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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 Bumble Inc. First Quarter 2026 Financial Results 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 Will Taveras, Head of Investor Relations. Please go ahead. Will Taveras: Thank you for joining us to discuss Bumble Inc.'s first quarter 2026 financial results. With me today are Bumble Inc.'s Founder and CEO, Whitney Wolfe Herd, and CFO, Kevin Cook. Before we begin, I would like to remind everyone that certain statements made on this call today are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of factors and risks that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in today's earnings press release and our periodic filings with the SEC. During the call, we will also refer to certain non-GAAP financial measures. These non-GAAP measures should be considered in addition to, and not as a substitute for or in isolation from, our GAAP results. Reconciliations to the most comparable GAAP measures are available in our earnings press release, which is available on the Investor Relations section of our website at ir.bumble.com. With that, I will turn the call over to Whitney. Whitney Wolfe Herd: Hello, everyone, and thank you for joining us today. This is a period of real transformation at Bumble Inc. Over the past few quarters, we have executed a deliberate reset of our member base. We made a clear choice to prioritize quality over quantity, focusing on well-intentioned, engaged members. That decision reduced overall scale but meaningfully improved the health of our ecosystem. Importantly, this quality reset was not isolated. It was the first step in a broader strategy to reestablish Bumble Inc. as the brand that sets the pace for innovation in our category. We focused first on strengthening the underlying supply of our platform, because scale without quality degrades the experience and stifles the outcome people are seeking: high-quality, relevant connections. At the same time, we continued rebuilding our technology and product platform to better serve our member demand for real dates and in-real-life connection. These moves required short-term trade-offs, but they were deliberate and necessary. Now, with healthier supply and stabilization in our member base, we are entering the next phase: activation. This phase is anchored by two innovation initiatives. First, the introduction of our new technology platform. Second, the launch of a fully reimagined experience for Bumble members, including a new interaction model and profile system. The new Bumble platform and experience will roll out over the balance of the year, beginning with the first stage of the new tech platform in the coming weeks. Our direct member engagement and our research, including our work with author and professor Dr. Arthur Brooks, reinforce a key insight: the biggest friction in dating today is not discovery; it is the gap between online interaction and real-world connection. People get stuck in that in-between. This is a central challenge faced by every scaled dating app. Everything we are building is designed to close that gap and drive real in-person dates between high-quality connections. Accelerating each member's progression toward finding that connection and getting out on a date is our priority. We have been doing foundational work on this problem ahead of introducing our new platform and reimagined experience. We have improved profiles, strengthened intent signaling, enhanced safety, and built more dynamic onboarding. These changes have helped members show up better, even within the limits of our legacy systems. We are also continuing to improve the current Bumble experience by addressing core member pain points, improving recommendations, and enhancing usability. Early tests are showing promising results, including improvements in matching behavior and monetization trends, but results are expected to be relatively limited on the legacy tech stack. We have more to do here in the months ahead. What comes next will go much further. The innovation starts with our technology platform. As we shared last quarter, we have been actively rebuilding our new cloud-native, AI-enabled tech stack. This modern platform will allow us to move faster, iterate more efficiently, and begin to unlock entirely new product experiences. Today, making meaningful changes to our recommendation engine or introducing new features can take months. This has been a real constraint on the rate of innovation. Our new tech platform is expected to eliminate this constraint. As the platform rebuild nears completion, we are ramping development of the next-generation Bumble Date application, a merging of the new back end and the reimagined member experience, launching in select markets in Q4 of this year. Between now and then, elements of our new technology platform will begin powering a parallel roadmap of incremental improvements in the existing product. With our new app experience, the opportunity is not just to improve the current interaction model but to evolve beyond it. We are designing a system that shortens the distance between intent and outcome, eliminating the friction caused by multiple steps between interest and connection. Clearer signals drive more mutual engagement and faster progression toward in-real-life connection. Early reactions to this new model have been very positive. Our AI layer, Bee, is expected to play a key role in the reimagined experience. Testing Bee in onboarding new members has been especially encouraging—not just in Bee's effectiveness, but in members' willingness to engage deeply and share richer context about who they are and what they are looking for. Bee’s ability to capture more signal and process information quickly improves our understanding of each member and will strengthen our recommendation engine. Onboarding is just the first step in how Bee will be used in the new experience. We also expect Bee to help facilitate connection and to suggest and plan real dates, among other roles. Bee is a great example of what we can accomplish on the new modern tech stack and how AI will be an important catalyst for our business. It is important to note that we built Bee separately from the legacy system. I have said a lot here. Let me summarize. First, demand for love and human connection is as vital as ever before. We have done the heavy lifting to reset our business with healthy supply that is ready to engage. We are giving members the tools to show up authentically as their best selves. Next is our new platform, which will accelerate product innovation. Right behind that will be an entirely transformed Bumble experience, which dramatically reduces friction and gets members to in-real-life connection faster. We believe this is our path to deliver what daters are seeking today. This is the path to restoring revenue growth, and we are already at work building the monetization model behind it. That is the core of the Bumble app transformation, but it is only part of the picture. Beyond dating, we are also investing in broader connection, which we see as both a critical need in the world and a competitive advantage for us. We have expanded groups on Bumble BFF and are seeing strong early traction with total group joins nearly doubling between December and March. This success is driven by Gen Z women, who comprise the largest cohort on the platform, highlighting our opportunity with this core demographic. Overall, more than 80% of BFF members are women, reinforcing the durability of our overall brand. We will continue to expand on group connection and in-real-life meetings for platonic purposes through BFF. But we are also bullish on the opportunity of romance beyond one-to-one in terms of how people come together and meet for love. We are testing new ways to bring people together for both platonic and romantic purposes, including a new product beta launching next month, which we are super excited about. Across all of these efforts, our approach remains consistent: test, learn, iterate, and do it quickly. We are data-driven, member-obsessed, and more passionate about the opportunity and problem we are solving than ever before. In terms of timing, members will first experience the rollout of our new platform, delivering a faster and more reliable experience starting in the coming weeks from a back-end standpoint. From there, we expect to introduce the initial features of our new interaction model and profile. This is our big bang. It will start to roll out to select markets in Q4, backed by a 360 marketing campaign. Then we will continue to refine the experience into 2027, including adding features like group dating and expanded access to Bee. Ahead of our upcoming unveil, we are continuing to deliver innovations in the current Bumble experience that help members show up better, more confident, and ready to engage. Not all of these improvements will be immediately visible to members. The critical signal enhancements they enable will drive more relevant connections on the back end, and the UI/UX will be on our modernized back end, which will enable the rollout of our transformed experience later this year. As we execute this transformation, we remain disciplined. We delivered a strong Q1 compared to our expectations, and we are managing our cost structure carefully while continuing to invest in product, technology, and selective marketing. Of note, we have reduced our performance marketing spend to less than 50% of pre–quality reset levels. We are starting to see the benefit of organic marketing again, including positive word of mouth, now that we have improved the member base quality. Despite tech limitations, we have been able to drive meaningful improvement, which we believe signals the opportunity ahead with a modern tech stack in place. To close, we have been hard at work rebuilding our foundation. Now we are focused on translating that into a meaningfully better product experience, which members will start seeing in the coming months. We cannot wait to reignite our brand, product, and mission as we transform Bumble Inc. and our category. We look forward to sharing more in the months ahead. Thank you so much for your time, and now I will turn it over to Kevin. Kevin Cook: Thank you, Whitney, and hello, everyone. In the first quarter, we delivered results in line with our expectations as we move past our quality reset to focus on product and technology innovation. As Whitney noted, we are seeing signs of stabilization in our member base as we enter the next phase of activation. I will review our quarterly results before turning to our outlook. Unless otherwise noted, my comments