and the demand for our high-quality mission-critical facilities. Turning to IQHQ. We continue to view this investment as a compelling strategic opportunity and an important extension of our platform. To date, we have funded $175 million of our $270 million commitment and continue to believe our entry point and timing of this investment will prove attractive over the long term. At the same time, we remain focused on executing across the business, driving performance in our existing portfolio, pursuing attractive opportunities in cannabis and allocating capital where we see the strongest risk-adjusted returns. With a diversified platform spanning cannabis and life science, a strong balance sheet with demonstrated access to capital and an experienced management team, we believe we are well positioned to build on our momentum and progress to deliver long-term value for our shareholders. With that, I'll turn the call over to Paul. Paul Smithers: Thanks, Alan. Last month, the DOJ and acting Attorney General issued a final order moving FDA-approved cannabis products and cannabis produced by state licensed medical operators to Schedule III, a landmark development and in our view, the most significant development affecting our business since our founding in 2016. This action eliminates the burden of 280E for qualifying medical operators, may create opportunity for retrospective tax relief and establishes an expedited DEA registration process for medical operators. Just as importantly, the DEA has now restarted the broader hearing process on whether marijuana as a category should move to Schedule III, with hearing set to begin on June 29 under an expedited time line. Taken together, we believe these developments mark a major step forward for the industry and powerful catalyst for improving operator economics, expanding access to capital and supporting a healthier environment for longer-term growth and investment. At the state level, we are monitoring the expansion of existing medical programs, particularly in Texas. In April, the Texas Compassionate Use Program awarded conditional licenses to our tenant partners, Green Thumb Industries and Cresco Labs, joining Texas Original, Trulieve, Verano and others in the market. We are encouraged by this progress and look forward to the continued expansion of the program and the opportunities it creates for our tenants. Regarding our current portfolio, as we highlighted in our March press release, we reached a resolution with PharmaCann on all pending litigation related to its lease defaults, and we are actively working to retenant the properties being returned to us later this month. Across the portfolio, we have now executed leases for the former Gold Flora assets, made substantial progress on the former PharmaCann assets and reached tentative agreements with prospective new tenants for all 4 former 4Front properties, subject to diligence and licensing approvals. I want to thank our team and all parties involved for their hard work in helping us navigate these challenges. The actions we have taken leave us better positioned to drive portfolio performance going forward. With that, I'd like to now turn the call over to Ben to provide additional details on our leasing activity and discuss our other investment activities. Ben Regin: Thanks, Paul. Year-to-date, we have executed new leases totaling 389,000 square feet across 5 properties located in California, Illinois and Ohio and completed the sale of a dispensary in Arizona. As Paul described, we are pleased with the progress we have made stabilizing our portfolio and bringing Revolution to the former 4Front, PharmaCann and Gold Flora assets. All 3 former Gold Flora properties comprising 330,000 square feet are now leased. We executed lease agreements for our 70,000 square foot Palm Springs property in November 2025, our 204,000 square foot Desert Hot Springs property in January 2026 and our 56,000 square foot Palm Springs property in March 2026. For 4Front, we have reached tentative agreements with prospective new tenants for all 4 properties, representing approximately 488,000 square feet across Illinois, Washington and Massachusetts. These tentative agreements remain subject to customary diligence and licensing approvals and are expected to take effect following the conclusion of the receivership proceedings, which we currently expect later this year. With respect to the former PharmaCann assets, we executed a lease agreement in March for our 66,000 square foot property in Dwight, Illinois with Grown Rogue, a publicly traded multistate operator new to our tenant roster. In April, we executed a lease agreement for our 58,000 square foot property in Ohio with Curaleaf, a public multistate operator and long-time tenant partner of ours. In addition to these executed leases, we executed a nonbinding LOI for our 234,000 square foot facility in New York and are currently in lease negotiations subject to customary due diligence, including licensing and regulatory approvals. We also continue to work through diligence and are in negotiations with a prospective tenant for our 71,000 square foot property in North Adams, Massachusetts. With respect to our 270,000 square foot property in Pennsylvania leased to the cannabis company as of quarter end, we regained possession of that property on April 15 and are in active discussions with a potential new tenant. While there can be no assurance that any of these discussions or negotiations will result in the execution of a definitive lease, we are very pleased with the demand we are seeing for our assets. For our 157,000 square foot property in Columbus, Ohio, remains leased to Battle Green, which defaulted on its lease obligations in March. We are actively enforcing our rights under the lease, including commencing eviction proceedings and pursuing available remedies under applicable guarantees. Turning to our life science portfolio. We have funded $175 million of our $270 million IQHQ commitment to date, with the remaining $95 million expected to be funded over time. The broader life science real estate market continues to show signs of stabilization and improving momentum as we move through 2026. Recent reports from CBRE and Colliers indicate that demand has held near pre-pandemic levels, while stronger equity performance and venture funding are supporting a more constructive backdrop for growth. At the same time, the market is still working through elevated vacancy from the prior supply wave, but new development has fallen sharply and the pipeline is at historically low levels, which should support a healthier supply-demand balance going forward. We also continue to see favorable long-term demand drivers in areas like manufacturing, onshoring and AI-enabled research, which we believe will position the sector for continued improvement over time. With that, I'll turn the call over to David. David Smith: Thank you, Ben. Before diving into our quarterly results, I want to begin with our bond maturity that we have this month, which, as we discussed on prior calls, has been a key focus for the company. During and subsequent to quarter end, we have undertaken a series of capital raising actions to address this maturity. Year-to-date, we have raised $128 million of gross capital comprised of $72 million of preferred equity, $36 million of common equity and $20 million of secured debt through a 3-year secured term loan with a fixed rate of 9% that we recently closed on. As Alan mentioned, we are also currently pursuing multiple secured and unsecured financing transactions totaling nearly $130 million, including a $56.5 million financing that we expect to be funded today. Based on the terms currently under discussion, these financings would carry an attractive blended rate of just over 8%. We are encouraged by the level of interest from multiple new lenders and by the opportunity to access attractively priced capital to address this maturity and provide additional capital to support future growth. These potential financings remain subject to a number of contingencies, and there can be no assurance that they will be completed on the terms currently contemplated or at all. Turning to our results. For the first quarter, we generated total revenues of $69 million, a 3.5% increase compared to the fourth quarter. This increase was primarily driven by payments received from PharmaCann totaling $3.2 million. In addition, as previously disclosed, we received $1.5 million in the first quarter in settlement of all remaining unpaid administrative rents due from the Gold Flora receivership. Adjusted funds from operations, or AFFO, for the quarter totaled $53.4 million or $1.88 per share, which was in line with our results for the fourth quarter of 2025. Turning to the balance sheet. As of March 31, we had total liquidity of approximately $177 million, consisting of $89 million of cash on hand and $87.5 million of availability under our revolving credit facilities. Once again, our balance sheet credit metrics remained excellent this quarter with a debt service coverage ratio exceeding 11x and net debt to adjusted EBITDA of 1.1x. And with our recent capital raising activity, we continue to maintain very strong credit metrics with a balance sheet positioned for growth in 2026. With that, operator, could you please open the call for questions? Operator: [Operator Instructions] Your first question comes from the line of Tom Catherwood with BTIG. William Catherwood: Ben, I just want to start with you. If my math is right, I think you have 8 leases that you've signed that have not yet commenced. And with the agreements for the 4Front assets, that could go to 12 properties. I know each deal is different and you don't control every aspect of commencement. But is there a way to bucket those 12 leases as to how many you expect to contribute in 2026 versus 2027 or even beyond that? Ben Regin: Tom, I guess I think the way I would think about it is just what we see in a typical deal from lease execution there's usually some sort of regulatory approval, license transfer. And after that, once the lease goes into effect, you could have a free rent period. So we've seen that average anywhere from 3 months to 12 to 18 months on the outside. I appreciate you mentioning the leasing activity. We've been very pleased with the demand we're continuing to see really across the portfolio. When you think about some of the previous tenant issues, PharmaCann, 4Fronts, Gold Flora, we've now addressed well north of 90% of those assets through LOIs, executed leases and lease discussions that we're currently having. And I would also add, when we think about the modeling is there can be the free rent period, there can be a license transfer period. But typically, the triple net expenses will be transferred over to the tenants upon lease execution. which is another pickup for our earnings. William Catherwood: And then I think last quarter, you mentioned, obviously, as I said, before each deal being different, but you had a range in execution as far as the rents that you achieved on those. I can't remember the exact numbers that you gave, you gave everything from nearly in line to down 50% in some cases. For those that you've executed this quarter, how have they come in compared to prior rents? Ben Regin: I still think that's the right way to think about it. I think that range applies across the board. And I think the other aspect of that to keep in mind is just the minimal capital outlay that we've seen really across the board. I mean these are I would say, on average, $5 to $10 a foot, sometimes as is deals, which is very unique, I think, in the real estate industry to be able to re-tenant these assets and really the volume of leasing that we've achieved really minimal cost to us. William Catherwood: Got it. Got it. And then this one might kind of seem a bit out there at the moment. But we've seen this increase in M&A activity come across the cannabis space, kind of early stages of it. But like, for example, what's happening with cannabis with -- they announced your tenant Holistic is taking over their operations in Ohio. As we see more resolutions and workouts like that, is there an opportunity for IIPR to get involved and provide the next wave of operators with capital for assets that had previously been owner-occupied? Or are we kind of thinking too far ahead? Ben Regin: No. I mean I don't think that we're thinking too far or anybody is thinking too far ahead. I think that the -- with the first phase of the rescheduling, and I know there's a lot more to go with that, we do see the strengthening of our -- of the tenants in general in the industry. And we do see, I think, an increased interest in the industry and potential growth opportunities in the cannabis industry. Now whether that's 6 months or 12 months or 36 months out there, it's an evolving story. William Catherwood: Got it. And then just last one for me, Paul, on the rescheduling. I know you mentioned the June 29 administrative hearings starting back up again. And what we're wrestling with is there's obviously the legalization on the medical cannabis side with the DOJ's final order. It sounds like there's a potential for the administrative hearings to expand that order. And it's obviously too early to tell, but what are the chances we might end up with kind of a split outcome where medical is exempt from 280E, but adult use still remains subject to more stricter taxation. Paul Smithers: Yes, Tom, I think that's a fair question. I think in the short run, and by short run, I mean the next 30 days, that's somewhat unclear. But what the executive order did state was an expedited hearing, and that means within 30 days. So once the June 29 process starts, they expect to have that wrapped up with 30 days and compare that to what we had under the Biden administration, much different. So I think there will be a clear resolution of how cannabis is treated across the board, including medical and adult use at the conclusion of that hearing. So we are very excited about where this is going, as you can imagine. We've talked in the past about rescheduling what we think this is going to do for the industry and our operators. And I think we are thrilled that it's on this expedited time line. And I think we're going to see certainly more capital to the bottom line for these operators. And we've had discussions, and we do expect that there will be much more interest in growth once the 280E tax situation is resolved and operators have a clear idea of where to go, and we think that's going to happen pretty quick. But we think that, that capital will be used to expand and they'll come to us for that expansion, we believe. We also see, of course, other advantages of rescheduling. We think that there's certain states that have maybe been kind of on the fence for a medical program or converting medical to adult use. We think that this rescheduling will really help those states make the move towards new programs. And lastly, I think rescheduling is wonderful for R&D there's a lot of companies going to be very interested in testing a plant and coming into particularly medical uses for the plant. So we are thrilled as these developments and the expedited time line. Operator: Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Just wanted to -- Paul, I just want to continue that same line of questioning. As we look at the -- certainly, the present on this is a bit confusing because there's a war on drugs and yet there's a promotion of medical use. So the -- what exactly happened is that medical use was downgraded to Schedule III, but adult use is still Schedule I. Is that what's happened? Or like what is technically in place right now? We know where ultimately, you can see where this path is sort of ending up. But what does it stand technically as of today? Paul Smithers: As of today, and the acting Attorney General Blanche is very clear, I think, Alex, in where it stands today. Licensed medical use operators have the benefit of Schedule III. And that's 100% medical licenses. And as you know, our operators all hold medical licenses. So that accounts for 100% of our operators in our portfolio. I think it's clear too of the decision they made as far as other use cannabis, they put it on expedited schedule starting June 29 and to have that resolved within 30 days. So we don't expect any extended period like we saw in the past. So I think it's pretty darn clear about the decision to bifurcate, that's fine. But in the interim, where we are today is great because it's 100% covers our medical license holders, and that's in our portfolio. Alexander Goldfarb: Okay. So as far as the 280E exemption goes then, so even though -- so 100% of your tenants are covered because they're medical, which is the way I understood it, so that's good. But as far as the 280E, those same tenants through their operating businesses get the full deduction? Or does the IRS sort of split out their sales? Paul Smithers: So what the DOJ order suggested was retroactive tax relief available for all qualifying medical operators. So that should be 100% for the medical operators. And as mentioned, that's our portfolio. I think what we will see through Treasury and the order does also request Treasury to give an opinion sooner than later as to what the retroactive effect of 280E will be for both medical and adult use. But in the short term, it's clear 280E relief, 100% for medical license holders. Alexander Goldfarb: Okay. So basically, it doesn't matter whether they sell rep or not, they're medical, and then we'll find out how long this retroactive is. In your view, and then as you guys look at your credit, as your tenants who have had credit issues, and this has been a few years from now, I mean, ongoing, is it your view that once the 280E relief comes in, that will basically eliminate any future pending credit issues? Or is your view that we're still going to have potential for credit issues even though there's this 280E relief? I guess that's -- as you know, that's what we've been focused on is just this continued sort of whack-a-mole and it'd be great to move past it and have everyone be in a stronger position. But I'm just curious if the 280E relief on its own and the retroactivity sort of solves that? Or if those credit issues are still going to be there because the tenants just -- the ones who have issues or debt refinancing, whatever, still have that and the 280E isn't really going to help in that front. Paul Smithers: Alex, businesses run all the same. They all have risks. All of them have -- all industries have tenants that -- or companies that grow, shrink, disappear. This 280E allows these businesses to have better operating environments and better operating statistics, but they're still businesses. And they all go through -- they all have good management, okay, management that needs to refocus on their business. So we're going to experience what all industries experience and just like any other real estate company out there that leases space to any business. Alexander Goldfarb: Okay. And then just final question. You mentioned the IQHQ and more doing life science, your deck indicated that. Alan, as you look over the company, let's call it, the next 5 years, do you think it's more like 50-50 or 25-75 as far as life science contribution? Or I'm just trying to think is life science going to be heading towards 50% or will still be a small sliver of the company over the next, call it, 5 years? And I'm not going to hold you to that. It's just trying to understand where you guys see the best investment path forward over the next several years. Alan Gold: I think that that's a very difficult question to answer. But what we can say is that we're now in a situation where we have a strengthening cannabis industry. And if you see the level of activity that's going on in the life science industry, we -- our entry point was, I think, at one of the lowest parts of the industry over a long period of time. And we're seeing a very strong and resurging life science industry. So we have positioned ourselves to be very opportunistic with 2, I think, growing industries that will help us drive growth for our shareholders in the future. Operator: Your next question comes from the line of Aaron Grey with Alliance Global Partners. Aaron Grey: Kind of piggybacking off that last one a bit, more specifically on IQHQ and incremental investments. I know in the filings, you talked about commencing more investments 2Q '26. Just want to -- sure, is that still the case? And maybe just give us some more color in terms of those incremental investments on IQHQ preferred stocks and the timing of it through the near to medium term. Alan Gold: Yes. I mean I think that we have scheduled the investment in the IQHQ organization out through 2027, mid-2027. And we have been able to opportunistically bring forward a couple of those scheduled investments for our benefit because they're a very accretive transaction. If you recall, it's on average, north of 14% and we have a cost of capital with our credit facility associated with making those investments in the 6% range. So extremely accretive investments, and we have been able to bring some of that forward. We continue to believe that the industry, the life science industry, of which IQHQ is involved with is doing really well. And we think that our investments will -- we will continue to look at opportunistically making the investments at the appropriate time. Aaron Grey: Okay. Great. Really appreciate the color there. Second question for me on cannabis. Great to see some of the progress you're making on new leases of the previously defaulted tenants. As we talk about Schedule III creating more opportunities for you, can you talk about maybe some of the near to more medium-term opportunities? You seem to have alluded to your ability to get more aggressive on acquisitions, bringing on more new -- net new tenants. Where would you see those in the near term, would it strictly be medical given the clarity that we have there and maybe markets like Texas, Kentucky or Georgia? Just giving more color and granular in terms of where you might be able to see some opportunities in the near term where we have clarity on just medical only versus more longer opportunities as we wait for the second phase of rescheduling. Alan Gold: I appreciate that question. We do -- we are looking at all acquisition opportunities and for growth in the second half of 2026 and certainly into 2027. But our #1 priority and focus is right now making sure that we complete the refinancing of our unsecured debt, which we have done -- the team has had tremendous success, and we're highly confident. And once we complete that and complete our commitment to IQHQ, I think we can then look at additional opportunities going forward. Operator: Your next question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: I wanted to keep going on rescheduling and try to get some perspective on whether you think the possibility of interstate commerce exists out of rescheduling? And if it did, would you consider the cultivation assets you have an opportunity in that environment? Or would there be a risk in that environment? How do you prepare, I guess, for the scenario or the possibility of interstate commerce? Paul Smithers: Bill, it's Paul. So I think there's 2 questions there. And I'll address the first part of the question is the answer is no that rescheduling does not address interstate commerce. It does not address banking. And those are 2 things that some people were looking for some clarity on and that the Attorney General was clear that interstate commerce and banking and uplisting were issues that were not addressed in this piece. But your further question about interstate commerce is really, I think, something we've talked about over the years. And we don't really see that happening until there is a complete legalization of cannabis across the board. And we believe that is many years out. But as we've discussed in the past, even if we do have some type of interstate commerce, we believe that our assets and our operators will do fine because what we have are indoor growth for the most part and medical, highly specialized product. And that's probably not going to be what's going to go rolling across some trucks across the country. So even if we are in interstate commerce situation, we think we're well positioned. But again, we don't see that for many years out. William Kirk: Okay. And then there is a possible demand unlock that would benefit your tenants in November unless something changes intoxicating hemp basis a federal ban. I imagine most of your properties aren't growing much of it. So I wanted to get your perspective here on what intoxicating hemp going away could mean for your tenants and the demand for the products that they are growing. Paul Smithers: Yes. I think that's accurate, Bill, that our tenants do not grow hemp. They are cannabis growers. And we've been watching that the whole litigation issue with the hemp really just kind of by standards in the sense that we don't believe hemp one way or the other is really going to affect our operators' business. But that being said, I think if there is a ban on intoxicating hemp products, that does put some clarity into the issue, and it will take away some of the Delta 8 stores that we see popping up in nonmedical states. So I think it's a good thing for the cannabis industry to get clarity in the intoxicating hemp legislation. Operator: That concludes our question-and-answer session. I will now turn the call back over to Alan Gold for closing remarks. Alan Gold: Thank you, and thank you all for joining today. I'd certainly like to thank the team for all their hard work, great work and our stockholders for their continued support. That ends the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: This is the conference operator. Welcome to the Ballard Power Systems Inc. First Quarter 2026 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Sumit Kundu, Investor Relations. Please go ahead. Sumit Kundu: Thank you, operator, and good morning. Welcome to Ballard Power Systems Inc.’s first quarter financial and operating results conference call. With us today on the call are Marty T. Neese, Ballard Power Systems Inc.’s President and CEO, Kate Igbalode, Chief Financial Officer, and Ralph Robinette, Ballard Power Systems Inc.’s new Chief Operating Officer. We will be making forward-looking statements based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could differ materially. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I will now turn the call over to Marty. Marty T. Neese: Thank you, Sumit, and welcome everyone to today’s conference call. This morning, I will give an overview of our Q1 2026 performance and provide a commercial update. I will focus on the progress we are seeing in the bus market. We are also joined by our new Chief Operating Officer, Ralph Robinette. He will introduce himself and share updates on our operations. Kate will then review our financial results in more detail. We had a solid start to the year. Deliveries into the bus and rail markets drove revenue growth compared to last year. We also delivered another quarter of positive gross margins. This is our third consecutive quarter of positive gross margin. It reflects disciplined cost and commercial management and marks an important step in our transformation toward becoming cash flow positive. To build on this progress, we have set a few near-term focus areas, including deepening our partnerships with bus OEMs in key geographies, improving and expanding our fleet services capabilities and offerings, and lowering costs through automation and intelligence. I will spend a few minutes on these and provide some additional color. Turning to buses. We have made several important announcements in the bus market this year. In North America, we signed a multiyear agreement with New Flyer representing approximately 50 megawatts of fuel cell engine supply. This strengthens our position as fleets continue to scale in the U.S. bus market. In the UK, Wrightbus selected Ballard Power Systems Inc. to power its next-generation hydrogen bus platform using our newest FCmove SC engine. In the EU, Solaris also selected Ballard Power Systems Inc. as the fuel cell supplier for its next-generation hydrogen bus platform, including the FCmove SC for its 12-meter bus. These announcements matter for several reasons. First, these new agreements are multiyear partnerships with leading bus OEMs in major markets. They include both engine sales and long-term service support. This strengthens our position as fleets scale and as our fleet services business continues to grow. Our intelligent fuel cell engines help us deliver better service. They provide real-time performance data that allows us and our OEM partners to respond faster and keep buses on the road. Our remote operations center adds another layer of support by improving parts planning, logistics, and predictive insights. Combined with our industry-leading durability, these capabilities position our engines as a zero-emission solution that can match or even exceed battery electric and diesel alternatives on uptime and total cost of ownership. Ballard Power Systems Inc. Fleet Services plays a key role in this strategy. We are moving from being only a module supplier to becoming a proactive, data-driven fleet partner. Our approach is built on more than 300,000,000 kilometers of real-world operating data. Using this experience, we created the industry-first uptime standard, bringing together predictive maintenance, training, service support, and parts assurance. These offerings are designed to deliver up to 98% fleet availability. This creates real value for OEMs by reducing after-sales friction and lowering risk. It also gives operators more predictable lifecycle costs and stronger protection against budget swings. As our installed base grows, these services expand our recurring revenue and turn our fleet into a long-term strategic asset. Second, these long-term agreements support our product cost reduction goals. Both Wrightbus and Solaris have committed to our ninth-generation FCmove SC platform. This engine was designed to reduce cost and simplify installation and maintenance, cutting the number of components by more than 40%, improving power density and durability. Each new bus we deploy also creates a long tail of service opportunities. Buses stay in service for eight, twelve, and even sixteen years. Our growing fleet gives us a multiyear runway for operations, maintenance, and training services. Through Ballard Power Systems Inc. Academy, we continue to support operators and technicians with the skills they need to run these fleets effectively. Taken together, these agreements and deep relationships reinforce our long-term market position. Ballard Power Systems Inc. holds a leading share of the fuel cell bus market in North America, the UK, and Europe. Being selected for next-generation platforms positions us to maintain that leadership as adoption accelerates and total cost of ownership continues to improve. Delivering industry-leading fleet services throughout the life of the bus is a major opportunity, and we are only getting started. We will now move to operations, which are central to delivering scalable, cost-competitive, and commercially ready products. For that, I will hand it over to our new Chief Operating Officer, Ralph Robinette. Unknown Speaker: Thank you, Marty, and good morning, everyone. I am pleased to join Ballard Power Systems Inc. at this pivotal stage in our transformation. By way of background, I bring more than 25 years of experience in operations, manufacturing, and supply chain across advanced technology and clean energy companies. My career has been defined by a focus on implementing the operational frameworks necessary to move advanced technologies from lab to high-volume manufacturing, scaling production, launching new products, and using automation to improve productivity and reduce cost. Most recently, I served as Chief Operating Officer at a leader in the residential solar manufacturing and service space. I led manufacturing, supply chain, fulfillment, and factory expansion. This included the launch of an automated production facility built around a closed-loop learning process where field performance data from tens of thousands of homes fed directly back into product design and process improvement. Proactively taking actions to prevent performance issues further differentiated our products, services, and solutions in the eyes of customers. In short, I bring a track record of scaling technology and building efficient, high-quality manufacturing and service systems. This aligns directly with Ballard Power Systems Inc.’s goal of reducing costs as we move towards cash flow positivity. What excites me about Ballard Power Systems Inc. is the combination of strong technology and a market that is now scaling. As Marty noted, this shift requires a sharp focus on execution. My team and I are prioritizing what matters most to our customers: quality, cost reduction, improved throughput, consistent delivery at scale, and closed-loop issue resolution. Relentless customer collaboration used to drive product and process improvements directly from customer field data and performance is critical. A key part of our process improvement work is Project Forge, our high-volume automated bipolar plate manufacturing line. At Ballard Power Systems Inc., we already use AI-assisted vision systems to detect defects in our MEAs. With Project Forge, we are deploying the same methodology to detect defects in our plates. By moving to higher volume with significantly more automation, we expect lower unit cost, reduced material waste, and improved quality, consistency, and scalability. We continue to expect Project Forge to enter full production in the second half of the year. Delivering that ramp successfully is a top priority. As mentioned, we are increasingly focused on optimizing the value of the intelligence of our engines. While the first order of business is to maximize uptime for our customers, there is even more we can do with these data-driven insights. As our deployed fleet continues to grow, we are increasingly leveraging the engine performance data from the field, creating insights to feed back to our manufacturing, supply chain, and product development teams. Ultimately, this work is about serving our customers by driving efficiency, simplifying our processes, improving quality, lowering costs, and ensuring we can deliver high-performance products at scale. Much of this happens behind the scenes, but I expect we will see the impact in product margin expansion and improved working capital management as these changes take hold. Marty, back to you. Marty T. Neese: Thanks, Ralph. Before I turn the call over to Kate, I will close with a few brief thoughts. Across the business, we remain focused on balancing cost discipline with growth, reducing product costs, improving commercial structures, and expanding our service offerings. We are also moving into new applications where our technology provides a clear advantage. Today, we highlighted progress in commercial terms and product cost reductions through our work in the bus market and through our operational initiatives. We also have additional business development activities underway in rail, material handling, and stationary power. In stationary power specifically, we continue to see green shoots of opportunities to improve grid stability and energy resilience, including in defense applications with NATO nations. These collective efforts are important building blocks for long-term growth, and we will continue to update you as these programs advance. Stepping back, we are encouraged by the progress we are making. We are seeing stronger gross margins, better commercial agreements, and continued cost reduction. These are clear signs that our transformation is taking hold. There is more work ahead, but we believe we are building a stronger and more scalable business. As a final note, we will be hosting our Capital Markets Day event called the Ballard Power Systems Inc. Forum on October 22. This will be an opportunity to get an up-close look at our work and discuss in-depth our path to profitability. With that, I will turn the call over to Kate. Kate Igbalode: Thanks, Marty. As Marty mentioned earlier, we continue to make progress toward cash flow positive. We delivered positive cash flow in Q1. These results reflect the early impact of the transformation initiatives underway across the business. Total revenue for the quarter was $19.4 million, which represents 26% growth compared to last year and was driven by our rail and bus verticals. Gross margin improved to 14%. This is a 37% increase compared to Q1 2025. It also marks our third straight quarter of positive gross margin. The improvement was driven by higher revenue and lower manufacturing overhead. Turning to operating expenses and cash. Our total operating expenses were $16.4 million, which is a 36% reduction compared to last year. The decrease reflects disciplined cost control across R&D, SG&A, and commercial activities. It also reflects the benefit of restructuring actions completed in 2025. Cash used in operating activities was $7.8 million. This compares to $24.4 million in the prior year, a 65% improvement. The change reflects the impact of restructuring actions and stronger operating performance as the business continues to scale. Adjusted EBITDA improved to negative $11.4 million compared to negative $27.5 million in 2025. Improvement was driven by stronger margins and lower operating expenses. We ended the quarter with $516.8 million in cash and cash equivalents. This is a decrease of about 2% from the prior quarter, and we have no bank debt and no near- or mid-term financing needs. This strong balance sheet gives us the flexibility to deploy capital in support of our goal of becoming cash flow positive. Consistent with past practice and given the early stage of the hydrogen fuel cell market, we are not providing specific revenue or net income guidance for 2026. We do expect revenue to be weighted towards the second half of the year. Our 2026 guidance ranges are as follows: total operating expense of $65 million to $75 million and capital expenditures of $5 million to $10 million. I will now turn the call over to the operator for questions. Operator: We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We ask callers to kindly limit themselves to one question and one supplemental. We will pause for a moment as callers join the queue. The first question today comes from Baltaj Sidhu with National Bank. Please go ahead. Analyst: Good morning. Could you elaborate on the drivers behind the strong growth in stationary revenues? Specifically, how much was supported by one-time deliveries, and to what extent is demand coming from data center customers versus traditional verticals? And then just on the bus segment, what were the key drivers of the decline this quarter year-over-year? Was it largely delivery timing related, or are there any changes in customer ordering patterns or funding that we should be aware of? Marty T. Neese: I will start. The stationary power business that we are seeing growth in year-over-year is largely diesel genset replacement business, not necessarily tied to data centers. The data center opportunity is an area of deep exploration for the company, and we expect that to materially change as we go forward. But right now the increase that you are seeing is more what I would call diesel genset replacement business in the stationary power market. On the bus segment, it is just timing. More than anything else, it is the amount of inventory they have in the channels already and their build out, if you will. Additionally, in the EU, there was some slowness in some of the funding support, and that translated into year-over-year changes in the demand flow. We expect that to change going forward as the friction is reduced. More importantly though, the Wrightbus and Solaris announcements are huge wins for the company. Those are major design wins for next-generation buses, and no matter the lumpiness of the 2025 to 2026 epoch, if you will, we see that as being really strong indications of the value of our new product, and that will translate materially into significant demand in our order book over the protracted period of multiyear agreements. Operator: The next question comes from Rob Brown with Lake Street Capital Markets. Rob Brown: Hi, good morning. First question is on the fleet services business model that you are developing. How do you see that playing out? Do the new sales come with a service contract element as well, or what is your vision on how the service business develops? And then on the rail business, it was strong in the quarter and I think you have some contracts you are delivering. How does the rail business play out over the next few quarters? Is it delivering your current contracts, and what is the cadence of that flow? Marty T. Neese: That is a great question, Rob. Yes, for sure, each new sale does come with a service level agreement accompanying it. That is a matter of basic warranty, extended warranty, parts packages, training. We have an entire suite of value-added activities and services that we have been complementing our initial CapEx sales with. That translates into, with the long asset life, an extended service tail. You can think of that as you get the one-time sale of the CapEx but then you get an annuity of the service for the duration of the extended asset. On rail, we are expecting that the prior work done in the rail business is now opening up future opportunities for us. To be more specific, we did very large-scale deployments with rail customers, and they have had the products in their hands for some period of time. As they are starting to see the value proposition come into sharper relief and getting more and more comfortable and familiar with a fuel cell locomotive, they are starting to be more bullish on their future, which bodes well for us. We think that could be a really exciting piece of business for us. It could end up being one of those annuity-type accounts where every year there is a capability to replace diesel engines with fuel cells and do that year after year until they materially decarbonize fleets. That is early days for us, but the product is performing well, the team is happy, the customers are happy, and we expect that there will be further advancements in that market over time. Operator: The next question comes from Michael Glen with Raymond James. Please go ahead. Analyst: Can you discuss how the infrastructure and hydrogen availability have changed? Do you see any meaningful investments taking place behind the scenes to improve hydrogen availability or distribution? Historically, a lot of hydrogen has been generated from fossil fuel sources such as natural gas. Have you seen any change to bring back renewables in terms of hydrogen generation? Marty T. Neese: We have been seeing meaningful progress in the availability of molecules. The supply is reasonable; the unit economics are what need to continue to improve, and that is starting to also gain a bit more momentum. When you can provide molecule suppliers with stronger and more predictable patterns of offtake, they can get more aggressive in their pricing depending on the tenor of the contracts that they are signing with different folks. Our job so far is to focus on creating the downstream demand and the offtake signal that allows the supply to keep being built and being consumed appropriately. So far, so good on that, and we are starting to see more and more interest outside of the large-scale industrial use cases, and that bodes well for applications such as mobility and stationary power. Regarding renewable generation, my prior comments were really focused more on green hydrogen. Green hydrogen is starting to see more and more penetration. The traditional gray hydrogen, methane-based gray hydrogen, is certainly going nowhere; it is there, it is incumbent, and it is competing with other outlets for natural gas. Gray hydrogen has to have its own economic footing, but green hydrogen is starting to take more and more advantage of the penetration of renewables around the globe. To some degree, blue hydrogen will find its path as well on an increasingly ambitious agenda over the next few years. Operator: This concludes our question and answer session. I would like to turn the conference back over to Marty T. Neese for any closing remarks. Marty T. Neese: Thank you for joining us today. We look forward to speaking with you next quarter. Operator: This brings to a close today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Operator: [Audio Gap] Scott Lauber: Vantage has stated that it is expected to invest $15 billion to complete this phase in 2028. Construction continues and the first facility could come online late in 2027. We currently have 1.3 gigawatts of demand for this Vantage site in our forecast over the next 5 years. Looking to the future, this site has the potential to reach 3.5 gigawatts of demand over time. And there's other notable growth in the state. As a recent example, Milwaukee Tool has announced plans to further expand its campus in our territory, including a new research and development facility. Waukesha Engine also announced plans to expand upon its local operation and employee base. In addition, we're starting to see good housing development. In fact, realtor.com recognized Racine County, Home of the Microsoft side as 1 of the nation's hottest housing markets. We're committed to meeting the growing demand across our service areas as we invest in our system for increased capacity and reliability. Our 5-year capital plan includes $37.5 billion of projected investments -- it's based on projects that are low risk and highly executable with a good portion dedicated to the very large customers. In total, by the end of 2030, we expect approximately 15% of our asset base to be attributable to these very large customers. As you recall, we project long-term earnings per share growth of 7% to 8% a year on a compound annual basis between 2026 and 2030. This is based on the midpoint of our 2025 adjusted guidance. We expect that growth rate to accelerate to the upper half of the range starting in 2028. Now let me give you an update on our capital projects. This March, we had a solar facility going to service with total capital of about $225 million. The Wisconsin Commission has approved the purchase of 3 additional solar projects and a battery storage project. In total, we plan to invest approximately $730 million in these newly approved projects. Construction continues on the new natural gas facilities in Paris and Old Creek, Wisconsin, -- we have our labor force and supply chain lined up to bring these projects online according to schedule. We expect the Paris Race units in the Yield Creek combustion turbines to start coming online in late 2027. Also at our Old Creek site, we recently announced plans to extend the operating lives of units 7 and 8. We expect to have units available to meet high energy demand periods through 2027 rather than retiring them at the end of this year. The decision is based on 2 critical factors: reliability and affordability for our customers. Overall, we have a highly -- a high level of confidence in our ability to execute on our capital plan and continue our growth trajectory. Now turning to the regulatory front. First, let's update you on Wisconsin and our VLC tariff. After completing its review, the Public Service Commission verbally approved the tariff structure on April 24. We expect the written order in the few weeks. As a reminder, this tariff provides a balanced approach, reliable electric service for our very large customers with a predictable cost profile, protection of other customers from bearing any cost to serve these very large customers, protection of the company's financial health and support for economic development and growth in the region. The commission approved the return on equity in the range of 10.48% to 10.98% and an equity ratio of 57%. For our non-VOC customers, on April 1, we filed rate request with the Wisconsin Commission for forward-looking test years 2027 and 2028. Our proposed plans would help us continue to strengthen key infrastructure and deliver the energy our customers depend on while remaining focused on affordability for our customers. We expect final orders by the end of the year with new rates effective in January 2027 and 2028. And in Illinois, just last week, we filed a proposed settlement with the Illinois Congress Commission if approved, these agreements will resolve all open proceedings related to the customers' uncollectible and QIP riders. As you recall, we filed a rate request for our Illinois utilities in January for test year 2027. A key driver of this request is support the pipe retirement program in Chicago. The Illinois Commerce Commission continues to review our filings, we expect the decision by the end of the year. In summary, we remain focused on executing our capital investment plan. Now I'll turn things over to Shaw. Liu Xia: Thank you, Scott. Our first quarter 2026 earnings of $2.45 per share reflects an $0.18 increase compared to the first quarter of 2025, our earnings package includes a comparison of first quarter results on Page 12. I'll walk through the significant drivers. Starting with our utility operations, earnings were $0.17 higher versus the first quarter of 2025. Let me highlight a couple of key drivers. Weather negatively impacted quarter-over-quarter earnings by approximately $0.02. Compared to normal conditions, we estimate that weather had a $0.01 negative impact in the first quarter of 2026 versus a $0.01 positive impact for the same period in 2025. Rate-based growth contributed $0.17 to earnings, including $0.09 of incremental AFUDC equity from projects under construction. Day-to-day O&M was $0.05 favorable in the first quarter. This includes a $0.02 gain from a planned asset sale in Illinois during first quarter of this year. The rest of the favorability was largely due to the timing of certain maintenance and benefit costs, which we expect to reverse throughout the rest of the year. For 2026, we continue to expect day-to-day O&M to increase 3% to 5% when compared to 2025 actuals. Next, let me give you some color on our weather-normal retail electric deliveries, excluding the iron ore mine. Compared to Q1 last year, we saw 1.3% growth this quarter led by the large commercial and industrial costs, which grew 3%. This is in line with our forecast. For the year, we still expect electric sales to grow around 1.5%. At American Transmission Company, earnings increased $0.01 compared to the first quarter of 2025 as a result of continued capital investment. Turning to our Energy Infrastructure segment. Earnings were $0.04 higher in the first quarter of '26 compared to the same period in 2025 driven largely by higher operating income from WEC infrastructure. WEC also benefited from a full quarter of operations from the Harden 3 solar projects acquired in February 2025. Next, you'll see that earnings from the Corporate and Other segment increased $0.03 driven by favorable tax timing. In terms of common equity, we locked in about $455 million in Q1 this year. This includes $25 million issued under our employee benefit plan and $430 million via the ATM program under forward contracts that we will settle in the future. Remember, we expect to issue up to $1.1 billion of common equity this year. So through the first quarter, we have accounted for almost half of our expected equity needs for 2026. Going forward, as a reminder, any incremental capital beyond the current plan is expected to be funded with 50% equity content. Now let me comment on guidance. As Scott mentioned earlier, we are reaffirming our 2026 earnings guidance of $5.51 to $5.61 per share, assuming normal weather for the rest of the year. For the second quarter, we're expecting a range of $0.76 to $0.82 per share. This accounts for April weather and assumes normal weather for the rest of the quarter. With that, I'll turn it back to Scott. Scott Lauber: Thank you, Shaw. Now as you may recall, our Board this January meeting increased the dividend by 6.7%. This marks the 23rd consecutive year that our shareholders will be rewarded with higher dividends. The increase is consistent with our plan to grow the dividend rate at the 6.5% to 7%. We're optimistic about continued growth in the region and our company's future. Operator, we are now ready for the question-and-answer portion of the call. Operator: [Operator Instructions] Your first question comes from the line of Shar Purreza with Wells Fargo. Unknown Analyst: It's actually Alex on for Shar. Janis good, Alex. So just obviously, you're seeing a lot of growth on the data center front. You have Microsoft and Vantage projects and you kind of highlighted some upsides there. But can you maybe talk a little bit more to the extent that you can? Are you seeing additional interest from other hyperscaler customers in the state -- and just to add on, there's been obviously a lot of local opposition in some parts of the state. So can you just talk about your strategy and overall confidence level around attracting new customers despite some of the headlines we've seen. Scott Lauber: Sure, sure. Let me kind of phrase this and look at it in total. When you think about -- we've got Microsoft and the Southeastern Wisconsin region and then North and Advantage site -- when you look at that, we have about 3.9 gigawatts in our 5-year plan. And if you just look at the acreage and do some back of the envelope math, you could see how these sites which have already been approved and have the ability to put data centers on could add another 4 to 5 gigawatts of capacity on those sites alone. So we see tremendous growth on already the available sites that we have in the works and construction is starting on a good portion of them. And then you think of the other data centers, we are in discussions with a few others. I think very optimistic now that we have the final VLC tariff, and we'll see that final order come out in the next few weeks, a little more clarity. I expect to have more information on our third quarter call and anticipate we hopefully we'll have another announcement debate on that third quarter call. Unknown Analyst: Got it. That's very helpful. I guess just switching gears here. Just want to touch on Point Beach. You've obviously mentioned in discussions there. Just if you were to go ahead with building sort of incremental generation, can you maybe provide some sort of sensitivity around the CapEx opportunity there and just maybe any sense on possible timing. Scott Lauber: Sure. And we're going through the planning process right now, we always go through the summer and go through our generation planning process and working with our very large customers to factor in additional growth along with what we need on the generation side to serve our native load. And as we talked about in the last call, the Point Beach PPA, the prices are pretty high. We're going to look at affordability for our customers. At this time, we're planning that we're going to have to replace that, and we'll put that in our 5-year plan this fall, most likely replace it with some gas, perhaps a combined cycle. -- remember that PPA ends -- the first unit end in like 2030 and the second unit ends in 2033. So we have some time, but it'll start working into our planning cycle. As just a lot it's about $2 billion to $2.5 billion, and this is over those 2 units, it's about 500 for each. So that's about a gigawatt. But when we look at our planning assumptions, it's about $2 million to $2.5 million. Unknown Analyst: Picking up some of the commentary on the VLC tariffs. I think the revisions from the commission saw the