are on a non-GAAP basis, and comparisons are year over year. Total revenue for the first quarter was $212 million compared to $247 million in the year-ago period. Foreign currency exchange rates contributed $9 million to revenue in the quarter. The loss of revenue from Fruitz and Official equated to approximately one percentage point of headwind in the quarter. Bumble app revenue was $173 million compared to $202 million a year ago. Foreign currency exchange rates contributed $6 million to Bumble app revenue. Adjusted EBITDA was $83 million, representing a margin of 39%, compared to $64 million and 26% in the prior-year period. Higher adjusted EBITDA despite the year-over-year revenue decline is a function of how we have executed through our reset period, most notably with more intensive operating discipline and thoughtful marketing spend. Selling and marketing expense was approximately $20 million, or 12% of revenue, compared to approximately $60 million, or 24% of revenue, in the prior-year period. In addition to the reduced overall spend, we have increased our focus on lower-cost and higher-return organic and targeted marketing channels. This strategy brings us back to our historical marketing strengths and, we believe, also supports long-term brand health. Product development expense was approximately $25 million, or 12% of revenue, compared to approximately $24 million and 10% in the prior-year period. Our product development spending is focused on core product innovation and platform modernization. General and administrative expense was approximately $24 million, or 11% of revenue, compared to approximately $26 million, or 10% of revenue, in the prior-year period. I will now turn to the balance sheet and cash flows. For the quarter, we generated $77 million in operating cash flow, $74 million of which converted into free cash flow. We ended the quarter with $246 million of cash and cash equivalents and continue to generate substantial cash flow while maintaining a strong liquidity position. In April, we completed the refinancing of our term loan as had been previously announced. Consistent with our plans to continue deleveraging, we paid down $114 million of debt in connection with the transaction. Pro forma for the refinancing, we had $150 million of cash and cash equivalents at the end of April. Turning to the outlook, as we move beyond the quality reset, our focus is now on activating our higher-quality member base through product innovation and improved member experience. This transition will unfold over the balance of the year as we introduce our new tech platform and accelerate the introduction of new member experiences. While this work will take time to be reflected in our financials, we believe it best positions us to drive more durable engagement and monetization. For the second quarter, we expect total revenue in the range of $205 million to $213 million, including Bumble app revenue of $168 million to $174 million, and adjusted EBITDA of $65 million to $70 million, representing a margin of approximately 32% at the midpoint. As we move through 2026, we expect revenue headwinds to moderate as the most acute effects of the quality reset dissipate and we transition from stabilizing to rebuilding the member base. Adjusted EBITDA margins are expected to normalize over the remainder of 2026 as we increase investment in technology and talent to modernize our platform and drive product innovation. We also plan to increase marketing spend to support our innovation initiatives, organic member growth, and brand strength. In closing, we have made meaningful progress on our transformation and are now focused on executing the next phase of the business. Preparing a healthier, more engaged member base with a modernized platform will enable faster product innovation and more effective revenue generation over time. Operator, let us take some questions, please. Operator: Thank you. We will now open the call for questions. Please limit yourself to one question and one follow-up. 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, and if you are muted locally, please remember to unmute your device. Your first question comes from the line of Eric James Sheridan from Goldman Sachs. Your line is open. Please go ahead. Eric James Sheridan: Thanks so much for taking the questions. Whitney, I want to come back to some of the comments you made in the prepared remarks and go a little bit deeper. When you think about the tech stack and how it will iterate going forward, I wanted to ask a two-parter. One, should we be thinking about the velocity of innovation and your speed in terms of going to market that will result from that as we continue to monitor the business from the outside in? And two, what do you think about your opportunity around personalization, and how much of it will be either AI-driven or non–AI-driven when you think about what the tech stack might enable you to do in the years ahead? Thanks so much. Whitney Wolfe Herd: Hey. Thank you, Eric. Great to hear from you. I will take this piece by piece. I think before we talk about the actual incredible opportunity we have ahead with this new tech stack, I want to double down on a couple of the prepared remarks I had around what we have been dealing with. We have had extraordinary tech debt. What do I mean by this? We have, frankly, not been able to make the changes that both our members are wanting, needing, and demanding, and that we have wanted to roll out. All of the results you have seen to date are done on the back end of a very legacy system, which really does inhibit the second part of your question—the personalization of the experience. So let us talk about velocity, my favorite word. Velocity is going to go up in such a way with this new tech stack. As an example, if we wanted to make a change to the recommendation engine right now—which is the algorithm, essentially—it could take us months. It is extremely clunky, cumbersome, and difficult to navigate. On this new tech stack, we are talking about being able to put tests in immediately. We can be monitoring in real time. We can have A/B tests going at levels we have never been able to access before, and, frankly, we can make changes in a matter of days or weeks versus months, or even, frankly, years. When you really start to wrap your head around the opportunity there, I think you can understand why I am personally so excited about this new system finally hitting members’ back ends in the coming weeks. Let us talk about personalization. This is the name of the game. What is the one reason why people come to a product like ours, particularly Bumble? They are not coming for entertainment or to use it like a social media platform. They are coming to meet people. If you want to meet someone, you have to be shown people you want to see and that you want to meet. With this new system and this next-gen recommendation engine—which goes side by side with the new tech infrastructure—we will be able to personalize the system in ways that we have just, frankly, never had access to. It is not lack of innovation, roadmap, or talent; it has been lack of technical capability. So you will see extreme personalization. Turning to the last part of your question—AI or not AI—no, it is a hybrid. I think it is important to end with a quick moment on how I look at AI for this business. AI should never replace human authenticity or human connection. I have been saying this for a long time, but I certainly hope the rest of the world is starting to see it the way I am, in the sense that human connection is starting to matter more now than ever before, and real, authentic human connection. For those of you that have been following and watching people fall in love with AI bots, this is not the future we want for ourselves or the next generation. This is why I am at work. I am giving it my all to make sure that we can bring people closer to in-real-life, face-to-face, human, meaningful relationships and connections. We will leverage AI to enable that, but we will not use AI to replace that. I hope that answers the question. I could talk about this for six hours, but I want to give other folks an opportunity to jump in. Thank you again, Eric, for your question. Operator: Your next question comes from the line of Shweta Khajuria from Wolfe Research. Please go ahead. Shweta Khajuria: Okay. Thank you for taking my question, and thanks for the commentary in your prepared remarks, Whitney. As we think about the timeline, could you please talk to what gives you confidence post the activation phase of the renewed tech platform in 2026 into 2027? You will start seeing potentially marked improvements in the refreshed tech platform. Could you point to what you saw in your tests that gives you that confidence, and what should we be looking for starting in Q4 into next year? Thank you. Whitney Wolfe Herd: Thanks, Shweta. It is great to hear from you. Let us talk about these different workstreams. I want to be very clear that the back-end tech rebuild is different from the forward-facing, member-facing interaction model and profile redesign. These are two separate things that will converge into each other; however, one comes before the other—that is the back-end technology migration, enablement, and rebuild. That is coming in the coming weeks for select members and will start to roll out globally and more broadly over the weeks and months following. That is the enabler of everything. That is where we can go in and make algorithmic improvements. We can start to make matching and recommendation economics better for folks and really make sure that you are seeing who you want to see. Now, very importantly, that is the back end that will start to enable everything. But very importantly, I fundamentally believe—and I feel that I am a trusted source here because I have been on the front line of this industry from its mobile explosion inception—that the interaction model is outdated, not just for us, but for the industry at large. I believe it is time to leapfrog anything that currently exists and help people break through these areas of friction where these cliffs exist. Right now, to get somebody from first sight to first date is extremely difficult. There are so many areas of drop-off where that mutuality of needing to like each other, needing to chat, needing to keep the conversations going on this double-sided format—it is quite difficult to get you to a date. Frankly, Shweta, we are a dating app. We are not a matching app or a swiping app, but have we really been behaving like that? That is the impetus of the new interaction model. We have listened to our members. We have been in the trenches