threshold move down to a lower level, maybe 100 megawatts if I'm recalling correctly. Curious if that captures more load than you were expecting to run through the VLC tariff and any ramifications on your plan as a result of that? And then it sounds like sort of customer interest overall, now that you've gotten to the other side of a VLC outcome, is sort of firming up. But again, just curious more broadly in the context of that load side revision, how you're thinking about the tariff impacting economic development going forward? Scott Lauber: Sure. And great question. And when you think about it, we proposed 500 megawatts, which is smaller than the 2 data centers that we have going right now. the load going down to the 100 megawatts, we don't have any current customers that fall into that range. So it doesn't affect any of our current customers. And we'll see as we talk to a future load -- is there something in that 200 megawatt? How does that deal? And how does it look at the economics with our tariff and we'll address that if we see something at the time. But right now, moving to 100 does not affect our economic development in either direction, maybe a little positive that it actually opened up the door for some smaller data centers and we can show that they're paying their full share. So not concerned at all about going to 100 megawatt. Unknown Analyst: Perfect. And then turning to Illinois, it sounds like, again, more progress that you've been able to put up in the state, although still more to come on the rate case as well. Could you speak a little bit more to the data points that are sort of emerging along the way here? How you see conversations trending overall in the state and kind of what you have an eye to over the balance of the year to get those rate orders? Scott Lauber: Sure. So a couple of things. We just filed the settlement, which I think has taken off 12 cases related to uncollectibles in the previous QIP rider. So an extremely long period. We filed that just the other day that had the support of the AG the ICC staff and the Citizens Utility Board was involved in that signing. So it's great to see that sign and that in front of the commission now. We have our rate case in front of the commission. Of course, 1 of the key elements there is going to be the pipe retirement plan and as we're ramping that up. That we expect to see the first testimony from our the ICC staff and other interveners I think by the end of the day to day, we'll see where that comes out. And then we're just executing on our plan, starting to ramp up the pipe replacement program that we've talked about. We're ramping it up this year. It will get about 200 -- I think we're about $200 million this year, and it will ramp up in 2027 and 2028. And we're just going to execute on the program. We're following along all the direction that we received in the order from the pipe retirement program on having workshops in working through those workshops and really have a lot of transparency on our program. So we're hitting the ground running feel really good about the progress we're having in our communication with our customers and keeping the ICC informed along with the safety monitor. So those are kind of the 3 key elements, and that will evolve during the summer here as we start seeing the testimony and more results of the settlement with Illinois. Operator: Your next question comes from the line of Nick Campanella with Barclays. Nicholas Campanella: Hey, good afternoon, and hope everyone is doing well. Can you hear me? Nick. Great. So I just wanted to ask on the -- you talked about the acreage that you have that is kind of fully permitted and ready to go. And I think you said like up to 4 gigawatt potential number. And maybe just acknowledging the fact that the hyperscaler CapEx is continuing to kind of increase here -- and if customers want to kind of maximize that, can you just kind of talk about your ability to execute on that from a supply chain and equipment standpoint? And then just how do we kind of think about how much could actually fall into the plan in the third quarter just based on the conversations you're having? And now that the DLC is finalized and it seems that everyone is happy with that. Maybe you could just expand on that a little bit more. Scott Lauber: Sure, sure. So as we kind of peel back that question, and we've been working with these very large customers, as you know, behind the scenes for years and working with our developer and our generation and planning team, and we feel very confident we can deliver all that needed to supply the load growth as we ramp this up. It's a little early before I talk about what gave you on that third quarter call, but feel for sure, there'll be increment add it in our third quarter. It's just -- we're still working with them on this individual amounts and a little more to come on third quarter, but feel good about the update we'll have there. Nicholas Campanella: Great. And then just maybe just 1 more thing, just keeping with the megawatts here on Point Beach. Is it the base idea that you're going to bring in the full replacement? Or could you just be kind of targeting half of that to start? And then on the next plan, look at the next part of the PPA that rolls off, I think, in the mid-2030 time frame? Scott Lauber: Yes, that's a great question. And when you think about that first 1 is -- so for sure, that first 1 will be in this plan and then probably some dollars as it relates to long lead time equipment for that 2033. So you may start to see a little bit tweak in on that last 500 in this plan. Nicholas Campanella: Great. Great. And then maybe if I could just 1 more. The GRC just given all that's kind of in front of you and you had a successful VLC with this commission, we're still very early innings of this case, but is this something that you expect to go fully litigated? Or do you think there could be an opportunity to settle depending on where the starting points of testimony are? Scott Lauber: Sure. As you look at it, and remember, we filed the case at the beginning of April. I think we have a real -- a modest increase out there on our base rates in the electric side of 4.7% and 4.5% in each of the -- in '27 and '28. -- we'll we don't even have a procedural schedule out, but I think we'll get through the staff audit sometime this summer. And when we see that audit and probably the first run to testimony, that will be an opportunity for us to take a step and see if there's an opportunity to settle you noticed last year, this commission did sell cases with a couple other utilities in the state. So optimistic that we're going to have a reasonable audit and then we can make progress later in the year, but a little early before we can make any decisions on that. Operator: Your next question comes from the line of Julian Damon Smith with Jefferies. Julien Dumoulin-Smith: Appreciate the time. Nicely done. Again, I got to hand it to you on the ICC backdrop here with the QIP resolution. Scott Lauber: Excellent. Thanks, Julien. Julien Dumoulin-Smith: Absolutely. Just a couple of things if I can come back to the VLC tariff with that approved here, at least verbally, -- are you having other discussions with other days developers? I know this was asked a little bit earlier in a different permutation, but -- how is this enabling or catalyzing developments? And can you speak to the expansion opportunity a little bit more specifically again, just if I can link this to another subject, how do you think about Point Beach enabling data centers as well. I just want to ask that explicitly here, if I can. Scott Lauber: Sure, sure. Well, the VLC and when we see the final order, I think that's just going to be a lot more transparency for everyone. And we wanted to make sure we filed as a tariff to make sure it's transparent not only for other VLC customers, but also for the public and the community to see that they're paying their full share. So very happy about that. It's good. I think all the people we've been talking to are well aware of what the VLC filing was and what the tariff and the discussion from the commission. So a lot of people are watching that decision to see what was going on in that. As you think about Point Beach, there's -- that's in 2030, 2033, we'll see what opportunities are there. But potentially, right now, we're looking at it, how do we serve our native load and actually provide a capital investment and probably some bill headroom as you think about affordability in that 2030 and '33 time frame. Julien Dumoulin-Smith: Yes. Yes, absolutely. I hear you here. And then just to ask it explicitly, I know it's brought up a little bit earlier. But given this rate case, I mean, it seems fairly benign in many respects, my words. How do you think about settlement and any specific items that might stand out here in the filing, right? I mean mid-single-digit increase, it seems fairly down the fairway. Scott Lauber: It's too early. We want to see what the final audit is. But when you think about our rate case filing, it's really balanced. There are some a little bit of new generation. There's a little bit of transmission. There's a little bit of reliability that we put in on the distribution system, some general inflation, some truing up for sales. So it's sprinkled throughout -- so it's not like we are having any 1 big initiative here. And remember, when we filed our case now, we laid out that those very large customers are paying a significant amount of our capital additions that we're putting into our plan. So you're not seeing it come through to these individual non-VOC customers. It's all being paid for by the large customers. But too early to talk about. Operator: Your next question comes from the line of Andrew Weisel with Scotiabank. Your next question comes from the line of Sophie Karp with KeyBanc. Sophie Karp: I wanted to ask you guys, yes, not a bit this horse to that, but I wanted to ask about Point Beach, and it sounds like since you're thinking about replacing that power that you're contemplate a scenario where it won't be available to serve our retail customers. And I just kind of -- can you give us some reminder what other options the owners of this asset would even have on the Wisconsin or which, and I don't think they're able to serve retail directly themselves. So what kind of an outcome is actually contemplated here with respect to point Beach? Scott Lauber: I can't speak with -- for NextEra. So you'd have to ask them that question. They could always enter into a financial transaction or something like that. But you'll have to run that by NextEra on to what their thoughts are. Sophie Karp: All right. And then I guess, on the VLC, what kind of feedback, if any, have you heard so far from the existing hyperscale customers and the potential others, just given the modifications that were made at the commission. Scott Lauber: Yes. And we've been talking -- and you could kind of see it through the testing only where those potential adjustments will be made. So the initial indication is -- there's nothing major right now. But of course, we all want to see the written order to see what's really in that final written order, but nothing surprising at this time. Operator: Your next question comes from the line of Andrew Weisel with Scotiabank. Andrew Weisel: Okay, terrific. I don't know what happened there, but thanks for giving it a second track. Okay. So I first want to ask another -- the Port Washington situation. My question is, to what degree do you see the referendum on data centers? Is there either challenging the current 1.3 gigawatt build-out? Do you see that at all being at risk? Or do you think it might make it harder for the customers to expand to the full 3.5 gigawatts or could this potentially defer other customers from looking into opportunities in or around that area or across Wisconsin more broadly? Scott Lauber: Well, I think you're referring to the referendum related to the TIF district. And when you look at that, it should not affect any of our any of that site up to the 3.5 gigawatts based on all of our understanding, it potentially could affect not just data centers, but any other just economic development in an area that would need a TIF district for that particular county. So more of a challenge just in general for economic development, but it should not affect any of the data center growth we had outlined in our script. Andrew Weisel: Okay. So not only the $1.3 billion, but the full $3.5 million you think would be safe. Okay, great. And then do you think it's isolated to that specific area? Do you think other -- from your conversation with customers, -- do you think it's isolated? Or do you think it's more of a broad issue in your conversations? Scott Lauber: We haven't seen any other issues out there as it relates to like a referendum. We have seen a couple of areas across the state, just put like a 1-year moratorium on reviewing data centers just because I think everyone wants to understand a little bit more of the facts in the data centers to get the facts out, but we have -- I have not seen any other type of referendum like that. Andrew Weisel: Great. Very helpful. And just a final 1 maybe for Shaw. The weather-adjusted natural gas deliveries were down over 2 point--or down 2.1% year-on-year. I know the weather was extremely mild that always messes with the normalization models. But volumes were also down 0.5% for the full year in -- what are you seeing in terms of trends or patterns? Is there anything worth calling out? Or was the 1Q maybe just a blip with the models? Liu Xia: Yes, Andrew, we looked at that. I think we expected some usage of decline in the forecast. So what played out was a little worse than what we expected by not much. But we filed in the test year '27, '28, the expected decline in the filing. So hopefully, we catch it up for the future. And there's some details about in which metropolitan area, you see a little more decline. So as people continue to come back to the office or reduce their residential usage, so you may see that naturally happen in the metropolitan area. So nothing surprising in the first quarter. Operator: Your next question comes from the line of Michael Sullivan with Wolfe Research. Michael Sullivan: Good afternoon. Scott, maybe I'll just try in Illinois, and this might be unfair because we're about to get the testimony, but is there any scenario where you think you can settle in that jurisdiction? And maybe just longer term, like how you think about the future of rate case cadence in that state? Scott Lauber: Sure. And you're right, we haven't even seen the testimony yet. So pretty hard to handicap anything there. Historically, Illinois has been a hard place to actually settle when you look across other jurisdictions. So I don't know all the opportunities there, but we got to see the testimony, but very happy as you could see, we actually got a settlement on those old historical riders. So that's a step in the right direction. And your second question was... Michael Sullivan: Just like the future rate case like is this going to be like every year, every other year? How do you think about that? Scott Lauber: Yes. I anticipate, especially as we ramp up this rider, and we start getting increases in 27, 28 and then an ongoing. I expect that it'll be more of an annual rate case kind of cadence as you think of Illinois specifically as it relates to putting in this pipe retirement program. Michael Sullivan: Okay. Very helpful. And then we saw -- I think you mentioned pushing out the retirement dates on some of your coal units. Just as you think about your remaining coal fleet holistically. What are kind of some of the options like in terms of conversions, further push outs? How you're thinking about some of those many units holistically? Scott Lauber: Sure, sure. And we're going to look at conversion of those to natural gas. For the most part, as you think about the EPA rules, we need to be in compliance with the current EPA rules. We'll see will those EPA rules go -- at this time, the reason we pushed out 7 and 8, we just wanted to make sure we get other dispatch a generation online and those parasites and the new CTs will start to come online at the end of '27. So we wanted to make sure we had -- as we retire old dispatches capacity, we had new capacity online. We also reviewed this to make sure there was no significant capital investments we had to make to keep these units running another year. And basically, they're only running on days that we really need it. So we're really running on a limited basis but we just want to make sure we have that capacity around to make sure we had that reliability. But as you look at the other units, we're still looking at converting to natural gas, and we'll follow the EPA rules as they evolve. Operator: Our next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Just 1 for me. Just wanted to check in kind of on -- I know you've talked about the construction activity at the Vantage site. -- has sort of started. Just any color you could provide on how execution is kind of tracking there relative to the time line, I think that the company has laid out? And perhaps just if you do see any slippage there, maybe can you refresh us kind of on the protections in place on if timing slips there related to the investments that WEC is making? Scott Lauber: And we don't see any slippage in we're in contact with the site. We have like a beating every other week with them on the site. We don't see any slippage there. And the other significant item is approval of a transmission line to serve that site, which there is data request and information going around with the commission right now. We expect to get approval for that in the fall of this year. So we don't think there's any issues in the slippage of that in service at this time. So things are going well there. If you think about in service, some of the fixes and fine-tuning that happened in the VLC tariff as it relates to transmission, will be more on a nominated basis, which will make sure that everyone pays their fair share and full cost as we build this cost and put that in. So it's not getting subsidized by anyone else. And it should not be a slippage also for any of our generation plan. So we feel good about the tariff and the protection plus but more importantly, we feel really good about the execution of that site and getting it online. Operator: Your final question comes from the line of Paul Fremont with Ladenburg. Paul Fremont: When I look at the $2 billion to $2.5 billion for 1 gigawatt in terms of replacement capacity, should I assume that what you're looking at is a combination of renewables and gas Point Beach. Scott Lauber: Yes. I think you got to kind of think about all of the above as we think -- and we'll look at our entire generation plan, it may be a combination of renewables and TT, but we also may be looking at a combined cycle as we look at our plan to continue to get more energy since it also provides a lot of energy. So we're going through that process. We look at it every year, not just as it relates to like the Point Beach, but also adding additional load on for our very large customers and the other economic development in the region. So we're going through that process right now and what makes sense and cost-effective value for our customers. Paul Fremont: Great. And then in terms of the nonregulated renewables, I imagine you're getting to a point where you're reaching sort of the end of the on some of the units. For those units, what type of uplift, if any, are you seeing in recontracting those assets? And does that sort of -- should we assume that, that offsets the BTC? Or how should we think about that? Scott Lauber: Great question. So 2 things. One is we're going through the process right now. And in fact, last year, we had safe harbored a lot of the materials to make sure those early PTCs that fall off. We have safe harbor materials so we could actually repower them to get to another 10 years of -- so we're evaluating that right now, and we'll talk about that on our third quarter conference call, but an opportunity to get another 10 years of PTCs. And then as those contracts come up, the value of renewable resources today and capacity across the country, it's more valuable than when we initially contracted those. So you also see some upside as those contracts come due. Now they just remind you, they don't all come due at the same time as the PTC. So there's a different timing there. But I think there's value on both sides of it. Paul Fremont: Great. And then I guess, last question that I have is, is it was the Microsoft Council plant, was that to be located near where the Oak Creek plant is located? Or was that in a different vicinity? Scott Lauber: Well, there was a potential option to purchase some land by the Oak Creek plant for a potential Microsoft expansion that is no longer moving forward but I mean, in total, they still have about 2,200 acres and that was by the Oak Creek site. Paul Fremont: So I guess my question, has there been any reconsideration by that community of potential benefits for having a data center located in their community? Scott Lauber: I haven't talked specifically with them, but I think every community is looking at potential for data centers or the discussion of data centers because there's a lot of discussion in the region. And I think a lot of these communities are looking at like Port Washington and Mt Pleasant look at the value of property taxes and the other value these hyperscalers bring to the community, especially when you talk about affordability and people talking about property taxes. So I think there's opportunities there. We haven't had direct discussions with them, but there's potential there. I think it's a great site. It requires very little transmission and is right by our power plant. So it's a great power supply with very little transmission, an ideal spot for something like that. All right. That concludes our conference call for today. Thank you for participating. If you have any more questions, please feel free to contact Beth Straka at (414) 221-4639. Thanks, everyone. Liu Xia: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 5, 2026. I would now like to turn the call over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Chief Accounting Officer. Sir, you may begin. Jeff Holy: Thank you, Kelly. Good afternoon, everyone, and welcome to the Westlake Chemical Partners First Quarter 2026 Conference Call. I'm joined today by Albert Chao, our Executive Chairman; Jean-Marc Gilson, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During this call, we refer to ourselves as Westlake Partners or the Partnership. References to Westlake refer to our parent company, Westlake Corporation, and references to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake and the Partnership, which owns certain olefins assets. Additionally, when we refer to distributable cash flow, we are referring to Westlake Chemical Partners MLP distributable cash flow. Definitions of these terms are available on the Partnership's website. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in our regulatory filings, which are also available on our Investor Relations website. This morning, Westlake Partners issued a press release with details of our first quarter 2026 financial and operating results. This document is available in the Press Release section of our web page at wlkpartners.com. A replay of today's call will be available beginning 2 hours after the conclusion of this call. The replay can be accessed via the partnership's website. Please note that information reported on this call speaks only as of today, May 5, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at wlkpartners.com. Now I would like to turn the call over to Jean-Marc Gilson. Jean-Marc? Jean-Marc Gilson: Thank you, Jeff, and good afternoon, everyone, and thank you for joining us to discuss our first quarter 2026 results. In this morning's press release, we reported Westlake Partners' first quarter 2026 net income of $14 million or $0.40 per unit. Compared to the fourth quarter of 2025, our first quarter sales and earnings benefited from a higher third-party average sales price that was offset by slightly lower production and sales volume. The stability of Westlake Partners' business model is consistently demonstrated through our fixed margin ethylene sales agreement, which minimizes market volatility and other production risks. The high degree of stability in cash -- in cash flow when paired with the predictability of our business has enabled us to deliver the long history of reliable distribution and coverage. This quarter's distribution is the 47th consecutive quarterly distribution since our IPO in July 2014 without any reductions. Before I turn the call over to Steve, I want to provide some thoughts on our CFO transition. As you may have read, on April 20, we announced that on June 15, Jon Baksht will join Westlake Corporation and Westlake Partners LP as Senior Vice President and Chief Financial Officer. Jon brings experience from the oil and gas, packaging and building product industries as well as investment banking to Westlake, and we look forward to him joining the partnership. On June 15, Steve Bender will transition to the role of Special Adviser and will continue to report to me as he supports the transition. We anticipate that Steve will participate in the second quarter earnings call in August. And with that, I would like to turn our call over to Steve to provide more detail on the financial and operating results for the quarter. Steve? Steven Bender: Thank you, Jean-Marc, and good afternoon, everyone. In this morning's press release, we reported Westlake Partners' first quarter 2026 net income of $14 million or $0.40 per unit. Consolidated net income, including OpCo's earnings, was $82 million on consolidated net sales of $306 million. The Partnership had distributable cash flow for the quarter of $18 million or $0.51 per unit. First quarter 2026 net income for Westlake Partners of $14 million was $9 million above the first quarter of 2025 Partnership net income due primarily to higher production and sales volumes as a result of last year's planned turnaround at Petro 1. Distributable cash flow of $18 million for the first quarter of 2026 increased by $13 million when compared to the first quarter of 2025 due to higher production and sales volumes and lower maintenance capital expenditures as a result of last year's Petro 1 planned turnaround. As compared to the fourth quarter of 2025, net income for Westlake Partners in the first quarter of 2026 declined by less than $1 million due to lower production and sales volumes that was mostly offset by higher third-party average sales price. Sequentially, our trailing 12-month coverage ratio improved to 1x from 0.8x, reflecting the aging out of the impact of the Petro 1 turnaround that occurred in the first quarter of 2025. Additionally, our operating surplus improved by $1 million as we achieved a coverage ratio above 1 in the first quarter. Turning our attention to the balance sheet and cash flows. At the end of the first quarter, we had consolidated cash and cash investments with Westlake through our investment management agreement totaling $81 million. Long-term debt at the end of the quarter was $400 million, of which $377 million was at the Partnership and the remaining $23 million was at OpCo. In the first quarter of 2026, OpCo spent $6 million on capital expenditures. We maintained our strong leverage metrics with a consolidated leverage ratio of approximately 1x. On May 4, 2026, we announced a quarterly distribution of $0.4714 per unit with respect to the first quarter of 2026. Since our IPO in 2014, the Partnership has made 47 consecutive quarterly distributions to unitholders. We have grown distributions 71% since the Partnership's original minimum quarterly distribution of $0.275 per unit. The Partnership's first quarter distribution will be paid on June 1, 2026, to unitholders of record on May 14, 2026. The Partnership's predictable fee-based cash flow continues to prove beneficial in today's environment and is differentiated by consistency of our earnings and cash flows. Looking back since our IPO in July of 2024 (sic) [ 2014 ], we have maintained a cumulative distribution coverage ratio of approximately 1x and the Partnership's stability in cash flows, we were able to sustain our current distribution without the need to access capital markets. For modeling purposes, we have no planned turnarounds in 2026. I'd like to turn the call back over to Jean-Marc to make some closing comments. Jean-Marc? Jean-Marc Gilson: Thank you, Steve. We are pleased with the Partnership's financial and operational performance during the first quarter. Solid operating rate at OpCo's ethylene facilities during the quarter resulted in a quarterly coverage ratio of 1.0x. Turning to our outlook. The conflict in the Middle East has significantly disrupted the global supply of oil, chemical feedstocks and polymers. Resulting supply concerns are prompting global chemical customers to source more material from North America in response to the conflict, which is supporting higher demand and prices for North American ethylene. While most of OpCo's ethylene volume is contracted to Westlake at a fixed margin of $0.10 per pound, margin for the approximately 5% of production that OpCo typically sells to third parties is benefiting from higher selling prices as a result of the factors I just discussed. Turning to our capital structure. We maintain a strong balance sheet with conservative financial and leverage metrics. As we continue to navigate market conditions, we will evaluate opportunities via our 4 levers of growth in the future, including increases of our ownership interest of OpCo, acquisitions of other qualified income streams, organic growth opportunities such as expansions of our current ethylene facilities and negotiation of a higher fixed margin in our ethylene sales agreement with Westlake. We remain focused on our ability to continue to provide long-term value and distribution to our unitholders. As always, we will continue to focus on safe operations, along with being good stewards of the environment where we work and live as part of our broader sustainability efforts. Thank you very much for listening to our first quarter earnings call. Now I will turn the call back over to Jeff. Jeff Holy: Thank you, Jean-Marc. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available 2 hours after the call has ended. We'll provide instructions to access the replay at the end of the call. Kelly, we will now take questions. Operator: [Operator Instructions] Our first question comes from the line of James Altschul of Aviation Advisory Service, Inc. James Altschul: In your prepared remarks, you mentioned that you anticipate or I don't know if you anticipate, you're seeing, I believe, increased margins on the 5% of your sales to third parties as a result of the war and thus the increased interest in sourcing your products from a North American-based supplier. Did we really see the impact of that in the first quarter because the war started at the end of February and the -- I'm not remembering exactly when the price of oil started to jump and the shipping was intercepted. Are we going to see a more significant impact in the second quarter? Steven Bender: Yes, it's a very good question. And I will say that as a result of the run-up in ethylene pricing, we did take the opportunity in the first quarter, in March to actually sell more third-party ethylene volumes than would be normally the case. We typically try to take opportunities to maximize the margin in this business when we see opportunities like this. And we did sell more volume in the first quarter than might be typically done as an example, last year's first quarter. And it did improve the margins associated with the business as a result of doing so. As we look into the -- I was going to say, as we look into the second quarter, if we see opportunities of this nature and continue to see elevated ethylene, we'll continue to do so. James Altschul: Okay. But I'm looking at the income statement and it says on the revenue, the figure for third-party sales is a few million less than the comparable quarter last year. But of course, that's sales, not margin. Steven Bender: Yes. And so again, just the impact of only 1 month of activity. I do expect that if the ethylene remains as elevated as it has been recently, you'll see more of a positive impact in the second quarter. Operator: I am showing no questions at this time. I will now turn the call back over to Jeff Holy. Jeff Holy: Thank you, Kelly. Thanks, everyone, for participating in today's call. We hope you'll join us for our next conference call to discuss our second quarter 2026 results. Operator: Thank you again for your participation in today's Westlake Chemical Partners First Quarter 2026 Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 p.m. Eastern Time on Tuesday, May 19, 2026. The replay can be accessed via the Partnership's website. Goodbye.
Operator: Ladies and gentlemen, welcome to the Marqeta, Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sarah Baquema, chief accounting officer and head of investor relations. Please go ahead. Sarah Baquema: Good afternoon, everyone, and welcome to Marqeta, Inc.’s First Quarter 2026 Earnings Call. Hosting today's call are Mike Milotich, Marqeta, Inc.’s CEO, and Patti Kangwankij, Marqeta, Inc.’s CFO. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties including those set forth in our filings with the SEC, which are available on our investor relations website, including our Annual Report on Form 10-Ks and our subsequent periodic filings with the SEC. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the time of this call, and the company does not assume any obligation or intent to update them except as required by law. In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplement materials, which are available on our investor relations website. With that, I would like to turn the call over to Mike. Mike Milotich: Thank you for joining us for Marqeta, Inc.’s first quarter 2026 earnings call. I will begin with a brief summary of our Q1 results, then provide an update on how the breadth of our platform capabilities is being leveraged by our customers across multiple geographies and a continuum of products, which differentiates us from other issuer processors. I will then turn the call over to Patti, who will cover the details of our Q1 results and our expectations for the remainder of 2026. Our first quarter results demonstrate the continued momentum of our business. Gross profit grew 19%, which was fueled by 33% TPV growth. The increasing scale of our platform was on display, as adjusted EBITDA grew to $33 million, achieving a 20% margin, and, importantly, we delivered GAAP profitability this quarter. The $8 million of net income is a testament to our strong growth, operating leverage, and disciplined execution. Marqeta, Inc. has been at the forefront of modern issuing for over a decade, enabling growth and innovation for customers in several diverse use cases and geographies. What makes us unique is how comprehensive and flexible our platform is, spanning debit and credit, consumer and commercial, certified to operate in over 40 countries, combined with the expertise and experience to execute a variety of innovative solutions for our customers. Our continued momentum this quarter highlights three trends that are growing in prominence within card issuing. First, multinational card issuers are becoming more and more common as card growth shifts from local banks to fintechs and enterprises looking to support their customers in many geographies. Second is an integrated continuum of products that span debit and credit that enables our customers to meet the needs of consumers and SMBs across their financial journey. There are many layers to the market including standalone debit, transaction-based lending integrated with debit in a single card credential, secured credit, charge card, and revolving credit. Our customers are often looking to serve several of those needs with a comprehensive offering. Third, there are early efforts underway to modernize the technology in the card issuing market. Utilizing modern platforms like Marqeta, Inc., many fintechs have achieved great success and have become big businesses, which is increasing the need for more established issuers to upgrade their capabilities in order to compete effectively. Let me start with the growing demand for multinational card issuing capabilities on a single platform. Already, 12 of our top 15 customers utilize Marqeta, Inc. in more than one country, and six of those 12 are in at least five countries as they continue to expand their businesses without the friction of multiple platform integrations. One of the latest examples of international expansion is Sezzle, who is now launching its virtual card in Canada. This allows Sezzle's Canadian consumers to enjoy the same BNPL flexibility at participating retailers that accept contactless payments while benefiting from the same seamless checkout experience their U.S. consumers already enjoy. Another example of our support for a global offering is Ramp, who is expanding its corporate expense management solutions across new international markets. By leveraging Marqeta, Inc.’s modern card issuing platform, Ramp is expanding local card issuing into Australia, Japan, Singapore, Brazil, and Mexico, with further geographic expansion planned for later this year. This will allow Ramp to provide its customers with flexible financial solutions in new markets including the ability to issue virtual and physical cards with customized spend limits, helping businesses thrive on a truly global stage. Marqeta, Inc. enables this rapid international scaling through a single integration, once again demonstrating our ability to operate at scale and enabling disruptors as they take share from legacy providers. An emerging use case that will be multinational from the start is stablecoin-backed card programs leveraging stablecoin settlement through our bank and network partners. In addition to extending our support of our crypto-native customers, we are currently forming new partnerships with crypto infrastructure providers to manage on- and off-ramping for fiat-native customers. A stablecoin-backed card issued on the Marqeta, Inc. platform could be linked to a crypto wallet enabling spend in local fiat from a stablecoin balance. We are building the capabilities and establishing the partnerships to support both existing and new customers to meet the growing demand for this multinational use case. Now let me shift to the integrated continuum of products. In the past several quarters, we have spoken about the rise of BNPL as a feature of a debit offering. But there is also increasing demand for another offering that bridges the gap for consumers who are looking for greater financial flexibility beyond debit but do not yet qualify for revolving credit. A secured credit card enables the consumer to build credit through their daily spend, eventually advancing to unsecured credit. Our continuum of products seamlessly enables fintechs and enterprises to serve consumers throughout their entire financial life cycle. A compelling example of this continuum involves one of our existing customers, a large and rapidly growing embedded finance brand with an established debit program on our platform. They have launched a new credit builder card with us to help consumers establish and strengthen their credit profiles. This product is designed to make credit building automatic and accessible. Consumers can use the card for everyday purchases, while funds are automatically set aside to pay off the monthly balance which is then reported to the credit bureaus. Over time, this helps their consumers build credit if they later desire to have an unsecured option, while our customer leverages our platform to grow and retain their user base throughout their evolving needs. Marqeta, Inc.’s strength across this continuum, particularly our experience with flexible credentials, is also attracting new customers with established portfolios. This quarter, we signed a customer that provides consumers with a personal financial assistant to help them better manage their financial lives. They sought a partner that enables innovation and could embed BNPL into a secured credit offering, allowing consumers to toggle between secured credit and installments on a single card for greater flexibility. This customer will migrate their existing portfolio to Marqeta, Inc., and we are one of the early adopters of the issuer-managed Mastercard One credential to support this new customer. The One credential gives consumers a single programmable card spanning debit, credit, installments, and prepaid with spending rules they control in real time. While the existing program migrating is from the U.S., this customer is also looking for a partner who can support rapid geographical expansion and eventually enable them to add revolving credit products to their offering. This win exemplifies the unique value that Marqeta, Inc. delivers to our customers: program migration to our modern platform delivering an innovative, multithreaded, comprehensive solution that is a market first, utilizing our leadership in flexible credentials across multiple geographies. Lastly, I want to highlight the emerging efforts of long-established issuers seeking new capabilities to meet the evolving needs of consumers and businesses with the modern, agile capabilities embraced by the fintech disruptors. In some cases, it could involve platform migrations, but many issuers are also considering more creative solutions to start their modernization efforts for specific use cases or programs before they take on bigger changes in their infrastructure. Leveraging Marqeta, Inc.’s virtual card expertise, a large U.S. financial institution has begun to provision a line of credit directly into a consumer wallet, eliminating lengthy and costly integrations. This enhancement will allow the bank's customers to leverage credit to spend seamlessly in physical retail locations, followed soon by online capabilities, driving engagement and unlocking significant value. This innovative lending use case is a powerful demonstration of Marqeta, Inc.’s modern and flexible platform deploying sophisticated cutting-edge capabilities at scale, which is an early step forward in Marqeta, Inc. establishing, expanding, and deepening our relationships with large banks. To wrap up, this quarter reinforces the momentum behind our business and the increasing value a modern card issuing platform delivers for innovators worldwide. Our financial results in Q1, combined with the business being onboarded and the capabilities being deployed, reflect how the comprehensiveness and flexibility of our platform is enabling our customers to expand and thrive. At the same time, our experience, expertise, and scale position us well to capture the emerging demand for multinational card issuing, an integrated continuum of products, and modern solutions for long-established issuers. Therefore, as we look ahead, we will continue to help fintechs and enterprises grow the pie, but we are also ready to help modernize existing programs with the capabilities that end users are beginning to expect. The current momentum combined with our expanding capabilities and the enormous opportunity ahead makes us confident that we will drive long-term value for our customers and shareholders. I will now turn the call over to Patti to discuss our Q1 financial results and expectations for 2026 in more detail. Patti Kangwankij: Thank you, Mike, and good afternoon, everyone. Our financial results for Q1 reflect a solid quarter. Both net revenue and gross profit grew 19% on a year-over-year basis, driven by TPV growth of 33%, with all three growth rates at the top end of expectations. Adjusted operating expenses were better than expected, which, coupled with strong gross profit growth, resulted in adjusted EBITDA growth of 66%. Most notably, we achieved GAAP profitability in the quarter with net income of $8 million. Q1 TPV was $112 billion, with strong growth on a continuously expanding base of 33% year over year. This is the second quarter in a row with TPV over $100 billion and the third quarter in a row with growth over 30%. Non-Block TPV continues to grow over 2x faster than Block TPV. Growth within our Financial Services use case continues to be a little slower than the overall company; we did not see any discernible changes to Cash App new issuance in the quarter. Excluding Block, Financial Services continues to grow meaningfully faster than the overall company, driven by neobanking customers. Lending, including buy now, pay later, growth remained on par with Q4 growth at nearly 60% on a year-over-year basis. This continues to be driven by the growth in flexible network credential usage and our customers' continued geographic expansion on our platform. Expense management growth remains over 40%. The robust growth is a result of customers continuing to expand their market share by acquiring new end users, made possible by their utilization of our unique configurable capabilities. On-demand delivery growth continues to be in the double digits but below the company's overall growth rate, as this is our most mature use case. Q1 net revenue was $160 million, growing 19% year over year. Block net revenue concentration was 42% in Q1, two percentage points less than last quarter, as our non-Block revenue is growing 2x faster than Block revenue. Q1 gross profit was $118 million. The 19% year-over-year growth was at the top end of expectations. Q1 gross profit growth had a headwind of 1.5 percentage points due to the revision of our accounting policy for estimating and recognizing card network incentives, which started in Q2 2025. As a reminder, this is the last quarter in which we will have any impact on the year-over-year comparison related to the accounting change. Our gross profit take rate was 10.5 basis points, half a basis point lower than last quarter, largely due to business mix. Q1 adjusted operating expenses were $84 million, growing 7% year over year. This is several points better than expectations due to the phased implementation of key investment initiatives. We continue to remain focused on operating efficiency and are realizing the benefits from the increased scale of our platform. Q1 adjusted EBITDA was $33 million, a margin of 20% based on net revenue. Adjusted EBITDA margin based on gross profit was 28% and illustrates the expansion of our business' profitability. Our Q1 GAAP net income was $8 million with an EPS of $0.02 as a result of gross profit growth, platform scale, and lower operating expenses, and benefiting from lower stock-based compensation. This quarter marks a significant milestone as we achieved GAAP net income profitability and remain confident in our ability to generate positive net income on an annual basis going forward. We ended the quarter with $712 million in cash and short-term investments. Our share repurchase activity remains ongoing as we continue to believe the current valuation does not fairly represent the company's value or the market opportunity ahead of us. In Q1, we repurchased 9.4 million shares at an average price of $4.16. As of March 31, we had over $52 million remaining on our latest buyback authorization. Before we transition to our expectations for Q2 and the full year, I wanted to acknowledge that our business continues to grow. EPS will become increasingly important and a better reflection of our business growth. With that, I would like to briefly touch on the proposed reverse stock split that was included in our proxy statement filed with the SEC in April. The reverse stock split would reduce Marqeta, Inc.’s common stock at a ratio of 1-for-4 and will result in higher reported net earnings or loss per share. At approximately 434 million shares, $0.01 of EPS is $4.34 million of net income, while at approximately 108 million shares, $0.01 of EPS is $1.08 million of net income. We believe a lower share count will provide a clearer reflection of changes in our per-share performance as our business performance evolves over time. Now let's transition to the expectations for Q2 2026. Consistent with what we shared last quarter, we expect both Q2 net revenue and gross profit to grow between 14% to 16%. As a reminder, gross profit growth in Q2 is expected to be slower than Q1, primarily due to a tougher comp from last year's remarkable BNPL growth which started in Q2, as well as renewal activity and evolving business mix. We continue to be focused with our investments, which are primarily directed towards platform capabilities and innovation. Q2 adjusted operating expenses are expected to grow in the high teens, consistent with the expectations we shared last quarter. As a reminder, the higher growth rate is due to a tougher comparison versus Q2 2025, when the expenses were uncharacteristically low due to investment delays during the CEO transition last year. Q2 adjusted EBITDA growth is expected to be 10% to 12%, in line with our previous expectations, and we expect to be at breakeven on a GAAP net income basis in Q2. For the full year, while we recognize the increasing levels of macroeconomic uncertainty, we are not currently seeing any notable shift in spend or consumer behavior. As a result, we are assuming consistent spending patterns for the remainder of the year, but noting the risk. Our expectations for net revenue and gross profit for the year remain consistent with what we shared last quarter. We expect net revenue growth of 12% to 14% and gross profit growth of 10% to 12%. While the Q1 results did come in at the higher end of expectations, this is not enough for us to revise our outlook upwards for the entire year, and we expect our net revenue and gross profit projections for the remaining three quarters and the full year to be consistent with what we guided to at the time of our fourth quarter call. We do, however, expect 2026 adjusted EBITDA growth to be several points higher than we shared last quarter, in the mid to high 20s percent, due to the outperformance in Q1. Lastly, we now expect to generate about $15 million in GAAP net income for the year, up $5 million based on our Q1 outperformance. The breadth and flexibility of our platform is translating directly into customer growth and expansion. The programs being onboarded and the capabilities being deployed this quarter reflect demand across both new and existing customers, and demonstrate how the continuum of products we offer enables customers to build and scale on a single modern platform. Our expertise and scale position us to capture an evolving set of opportunities that we believe will continue to drive long-term value for customers and shareholders. In conclusion, we are starting 2026 on a solid foundation, showcasing the momentum of the business, combining gross profit growth and disciplined investment. The ongoing benefits of scale give us confidence that we can sustain this trajectory of profitable growth at scale. I will now turn it back over to the operator for questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, a confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Ladies and gentlemen, we will wait for a moment while we poll for questions. We will take the first question from the line of Darrin Peller from Wolfe Research. Please go ahead. Darrin Peller: Hey, guys. Thanks for taking the question. You called out the non-Block growth being as strong as it is, and you mentioned the verticals. We are getting questions, and I am curious to know what the underlying strength is coming from—let us call it same-store sales. Are your existing customers really outperforming? And talk a little more about your ability to keep gaining market share in those verticals. What has really been driving the differentiation in expense management and BNPL as its core areas for you? Do you see more and more barriers to entry for you guys to continue that? Patti Kangwankij: Thank you for the question, Darrin. We see pretty broad-based growth across our use cases right now. BNPL is maintaining its momentum at nearly 60%, and expense management is growing at over 40% this quarter. We are very pleased with that. A majority of that is driven by existing programs because these programs take time to launch and grow, but a lot of it is with the existing customers that we have. As we have talked about for several quarters, for BNPL we have seen over four quarters of growth over 50% with BFC, geographic expansion, Pay Anywhere cards, and stronger user growth among SMB lending solutions. These continue, and we continue to lead from a product perspective, including the Mastercard One credential program launching later this year, as Mike mentioned. While we will be lapping some tough comps over the next few quarters and expect some decrease in growth rates over time, in expense management our capabilities continue to lead in terms of how uniquely we can configure products. Mike Milotich: The only thing I would add, Darrin, is that some of this is the unique capabilities of our platform—certainly we are in the lead when it comes to flexible credentials and have been a leader for some time in expense management—but it is also a tribute to our customer base. They continue to win, and the adoption of their services is growing faster than the market, and they are taking share. We are an enabler of their success. As they continue to significantly outperform the market, that continues to drive our growth, along with lots of new business and new programs. As Patti mentioned last quarter, our top 15 customers did over 30 new programs with us over the last two years. Our customers are successful and they continue to build on our platform, and that is what is driving our success. Darrin Peller: That is great to hear. One quick follow-up on Block. Any further incremental learnings relative to what you measured in terms of impact on this year's performance—any change between now and the last few months? Patti Kangwankij: I will start with what we are assuming for the forecast and what we have been seeing, then turn it over to Mike to talk about the broader relationship. On our last call, we talked about our new issuance assumption being that we would slowly, gradually decrease new issuance in the first half and then have no new issuances in the second half. We cannot speak to Block's business, but in Q1 we did not see any discernible changes to new issuances. It is still too early to tell for the entire year, but we do still expect to see a decline of new issuances in Q2 and more in the second half—so essentially shifting the curve out to the right a bit. We had mentioned 1.5% to 2% of gross profit growth impact at our last earnings call, and now we are at the lower end of that given the delays, so we are probably closer to the 1.5% growth impact as of right now. Mike Milotich: Consistent with what we have said in the past, our relationship is very strong. We are communicating on a very regular basis. The fact that they want to diversify, we understand and have accepted. Importantly, we continue to engage in new ideas and new things that we can do together. The relationship remains very healthy and strong. Operator: We will take the next question from the line of Connor Allen from JPMorgan. Please go ahead. Connor Allen: Hi, thanks for taking my questions. Curious about the demand more broadly for the secured credit card programs. I caught your comments about the embedded finance brand layering that on. How broad is that interest across your customer set? And as a follow-up, on demand for more flexible card products—you were very early to BFC and Mastercard One—are you seeing competitors step up there? Mike Milotich: Thanks, Connor, for your question. We are seeing more and more demand. There is really a continuum of products. Ten years ago, you were either debit or revolving credit, maybe a charge card. The market is evolving into a continuum where you can start someone on debit, then give them transaction-based lending—which allows you to control risk because it is done on a transaction basis—and with a flexible credential you can do that on the same card. The next step is helping the consumer start to build credit through a credit builder card, better positioning them for revolving credit down the road. If you are a fintech or embedded finance company, you want to serve the entire spectrum of your customer base and not leave anyone behind, matching the right customer with the right product. Decline rates on premium co-brand cards can be quite high, which is not a great experience—especially for customers already using other products. Offering secured plus installment options helps address that and can help customers work toward the product they originally wanted. As I mentioned, we now have a customer launching later this year that will combine a secured card with embedded BNPL—skipping past debit and doing secured credit plus transactional lending on a single card. We think there is a growing market for this capability. On flexible credentials, not yet in a significant way. We know from our network partners that competition is coming. We appreciated the lead but knew we would not be the only provider forever. There may be a couple of others live on a limited basis today, and by the end of the year it could become more substantial. It is safe to say we have a significant lead that will likely continue for at least the next several quarters. Operator: We will take the next question from the line of Bryan Keane from Citi. Please go ahead. Bryan Keane: Yes, thank you. I wanted to ask about the outperformance in EBITDA and the change in GAAP net income. What in the business is driving that? And does any of that upside in margin continue into the second, third, and fourth quarters? And as a follow-up, on business mix you called out a little bit lower take rate due to mix—how should we think about growth rates and take rate going forward as a result? Patti Kangwankij: Thanks, Bryan. In Q1, from a top-line and momentum perspective, TPV, net revenue, and gross profit were all on the high end of the range. EBITDA and net income beat our expectations—our first quarter of true operating GAAP profitability. The EBITDA outperformance was due to lower-than-expected adjusted operating expenses. A couple of key investment initiatives were a little slower to ramp. We ended the quarter where we wanted to be in terms of trajectory, but the uptick started later, which resulted in the EBITDA beat. For net income, we benefited from the EBITDA beat and were slightly lower than expected on stock-based compensation. For the full year, it is still early. We are monitoring a number of key initiatives and the macro environment. At this point, there is not a lot of new information that changes our outlook for the next few quarters, so we are reiterating our guide for net revenue and gross profit, and flowing through what we saw in Q1 for EBITDA and net income—hence the slight increase in our guidance for the year. On business mix and take rate, on an overall portfolio basis we are pretty good at estimating and are reiterating gross profit growth guidance. Sometimes the customer mix changes—last year BNPL outperformed, and program mix varies between program-managed and processing-only. That had a modest headwind, but we were still at the top end this quarter and reiterating for the full year. Mike Milotich: Historically, the mix effect is often driven by some of our largest customers still growing very fast. Approximately five of our top 10 are still growing over 50%. As they take a little more share within our TPV base, that can create a bit of pressure because they have slightly better pricing. We think that is a great outcome and exactly what we want. We structure pricing in a disciplined way to create win-win outcomes—puts a little pressure on take rate, but it is a good outcome. Operator: We will take the next question from the line of Timothy Chiodo from UBS. Please go ahead. Tim, please unmute your line and proceed. Timothy Chiodo: I am here. Thank you. An industry question on Reg II as it relates to card-not-present. Can you talk about what Marqeta, Inc. sees in terms of merchants deciding to route to the alternative network on the back of cards that you issue, and what that means for Marqeta, Inc.’s unit economics? Mike Milotich: Thanks, Tim. On merchant routing, for the most part it is pretty stable. Many have already made routing moves. Occasionally we see certain merchants increase routing to alternative networks after doing some work on their side, but those are fewer and farther between now and do not change the mix significantly from month to month or quarter to quarter. From a unit economics perspective, our exposure is minor. We have shifted our pricing model over the last few years to get paid for the service we provide and to disassociate our economics from interchange. For the most part, that is how our contracts are structured, so the routing mix does not directly impact us. It can come up in negotiations, and there are a few customers where we still have some exposure, but each year the comparable exposure continues to shrink. Operator: We will take the next question from the line of Sanjay Sakhrani from KBW. Please go ahead. Sanjay Sakhrani: Good afternoon. Last year, BNPL, expense management, and Europe were all good drivers of outperformance. As we look at this year, where might there be opportunities to outperform, and where are the risks—especially with geopolitical events, higher fuel prices, etc.? And as a follow-up, on the large FI you are working with, do you feel competitive intensity is picking up versus the past? Mike Milotich: Starting with BNPL, the business continues to grow really fast. As Patti said, it is still growing nearly 60%. Comps will get tougher, so the growth rate will slow, but the dollar growth remains healthy. Expense management is very steady and has accelerated the last couple of quarters, driven by our customers winning share and our experience and scale, which positions us to win additional business. If I had to pick an outperformer for the year, I would choose expense management. Generally, we are pretty good at predicting how the business will go since we have a lot of conversations with customers. In terms of risk, the biggest is macro-related. So far, consumer and SMB seem stable and strong, and we are not seeing impacts to spending trajectory, but we will continue to watch it given the uncertainty. On competitive intensity with large FIs, it is less about intensity and more about momentum behind modernizing. Conversations are becoming more frequent and substantive. We see three approaches: full conversions (least likely starting point), de novo opportunities for new products, and infusing modern capabilities without heavy lifting—the third is what we highlighted. Similar to how BNPL customers inject a virtual card for in-store purchases, we are helping a bank inject a line of credit into an existing wallet experience without disrupting the current program. It saves effort and complexity by leveraging our technology. That gets our foot in the door so they can experience our platform, which we believe will lead to broader adoption. The overall competitive intensity is fairly similar; who we see most often varies by use case, but the level has been constant over the last four years. Operator: We will take the next question from the line of Analyst from KeyBanc Capital Markets. Please go ahead. Analyst: Hi, Mike. Hi, Patti. Thanks for taking the question. On agentic commerce, maybe talk about Marqeta, Inc.’s role. There are use cases where a virtual card can be used successfully. Still early on protocols, but how can Marqeta, Inc. play? And then on digital assets, good to see the stablecoin-linked card development—what are you seeing in terms of demand? Mike Milotich: Thanks for the question. On agentic commerce, doing things in real time and flexibly is native to our platform, which positions us well. Our view is that for agentic to be successful it will need to be issuer-led more than merchant-led. Early attempts at autonomous checkout have seen fraud challenges. Issuers are better positioned—they have KYC, device fingerprints, and behavioral data—so they can authenticate the user before sending an agent to purchase on their behalf. We also believe virtual cards will often be used to minimize risk—provisioning a virtual card with specifications and limitations for the agent rather than exposing the underlying credential. These capabilities position us well, but it is early. We are having conversations, with some engagement but not broad market deployments yet. On stablecoin-linked cards, we see it as additive, not disruptive. In mature markets, customers are looking to target new opportunities, often around remittance or payouts. Blockchain and stablecoins are effective at moving money, but a card credential is the most effective way to spend it. A card fronting the wallet allows quick and cheaper distribution across countries while giving end users a familiar, user-friendly credential to put stablecoins to use. Demand is centered on wallets with broad functionality. This product would live alongside debit, secured credit, or revolving credit to support use cases that are harder or more expensive to do on traditional rails. Operator: We will take the next question from the line of Craig Maurer from FT Partners. Please go ahead. Craig Maurer: Thanks for taking the questions. On Earned Wage Access, it has been about a year since we heard about the product and we have seen substantial growth from some players in the market. Can you talk about growth in that industry? And on share repurchases, I believe you purchased about $39 million worth of stock in the first quarter and should have about $60 million left on the authorization—plans going forward? Mike Milotich: Thanks for your question, Craig. On Earned Wage Access, there continue to be good discussions with customers, particularly as we move more into embedded finance opportunities. Companies are looking to distribute earnings or funds to employees faster, usually for retention—whether gig workers or traditional employees. It is an attractive value proposition. We are working to establish the right partnerships because complexity often comes from payroll and tax calculations. In gig environments, the business model is geared to per-transaction pricing, so it is more seamless. For typical employees, it is more complicated. We are optimizing the solution, and customers with the most success are taking on a lot of the payroll/tax work to get it right. Patti Kangwankij: From a share repurchase standpoint, as of the end of Q1, we had about $52 million remaining of the $100 million authorized by the Board. We repurchased about 9.4 million shares at $4.16, decreasing total shares by roughly 2%. We believe the current valuation does not properly reflect the market opportunity and our differentiation. As long as our market valuation lags, we intend to continue repurchasing shares. We are not yet committing to systematically repurchasing, but we will continue to evaluate as we get closer to depleting the current authorization. Operator: We will take the next question from the line of Tien-Tsin Huang from JPMorgan. Please go ahead. Mike Milotich: Turning to capital allocation. Our balance sheet remains strong while continuing to invest in the business. Operator: Please go ahead with your question. Tien-Tsin, please unmute your line and proceed with your question. Since there is no response, we will move to the next question, which is from the line of Analyst from Deutsche Bank. Please go ahead. Analyst: Hey, thanks for the question. I wanted to walk through some of the back-half growth dynamics. Last quarter, you called out four discrete items: lapping strong BNPL growth, renewals, Block issuance commentary, and the Transact Pay item. Can you reconfirm the expected impact to the back half of the year? For the full year, you are saying it is closer to 1.5 points rather than 2 points—does that mean the back half is a little bit lower on an absolute basis and some shifted to Q1? And on the renewal assumptions, I think one was supposed to start impacting Q2 gross profit—confirm timing and magnitude? Patti Kangwankij: For the Cash App impact, we stated 1.5 to 2 percentage points of gross profit growth impact for the full year. Based on delays and the shift—given we have not seen discernible changes as of Q1—we are shifting the curve to the right, closer to 1.5. It is fair to assume that for the back half, when we say Cash App new issuances is a 2 to 3 percentage point headwind, it is on the lower end of that range as well, though eventually we will get there. Regarding renewals, we mentioned the impact of two renewals: one was completed in Q4 last year, and the second we still expect to land this quarter. Analyst: Helpful. And more color on the large financial institution with provisioning a line of credit directly into a consumer wallet—what specifically are you doing, how did the relationship come about, is the wallet issued by the FI itself, and thoughts on timing and how this helps you win more large FIs? Mike Milotich: This opportunity came from market references—networks and others suggested they speak to Marqeta, Inc. The wallet already exists; they provide this functionality and wanted to inject credit into that product without recarding or replatforming. We had experience with a similar solve for BNPL customers—injecting a virtual credential into an experience—and that is how the conversation started. It has started to roll out and is live in market now. For future business, we want to be doing processing for large banks so they can directly compare functionality. Any opportunity to do programs—even relatively small ones—is a big opportunity, as it demonstrates our platform's capabilities. Conversations with banks are getting more frequent as fintechs and embedded finance companies get bigger, which is pushing banks to evaluate their technology capabilities. The timing of decisions is to be determined, but interest in paths to modernizing card issuing technology is rising. Operator: Ladies and gentlemen, with that, we conclude the question and answer session. Thank you for your participation, and you may now disconnect your line.
Mark Flynn: Good morning, everyone, and once again thanks for joining us. We'll cover a couple of things today with Nova Eye. Obviously the March quarter results. We'll cover the record April sales release that we've put out to the ASX and our guidance today as well. And also, we'll give you an update on how the U.S. business is scaling up at this present time. Quick reminder, this session may include some forward-looking statements. So please refer to the ASX release and the investor presentation for full details. As always, if you like to ask a question, please use the Q&A function in Zoom and we will try and get to as many as we can. I have received a number of questions ahead of the meeting. So thank you to those that have sent those through. But with no further ado, I hand you straight over to Tom. Thomas Spurling: Thanks, Mark. Thank you very much, everybody, for tuning in today. I'm always very pleased with the number of people that take the time to listen to our story. I think we've got a good story again for the quarter to 31 December -- 31 March 2026. As our disclaimer, just a reminder, it's about pressure. Glaucoma is about pressure and us intervening in the disease to open up blockages and reduce that pressure. Next slide. The messages from today, we address, Nova Eye products address a genuine and growing clinical need. So we're not trying to make people do something they haven't done before. The disease is real. The customer base is real. There is competition, but that just means that we have -- and we have an offering that participates very well. Our revenues are now up near $23 million annually and growing at 25% plus year-on-year. And they reflect that real market demand. This quarter showed that we can grow revenue while also improving profitability. I've been saying that too for a while. We were just $75,000 short, just 1% of revenue away from breakeven in Q3. We were EBITDA positive if you include our strong December in the 4 months to March, and we're forecasting EBITDA positive in Q4. So that's EBITDA positive in the second half in total. We are delivering the outcomes we committed to, and that's what I'm pleased about. We have a company with 20-plus percent growth and profit at the bottom or EBITDA. Record sales were achieved in April. We saw the need to upgrade our sales guidance as a result of that. And on the -- just a USA surgeon, I received this e-mail randomly, just general feedback about how good iTrack is, performs better with its canaloplasty than other devices. As such, it is not critical to perform a concomitant goniotomy, which is a tearing of the trabecular meshwork. There's less likelihood of postoperative blood. And for premium IOL patients, it's good. You don't want to have someone that's just had a cataract surgery, spend a lot of money on a premium IOL and come out of that surgery with blood in their eye. I hear that from a lot of surgeons, and this is just another example. Next one. A reminder about the interventional glaucoma market. It means the active surgical engagement to change the disease trajectory and remove the patient's reliance on drops. I encourage you to have a look at Glaukos. Glaukos made an investor presentation today or released it to the market. I looked at it, they give a very good definition of interventional glaucoma and how important it is. And we are part of that market. Nova Eye is part of that market. That cataract link, 1 in 5 patients also have glaucoma gives us a reason for patients going into the OR, let's fix your cataract and get you off those drops. Our stent-free tissue preserving repeatable product is what puts us in the game. We are a required part of the business, interventional glaucoma market globally and in particular in the United States. Next slide. Just a quick summary of our -- a number of you have seen this. We have an FDA-cleared product, of course. We have a good reimbursement, which is stable. That reimbursement gives economic value to all the participants in the surgery, the surgeon, the facility hosting the surgery and us. Why do doctors choose iTrack Advance, well, we're talking about restoring the natural systems of the eye. It's implant-free and tissue sparing with a single pass with now the beautiful Green Light passing around the Canal of Schlemm, gives us the advantage over other devices that call themselves MIGS devices or are MIGS devices giving that doctors can choose from. And there are many -- I have all sorts of -- we've had all sorts of slides in the past about that. But at the heart of the matter is the tissue sparing natural method of action. Next slide. Here's our sales quarter-on-quarter compared with the PCP, USD 5.8 million. There were 2 new additional sales reps in the U.S. to service the growing demand we have there. This is, that's okay. I prefer to look at the next slide, which is our trailing 12 months revenue. It's a better picture of trends. And you can see 26% globally, 27% sales excluding China. We only do that. We started doing that because of the difficulties with tariffs. Remembering we're selling from the U.S. to China. And we were -- at the commencement of this financial year, there was a lot of uncertainty associated with that. So we just measure ourselves on sales excluding China at the moment. That doesn't mean China isn't being worked on. It just means that for guidance, we go to sales excluding China. And the sales guidance was lifted $21.7 million. We had guided to $21 million minimum a week or 2 ago. We have now passed that. So we've upgraded our guidance as a result of the very strong sales in April in all markets. Very pleasing. The drivers of that sales growth, our brand and product awareness by doctors was on display at the recent Australian -- American ASCRSA (sic) [ ASCRS ], American Society of Cataract and Refractive Surgeons in Washington, D.C. We have great trade booth presence and great booth attendance by doctors. We have sales team productivity, which I challenge is up with any ophthalmology company in the U.S. The release during the quarter of our proprietary Green Light technology to provide a clearer view for better navigation of the catheter through the Canal of Schlemm. I guess it's kind of goes without saying that a Green Light with -- is better seen in the case of any blood in the operation. And the release also of our Shear Clear technology, iTrack advanced with Shear Clear technology. This is also our technology transforms the cohesive viscoelastic into a low viscosity fluid during canaloplasty. You'll recall that viscoelastic is really a biocompatible hydraulic fluid that we flush, that we push through the canal. By virtue of our delivery system, it is thin and that thin viscoelastic circulates more freely into the ocular structures, the Schlemm's canal and the outflow pathway. And after a period of latency, regains viscosity and therefore holds open those structures. We're very pleased with the Shear Clear, the outcome of -- the addition of Shear Clear to our technology. There are some surgeon videos on YouTube that are highlighting the impact of this technology on their surgical outcomes. That is why sales are going up. We have a great product. We've got a good team, and we've got a lot of awareness of our brand and, well, to be honest, a little company. Next slide. China remains -- we made our first sales in February to China of iTrack Advance. And in that regard, I draw your attention or we draw your attention to the opportunity in China compared to the U.S. The same dynamic, 1 in 5 cataract patients present with concurrent glaucoma, and the opportunity to grow our business in China is very strong. It is a big opportunity. It will take time. But we think it is very exciting. Next slide. This slide, we've had a question about dips in sales reps. Well, I also get questions about dips -- sorry, revenue per rep. So what we've got is sales growth in the United States by quarter. What I like about this slide is that I have not made any change to the scale on the left-hand side to exacerbate the growth rate. It is a commendable growth rate of 6% a quarter. What we take away from that is despite our sales, we were maintaining a very strong revenue per rep. I'm often asked, how long does it take for reps to get to $1.6 million a quarter, $1.8 million and $1.9 million. I consider our whole pool of reps as an asset. And on average, we have managed over time to keep that quite high. Sales growth, keep it quite high. And therefore, that -- the sales rep expense is quite high. So that is a driver of productivity. Sales in the quarter, on that graph, look flat quarter-on-quarter. That could be, say Nova Eye has flat sales in the United States. January and February were materially affected by winter storms and surgery. And quite possibly, those surgeries were caught up in April, quite possibly. So we have had a great April, as we said, which augers well for Q4. So we will continue to push when we find the right people because there are territories in the United States which are underserved. We will continue to look for reps that we believe can be added to our team and maintain at $1.6 million, $1.7 million, $1.8 million per rep and therefore drive the bottom line productivity as well as sales growth. Our operating result here, I call out our investment in clinical data because it doesn't actually impact the current operating leverage as they call it. You can see I'm not resiling from the fact that we're EBITDA negative. I am pointing out that we're EBITDA positive for 4 months, but not for 3 months because we had a good December. That's a small loss in a -- as a percentage of total revenue, and it's heading in the right direction. The leverage -- the gross margin is pleasing as we improve our production -- constantly improving production processes, but also pricing of our product increasing, particularly in outside the U.S. markets where we're still only transitioning in some cases, from iTrack 250A to the more expensive, for us being a more expensive -- higher price, sorry, iTrack Advance. So I think this highlights the trends in quarterly EBITDA. I draw your attention to the green arrows which show Q4 relative to Q3 for the last couple of years. So we think our outlook for Q4, if that trend continues, is very strong. A couple of periods of very close to breakeven performance, and we're forecasting an improvement that to continue during the month of -- during the April, May and June. Cash flow, we continue to invest in working capital. There was a lot of marketing expenditure upfront that we had to make. Our cash receipts will flow through. And as we said, our existing cash and debt facilities provide sufficient runway for the continued execution of our mission, which is a mission to cash to EBITDA positive, cash flow positive will follow. Next one. Recapping our guidance. There's an update from $21 million to $22 million to $22 million to $23 million. People may say that's not much, but I'm excited by it because we're proud of the work we're doing. We're only a little company, and we are delivering what we want, what we said we'd deliver. So there's some FX things there. I tend not to worry about Australian dollars, but I have to give the -- just a reminder, we have no Australian dollar revenue. We do not sell in Australia. So it's U.S. dollars for us. Next one. And that's the same, our guidance that continued targeting breakeven with a small positive in H2 FY '26 and positive EBITDA from operations that removing the effect of clinical data and ongoing improvements in cash flows. We are generating cash in the U.S. I don't want to say the U.S. is a business on its own, but because it's a very global integrated business. But all our cash is coming in euros in the U.S., which the appreciating Australian dollar doesn't help when you turn it into Australian dollars. Okay. So thank you for that. Mark Flynn: Thanks, Tom. A couple of questions coming through. One live is that the Green Light, which we've announced and is currently in use in the U.S., will that supersede the red light or will both lights remain available for surgeon choice? Thomas Spurling: It will stay the same. And that's actually our choice because doctors, we are not making it -- if someone has a red light and they ask for it and they're a good customer, well, we are not trying to build to, the better production planning thing is just to deliver green is the answer. Mark Flynn: A question from Nick Lau at Taylor Collison in regards to those U.S.A. sales. You did cover it there and also the revenue per rep, which sort of dipped a little bit. What are the factors the sales rep are seeing that may have contributed to this? And I know you mentioned the weather. Thomas Spurling: Yes. So I know the weather sounds a lot like the dog ate my homework. But in the end, the Northeast of the U.S. in January and February, which seems like an eternity ago, but to me it's not because we're still seeing the effects on our P&L account where there was -- our reps were shut down, surgeries were shut down and surgeries were canceled. That impacts. It impacts doctors bimonthly and so it impacts. The revenue per rep, it's a vexed issue. I get equally the number of times people say, put on more reps, why don't you put on more reps? Well, when we put on more reps, there must be a dip naturally because you can't get all