with them. I personally have been on the front lines of research and deep in the data. That forward-facing, member-touching interface transition and profile redesign is what you will start to see in a major market in Q4, and then, of course, rolling out more broadly through the end of Q4 and early into 2027. To answer your precise question—when do we start to see a rebound in the numbers you are all looking for? The answer is very simple: when our technology and our next-gen recommendation engine can help better connect people more compatibly, show people who they want to see, and then get them out on great dates. That is where the magic happens. Every single thing we are doing—I am spending every waking hour of my life right now—in service of that one goal: get people out on great dates. I hope that this starts to answer your question, and thank you again for taking the time. Operator: Your next question comes from the line of Nathaniel Jay Feather from Morgan Stanley. Please go ahead. Nathaniel Jay Feather: Hey, everyone. Thanks so much for the question. I am thinking a little bit more about that pipeline from discovery to getting out on dates. What do you feel are the current real pinch points that cause people to maybe have a match but not convert that into an in-person connection, and what can actually solve that problem? You know, is there any issue from the perspective of a lot of people having different state or preference dynamics, local markets, etc.? Are there ways that you can solve those? That is the first part of the question. And second, we see really strong performance on gross margin. Can you give an update on what you are seeing in terms of direct payment adoption, and how should we think about the uplift that is driving these? Thank you. Whitney Wolfe Herd: Thanks, Nathan, for the question. I will take the first half and kick the second part to Kevin. The reality is you are right—everyone has different dating preferences. But the one thing everybody can agree on at this point is that everyone is exhausted from this passive model of just low-effort likes, low-effort interest with very little follow-through. Frankly, the industry at large—and us included—has made it too easy to express low-intent interest. We are turning that on its head. I cannot say much more. I really believe that this is going to be category-defining, and we want to keep it close to the chest. What we will tell you is the early testing has come back remarkably positive. There is very little concern that this is not the right direction. To your point, every market is culturally different, and preferences are different. We have no issue with being really agile and making sure that we test our way into the appropriate sequencing and rollout strategy to make sure that those nuances are accounted for. Listen, I am now 36. I have been doing this since I was 22. I cannot tell you how much this is needed right now for people to really feel reinvigorated with finding love. There are a few frank realities: we are on our phones more than we have ever been before—much more so than when I started this company. The need for human connection and love is greater right now than ever. We are more disconnected. Everything is working in our favor. The only thing that has been going wrong is our ability to execute on product innovation, and that is simply due to legacy tech debt. We are working extraordinarily hard. The teams are incredible, and they are so close to getting us to a place where we can finally innovate and deliver a modern product to our members so that they can continue to make meaningful connections in the real world. Kevin Cook: The improvement in gross margin is primarily a function of increased adoption of alternative billing methods and therefore reduction in aggregator fees. You are right to point out that we had very strong gross margin in the quarter—about 300 basis points higher than the prior-year period—and we continue to see strong adoption of our Apple Pay program, for example, in the U.S. That program is slightly ahead of expectation, and we expect alternative billing to be a tailwind to margin throughout 2026. Operator: Your next question comes from the line of Andrew Jordan Marok from Raymond James. Your line is currently opening. One moment. Please go ahead. Raj (for Andrew Marok): Hi. This is Raj dialing in for Andrew Marok. Thank you for taking our question. As it relates to the post-reset disclosures made today, could you update us through March and April and explain how the curves for registrations, retention, MAUs, and payer penetration trended from October until now, given that October was the first month dubbed as the post–quality reset? Which metric should best predict payer recovery going forward? Kevin Cook: Yeah. Hey, Ron. Thanks for the question. The disclosures were provided specifically as a way for us to meet a contractual obligation to prospective lenders to cleanse data that we shared with them in connection with the refinancing. That information is all for the periods provided. You can see them outlined in the specific disclosure on the website. They are all reflected in our current financials. They are out of date, stale, and have no import in terms of the business today. The only thing I can share is that the business has stabilized with respect to KPI performance. In particular, on registrations, I think you see highlighted there the steps that we took—quite intentionally—to bring the member base down to what we viewed as a healthier, higher-quality ecosystem from which, now, we can build. That is all I have for you on that. Operator: Next question comes from the line of Ken G. from Wells Fargo. Please go ahead. Ken G.: Thank you so much. As you look out a couple of years and success as you transition the business, can you talk about how you could see the financial profile of the business relative to the 2022–2024 time frame? The tech debt that built up in the past—you obviously want that to not recur. Could you talk about any changes we might see to the financial profile of the business as you get back to growth in 2027–2028? Kevin Cook: Hey, Ken. So apologies—you broke up a bit, but I believe I got the question. You are right to point out two key things. First, in the time frame you referenced, it was a marketing-led business, not a product- and technology-led business as it has been since Whitney returned as CEO. What you will continue to see is a much more efficient marketing spend. Marketing should never return to the levels that you observed in 2024 and 2025. Marketing is used in support of and as a tool to enhance product—contributing to new product introduction, launch, and, of course, to some degree, brand. You will see a higher overall rate of technology and product development spend. We are in a period of investment now. You see us beginning to gently increase product development expense to deliver all of the innovation that Whitney described and that is expected for the second half of the year. Overall, with steady revenue or revenue growth, there is substantial operating margin in the business. You should expect to see continued adjusted EBITDA margin expansion—again, so long as revenue is stable or increasing. Let me know if that answers the question. Ken G.: Yes. Thank you. Operator: At this time, there are no further questions. This concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Welcome to the first quarter 2026 financial results conference call and webcast. At this time, all participant lines are in a listen-only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of today's call and prepared remarks. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, vice president of investor relations. Juliet Cunningham: Afternoon, everyone, and thanks for joining us today. With me are Brian J. Blaser, President and Chief Executive Officer, and Joseph M. Busky, Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. To assist in the presentation, we also posted supplemental information on our Investor Relations page that will be referenced in this call. This conference call and supplemental information may contain forward-looking statements which are made as of today, 05/05/2026. We assume no obligation to update any forward-looking statement except as required by law. Statements that are not strictly historical, including the company's expectations, plans, financial guidance, future performance, and prospects, are forward-looking statements that are subject to certain risks, uncertainty, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Please refer to our SEC filings for a description of potential risks. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and supplemental information on the Investor Relations page of our website. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call are on a constant currency basis. And now I would like to turn the call over to our CEO, Brian J. Blaser. Brian J. Blaser: Thanks, Juliet, and good afternoon, everyone. I will start today with a brief perspective on the first quarter and then discuss details of our business performance more broadly. Our first quarter results were impacted by a significantly softer respiratory season compared to Q1 of last year, with influenza-like illness, or ILI, visits down approximately 30% as reported by the CDC in April. While ILI visits are one indicator, the season was also notably weaker across other key measures including severity of illness, hospitalizations, and duration. Overall, the respiratory season was both significantly milder and shorter than in Q1 2025. We also experienced broader macroeconomic and geopolitical headwinds during the first quarter. In China, sales slowed in March ahead of the anticipated national IVD pricing guidelines as distributors exercised caution on inventory purchases in light of potential future pricing declines. While final guidelines have not yet been issued following the comment period, our updated full-year 2026 guidance reflects the estimated impact based on the current draft. And as is expected, this estimate may change once the final guidelines and implementation timeline are announced, and, accordingly, we are preparing mitigation actions to help offset these headwinds. Moving into 2027, the proposed pricing changes would impact only about half our sales in China, and even with the new guidelines, that business is certainly not going away and will continue to be a meaningful component of our revenues. Notably, even after these pricing changes are implemented, we believe our China business will continue to be accretive to the company margin profile. We do not think the changes will be fully implemented until the