those sales in the first month the person is there. We try and split the territories, give the person a lot of leads. But we put on reps because we know in that 2, 3, 4 months' time, we'll get back up to the [ $1.678910 ], $1.6789 million per rep, which we know drives our bottom line result. And as I said, 20% growth, 20% plus top line growth and EBITDA. That seems to me like an achievable target for our business. Mark Flynn: The sales adoption by new or established surgeons, are you able to comment on the sales pattern? Thomas Spurling: Well, you can -- that requires a lot of analysis. We are a small business, but it also -- we'd like to think that our competitors don't need to tell -- we don't need to tell our competitors about new accounts. We just deliver our sales information. I know so many people have how many facilities, what's new, what are new accounts, what are old accounts, why are the old -- why are facilities dropping off? Why are new facilities not buying if they just bought a -- in month 1, they're not buying in month 2. There are so many combinations of analysis that we could do. And they are compromised by doctors moving around between facilities, by -- in particular that and the idea that some accounts have more than one facility and more than doctor doing it versus some accounts just having one doctor. So we believe that our EBITDA, operating revenue per rep. Increasing top line sales is our goal, and we have our internal guidance as to how we're doing at each account. Mark Flynn: You mentioned Glaukos and a bit of a comparison. So I know Glaukos leads in stents and drug delivery, but where do they sit with in competition against us? Thomas Spurling: Well, it's interesting, I refer you to some of the videos that have been posted by surgeons where there is a combination going on now where there seems to be doctors are deciding to team iTrack with Glaukos products, which is interesting. And we think that we don't have any clinical evidence around why that would do it, but that's up to doctors to do what doctors do. Glaukos' investor webinar today gives a very rosy outlook for interventional glaucoma. And I know it's to service their own needs, but it does describe very well the trends. And we think that we are -- if you like, we could be on the coattails of some of those trends. I mean the trends are real. I think that's what -- a review of the Glaukos investor presentation will show you, that we have -- that Nova Eye Medical is in a real market with a real growth thing. Mark Flynn: China, I know we do exclude China, but when do you believe or when do you think that sales there will become material? Thomas Spurling: I'm just starting. We've decided corporately to just be cool on that decision and let them flow through. So we're not giving any more guidance than what we have. Operator: Thank you. We've got one here. In regards -- we haven't mentioned the manufacturing facility or clean room in Adelaide. Just a short update on that. Thomas Spurling: Yes. So we have quietly and with conviction to lower our production costs, insourced some parts into, establish Nova Eye cleanroom facility and insource some parts to lower production costs ultimately. And it also provides a test bed for new manufacturing techniques and new product testing. The Shear Clear and the Green Light are as a result of that. So it's a good capability we have here in Adelaide. And compared with other parts of the world, Adelaide is a low-cost domain. So it's good. Mark Flynn: Always a reminder that there's new people joining our webinars and asking why don't we sell this product in Australia. Thomas Spurling: So simply put, we have presented data to the U.S. Medicare and it has accepted that data as meaningful in saying that, yes, canaloplasty does work, and therefore we will reimburse patients who need it or reimburse, yes, patients effectively. In Australia, the data, they have a different level -- different standard. They don't -- they believe more data is required. The size of the Australian market does not warrant our investment in getting that clinical data, just a standalone. We do have some clinical data in the pipe, which may help, but we see the investment in an additional rep in the U.S. helps us get to our 20% plus growth, EBITDA positive down the bottom, far better than just selling in Australia, unfortunately. Mark Flynn: Thanks, Tom. I think that covers all the questions. Any final questions come through now or as always, Tom and my details are on the screen. Please send through any questions. Happy to have a phone call as well. Look forward to staying in touch. But great news from Nova Eye today, and welcome any further questions. So thanks very much for joining. Thank you, everyone.
Operator: Thank you for joining us, and welcome to the Freshworks Inc. first quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Kate Scolnick, VP of Investor Relations. Kate, please go ahead. Kate Scolnick: Thank you. Good afternoon, and welcome to Freshworks Inc.'s first quarter 2026 earnings conference call. Joining me today are Dennis Woodside, Freshworks Inc.'s chief executive officer and president, and Tyler Sloat, Freshworks Inc.'s chief operating officer and chief financial officer. The primary purpose of today's call is to provide you with information regarding our first quarter 2026 performance, and our financial outlook for our second quarter and full year 2026. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroeconomic environment in which we operate, market volatility, and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand, and to control costs and improve operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-Ks, and other periodic filings with the SEC. Freshworks Inc. assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures for historical periods are included in our earnings release, which is available on our Investor Relations website at ir.freshworks.com. I encourage you to visit our Investor Relations site to access our earnings release, supplemental earnings slides, periodic SEC reports, and a replay of today's call to learn more about Freshworks Inc. For presentation purposes today, Dennis' financial comments will be on an as-reported basis. Tyler will be providing financial comments on an as-reported and constant currency basis. I will now turn the call over to Dennis. Please go ahead. Dennis Woodside: Good afternoon, everyone, and thank you for joining us. Freshworks Inc. delivered a strong start to 2026, exceeding expectations across revenue, profitability, and free cash flow. Our Q1 revenue grew 16% year over year, above the high end of our estimates. Non-GAAP operating margin was 18%, nearly three points above our estimate. And adjusted free cash flow margin was 24%. Once again, we achieved rule of 40. In Q1, we signed the two largest deals in Freshworks Inc. history, including our first seven-figure EX ARR deal. Customers with more than $100 thousand in ARR grew 29% year over year, and customers with more than $50 thousand in ARR grew 22% year over year. This demonstrates our continued success in serving mid-market and enterprise customers. Freshworks Inc. is the AI-enabled unified service operations platform that is fast to deploy, intuitive to use, and enables every employee to be more productive. We entered 2026 with clear goals: expanding our EX business, monetizing AI at scale, and profitably growing our CX business, as we grow Freshworks Inc. to a $1 billion ARR company and beyond. Now let's look at the results for each of these areas in Q1. Our EX business represents the primary and largest growth opportunity. EX ARR grew 27% year over year in Q1, with both new and expansion business coming in ahead of our expectations. We are attracting a fast-growing base of mid-market companies and enterprises choosing Freshservice for enterprise-grade capabilities, fast time to value, and lower complexity in implementation. Most notably, in Q1, a global leader in nutrition replaced our largest competitor with Freshservice in what represents the largest new customer deal in our company's history. They were seeking a solution that could handle enterprise-grade scale without sacrificing the intuitive experience necessary to manage complex workflows. Following that historic win, Piedmont Healthcare also selected Freshservice over our largest competitor, citing our significantly lower total cost of ownership, faster implementation, and enterprise capabilities. Finally, Reed, the UK's number one specialist recruitment company, moved to Freshworks Inc. to achieve a faster and more collaborative enterprise IT experience. These wins underscore a clear trend: organizations are increasingly choosing our platform for its ability to deliver sophisticated results without the traditional overhead. Freshworks Inc.'s ability to deliver enterprise-grade outcomes without the implementation drag and administrative burden of legacy systems is exactly why we are displacing vendors whose products have become too expensive and complex for mid-market and enterprise customers to maintain. We are also expanding our right to win by integrating and broadening our EX offerings. In March, we launched a new Freshservice ITAM experience, bringing Device42 capabilities natively into Freshservice and making it easier for customers to use in a single cloud experience. We also completed the acquisition of FireHydrant, which advances our vision for an AI-enabled service ops platform that unifies service, asset, and operational data. We will complete the integration of FireHydrant over the course of 2026. Moving on to our AI progress, Freddy AI continues to be embedded throughout our platform, enhancing customer outcomes today while building toward a long-term monetization opportunity. Freddy AI Copilot is one of our fastest-growing products, with strong customer growth, new business attach rates, and higher expansion among AI customers. In Q1, Freddy AI Copilot customer growth exceeded 80% year over year, and the attach rate for new deals over $30 thousand in ARR was above 65%. Specifically, in our EX business in Q1, our customer penetration for AI surpassed 20%, nearly doubling year over year, and roughly a third of all new EX customers in Q1 had Copilot attached. AmeriSure, a commercial insurance provider and EX customer, has been able to transform service delivery within a single platform using Freshservice's AI-driven workflows and Freddy Insights. With Freshservice for business teams, the use case has expanded beyond IT into legal, HR, underwriting, and marketing, saving thousands of hours in 2025 alone and cutting employee onboarding resolution time by 97%. We look forward to detailing more about our future AI strategy and EX product innovations at our Refresh event next week. Turning to our customer experience business, we continued to deliver durable growth, with CX ARR up 6% year over year in Q1. We are making progress in this business through go-to-market discipline, platform integration, and increased market fit enabled by our AI capabilities. A leading provider of lender-placed insurance solutions consolidated a fragmented stack of JSM, Genesys, and SharePoint into a single Freshworks Inc. platform. By unifying ticketing, automation, and AI in one place, the team reduced manual effort, improved operational visibility, and gained a clear path to scaling support. Over 80% of our CX customer base has now migrated to the new Freshdesk Omni platform. This successful replatforming is more than just an improvement for customers; it is the foundational work to enable the next wave of generative AI capabilities in our CX products and accelerate margin accretion. Since we began offering Freshdesk Omni at the end of last year, ARPA is 2.5 times higher for new Freshdesk Omni customers compared to the prior platform. In lockstep with our focus on durable growth from our EX and CX businesses, we remain committed to driving structural operating efficiencies that support enterprise-grade scale and long-term profitability. Q1 non-GAAP operating margin reached 18%, nearly three points above our estimate, reflecting the disciplined execution we expect to sustain throughout 2026. Today, we announced workforce changes we are making to the company in Q2 to consolidate overlapping go-to-market efforts, streamline our product development process, and apply AI and automation across our business. These actions enable us to focus energy on our momentum in EX and accelerate Freshworks Inc.'s competitiveness. Tyler will provide the financial impact and updates to our outlook in his remarks. Turning to capital allocation, our operating model continues to deliver durable free cash flow. This operational strength allows us to take a balanced approach to capital allocation, reinvesting in high-return growth opportunities while also returning capital to shareholders. In February, our board authorized a new $400 million share repurchase program, reflecting our confidence in the intrinsic value of our business. In Q1, we reduced shares outstanding by approximately 2%. We remain confident in our ability to compound adjusted free cash flow and drive long-term shareholder returns. Overall, Freshworks Inc. achieved significant progress in Q1, accelerating our momentum with profitable growth fueled by our EX opportunities. By structurally shifting our operating model over the last two years, we have established a durable framework that balances top-line performance with capital efficiency. Our long-term focus is on compounding adjusted free cash flow per share. Having more than doubled this metric over the last two years, we are now positioned to compound adjusted free cash flow per share by at least 20% annually over the next three years. We will share more details on the operational drivers and our long-term vision at the Refresh event next week. I will now turn it over to Tyler to walk through our financials. Tyler Sloat: Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today. We kicked off 2026 with strong results, exceeding our expectations on revenue, non-GAAP operating income, and free cash flow. Our Q1 performance reflects accelerating momentum and strong retention in EX, increasing success in the enterprise market, and disciplined operational execution across the business. For our call today, I will cover the Q1 2026 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q2 and full year 2026. As a reminder, most of my discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, restructuring charges, and other adjustments. I will also talk about our adjusted free cash flow, which excludes the cash outlay related to the cost associated with the Q2 restructuring announced earlier today. To provide greater transparency into our underlying business performance, I will also include constant currency comparisons throughout today's call. Starting with the income statement, we had a strong first quarter. Total revenue reached $228.6 million, up 16% year over year as reported or 14% on a constant currency basis. Within this total, professional services revenue was approximately $2 million. Professional services revenue grew in line with our internal expectations and is a key component of our overall customer success strategy, ensuring successful deployment and adoption of our platform. EX continues to be our primary growth engine, and EX ARR ended at over $540 million, growing 27% year over year on an as-reported basis and 25% on a constant currency basis. This performance was supported by strong expansion and new logo activity, including the two largest new business contracts in our history. These large wins validate our enterprise readiness and competitive positioning in market. Looking ahead, we anticipate EX ARR to grow in the mid-twenties and EX ARR to be over 60% of total ARR by year end. Turning to our CX business, we ended Q1 with over $395 million in ARR, up 6% year over year on an as-reported basis and 4% on a constant currency basis. The replatforming work we are doing to Freshdesk Omni to improve product consistency, support AI adoption, and increase the competitiveness of our platform is on track and will enable efficiency gains for the CX business over time. We have a disciplined focus on our CX business as we complete our customer migration and tighten alignment with our ideal customer profile. Going forward, we are adopting a prudent outlook and anticipate CX ARR to grow in the low single digits in 2026. Moving to margins, we demonstrated the durability of our business model by maintaining a non-GAAP gross margin of 80.3% in Q1, consistent with prior quarters. Our non-GAAP operating income for the first quarter reached $41 million, translating to a non-GAAP operating margin of approximately 18%. This performance surpassed the high end of our initial expectations for the quarter. The key drivers behind this result were twofold: strong top-line performance and continued efficiency gains realized across various lines of our operating expenses. We are structurally continuing to shift our business towards GAAP profitability, with strategic efficiency gains driving a meaningful improvement in margins throughout the year. As Dennis noted, we announced operational changes to our workforce that consolidate overlapping organizational efforts, streamline our product development process, and increase the leverage of AI and automation across our business. As a result of these actions, we are reducing our global headcount by approximately 11%. We anticipate taking one-time restructuring charges of approximately $8 million, with the vast majority in Q2. In a moment, I will discuss our updated Q2 and full year estimates that incorporate the financial impact of these actions. Moving to operating metrics, net dollar retention was 106% on an as-reported basis and 105% on a constant currency basis, a one-point acceleration from the prior quarter. Within this, we are demonstrating strong momentum in the expansion growth of our EX business. Q1 EX net dollar retention achieved 111% on an as-reported basis and 109% on a constant currency basis. Going forward, we expect to sustain net dollar retention of approximately 105% on a constant currency basis for Q2 2026. As a reminder, this excludes any impact from Device42 legacy customers. Moving on, I would like to provide some additional color on results from our customer cohorts. Customers contributing more than $50 thousand in ARR grew 22% year over year as reported and 20% on a constant currency basis. This cohort represents over 55% of our total ARR. Customers contributing more than $100 thousand in ARR grew 29% year over year as reported and 26% on a constant currency basis. This cohort represents approximately 39% of our total ARR. Double-digit growth in our larger customer cohorts was driven by the strong performance within EX, which we believe validates our strategy to increase our focused investments on mid-market and enterprise EX customers. The accelerating growth we are achieving tells us we are structurally well positioned to capture a disproportionate share of the future EX market and sustain durable growth from our most strategic customers. Now let's turn to calculated billings, balance sheet, and cash items. Calculated billings came in at $235 million in Q1, up approximately 16% year over year as reported and 13.5% on a constant currency basis. For Q2, we estimate billings growth of approximately 14.5% on both an as-reported and constant currency basis. Looking ahead, we expect billings growth to be in line with revenue growth for 2026. Our cash position remains strong. In Q1, we generated $55.8 million in free cash flow, representing a 24% margin and slightly better than our expectations. Adjusted free cash flow per share was $0.20, an 8% increase over the prior year. This metric underscores our operational efficiency and our disciplined approach to converting growth into tangible shareholder value. Turning to our capital structure, we view share repurchases as part of a disciplined capital allocation framework and a reflection of our confidence in the long-term opportunity ahead. In Q1, we repurchased 5.7 million shares for $45.4 million, while utilizing an additional $7 million to offset dilution through the net settlement of vested equity. We ended Q1 with approximately 318 million fully diluted shares outstanding, down 2% year over year. Included within this were approximately 279 million basic shares outstanding, which also declined year over year. We ended the quarter with $780 million in cash and investments, providing ample financial firepower to continue our repurchase program while investing in future growth. Now on to our forward-looking estimates. As a reminder, our non-GAAP net income projections for 2026 assume a tax rate of 24%. For Q2 2026, we expect revenue to be in the range of $232 million to $235 million, growing approximately 13% to 15% year over year; non-GAAP income from operations to be in the range of $41 million to $43 million; and non-GAAP net income per share to be approximately $0.13, assuming weighted average shares outstanding of approximately 280 million shares. For the full year 2026, we expect revenue to be in the range of $958 million to [inaudible]. This results in adjusted free cash flow margin of 24% to 27.5% for Q2 and full year 2026, respectively. Our full year 2026 outlook for adjusted free cash flow per share is $0.94, up 24% compared to fiscal 2025. As a reminder, cash used for stock repurchases is reflected in our financing activities and is excluded from our adjusted free cash flow calculations. Finally, our forward-looking estimates are based on FX rates as of 05/01/2026 and do not take into account any impact from currency moves. Overall, Freshworks Inc. delivered a strong start to 2026, establishing a solid foundation for the year ahead. We remain confident in our ability to consistently exceed our goals as we drive durable growth and expanding profitability. To that end, our internal metric that best aligns with our strategic priorities and long-term shareholder value creation is growth in adjusted free cash flow per share. Over the last two years, we have more than doubled our adjusted free cash flow per share results. More importantly, we have laid the foundation to compound adjusted free cash flow per share by at least 20% annually over the next three years. We look forward to sharing more details on this metric, the operational drivers behind it, and our long-term vision at our upcoming financial analyst session at our Refresh event next week. Thank you. Operator, we are ready for Q&A. Operator: Thank you. We will now open the call for questions. Please limit yourself to one question. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Scott Berg at Needham and Company. Your line is open. Please go ahead. Analyst: Hi, everyone. This is Lucas Mekop on for Scott Berg. Thanks for taking the questions. On the employee experience side, what drove the variance to the high end of your implied year-over-year constant currency revenue growth here in the first quarter? Historically, that has tended to skew towards the higher end, so I am trying to understand any changes in the quarter. Dennis Woodside: First, we continue to see real momentum in the EX business, and the move upmarket is working. You see that in a couple of different ways. If you look at our growth of accounts that are spending more than $100 thousand with us, that is up 29% year over year. We had our biggest deal ever—a large nutrition company that was a 10-year customer of one of our competitors—that is moving over to us for all the reasons we have discussed: enterprise-grade scale, much faster time to value, easier to manage the platform, and AI capabilities. We also had our second largest land ever with a large healthcare provider—very similar story. The upmarket motion continues to drive the overall EX business. Over the last couple of years, we have built a platform that extends from service management to operations management (now with FireHydrant) to asset management. We brought the Device42 capabilities into the cloud and launched that last quarter, and then into ESM. That is what customers are looking for, particularly in the mid-market—customers from 5 thousand to 20 thousand employees. We call these mid-market or agile enterprises that are looking for a provider that can keep up with them, and that market is big. Tyler? Tyler Sloat: In general, EX is doing really well. It is organically accelerating growth, and that is something we are really proud of. We have been talking about it for a couple of years now, and we are seeing great product market fit, evidenced in some of the larger customers choosing us over our biggest competitor. Analyst: Thanks. And as a quick follow-up, you were reviewing pricing changes earlier in the year. Do you have any updated view on the impact of pricing changes on your full-year guidance? Tyler Sloat: We had pricing changes, but they are not material to our guidance. We are going through a normal process with our customers as they renew, which is more of a CPI-type increase that any other software company would do. This is something we put in place about a year and a half ago. In general, there is no impact to our guidance because of pricing changes. The impact is really because new business is going really well on the EX side. Operator: Your next question comes from the line of Morgan Stanley. Your line is open. Please go ahead. Oscar Saavedra: Hi, you have got Oscar Saavedra on for Elizabeth Porter. Thank you for taking my question. I want to stick with Freshservice. Nice to see the wins you called out against your largest competitor. As we think about that opportunity, how would you characterize the pipeline building, given that pipeline going into last quarter looked pretty strong as well? Tyler Sloat: It is a continuation from what we saw coming into the year. We have been building out the field motion over the last year. Last year was about putting the leaders in place, and those leaders started filling out the roles underneath them—sales reps, CSMs, and ASMs who can engage larger customers. We are building that muscle, including the pipeline muscle, and we are seeing a really strong pipeline in the field for EX in particular. Oscar Saavedra: Got it. And a follow-up around seat expansion: there is debate about lower headcount among customers, but your NDR picked up quarter over quarter on a constant currency basis. Can you share details on whether that was more of an upsell driver, or did you also see strong seat expansion? Dennis Woodside: We saw strong new business wins and strong seat expansion as well. Remember, our product portfolio is broadening. We have additional seats accessible outside of the core IT department through ESM, which has been a big growth driver for us over the last year. We have asset growth through advanced ITAM that monetizes on an asset base—customers pay for every piece of software or hardware cataloged by the system. We are in a position of taking share from bigger players, which creates the opportunity to gain seats regardless of the overall market. We have not seen seat erosion; seat growth continues to be a meaningful driver of our business. Our business model is evolving. We have consumption-based offerings like Freddy AI Agent, asset-based offerings like advanced ITAM, and resolution- or transaction-based offerings. We expect the model to continue to evolve over the course of the year, and we are excited about new products coming out next week that will enhance monetization, particularly around AI. Operator: Your next question comes from the line of Citizens. Your line is open. Please go ahead. Austin Cole: This is Austin Cole on for Patrick D. Walravens. Dennis, could you double-click on what allowed you to win that largest deal? And as you move upmarket, how much interest are you seeing in the AI solutions and in Copilot? Dennis Woodside: Customers in the mid-market and lower end of enterprise are looking for an enterprise-grade platform that extends from service management through operations management, asset management, and ESM. They want fast time to value and a solution with a proven track record transitioning large customers from legacy platforms onto ours and making them successful quickly. They are looking for AI functionality today as well as a strong roadmap, and they appreciate having choice in how they want to consume AI over time. Some want to provision their agents with Copilot; others want to go directly into agentic AI. At our Refresh for EX event next week, we will announce product enhancements that lean into this enterprise motion and customer choice. We will roll out AI Agent Studio for EX, which allows customers to build their own agentic capabilities directly in our platform, with 20 preconfigured workflows for onboarding, offboarding, software provisioning, password changes, and more. We are also announcing our MCP Gateway, which will allow customers who want to bring their own AI—or build agents in cloud or in ChatGPT—to do so and take advantage of the data and information in our platform through MCP calls, which we will monetize over time. We launched our cloud-based version of advanced IT Asset Management about a month ago—available for all customers—which opens up growth for cloud-first customers. With FireHydrant, we have a new integration with Freshservice so you can see incident response data through Freshservice—another vector of growth we are opening up this quarter. EX grew 27% year over year this past quarter. We see EX continuing to be a bigger part and the majority of the business overall, driving growth. We have oriented investments in go-to-market and engineering around that. Operator: Your next question comes from the line of Canaccord. Your line is open. Please go ahead. David E. Hynes: Hey, it is actually DJ. Dennis, I hear largest deals ever and pipeline is fantastic, with signs of organic acceleration. Why the decision to restructure now, and where will those optimizations be focused? Dennis Woodside: We are building an agile company that can deliver strong free cash flow per share growth while fueling the EX business that is growing 27% year over year. A couple of reasons we acted now. First, we recently consolidated our go-to-market strategy. We had a more equal focus on inbound versus outbound. We are increasingly focusing on EX, which is primarily an outbound motion, and on acquiring CX customers with better unit economics. That has led us to rebalance teams and spend more toward EX, and to run the CX business to drive profitability and cash that we reinvest in EX. Second, over the last year to year and a half, we have invested in changing how we build product to embed AI in the development process, resulting in much shorter cycle times. Over half of our code is originated in AI today, which changes how fast we build and the number of people we need. Third, across the business, we have invested in automation and AI to streamline operations and move faster. All of these factors contributed to the restructuring. It sets us up well for the rest of the year, allowing continued investment in EX growth initiatives and efficient, profitable operation of CX. David E. Hynes: Thanks. And Tyler, a follow-up: what does dollar-based net retention look like if we isolate the EX business? Tyler Sloat: Net dollar retention for EX is still over 110%, coming in around 111% as reported and 109% at constant currency. That includes a bit of headwind from Device42 legacy churn—those are multi-year contracts, and we have discussed that since we bought Device42. We are pleased with the result. As EX continues to grow faster, on a weighted average basis, it helps overall NDR—we saw a slight acceleration this quarter as a result. We are introducing more products that provide upsell capabilities against core Freshservice. Operator: The next question comes from the line of Wolfe Research. Your line is open. Please go ahead. Alex Zukin: Thanks for taking my question. Tyler, it looks like you accelerated revenue and billings growth constant currency in the quarter, and you are guiding for accelerating constant currency billings growth next quarter. Anything one-time in nature to call out this quarter? And why were you in line with your constant currency revenue guide rather than ahead of it at the high end? Tyler Sloat: There were no one-times. In past quarters, we called out significant Device42 deals that had accelerated revenue on the front end. We have also talked about some churn on Device42, which is somewhat of a headwind against revenue growth because as those deals renew, we had upfront sums on the old term-license model. So no one-time positives here—just really good execution, and good go-forward execution as well. We rolled through the beat for the year. We are quite positive on what happened in the quarter, specifically in EX. We are being prudent about our estimates for CX going forward—internally optimistic, but externally prudent. Alex Zukin: And Dennis, lots of noise in the market about some vendors going more upmarket or downmarket. What are you seeing generally in your lanes from competitors both higher and lower? Any AI anxiety impacting sales cycles? Dennis Woodside: We do not see AI anxiety slowing or impacting deals. Most of our larger deals now include an AI component—AI is core to the pitch, discussion, and roadmap. Customers are coming for the full platform as well: they need capabilities across IT and beyond to make a switch. On the EX side, primary competitors on the large side are ServiceNow and Atlassian, plus a fragmented tail—Ivanti, Cherwell, BMC, and others. On the CX side, it is more fragmented—Zendesk and a range of smaller players. We have not seen major changes in competitive dynamics. We are confident in our ability to win against larger EX competitors. We had many deals close this past quarter—including the largest and second largest in our history—both multi-year customers of our largest competitor. For companies in the 5 thousand to 20 thousand employee range, we have the right product, and that is increasingly apparent. In CX, dynamics are similar; AI is more prevalent in conversations. We are focusing CX on SMB, commercial, and mid-market customers where we have strong unit economics and expansion dynamics. We are no longer chasing micro deals at the lower end. With replatforming, there are positive signs: we have over 2.5x ARPA for new Freshdesk Omni customers. If we keep that trend and realize price increases from migrating customers to a single Freshdesk Omni product, that will flow through to CX over time. We are being conservative for the rest of the year—our guide implies low single-digit growth for CX—because we want to see how it plays out over the next quarter. Overall, we are set up for a good year. We raised our non-GAAP operating profit by about $26 million, and we see the ability to drive a profitable business with mid- to high-teens growth over multiple quarters. Operator: Your next question comes from the line of Raymond James. Your line is open. Please go ahead. Brian Christopher Peterson: Thanks, I will keep it to one. Dennis, can we get an update on channel efforts? How big are bookings generation today? As you build out the broader EX suite, does that change conversations with partners and how you could expand that base over time? Dennis Woodside: Most of our channel partners are regional service providers that historically may have specialized in JSM or Ivanti or BMC. They are important and are driving meaningful business for us. We do have a couple of GSIs we have been working with—Unisys is one—but that is nascent. We brought in a new channel leader focused on moving up and engaging GSIs. There is interest because customers on the lower side of the enterprise market are looking for choice, and we have a great product. We will continue to invest in the channel. Right now, dynamics are favorable on the regional side; the GSI side is early. Operator: Your next question comes from the line of Piper Sandler. Your line is open. Please go ahead. William Fitzsimmons: Hey, thanks for taking my question. You mentioned opening up the platform to third-party agents and the potential monetization of third-party AI agents. How should we think about that potential within the platform? And on the large EX displacements, how should we think about the repeatability of these over time? Dennis Woodside: On EX displacements, we have been winning bigger deals for a while and will continue to highlight them. The metrics show it—customers over $100 thousand are up 29% year over year, and ARPA for the business has been growing nicely. It is repeatable, and we are repeating it every quarter. Our pipeline this quarter is bigger than last quarter and meaningfully larger than a year ago. On opening up the platform, at our Refresh EX event next week we will reveal our MCP Gateway, which enables customers who want to build broader analytics platforms—combining data from multiple systems into a data lake and applying AI—to both pull and push information to our system. We will monetize it over time. It is a way for us to participate in AI initiatives customers drive outside of our AI. It allows customers to choose: use our Copilot or AI Agent, or build their own agents that interact with Freshservice data and systems—extracting data and driving actions within Freshservice. We are building an open system that can monetize both over time. We will have more details next week at the launch. Operator: There are no further questions.
Operator: Hello, everyone. Thank you for joining us, and welcome to Procore Technologies, Inc. FY '26 First Quarter Earnings Call. [Operator Instructions] I will now hand the conference over to Matthew Puljiz, SVP of Finance. Matthew Puljiz: Good morning, and welcome to Procore's 2026 First Quarter Earnings Call. I'm Matthew Puljiz, SVP of Finance. With me today are Ajei Gopal, President and CEO; and Rachel Pyles, CFO. Further disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website and our periodic reports filed with the SEC. Today's call is being recorded, and a replay will be available following the conclusion of the call. Comments made on this call include forward-looking statements regarding, among other things, our financial outlook, platform and products, customer demand, operations and macroeconomic and geopolitical conditions. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements are subject to risks, uncertainties and assumptions and are based on management's current expectations and views as of today, May 5, 2026. Procore undertakes no obligation to update any looking statements except as required by law. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We'll also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release and our periodic reports filed with the SEC. With that, let me turn the call over to Ajei. Ajei Gopal: Good morning, everyone, and thank you for joining us. Continuing our momentum from 2025. Q1 saw strong performance that exceeded the high end of our guidance. For Q1, we delivered 15.7% revenue growth and 17% non-GAAP operating margin, which represents 650 basis points of year-over-year expansion. I'm particularly pleased with these results given the ongoing headwinds from a challenging construction environment. On our last earnings call, I outlined why Procore will be an AI winner. Our flagship products and early investments in AI, including our acquisition of Datagrid, has positioned us well to capitalize on the disruptive technology. Building on our flagship system of collaboration with nearly 3 million active users and a massive proprietary dynamic data set, Procore AI can deliver outcomes simply not possible with traditional software. In that call, I walked through a real example of a customer using our AI agents as a digital coworker capable of executing complex high effort tests with [indiscernible] a critical advantage for an industry facing a severe labor shortage. This also opened a meaningful new dimension to our TAM as Procore AI can access construction labor budgets well beyond the industry's software spend. Our path forward is defined by a powerful economic duality, upside opportunity through AI monetization and downside protection through our volume-based model. I believe Procore will unlock unprecedented value as the definitive winner in the Agentic AI era. I would like to begin today's call by discussing the great progress we have made with Procore AI on last call. Then I want to discuss our continuing success with our flagship solutions. Finally, I'll discuss our intention to continue to improve margins and free cash flow per share. Let me start the Procore AI, which include our recent acquisition of Datagrid. I am pleased that the technology integration has proceeded rapidly leveraging the foundational security and platform investments we had made earlier in Helix. We have taken the best of both products to provide customers with new capabilities and are now executing on a combined product road map for Procore AI. Our solution enables customers to deploy embedded Procore AI agents that can execute tasks such as RFI analysis submittal cross-checking and compliance auditor. We recently released agents in the triggers, which enable customers to define automated event-driven AI workflows transitioning from reactive to proactive test execution across their projects. We are piloting a new voice AI interface designed for field workers who want hands-free access to project data on the job site. We also recently introduced a specialized contract review agent that can efficiently analyze construction documents that flag any risk in the contract. By building on the foundations already established in Procore AI, we were able to introduce this workflow in fewer than 30 days, and it is already being tested by customers. As the hard Procore AI is a reasoning engine purpose-built to construction. It understands the language and logic of the project. For example, when an RFI is how a submittal connects to a drawing, how a change order gets approved. On top of that, it works as a [indiscernible] system that holds context across multiple steps. It don't just answer a question, it understands the threat. For example, why is the middle was sent, what is obligate and what needs to happen next. Think of it as a digital coworker that encodes the logical construction decision making, reasoning about the project the way and experienced practitioner would. This data and contact can only be accessed within a system of record and coloration like Procore. That capability is backed by a tool library of dozens of construction-specific capabilities, including co-compliance capulators, drawing analyses and documents cross-referencing engines. And it is still early. As we continue to develop Procore AI, going deeper into our proprietary data and broader across project types, the reasoning engine will only become more capable. We expect our solution to continue to improve with every layer we unlock, and we have a long runway ahead of us. Turning to go-to-market. We made a deliberate decision to launch Procore AI through a dedicated specialist team working today as an overlay alongside our core sales force. The team is very small and intentionally so. The goal was to learn what the commercial motion looks like before scaling it. We are now working on translating those learnings into enablement for the broader sales force and we expect much of our sales organization to be selling Procore AI in Q3. I'm excited that customers are adopting our Agentic solutions in addition to our flagship offering. A great example of this is within the estimating department and one of our Enterprise customers Crest operations. Crest is already seeing transformative ROI from Procore AI. For their most complex projects, bidding is an audios process involving thousands of data points across massive sets of doing. By leveraging Procore AI, Crest has done a manual process that could spend weeks of effort down to an automation that can take as little as 20 minutes. This isn't just an incremental improvement in speed. It is a fundamental shift in their competitive advantage, allowing them to bid more accurately respond to opportunities faster and ultimately drive a level of ROI that was previously unattainable. Moving to our flagship solutions. In Q1, we have driven more innovation at a faster pace than ever before. We expect that these new product capabilities will help to drive sales, increase customer satisfaction, and improve retention. I'll start with the largest and most mature part of our business today, U.S. general contractors. We are focused on improving our platform by enhancing products like quality and safety and by extending Procore Connect to support RFI in addition to drawings. I'm particularly pleased with the general availability of the updated Procore scheduling, our natively connected scheduling solution that has already been implemented by over 2,000 companies since February launch, making it one of the fastest adopted products in our history. Together, these releases defend and extend our leadership while opening new expansion opportunities in civil and infrastructure construction. In Q1, Trinity Group a long-time GC customer expanded its construction volume commitment to $1.1 billion, a 6x increase. Trinity is evolving from a heavy user of siloed tools into a platform-first organization to support rapid growth and the growing complexity of large-scale bills and is increasingly relying on the Procore platform to help run its business. Now let me move beyond general contractors. On our last call, I focused on owners, including data center operators, this time, I would like to discuss new functionality available to specialty contractors as well as international customers. For specialty contractors, we introduced materials management which provides end-to-end supply chain visibility for self-perform contractors from procurement and better management through delivery tracking to the job site. This is part of our broader investment in a purpose-built self-perform platform that unifies resource management, financial and scheduling for the specialty and self-perform contractor market. This represents a significant step in our strategy to serve the heavy construction market where equipment costs can be just as material as labor for some projects. Also in Q1, Helm Group, a leading specialty and mechanical contractor in the Midwest, ranked #61 on the E&R 600 significantly expanded its construction volume commitment after 18 months of successful usage. The company which specializes in major projects like data centers and Northwestern University's new football stadium initially started with only a portion of its construction volume. Following a successful initial rollout of project management tools, Helm Group decided to standardize on Procore. The primary goal of this expansion was to achieve increased labor productivity, mitigate risk and streamline project management operations in a single location. Moving to international markets. We launched a new BIN model federation and streaming viewer, which enable customers to federate and navigate large 3D building information models directly within Procore. A key requirement for winning upmarket in Europe. This is the anchor of our European common data environment strategy, which combines bin, asset management document management and product execution into an ISL-19650 compliance solution. This positions Pro port as the connected construction platform for markets where CD clients is a contractual requirement. In Q1, we signed a new contract with Collin Construction Limited, a large general contractor headquartered in Dublin. Collin had been using over 25 disconnected point solutions and is now standardized on Procore's unified form to solve reporting and mobile access challenges. The customer anticipates saving over 46,000 labor hours over the next 3 years, the equivalent of more than 13 full-time employees as well as decreasing nonrecoverable change order by 25%. Moving to strategic partnerships. In Q1, we announced that we are integrating the Procore platform with NVIDIA on [indiscernible] VSX Blueprint to accelerate the building of AI factories and other critical infrastructure. This integration will establish a digital thread throughout the entire construction life cycle to build safer, faster and smarter infrastructure. The combination of Procore and NVIDIA solutions will enable teams to rapidly model design changes using a high fidelity, physically accurate 3D digital twin resulting in infrastructure that comes online faster and is optimized for pet performance. This has started our strategy of developing meaningful relationships with leading vendors that will reap rewards in the long term. Next, I would like to briefly talk about our use of AI to enable us to grow more efficiently in the future to increase the speed of the organization and to improve margins. Today, every Procore employee has access to at least one AI platform from the leading vendors. In R&D, we're in the middle of incorporating AI to transform our operating model. The part of that organization that have already gone through this position are able to deliver products faster and more efficiently than before. The rest of the organization will follow R&D leads, and we expect to see and efficiencies from these changes to provide our financial model with incremental leverage in 2027 and beyond. Rachel will expand on this opportunity in a moment. And speaking of Rachel, I'd like to take this opportunity to formally welcome her to the team as our new CFO, along with our new CRO, Walt Hearn. Rachel and Walt, our business and technology [indiscernible] and each held a key leadership role with me at ANSYS. They are highly qualified individuals who is successful in vertical software. We have all worked together and know how to meet challenges and deliver value as a team. I'm excited they are joined Procore at this critical time. I have been CEO of Procore for about 6 months now, and my enthusiasm of the job, the company and the construction industry has only grown. I remain optimistic for Procore's future, which is reflected in our financial performance for Q1, where we exceeded the high end of guidance and increased our full year outlook. A special thanks to my colleagues at Procore of their hard work and dedication to our customers and stakeholders. Looking to the future, Procore plans to grow its presence in the construction industry become wider in the AI era and continue to compound free cash flow per share. And with that, I'd like to turn the call over to Rachel. Rachel? Rachel Pyles: Thank you, Ajei, and good morning, everyone. I am incredibly excited to be joining Procore at such a transformative moment. Before we dive deeper into the numbers in the overall business, I would like to briefly touch on why I joined Procore and my approach to the CFO role. Joining this organization represents a rare opportunity to serve as the CFO for a category leader that is digitizing the industry that builds the world. Beyond Procore's established leadership position, I see a compelling financial profile with clear levers for long-term value creation. Furthermore, my prior history with Ajei and Walt ensure strategic alignment from Dave Batten allowing us to move decisively as we scale. I'm thrilled to be part of this journey and look forward to building on the strong foundation already in place. My philosophy as CFO will be anchored in the pursuit of durable, profitable growth. Given Procore's market opportunity, this should remain our top priority. The pursuit of durable growth will be underpinned by disciplined and thoughtful capital allocation strategy, specifically to reiterate our capital allocation philosophy. First, we will prioritize high ROI organic growth investments. Second, we will remain targeted with acquisitions that accelerate our strategic road map. Finally, we are committed to returning excess capital to shareholders via opportunistic share repurchases. By aligning our investments with this framework, we aim to consistently compound free cash flow per share, ensuring that our category leadership translates directly into long-term value for our shareholders. Moving on to our Q1 results. Total revenue in Q1 was $359 million, up 15.7% year-over-year. Q1 non-GAAP operating income was $61 million, representing a non-GAAP operating margin of 17% and up 650 basis points year-over-year and free cash flow was $56 million, up 20% year-over-year. As for our key backlog metrics, current RPO grew 21% year-over-year and current deferred revenue grew 17% year-over-year. Turning to commentary on our results. We delivered another quarter of durable revenue growth driven by healthy demand across our customer base. This performance was underpinned by 3 primary strengths. First, we secured several significant new logo wins that highlight our increasing market share. Second, we saw a meaningful shift towards larger-scale engagements with a 6-plus figure ARR wins growing 24% year-over-year. And finally, we generated strong pipeline in the quarter. This momentum in high-value customer wins and overall pipeline strength gives us confidence in our trajectory and sets that a favorable foundation for 2026. Our strength in the quarter also contributed to strength in CRPO. This metric continues to benefit primarily from longer average contract duration. When normalizing CRPO for this dynamic, the year-over-year growth was consistent with both Q1 revenue growth and ending ARR growth. Once contract duration stabilizes, reported and normalized CRPO growth will eventually converge with revenue growth. Our performance this quarter unexplored our commitment to driving long-term shareholder value. By delivering durable top line growth, combined with strong year-over-year margin expansion, we improved our growth in year-over-year free cash flow. Those items, coupled with limiting our share count growth via disciplined equity compensation and our share buyback activity drove meaningful improvement in our North Star metric, free cash flow per share. We believe this approach of compounding free cash flow while managing our share count remains the most effective way to maximize returns for our shareholders over time. Looking ahead and to expand upon Ajei's commentary, we view AI as a fundamental catalyst for our long-term financial profile. On the top line, we expect AI to serve as a tailwind to revenue growth as we monetize high-value capabilities and deepen platform engagement. Regarding our margin profile, we do anticipate modest headwinds to gross margin given the increased compute expenses to support these workloads. However, we expect this to be more than offset by the tailwinds to our operating expenses as we leverage AI to drive internal efficiencies and scale across all functions. Ultimately, the convergence of durable growth and an optimized cost structure reinforces our conviction that AI will be a powerful tailwind to free cash flow per share, creating a highly efficient engine for long-term shareholder vacuum. With that, let's move on to our outlook. For the second quarter of 2026, we expect revenue between $364 million and $366 million, representing year-over-year growth of 13% at the high end. Q2 non-GAAP operating margin is expected to be between 17.5% and 18.5%. For the full year fiscal '26, we are raising our revenue guide to a range of $1.499 billion to $1.53 billion, representing total year-over-year growth of 13.6% at the high end. We are also raising our non-GAAP operating margin guidance for the year by 50 basis points to be between 18% and 18.5%, which implies year-over-year margin expansion of 390 to 440 basis points. Finally, we are maintaining our free cash flow margin guidance of 19%, which implies year-over-year free cash flow margin expansion of approximately 280 basis points. To wrap up, we are pleased with the quarter