middle of next year, which gives us time to work on mitigating actions. Shifting back to Q1 results, we also saw delays in some orders and tenders due to the ongoing disruption in the Middle East. Assuming conditions stabilize, we expect these orders and tenders to resume during the remainder of the year. Importantly, our underlying business remains strong and durable. Our core labs and immunohematology franchises are performing well, and we are executing against our priorities. As a result, we believe we are well positioned to deliver on our objectives to expand our adjusted EBITDA margin and improve cash flow in 2026. We are also making solid progress in advancing our strategy. We completed the acquisition of Lex Diagnostics in April, adding a highly differentiated ultrafast molecular platform that strengthens our position in point of care, an area we believe will be a meaningful driver of future growth and reinforces our ability to deliver integrated diagnostic solutions across the continuum of care. We are already seeing strong customer interest and have secured our first orders. Customer insights reinforce this opportunity. Approximately 90% of Sofia customers currently use both antigen and molecular testing systems, and many have indicated a willingness to switch to our more competitive molecular platform. Their priorities are clear: better ease of use, faster time to result, and lower cost. And Lex is designed to deliver all three. To support launch readiness, we are expanding manufacturing capacity at our site in the UK, and we expect to begin placing instruments this quarter with measurable assay pull-through and associated revenue beginning in early 2027. Turning to our labs business, we launched our high-sensitivity troponin assay in the U.S., strengthening our cardiac portfolio and enhancing our clinical value proposition. We are seeing strong demand, and we are now shipping to more than 300 U.S. customers. We also began rolling out the VITROS 450 platform in select international markets, expanding access to our diagnostic solutions. As a successor to the VITROS 350, this platform is designed to meet the needs of emerging markets requiring low-volume, cost-effective solutions. Initial shipments are targeted for JAPAC followed by LATAM and EMEA, where we recently received the CE Mark. Importantly, the combination of VITROS 450 and VITROS ECL enables us to deliver a comprehensive solution across clinical chemistry and immunoassays in attractive international markets. We expect these product launches to support our mid-single-digit revenue growth expectations for the labs business, which represents over half of our revenue. In summary, we are navigating near-term headwinds, but our strategy is sound, our innovation pipeline is strong, and we remain focused on executing with discipline to deliver sustainable, profitable growth. I will now turn the call over to Joseph M. Busky. Joseph M. Busky: Okay. Thanks, Brian. I will walk through the key financials for 2026. Unless otherwise noted, all comparisons are to the prior-year period on a constant currency basis. Total reported revenue was $620 million. Of that, non-respiratory revenue was $552 million, or $544 million excluding the donor screening business. Labs revenue declined 8% primarily due to the factors Brian discussed. In addition, the termination of our joint business agreement with Grifols reduced Q1 labs revenue and created a difficult year-over-year comp. Immunohematology grew 3%, driven by North America, China, and JAPAC. Triage declined by $3 million primarily due to slower distributor sales in China. Looking at our respiratory revenue, as was widely reported, the North America respiratory market showed an atypical decline versus the prior-year period. This was an industry-wide trend, not unique to QuidelOrtho Corporation, and is supported by KOLs and competitor reports. As a result, our respiratory revenue was $68 million, down significantly as noted in our preannouncement due to the approximately 30% lower ILI visits compared to Q1 2025. Keep in mind that our large global installed base of the Sofia platform and QuickVue has demonstrated growth over time, and importantly, during 2026, we saw no change in testing protocols, and our market share remained stable. Lastly, on revenue, foreign currency exchange was favorable by 210 basis points during the quarter. Now moving down the P&L, non-GAAP opex decreased by 2%, primarily due to R&D efficiencies. Adjusted gross profit margin was 44%, a decrease of 630 basis points due to product mix with lower respiratory revenue contribution, and our adjusted EBITDA was $109 million, representing an 18% adjusted EBITDA margin, and diluted adjusted loss per share was $0.40. We expect to continue to drive adjusted EBITDA margin expansion for the full year with targeted staffing reductions, procurement, and facility consolidation cost savings initiatives. Now turning to the balance sheet. At the end of March, we had cash of $140 million and borrowings of $130 million under our revolving credit facility. From a cash flow standpoint, operating cash flow was negative $33 million and free cash flow was negative $67 million. While we expected cash flow to be negative in the first half, which is consistent with our historical seasonality, first quarter 2026 cash flow declined year over year primarily due to lower EBITDA related to the weaker respiratory season and the timing of accounts payable and accrued interest. Inventory also increased due to the weaker respiratory season as well as in preparation for multiple upcoming product launches. On the positive side, we delivered strong accounts receivable cash collections of $54 million and reduced our CapEx by $22 million compared to the prior-year period, as a result of lower systems and manufacturing capacity spend. We remain focused on improving cash flow generation and still expect positive cash flow for the full year, now expected to be in the range of $100 million to $120 million, with positive cash flow driven by higher revenue in the second half of the year. Lastly, net debt to adjusted EBITDA leverage was 4.1x, including pro forma adjustments allowable under our credit agreement. We continue to expect pro forma leverage under the terms of our credit agreement to be at 3.25x to 3.5x by the end of this year. To wrap up, first quarter results reflected the impact of lower respiratory volumes, macro and geopolitical pressure, and continued investment in our strategic initiatives including molecular diagnostics. Now I would like to cover our full-year 2026 outlook at a high level. For a full list of assumptions, please refer to Page 6 of our first quarter 2026 earnings presentation. Importantly, we are providing a new guidance range. As noted in our Q1 preannouncement, we are tethered to the low end of our previously provided range, which was purposely wide to account for respiratory season variability. We now expect total reported revenue of $2 billion to $2.75 billion, which is driven by two changes: our first quarter performance and the expected lower full-year revenue in China, which takes into consideration distributor reactions to the pending China national IVD pricing guidelines as currently drafted; and in North America, first quarter respiratory revenue reflecting a weaker ILI trend. Looking back over the past ten years, and excluding pandemic years, in periods where ILI declined in Q1 versus the prior year, trends rebounded over the remainder of the year, resulting in higher ILI on a full-year basis. Despite this empirical data, to be prudent, we are continuing to plan for an average respiratory season and forecasting a flat second half without a bump-up and an 8% decline in respiratory revenue for the full year 2026. These two revenue impacts flow from the top line to the bottom line. Therefore, we now expect full-year 2026 adjusted EBITDA of $615 million to $630 million, still representing an adjusted EBITDA margin of 23%, which reflects a 100 basis point improvement over full-year 2025. We expect adjusted diluted earnings per share of $0.80 to $2.00. We expect to deliver free cash flow of $100 million to $120 million. Note that the second quarter has historically been our seasonally lowest quarter. Consistent with this pattern, we expect sequential revenue, adjusted EBITDA, and adjusted EPS to be roughly in line with Q1 2026 but still reflecting year-over-year growth across all three metrics. Our updated outlook reflects improving operating performance in the second half of the year as well as continued disciplined execution and the ramping up of the Lex Diagnostics business. We will now open the call for questions. Operator: We will now begin the 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. 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 Tycho Peterson of Jefferies. Your line is open. Please go ahead. Jack Meehan: Yeah, hi. This is Jack on for Tycho. Thanks for the question. Could you just walk us through the guide for second quarter growth by segment? And then also, down the P&L, what are margins going to look like? Joseph M. Busky: Yeah. Jack, as noted in the prepared remarks, we do expect that sequentially Q2 will be relatively flat with Q1 but will provide growth year over year. The growth is going to come from the core business as you think about the labs business and the IH business and the Triage business, that growth versus prior year. Jack Meehan: Okay. That is helpful. Then on China, NHSA, can you tell us exactly how big of a headwind that is in 2026, what you are assuming in the guidance, and just a little bit more detail on how you arrived at that number? Joseph M. Busky: Yeah, sure. As you think about the updated revenue guide, which, again, is tethered to the low end of the previous revenue guide, there are really only two changes that we made to the revenue guide. I want to be really clear with that. One is the respiratory season weakness we saw in Q1, and then the impacts that we are seeing in China from our distributors pausing on their purchases due to the pending new national pricing guidelines, which we expect to come out in the next couple of months. I would say if you look at the new revenue guide, Jack, it is down roughly $75 million at the midpoint. It is probably split almost 50/50 between respiratory and China, maybe a little bit less on China, a little bit more on respiratory. Maybe, you know, 45 million respiratory and 30 million China kind of thing. That is where we are seeing it. We have pretty good visibility, as you would imagine, from our local team and the good relationships we have with our customer base. So we feel pretty good about this new guide for 2026. Operator: Your next question comes from the line of Andrew Brackmann of William Blair. Your line is open. Please go ahead. Andrew Brackmann: Hey, guys. Good afternoon. Thanks for taking the question. I wanted to pick up off of Jack's first question there with respect to Q2. So if you are sequentially sort of flattish to Q1, I think that implies a pretty significant ramp in adjusted EBITDA margin in Q3 and Q4. Can you maybe just talk to us about some of the levers that you see there, not just on the revenue side but also on the cost side as well? Joseph M. Busky: Yeah, hey, Andrew. I do think that what we are looking at in the guide, as you think about first half versus second half, is that we are expecting the revenue growth to pick up quite a bit in the second half versus the first half. That is really a function of our expectation that the China impacts we talked about in the prepared remarks generally are going to happen in the first half of the year and not so much in the second half of the year. In addition, as I said, we are expecting continued growth with labs, IH, and Triage. We are planning for an average respiratory season in the second half of the year, so we are not expecting growth in the second half for respiratory year over year, but we do expect it to be flat, so I do not expect it to be a headwind. All those factors, including what Brian mentioned with the new products coming out—the 450, the high-sensitivity troponin—and you are going to have some Lex revenue in the second half, all those things contribute to the higher revenue in the second half versus the first half of the year, which will drop down and drive higher EBITDA, EPS, and cash flow. Andrew Brackmann: Okay. Thanks for all that. And then, Brian, with respect to Lex, it sounds like some folks in your customer base are pretty interested. Can you maybe just remind us about switching dynamics and what you are seeing? Brian J. Blaser: We are excited about Lex and are working actively, as I mentioned, to build additional capacity at our site in the UK to support the ramp-up. At this point, we are expecting to place a few hundred instruments this year, followed by a more significant ramp-up in 2027 that I think is really going to begin to create meaningful assay pull-through. We are doing everything we can to bring on additional capacity as quickly as possible, because I think more than anything, we will probably be capacity constrained versus demand constrained given what we are seeing with the product. Most of these instruments will be placed in customers' sites, meaning there is no real capital outlay from a switching cost standpoint. The ease-of-use profile—this is truly a plug-and-play instrument that requires sample in, answer out in six to ten minutes. Your question about the switching costs: there are really very low barriers to customer objection to placing new instruments. We do not think that is going to be an issue, and we think the value proposition across speed, turnaround time, and cost is really going to position this platform well. Operator: Your next question comes from the line of Patrick Donnelly of Citi. Your line is open. Please go ahead. Patrick Donnelly: Hey, guys. Thank you for taking the question. Maybe one on the China side. I am sure you guys saw this morning a competitor of sorts that walked away from their China diagnostics business and sold it, which was rewarded, given that it has been an overhang on a lot of the company. What is your commitment there on the China side and visibility given some of these recent changes? It just feels like a slippery slope over there. How are you framing up that risk and the comfort level going forward on that business? Brian J. Blaser: Thanks, Patrick. Clearly, the reimbursement changes are a headwind there, but the way we are looking at it, the reimbursement changes themselves will only impact about half our sales there. We have no plans to walk away from China, and even after these changes are implemented, we believe the business continues to be accretive to our company margin profile. We have time to address this. We think that the changes will not be fully implemented until probably mid next year, and so we are going to be taking actions to offset that. We will continue to monitor the environment in China after these changes are made, but as long as the economics continue to be favorable, we intend to remain in that market. Over the very long term, it continues to be an attractive growth market for healthcare and diagnostic testing in particular. Patrick Donnelly: Okay. That is helpful. And then maybe just on the margin side, the EBITDA build, can you talk about some of the actions you are taking on the cost side, not only this year but just the base heading forward? Obviously, you guys in the past have given some longer-term targets. How are you thinking about the key levers there as we work our way through the year and into next year? Thank you. Brian J. Blaser: We continue to do a lot of heavy lifting on the margin side of the business. I referenced that we have taken out close to a thousand positions in the organization. A lot of that work pushed us into the low-20s adjusted EBITDA margin. We are going to start to see a 50 to 100 basis point improvement starting in 2026 from our donor screening exit. We have a rich portfolio of projects across our indirect and direct procurement efforts. We have the shutdown of our Raritan facility in progress, and we have a lot of opportunity outside the U.S. to optimize our profitability in our OUS regions. Additionally, we continue to benefit from placing more immunoassay volume that is at higher margin. Moving forward, you are going to see the benefit of Lex and molecular margins being typically much higher than immunoassay margins as well. We get into that mid-20s range solidly with our procurement initiatives and the Raritan footprint optimization, and with some targeted staff reductions, I think we push into the higher-20s as Lex becomes a bigger component of the business over the next few years. Operator: Your next question comes from the line of Lu Li of UBS. Your line is open. Please go ahead. Lu Li: Great. Thank you for taking my questions. I want to go back to China a little bit. I think you mentioned that in the guide you are assuming the China impacts are basically happening in the first half and not the second half. Can you provide a little bit more color on that? Are you still seeing distributors pausing sales in April and May as well? Joseph M. Busky: Yeah. We are still seeing some of that pressure, and over the next couple of months here, we are going to see that behavior in the first half order patterns. We expect it to start to mitigate, and we believe that will stabilize over time. Lu Li: Got it. And then my second question, just to double confirm your margin target. Are you still hoping to get to mid- to high-20s by mid 2027, or does that margin target get a little bit delayed given potential changes in China and maybe other macro factors? Joseph M. Busky: Hey, Lu. It is Joe. I think Brian touched on this a minute ago. Just to reiterate, we are confident in our EBITDA margin goals and the timeline for them. There is no change to that. That is because we still have, as Brian said, all these initiatives around procurement and site consolidation in flight that we expect to complete as we move through this year and into early next year. On China, we do have some time. We do not think that these potential reimbursement changes will be enacted until you get more into mid-2027, so we have about a year to implement cost mitigation actions to offset any potential price declines that we may see in 2027. Because of all that, we still feel really good about the margin goals and the timing that we have communicated already in the past. Operator: If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 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. There are no further questions at this time. I will now turn the call back to Brian J. Blaser, President and Chief Executive Officer, for closing remarks. Brian J. Blaser: Thank you, operator. In closing, stepping back from the first quarter and the headwinds that we saw in the respiratory season and China, this really does not change our direction. We are executing well. Our strategy is working, and we are strengthening the business in the right areas. We do expect a stronger second half and remain focused on delivering consistent, profitable growth. Thank you for your interest in the company, and we look forward to updating you in the quarters ahead. Operator: This concludes today's call. Thank you.
Kevin Lorenz: Good afternoon, ladies and gentlemen, and welcome to WashTec's earnings call on the results of Q1 2026. My name is Kevin Lorenz. I'm Investor Relations Manager at WashTec. With me, I have today our Chief Financial Officer, Andreas Pabst, who will provide a brief update on WashTec and guide you through our quarterly results. Following his presentation, the floor will be open for questions. Also, you might have just seen a short video on our newest product, JetWash Connect during the waiting room, which we are very proud of. If you are interested, you can find this and further videos on this new product on our WashTec website or you can also just send us a short mail, and we will share it with you. But without further ado, I'm now handing over to our Chief Financial Officer, Andreas Pabst. Andreas Pabst: Thank you, Kevin. Also from my side, a very warm welcome. I really appreciate that you are in our call today. Let me first give you some brief statements about our current topics at WashTec before I shift over to the figures of the first quarter of 2026. Let's start with our new JetWash Connect. We already mentioned the planned launch of this new product during our last call on the fiscal year 2025. But now we are live. And as you can imagine, we are very proud on our product launch on April 14. Our new JetWash has some really good features for the users, for our customers, the operators as well as for us. First, the new steel structure. We own the complete construction details, and that puts us in the position that we can source the necessary steel parts locally instead of shipping them from Germany to all over Europe. Second, Wash & Pay leads to the fact that the average paid time increases by 25% to 30%. That means more revenue for our customers. And third, the new polish is a real eye catcher. You can really see the difference when you clean your car with this feature. With all these advantages, we believe that we can expand our business in this production category even further. Already with our