and are excited about the momentum we have created for the remainder of the year. We are confident that we can continue to provide durable growth, margin expansion, limited share count growth and compound free cash flow per share. With that, let me ask the operator to open it up for questions. Operator: [Operator Instructions] Your first question from the line of Joe Vruwink with Baird. Joseph Vruwink: [indiscernible] congratulate Rachel on your appointment. I wanted to start with a few things on financials. One is good to see the upside, but the magnitude of upside in revenue and CRPO is, I suppose, a bit less than the prevailing experience where you've been beating by 3% to 4% anything to read into that? And then the second is just on the outlook. You're bringing up the full year by more than the 1Q upside but it looks like that overage or upside remainder is weighted to the second half. Maybe what's informing your expectation there? Rachel Pyles: Thanks, Joe. I appreciate the question. Excited to be here. First, what I would say about our overall financial deal, we were really pleased with the results. If I think about we had strong pipeline, we had strong new logos. So just overall excited about the performance. In terms of the revenue upside that you saw, that was really consistent with what you saw in Q4 in terms of a beat so nothing really different there. And then if you think about our guide, Q2 at the high end is consistent with the Street estimates. No change in our guidance philosophy. We're still going to give you guidance that we feel a high level of conviction in. Joseph Vruwink: Great. And then I wanted to ask on broker scheduling and maybe a bit more feedback since general availability. I remember -- there is discussion at ground break, just spotlighting this particular area is one that's really differentiated in terms of pulling in the full Procore platform capability and AI to the extent that this gets adopted or maybe see as a landing point, does it open richer cross-sell opportunities or maybe give customers more obvious and explicit exposure to what Procore AI can do? Ajei Gopal: Yes. I mean absolutely, Joe, thanks for the question. Look, we're excited about broker scheduling. Firstly, we were able to get the product out and we were able to see very quick adoption because it's essentially natively connected into the platform, and that gives customers tremendous benefits when they take advantage of the product. And obviously, we're in a position to, as part of our strategy, continue to add more AI capabilities, and that will obviously reflect in the flagship products as well. Operator: Our next question comes from Saket Kaila with Barclays. Saket Kalia: Welcome, Rachel. Ajei, maybe for you, maybe just to zoom out a little bit. I'd love to get your views on kind of where we are in this construction cycle. There are tons of factors, of course, to consider. But I know you spend a lot of time with customers, what are they saying to you right now just about project starts this year and how they're thinking about the environment? Ajei Gopal: Saket, thanks for the question. So I would say that the construction environment has been pretty stable, certainly from the -- in the time that I've been with the company now with -- in the conversations that I've had with customers, it's been pretty stable over the last couple of quarters. What I would say, though, is that there's different levels of excitement about certain portions of the business. In fact, last time I talked about data centers, and even though data centers represent a relatively small amount of the overall construction volume, there's a lot of excitement about data centers. And certainly, there we are in the center of the conversations I mentioned in the script in the prepared remarks, I mentioned our relationship with NVIDIA, where we are working with them on a blueprint to accelerate the building of AI factories and other infrastructure. So those kinds of activities create a lot of excitement because there's those data centers are front and center right now. But otherwise, it's a pretty stable demand environment. And obviously, I'm excited about those conversations with customers because it does reflect their trust in Procore and their perspective on how we can help them as we move forward together. Saket Kalia: Got it. That makes a ton of sense. Rachel, maybe for you. It was great to see CRPO growth kind of continue at 20%. And of course, you noted the duration benefit there as well. Maybe the question is, how do you think about the glide path for maybe that growth rate starting to converge with revenue growth? Rachel Pyles: Yes, thanks, Saket. That's a great question. So CRPO has remained strong. We are starting to see that average contract duration start to normalize. So between Q4 and Q1, duration stay kind of roughly flat quarter-over-quarter. If you look forward kind of once that duration does stabilize, it will probably take around 3 to 4 quarters following that stabilization before you see the CRPO and the revenue growth kind of comes together. Operator: Our next question comes from Dylan Becker with William Baird. Dylan Becker: Maybe, Ajei, for you to start. It sounds like kind of platform consolidation remains a key theme in kind of the customer conversations and expanding volume. And I think that makes sense, right, in the context of leveraging your agents, utilizing more of the platform to deliver more of that -- realize maybe more of that value. I guess to what extent is that AI conversation playing a role in kind of catalyzing adoption from an industry perspective? And maybe validating the perception or buy-in into Procore AI strategy to help those customers solve for productivity, if that makes sense. Ajei Gopal: Yes. So if I understand the question, let me just -- let me sort of address it, and then if I miss the point, please ask more. But when I've had a number of conversations with customers about the overall platform and about AI, in general, certainly in the context of construction. When you talk to customers, many of them I mean, they don't really have the time or the inclination to become experts for AI and construction. They look to us as being their technology partner. They've worked with us for years. They trust us. And their objective is they just want to be able to build better projects, that's their business. And they want to make sure that their vendors, their tech vendors and their tech partners are in a position to do their job, which is to bring them the best and the latest technologies, including, of course, AI to be able to help them perform what they need to do. And so the fact that we are able to provide Agentic AI capabilities that have such compelling value. The fact that we're able to provide Agentic AI capabilities from within the context within security within the framework of their system of record, of their system of collaboration where they store their data, with the area where they rely on to participate with all of their partners and our projects, I think that gives them a lot of comfort as we are making these investments. So we can have those conversations with them. They see what we're able to do. And and that's been very positive for us. And I'll give you an example of customer engagement. We just had one of our largest customers here in Austin for hackathon last week. And they brought together about 85 of their employees, and it was a multi-day event. And we were able to, in the context of the platform, we were able to post their creation of agents and they've built something like 300 custom automation agents that they were able to pull together for their particular use case. So that just gives you an example of how customers are able to take advantage of our genetic capabilities under the overall umbrella of the Procore platform. Dylan Becker: Very helpful. And maybe to kind of stick with you or Rachel, love your kind of perspectives here. But as kind of an extension of that, you called out kind of some of the commercial learnings and how you're kind of deploying agents maybe being deployed a bit more broadly in the go-to-market muscle in the third quarter. I guess maybe kind of any learnings in receptivity around what the monetization strategy is going to look like. And then I think -- you also called out the internal efficiency leverage is kind of be felt more into 2027 and beyond. But maybe just kind of reconciling or how we should think about the timing between 2026 and 2027 for some of these benefits to layer in? Ajei Gopal: So in terms of the go-to-market, it's pretty much what I said in the script, which is we wanted to make sure that we completed the -- or we made significant progress on the technical integration between the projects. And as you know, we did the acquisition of Datagrid earlier this year that the data grid platform with the data capabilities were integrated into the Helix work that we've done earlier. So there was a lot of good positive energy there from that integration work. Coming out of that, we have obviously an updated product capability where we're now with a small overlay sales force, as I described, of a very small number of people talking to customers in conjunction with the sales force, but really as an overlay so that we can get the value proposition, the ROI down. And then the expectation, of course, is in Q3 that we'll be in a position to roll it out to the larger sales force. Our expectation is for our genic solutions that we'd be in a position to be able to monetize that and some capacity-based consumption-based licensing structures. In contrast with our ACV-based pricing licensing structures for our flagship offerings. And so that's the path going forward. As far as the -- I'll let Rachel address the rest of the question. Rachel Pyles: Yes, absolutely. So Ajei, I think highlighted a lot of the top line benefits that we're expecting from AI and from the token-based model we rolled this out across the sales force and engage our customers. So I'll speak a little bit more about kind of the margin impact. So I think that as we see more agents deployed, we're going to start to see some gross margin headwinds that come from that. Now I think over time, those will really be managed in 2 ways. So first, I'm optimistic that those overall costs themselves will come down kind of over the long term. Similar to, I think, about a little bit like cloud computing, when cloud computing, everyone moved to the cloud, costs were up, but then over time, those came down and optimistic that will happen here. But even more importantly, on our side, the benefits that we expect from deploying AI within our own workflows across all parts of our organization, I expect will more than offset any headwinds that we see from the gross margin. So I'm really excited about that opportunity and it gives me even more conviction about our margin expansion kind of over the long term. Dylan Becker: Ultimately, is this more of a fine tune? Or should we expect major changes going forward again? I'm just trying to kind of gauge the approach. Ajei Gopal: Great question. Thanks. So as I've been looking at the company, look, my core takeaway is that we have a really strong foundation. We certainly have great relationships with customers. We have built a great platform on which to be able to build our products and we've built a great platform in which to be able to sell and support our products. And so I think we're in a good place, of course, where we are today. But the reality is that the world that we're in continues to change the market conditions continue to change. Technology continues to evolve. And I believe that every company needs to be in a position to change to reflect market circumstances and the need to continue to move faster. And so what I felt was important as we go to this next stage was to make sure that I could bring on a couple of executives who I know well, who would allow us to be able to move really fast in a complex business environment, we stand what it means to run a global business. And certainly, you have that with Walt and Rachel I've worked as well for a number of years. given where we are with the opportunity, we need to continue to be able to move fast. And I expect Walt to provide leadership along the different dimensions of growth our organization as he has in the past working together with me. So I'm excited about his participation with the company. I'm excited about the foundation that we have and I'm excited about our ability to continue to evolve our business to take advantage of the optionality in front of us. Dylan Becker: And just a quick follow-on with Rachel saying the guidance at hasn't changed, but you're seeing decelerating growth at least in your guide. So many are asking, are you embedding the potential disruption of more changes in this guy in the front half of the year. Is that why it's so conservative on the total year deceleration? Rachel Pyles: So if I think about just coming back to our guidance philosophy, we consistently have a beaten raise methodology, and that's what you're seeing us do here. So really nothing different than what we've done historically. Ajei Gopal: So our expectation is to continue to execute as we improve our business. And so there isn't any subliminal message here. Operator: Our next question comes from DJ Hynes with Canaccord. David Hynes: Ajei, do you think the network effects of the business model get any stronger as AI is increasingly embedded into workflows and collaborators get insight into those capabilities. In other words, like is it only the payer that will realize the benefits of Helix and your AI agents? Or does the whole ecosystem equally benefit, which could be a good thing for generating broader demand? Ajei Gopal: Well, when you think about Procore, Procore is intrinsically a system of collaboration, right? Because if think about the nature of construction. Construction is essentially multiple parties getting together on a project of one and with strong commercial relationships between the parties with an ongoing sequence of changes and modifications, et cetera, based upon the realities of the day-to-day activities that are taking place on the construction side. And so it is intrinsically a system of all parties collaborating in a very safe and secure manner where changes are -- have financial consequences and therefore, need to be audited and managed effectively. That is a -- that is kind of a very unique -- it's a very unique environment. It's not just a sort of a system of record that's available to just a single party. And as such, when we're in a position to take advantage of and create a genetic workflows the benefit accrues to all of the people who are collaborating on the project because, obviously, as we create digital coworkers, for example, which is one way to think about agents. If you think about digital cowork is helping that allows people to be able to make decisions faster more effectively, that creates more speed that creates more accuracy in the overall collaborative effort on the construction side. David Hynes: Yes. Yes. Okay. Makes sense. And then, Rachel, I'm not sure if I missed it, but can you give us a sense for how much data grid and FX impacted both revenue and CRPO in the quarter. I think investors are trying to wrap their arms around inorganic ex FX growth rate in the quarter. So anything on that front would be helpful. Rachel Pyles: Yes, absolutely. So first with FX, FX on our overall consolidated business was immaterial. If you think about where you see FX it comes through in our international business, there was about a 2 percentage point impact in that business. But from a consolidated perspective, it was de minimis. On the Datagrid side as well, data grid, as Ajei said, we're just finishing the integration and going into GA shortly those capabilities. So Datagrid was really immaterial to the overall results. Our organic business continues to grow 15% to 16%. Operator: Our next question comes from Adam Borg with Stifel. Adam Borg: Maybe, Ajei, just on the macro going back to that, we talked about it being stable over the last 6 or so months. I'd love to talk a little bit more about the government vertical, in particular, especially following the FedRAMP modern authorization earlier this year. Ajei Gopal: Yes. Yes. Sorry, you said you want to talk about the government vertical and then I lost you [indiscernible] ask the question. Adam Borg: Apologies. Yes, just the government vertical, especially following the FedRAMP Moderate authorization earlier this year. Ajei Gopal: Okay. Yes. So look, I think the FedRAMP thing, we were very excited about the FedRAMP authorization that we got earlier it is fundamentally a longer-term play for us because it allows us to participate in some of these government contracts. There is inherently some latency in government contracts, but it is in order to allow us to participate with them, we need to have that authorization. So government agencies require the authorization, the GCs that build on their behalf required authorization. We're certainly able to have these conversations with customers but the impact takes a little bit of time before from the time of announcement to the time that you can actually see it as well. Adam Borg: Super clear. And maybe as my quick follow-up. Earlier this year, Procore began offering 4 bundled packages each with 3 tiers. Just curious how that new package and pricing is -- really new packaging has been receptivity from the customer base. Ajei Gopal: Yes. So we had a chance to roll that out earlier, and the feedback from customers has been positive. I think it gives us an opportunity from a proper perspective to really position the right capability for the customer, depending on what they're looking for. And it certainly gives us an opportunity to generate incremental monetization as our customers move up that packaging stack. So it's still early days, but we're pleased with the capabilities that we have. And frankly, I guess the other point is that the intent behind the packaging was to really streamline the sales cycle. So it provides an ability for customers to be able to digest kind of a bundled value price as opposed to wondering about multiple a la carte items. And that gives customers a very clear path to being able to add an adoptable products. And so that combination, I think, is something that I think works so well for the customer and frankly, works out well for us as well. Operator: Our next question comes from Matthew Martino with Goldman Sachs. Matthew Martino: Ajei, I wanted to touch on international for a moment. With Walt now in the seed, where do you see the most meaningful opportunities to strengthen the international franchise from your here? And how do you think about the trajectory of that part of the business over time? I know you announced some new products as well to capture the upmarket in Europe. So if you could tie all that together. Ajei Gopal: Yes. So on the new products, just to slide together, we announced a CDE in Europe. And in fact, last week, I believe, we had an innovation conference in London, where customer feedback on the CDE was very positive. I think we had something like 170 regional customers and prospects. We had strategic partners and I think that continues to help reinforce our central role in the construction type system because, certainly, in that geography, the CDE is an important aspect of the tech ecosystem. And so that's one of the reasons why we're very pleased with that. I would say that, overall, if I were to Think about our go-to-market. I mean, obviously, international has been a relatively smaller part of our business relative to the opportunity. And it's obviously an area where we will spend some more time. I think the U.K., Ireland is where we're spending some initial momentum, but we do see opportunities in EMEA and with Walt in seat, I think we'll have an opportunity to continue to accelerate that part of the business, and we're looking forward to seeing that. Matthew Martino: Got it. And then, Rachel, for you, you laid out a capital allocation framework across organic investments, targeted M&A and opportunistic share repurchases. So as the new CFO stepping in, how are you thinking about the relative priority of those 3 buckets in the current environment? Rachel Pyles: Yes, absolutely. Thanks for the question. As I think about it, I really do them in that order. So first, focusing on organic growth and making the right investments there. And then to the extent that we the M&A becomes available that helps us accelerate our strategic road map, we will definitely pursue that. I think about those 2 things kind of one and then the other M&A, you can't always predict when it's going to happen and when it's going to be available. But certainly, we'll look to pursue those opportunities. And then finally, third would be the strategic opportunistic share repurchases. Operator: Our next question comes from Daniel Jester with BMO Capital Markets. Daniel Jester: Maybe, Rach, just starting with you on the seasonality of margin performance this year. I think last quarter, it was suggested that maybe the fourth quarter exit rate of margin expansion this year might be a little bit lower from sort of typical events and things like that. Any updated color on how we should be thinking about the margin trajectory this year. Rachel Pyles: Yes, absolutely. Thanks for the question. So we're confident in kind of our overall margin profile. As you imagine all expenses are linear. And so margin does move around in the quarters. But from an overall perspective, you're very confident in our full year margin expansion numbers. Daniel Jester: Okay. And then, Ajei, just on the comments about specialty contractors that you made. It's great to hear about that. And I think in the past, I think there's a lot of focus on owners and as great opportunities for Procore. Maybe can you just double-click on the specialty contractor opportunity and how you can maybe see that additive to growth this year? Ajei Gopal: Well, we certainly -- with respect to specialty contractors, I think we've had, from a product perspective, incremental releases that we talked about. I talked about materials management on the call. And obviously, I talked about equipping telematics. Both of those are areas of products that I think will help with our specialty contractors. I mean we give them essentially a place to manage documents to attract labor to track equipment to coordinate the DCs to get paid faster. So there's a lot of value that we're in a position to provide 2 specialty contractors. I'm excited about the area, and this is this is obviously one of the areas of focus for us as we go forward. Operator: Our next question comes from Jason Celino with KeyBanc Capital Markets. Jason Celino: So maybe my first question is kind of the incremental operating leverage comment that you expect to see in 2027 from AI. When we think about this internal AI adoption, I guess where is Procore on that journey today? Or said another way to drive that incremental leverage next year. are those AI efficiencies that you've already implemented? Or is that based on a road map of AI adoption you look to take on? Ajei Gopal: So let me just jump in here a little bit to talk about kind of where we are today in terms of our use of AI. Look, when you think about -- and I mentioned this in the script, but I'm excited that within our R&D organization, we're in the middle of transforming our operating model using AI. And my expectation is that as we go through that transformation, the rest of the organization will be in a position to follow the lead the R&D organization has -- is driving. And to be honest, we are already seeing the benefits of that and the part of the R&D organization that has adopted a very different model from a more traditional model, taking advantage of Agentic capabilities. We're starting to see increased speed in terms of product delivery, increased capabilities. So that value and benefit is something they're excited about. We're in the middle of that taking place. And obviously, the rest of the organization will follow. And we expect, obviously, the speed and the efficiencies from those changes are the basis of some of the financial leverage that we talked about for the next year. Rachel Pyles: To kind of add on to what Ajei said, he mentioned R&D is going first and then the capabilities out to the rest of the organization. But I would also note that we do have AI capabilities in other parts of the organization and our employees have access those tools, although not quite as advanced as on the R&D side. As we go into '27, I'm excited about seeing that all come together and seeing the efficiencies really across all parts of the organization. So I don't -- you're not going to see the leverage coming just from one place. It will really be coming from all lines across the P&L. Jason Celino: Okay. Great. And then in prior questions, you've talked about seeing a stabilized macro, but maybe going a step deeper in your conversations with customers, how are they managing the increase in oil prices. Obviously, it adds to the project cost, and it doesn't sound like it's affecting near-term project starts, but curious how conversations are going in more recent discussions. Ajei Gopal: I mean I think the important thing to recognize is the projects that we are involved in working with customers on all long-term projects. And so there it's not about what happens that's perhaps contained to one quarter or another. So no customers have really, in my conversations have really talked about this as being a long-term consideration. And so we continue to see a stable demand environment for the products and from our customers. Operator: Our next question comes from Ken Wong with Oppenheimer. Hoi-Fung Wong: When looking at the shape of the guidance, it does seem to imply second half acceleration from 2Q. Should we think of that as just purely mechanical? Or are you guys -- as you think about the business, as you look at what's in the pipeline that there is some business momentum, there is some improvement and an inflection coming in that back half? . Rachel Pyles: Thanks, Ken. It's really mechanical. So consistent with what you've seen us do in the past, we did a beat and raise this quarter. Again, that no change in our guidance last year. We're continuing to give you guidance that we feel a high level of conviction in. Hoi-Fung Wong: Got it. And then Ajei, I think it was someone alluded to earlier, but again, great to see you pair up with Walt again. As you and Walt look at the current go-to-market, any additional changes you think that needs to be made whether it's in terms of the organization or just the approach to selling. Any thoughts there that you can share with us? Ajei Gopal: Well, Walt has been officially in the seat for a little over a month, April 1. So he's still evaluating the organization, the team, et cetera. But look, Walt understands the vertical software motion, he spent years in vertical software. Obviously, we work together in a vertical company -- vertical software company. So he understands the motion. He understands the customers and how to have those conversations. And he was, frankly, with me working -- we were working very closely together on the journey that we went through in our last company to be in a position to take the sales organization and continue to scale it both internationally as well as across multiple customer segments and continue to expand the business. So I'm excited about Walt's capabilities but certainly, what I can tell you is that even as we make changes, and obviously, every sales leader will find areas of ongoing improvement as we make changes we will -- my expectation is that we will continue to execute as we improve, and I'm excited about that. Operator: We have reached the end of the Q&A session, and this concludes today's call. Thank you for attending. You may now disconnect.