last generation, we were able to achieve double-digit million revenue in Europe in 2025 that stands for approximately 10% of our equipment business. So we expect more to come. That brings me to my next topic. You are already aware that we are optimizing our production. This is one of the biggest levers we currently have in the company. We have made a major step in the future development of our production network. The grand opening of our new plant in Czech took place on March 26. We started with the transfer of preassembly, assembly and logistics to the new building. The state-of-the-art facilities ensures process stability and efficient material flows while enhancing preassembly capacity with clear structured process change. Currently, we have already transferred around 50% of the total jobs to be transferred. That means on the other side, we currently have planned higher costs. There are people in Augsburg who train the new colleagues in Czech. The handover is in quite good shape, and our employees are working very well together. We expect that this higher capacity need will be resolved before the end of this year, and then we will collect the full saving from this lighthouse project. Let me now briefly address the potential risks related to the conflict in the Middle East. From a revenues perspective, our direct exposure in the affected countries is limited and remains modest. However, the broader uncertainty can lead to a temporary reluctance to invest, particularly impacting equipment demand on a global level. This is something we are closely monitoring. On the recurring side of the business, our assessment remains unchanged. Based on historical data, higher fuel prices may lead to short-term adjustments in driving behavior, but we do not expect a structural impact on car wash usage. Accordingly, we see no material long-term risk to our chemicals and service revenues. On the cost side, we are paying particular attention to supply chains and commodity prices, especially energy-related inputs and selected raw materials. For metals, we are in the lucky situation that we have secured a major part of our need until end of this year already in December 2025. For other parts, we are increasing our stock level cautiously. Higher fuel prices, we counteracted with some surcharges for our customers in the field of service. Currently, we are discussing further mitigation measures and put them in place, depending on the duration of the conflict. You see we are prepared and do the utmost to keep the financial impact on WashTec manageable and to protect margins. On this slide, which you probably already know, you see our main efficiency programs, which we are currently driving. And you are, of course, aware that these are already fundamental for our company. For sure, you also can imagine that not all of those programs always run 100% as planned. I have already given an update on the optimization of production footprint, where we currently have some planned negative impact on the gross margin, but where we are fully in line with our targets. In terms of installation costs, here, we are facing some delays, which are -- influence our gross margin negatively. We somehow have underestimated the complexity of this job in some details and have intensified our efforts here. Our program for cost down of production and modularization is currently slightly behind time line, but overall, with no significant impact for the 2026 figures. On the other side, our programs for quality excellence and the Global Scope Configurator are developing extremely well. Our quality cost per units are decreasing continuously and contribute to our profitability. The Global Scope Configurator has been rolled out now to 3 European countries and further to come. This program clearly delivers what we expected, a strong complexity reduction along the whole process chain from the customer order to production. Now let's come to the figures for Q1 2026. Summing up Q1 in a statement. Revenue is good, especially in equipment in North America, improvement of profitability necessary. But first things first. Starting with our revenues for Q1 2026. We achieved a new first quarter revenue record of EUR 111 million, representing an increase of 2.3% year-on-year. This growth was primarily driven by a strong performance in North America, particularly in the equipment business, supported by higher revenues with key accounts. In Europe and Other, revenues were stable overall compared to prior year. On a business line basis, equipment revenues increased by 7%, while service remained stable. Consumable revenues declined mainly due to the weather-related lower wash volumes. However, the revenue decline was less pronounced than the drop in volumes, underlining the resilience of the underlying business. Looking at our profitability, we see an EBIT of EUR 3.8 million. This is an EBIT margin of 3.4%, whereas on -- 1 year ago, we booked 4.5%. The shortfall was on the one hand side, expected by necessary expenses caused by some programs. Remember my statements to a production shift to Czech. On the other side, we saw a cost increase in terms of installation. Our measures we started are not finished and do not show positive effects in the first quarter, but they will come. We have full focus on this cost block. Having a short view on free cash flow. The number is down by EUR 9 million to EUR 7 million. This drop doesn't make me too nervous right now as we have increased our stock due to the real good order backlog we have. Therefore, our net working capital increased to EUR 94 million and comparable number of March 2025 was EUR 82 million. So overall, Q1 was mixed in terms of financials and hard work is still in front of us. But given the strong top line as well as our current order book, we can look optimistic in the future, especially if we look at the development in equipment, what brings me to the next page. In the first quarter, we see a clear differentiation across our business lines. Equipment was the key growth driver with revenues up 7% year-on-year. This growth was primarily driven by North America, supported by higher revenues with key accounts, while Europe and Others also showed a slight increase. Service revenues were stable compared to the prior year, once again underlying the resilience of our recurring revenue base. This stability is a key strength of our business model, particularly in a more volatile macro environment. Consumable revenues were below the prior year level, mainly due to weather-related lower wash volumes. Importantly, the decline in revenue was less pronounced than the decline in volumes, which demonstrates the fundamentally sound operational development of our washing chemical business. Overall, we are confident with the growth of our top line. Now let's put eyes on our segments. In Europe and Other, revenue remained broadly stable year-on-year. Earnings in the segment were impacted by planned temporarily higher costs, mainly related to the expansion to our Czech site as well as delays in the execution of certain efficiency initiatives, particularly in installation and logistics. I already gave some insights here. In addition, earnings were affected by weather-related lower activity in consumable business. In North America, we saw a clear improvement in both revenue and earnings, driven primarily by higher equipment revenues with key accounts. The segment benefited from improved execution and more favorable product mix. Looking at the EBIT number, we see an increase in this KPI by EUR 1.4 million to now breakeven. This is the best EBIT in the first quarter in North America since 2017. Yes, that's remarkable. Coming now to our EBIT bridge, showing the development of Q1 '25 to Q1 '26. The increase in group revenue in the first quarter generated a positive gross profit contribution, while at the same time, the gross margin declined year-on-year, coming from 29.3% last year to now 28.4%. This was mainly driven by a less favorable product and regional mix, including a lower share of consumables and a higher share of equipment business in North America. In addition, gross profit was impacted by planned temporarily higher costs, primarily related to the expansion of the Czech site and delays in selected efficiency programs, as already mentioned. Selling expenses increased in line with revenue growth and remained broadly stable as a percentage of revenue. Administrative expenses are slightly higher compared to last year, mainly to ongoing IT projects. On this slide, you see some more financial KPIs. Net income and earnings per share follow mainly our EBIT development. Our net financial debt is still in a very good shape despite the outstanding amount is higher compared to the same time 1 year ago. Reason for this is besides higher dividend payment and the share buyback program, we already mentioned higher net working capital. On the following slide, you see our equity ratio and our fixed asset ratio. Both in a reasonable shape. In terms of employees, it is remarkable that we have increased our workforce by 94 year-on-year. Most of our new colleagues have been hired in the business line service followed by sales department. Now to the equipment order backlog, as always, indexed basis this time is the year 2022. Equipment orders received was significantly higher in the first 3 months of the year than in the prior year quarter. This cut across both segments and was primarily due to the positive trend in North American segment, where the increase was even well into the double-digit percentage range. Therefore, as already mentioned, we have a very strong order backlog, plus 10% compared year-on-year, plus 16% compared to end of 2025. And by the way, the increase in North America is even stronger. This gives us a good view on the top line in the coming months. Let's now turn to our guidance for 2026. In general, WashTec confirms its guidance for 2026 and expects that the delays in the efficiency projects will be made good over the course of the year. That is where we, the management and the complete team, need to focus on. We expect revenue growth in the mid-single-digit percentage range and an increase in EBIT that is disproportionately higher than revenue growth. The forecast does not make allowance for any further significant worsening of the economic situation due to the developments in the Middle East or other global disturbances due to some political statements and actions. However, in addition to high volatility in raw material markets, we are currently seeing a significant increase in uncertainty regarding the future course of the conflict in Middle East and the resulting indirect economic impact. That doesn't help too much for stable guidance. So this time, it is even more important to state that this guidance is subject to uncertainties and all these figures reflect our expectations based on our current knowledge and significant deviations in either directions are not factored in here. This concludes my remarks. On the following page, you will find our 2026 financial calendar. Thank you very much for your interest so far. Kevin and I are now available to answer your questions you might have. Kevin Lorenz: [Operator Instructions] We have the first question from Stefan Augustin from Warburg Research. Mr. Augustin, we can hear you. Stefan Augustin: Great. I hope so. I have a couple of questions. So the first one is actually, can you elaborate a little bit more again on the headwinds? So when do you think which one of the headwinds is going to start to decline? I mean, Czech Republic is probably second half of the year, so not Q2 yet. When is the element of the installation efficiencies going to kick in? And can you remind us on the SAP integration costs in Q1 '26 compared to the ones you might have had in Q1 '25? So that would be the first block. Andreas Pabst: Okay. So yes, you are right, the profitability or the increasing profitability for the transfer to Czech Republic will kick in more, end of this year, and we will see full effect according to the actual plans. And we are in the current time line, we are fully on track. We will see that in 2027. In terms of installation costs, we are currently really a little bit behind. We detected some, let's call it, difficulties, yes, where we need to dig further and we need to create other solutions to come back here. So that means, I would say we are here now 1 quarter behind, but we will manage to come up with this one during the year. And then you asked about the cost for the implementation of SAP. So if you look to the EBIT bridge, which is in the presentation, the deviation in administrative cost is more or less coming from this cost for the introduction of S/4HANA. So it's around about EUR 200,000. Stefan Augustin: Okay. The next one is the -- you mentioned that the orders that you received in Q1 are largely also on the U.S. side, but we should also expect growth and a positive book-to-bill in the quarter on the European side. Is that okay? Andreas Pabst: So if I look at the order income, I'm positive in Europe as well as North America for the first quarter. Both showed an increase compared to prior year. That is good. The increase was even -- just what I said was, the increase was even higher in North America. So yes, you're right with your statement. Stefan Augustin: And probably the weather, especially in Germany has been quite good in the second quarter or in April. So it would not be wrong to expect a better chemicals business in the second quarter. Is that a fair assumption? Andreas Pabst: Let me think about -- so currently, we have May 5, I guess. So the second quarter is not completely done yet. But looking at April was good washing weather, especially in Europe in one of our key markets. That's some headwind we have -- or tailwind, sorry. Stefan Augustin: Okay. And then maybe just switching back a little bit. The -- say, the headwind on the installation efficiencies, is that more in Europe or respectively, if we have in the second quarter, stronger volumes to expect from North America, would we still see a very or a sizable drop-through in operating leverage as the installation part is quite okay in North America? Andreas Pabst: That's really a good question. Thank you for that one. So the topic what we see in installation cost is mainly related to Europe. So the installation costs in North America are on a reasonable level if we compare it over the year and compare it to the targets we have. Kevin Lorenz: And we have another question from Wolfgang Specht from Berenberg. Mr. Specht, can you hear us? We can't hear you. Sorry, okay, I see the question was actually in written form. So the question is, connection is a mess still would have several questions. Okay. And so Mr. Specht, our provider in EQS has now also included an option that you can dial in via phone. Currently, many analysts have the problems that their banks are very restrictive with their IT and so if you can -- if it's possible for you, then you can also dial in via phone and there should be -- the procedure should be described. There should be a number that you have to call and then -- so let's maybe give him a little bit more time to -- if there's a question coming or not. Else -- I don't see any other questions right now. So I don't know, should we give him another minute or should we. Andreas Pabst: Let's wait for 30 seconds and see if it works, if not yes. And that's also. Kevin Lorenz: There should also be an option to write down questions in text form, also for everyone else who might still have questions. Andreas Pabst: So Mr. Specht, we really like to answer your question. So if it doesn't work right now, yes, probably then we can do it later on. That is for all the audience. But then I would say no further questions right now. So then ladies and gentlemen, on behalf of the whole Management Board, we really would like to thank you for your interest in WashTec and wish you a pleasant day. Thank you. Bye-bye.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Centerspace Q1 2026 Earnings Call. [Operator Instructions] I will now hand the call over to Josh Klaetsch, Director of Investor Relations. Please go ahead. Joshua Klaetsch: Thank you, and good morning, everyone. Centerspace's Form 10-Q for the quarter ended March 31, 2026, was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at centerspacehomes.com and filed on Form 8-K. It's important to note that today's remarks will include statements about our business outlook and other forward-looking statements that are based on management's current views and assumptions. These statements are subject to risks and uncertainties discussed in our filings under the section titled Risk Factors and in our other filings with the SEC. We cannot guarantee that any forward-looking statements will materialize, and you're cautioned not to place undue reliance on these forward-looking statements. Please refer to our earnings release for reconciliations of any non-GAAP information which may be discussed on today's call. I'll now turn it over to Centerspace's President and CEO, Anne Olson, for the company's prepared remarks. Anne Olson: Thank you, Josh, and good morning, everyone. I'm here with our SVP of Investments and Capital Markets, Grant Campbell; and our CFO, Bhairav Patel. I'll start by addressing the strategic review which we initiated in 2025. This process is ongoing, and we appreciate the feedback we have received from our stakeholders. The Board and its advisers continue to make progress, and we expect to provide shareholders with a more substantive update on the status of the review process before or in connection with our second quarter earnings release. There can be no assurance as to the timing or outcome of our process and no assurance that the review process will result in a transaction or other strategic change or outcome. We do not intend to provide further details in connection with discussion of our first quarter earnings results today. Thank you for your understanding as we keep our comments focused on our results and our outlook. Our revenues for Q1 were in line with our expectations, supported by stable demand and continued execution by our leasing teams. First quarter results reflect the negative impact of recent changes to Colorado regulations, timing of certain expenses and costs related to our strategic review. These were anticipated, and our expectations for full year core FFO and its drivers remain substantially unchanged. We are reiterating our previously released earnings guidance, and Bhairav will discuss this momentarily. Operationally, we are starting to see the expected seasonal pickup in leasing. While blended leasing spreads in the quarter were up 40 basis points over prior leases, each month demonstrated improvement, increasing from negative 90 basis points in January to positive 140 basis points in March. We've seen this trend continue into April with preliminary blended spreads of 1.8%. The Q1 blend was composed of a 2.1% decrease in new lease rents, combined with a 3.1% increase on renewals, while in April, new lease spreads broke into positive territory and renewal spreads increased to 3.3%. Retention of 54.1% in our same-store portfolio was a 2 percentage point improvement from the same quarter last year, and our resident base remains healthy, with rent-to-income levels at 21.2% and bad debt within our historical range. Our Midwest markets continue to see rent growth outpacing national averages, and our largest market of Minneapolis saw blended spreads of 1.3% in Q1. Notably, Minneapolis has shown the best acceleration into April with blended spreads of 3.8% and new lease spreads of 4.3% in the month. In Denver, Q1 blended rates were down 5.1%, and reimbursement revenues are exhibiting the impact of regulatory changes in the market. Concessions are prevalent in the market, and we experienced our highest usage of concessions to date in Q1. That said, we have reason for optimism. Q1 absorption levels were at their highest level since the pandemic rebound in 2021, and retention in our Denver communities was 51.9%, an improvement over Q1 2025. This data, together with the significant drop-off of new construction starts, sets us up for a better leasing profile as the year progresses, with improvement in both concessions and leasing spreads expected as we enter peak leasing season. Expenses in the quarter were higher than our historic trend or 2026 projected run rate. Much of this was related to timing, which Bhairav will elaborate on. Our team excels in expense management, as evidenced by our same-store expense growth of only 1.6% over 2024 and 2025, and we expect that discipline to show again in 2026 as the impacts of onetime expenses normalize. I would be remiss not to recognize our team. Their commitment and execution sets us apart, and we're proud that their efforts have been recognized through several awards, most recently being named a USA Today Top Workplace. I'm very grateful for our amazing team members. With that, I'll turn it over to Grant. Grant Campbell: Thanks, Anne, and good morning, everyone. Nationwide transaction activity continued showing signs of improvement, including a 13% total volume increase in 2025 compared to 2024. At the same time, investors are becoming increasingly selective with their investment decisions. There is a wide variation across individual markets as it pertains to investor conviction and actions. Within our geographic footprint, this dynamic exists. In Minneapolis, 2025 was a record year for transactions at $2.5 billion in total volume. This is driven by supply peaking in 2023, and at the peak, new deliveries representing only 6% of then existing stock, comparing favorably to the profile of high supply markets. Coupling this with stable and persistent renter demand, investors have been drawn to the market, and we expect this to continue throughout 2026, in part due to next 12-month deliveries representing 1.6% of existing inventory and the full construction pipeline at 2.1% of inventory. In our other Midwest markets, we continue seeing strong interest from private capital investors. These markets are anchored by health care, education and government and have muted supply profiles, including next 12-month deliveries ranging from 0% in our North Dakota and Rochester, Minnesota markets to 2.4% of existing inventory in Omaha. While the labor market has slowed nationally, we are seeing healthier relative performance in these locations, including in Grand Forks, North Dakota, where the U.S. Space Force is expanding its presence and a new $450 million food processing facility is underway, along with Rochester, Minnesota, which saw strong job growth in 2025, driven by health care and education. Shifting to Denver. Transaction volume was down 41% in 2025 compared to 2024, and this has carried into 2026 thus far. The market continues working through the influx of deliveries from the past 24 months, flat job growth in 2025 and the recent legislative changes affecting property level other income. This has generally put Denver's transaction market in a wait-and-see environment. Premium assets and locations are still commanding strong pricing, including a few recent trades at sub 5% in-place cap rates, though the divide between premium profile and the rest of the market has widened. We believe this theme will continue until growth indicators translate into hard data, providing investors more conviction in underwriting strengthening fundamentals. Strong Q1 absorption numbers are one building block. Taken together, we think this environment reinforces our historical focus on disciplined capital allocation. We expect household formation in our portfolio to outpace national averages by 50 basis points through the end of next year and employment growth to similarly outpace the U.S. We believe this positioning will allow us to navigate the current environment while creating value over time. I'll now turn it over to Bhairav to discuss our financial results and guidance. Bhairav Patel: Thanks, Grant, and hello, everyone. Last night, we reported first quarter core FFO of $1.12 per diluted share, driven by a 1.1% year-over-year decrease in Q1 same-store NOI. Revenues from same-store communities were flat compared to the same quarter in 2025, with a 1.7% increase to average monthly rental rate in the portfolio offset by a 40 basis point decrease to occupancy and the impact of lower RUBS revenue in our Colorado communities. On the same-store expense side, Q1 numbers were up 1.7% year-over-year, with controllable expenses up 3.5% and noncontrollables down 1.1%. Our G&A expenses increased by $1.3 million over the same quarter last year, with strategic review costs as the main driver of that increase. Turning to full year 2026 expectations. Our guidance is consistent with what we outlined in February with core FFO at $4.93, same-store NOI growth of 75 basis points, same-store revenue growth of 88 basis points and same-store expense growth of 1.5%, each at the midpoint of their guided range. Casualty recoveries in Q1 led us to increase our NAREIT FFO expectations for the year by $0.03 at the midpoint to $4.78 per share. Revenue growth assumes blended gross leasing spreads of approximately 2%, with occupancy in the mid-95% range and retention of about 52%. We continue to expect blended spreads will again be highest in our Midwest communities. That strength will bolster our Denver portfolio, where we expect spreads to be down for the year, though improving as the year progresses. As we have previously stated, regulatory changes are expected to temper revenue growth in our Colorado portfolio, with RUBS expected to be down nearly $1 million, which was already incorporated into our initial guidance. As Anne alluded to earlier, expenses in the first quarter were slightly higher than our expectations. However, part of that increase was driven by timing differences, especially on the noncontrollable side. We recorded approximately $400,000 in real estate tax true-ups during the quarter. True-ups are not uncommon during the first quarter, and we expect these to be offset when we resolve open appeals in the second half of this year. Our nonreimbursable losses during the quarter were also slightly higher than anticipated. This line item tends to be volatile, and our first quarter experience has not altered our expectations for the full year. Controllable expenses were impacted by a low team member open position count and the timing of R&M projects. We expect offsets to both will favorably impact the cost of these for the remainder of the year. Lastly, while G&A during the quarter was higher than the projected run rate for the rest of the year, we now expect full year G&A to be lower than our initial projection. As a result, we still expect to deliver financial performance within the initial guidance ranges we discussed at the beginning of the year. To further aid in modeling, I wanted to highlight our expectations for certain line items and related timing. Costs related to our strategic review are expected to be $1 million to $1.5 million for the year, with those costs expected to occur primarily in the first half of the year. This expense appears in both our G&A costs and has an add-back from FFO to core FFO. Amortization of assumed debt is expected to be $1.3 million for the year, with $490,000 expected in Q2 before quarterly amortization decreases to $215,000 per quarter in Q3 and Q4. Our guidance does not include any acquisitions or dispositions. Turning to our balance sheet. Q1 annualized debt-to-EBITDA was impacted by the higher G&A and taxes in the quarter, leading it to be atypically high. This is not indicative of any meaningful change to our leverage profile, and we expect this number to return to our historical mid-7x range as the year progresses and expenses normalize. Our debt schedule features both a compelling rate and a long tenure with a weighted average rate of 3.6% and weighted average maturity of 6.7 years, while our liquidity remains strong with $267 million of cash and line of credit availability compared to $98 million of debt maturing through 2027. To conclude, this quarter demonstrated the stability and consistency of our portfolio, with our results demonstrating our commitments to both operational excellence and financial discipline and positioning us well for the rest of 2026. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Brad Heffern of RBC. Brad Heffern: On Minneapolis, it sounds like you're seeing a strong inflection in spreads there. Do you view that market as being sort of back to normal at this point after we've passed all the supply? And then do you expect to see it overshoot to the upside to some extent? Anne Olson: Yes. I think you're exactly right, how we feel about it. We are certainly past the inflection point where the demand has stayed steady and the supply has been significantly absorbed and the new supply pipeline, as Grant discussed, is tapering to just over 2%. And so we're seeing really good rent increases there, and we think that, that will continue. We have no indicators that demand is softening here in Minneapolis. And the economy -- the regional economy here is healthy. So we do expect some outperformance from Minneapolis this year, particularly relative to our other markets. Brad Heffern: Okay. Got it. And then, Bhairav, on the guidance, 1Q was at the bottom end of the revenue growth guidance range. The expenses in 1Q were close to the top end of the range. Obviously, you didn't change the guidance, but I'm curious if you can just walk through the path to both of those getting to their midpoints? Or do you expect that NOI maybe won't get to the midpoint, just based on where we are so far? Bhairav Patel: Yes, let's go through the components. So revenue was still in line with our expectations. It was flat for the quarter, but we expected it. The increase in scheduled rent was offset by the loss of RUBS revenue in Colorado, and there was amortization and concessions that started in the second half of last year. But overall, revenue came in, in line with expectations, and April is shaping up also in line with expectations. We do expect that remains on track. On controllables, R&M was slightly higher in the first quarter. Some of that was timing, which will correct itself. And the remainder, we expect to offset with savings elsewhere. And we are fully staffed now, so we expect to be able to drive efficiencies as we enter leasing season by better managing overtime spend and third-party vendors. So we do expect that we'll kind of remain on track on controllables as well. With respect to noncontrollables, there were some tax true-ups in the first quarter. It's not unusual for us to see tax true-ups in the first quarter. We do expect some fuel savings to materialize in the second half of the year, so that should offset it. And also, as I said in my prepared remarks, there were some nonreimbursable losses, which again tend to be volatile. So we saw higher losses in the first quarter, which is not really indicative of the run rate going forward. So that should normalize as well. Lastly, there's G&A. That was also higher than the run rate. It was driven by some payroll tax accruals that are typically higher in the first quarter when we grant the equity awards. That should also normalize as we go through the rest of the year, and we actually did identify some additional savings. So overall, then you kind of combine all of these components, we expect to remain in line with the midpoint of our NOI as well as core FFO. Operator: Your next question comes from Ami Probandt of UBS. Ami Probandt: Just to dive in a little bit more on the markets. The other Mountain West markets are a relatively small part of the portfolio, but growth in the quarter was pretty soft. So I was wondering if you could talk through what's going on there? Anne Olson: Yes, sure. So the other Mountain West consists of Rapid City and Billings. And those markets, if you recall, are acting a little bit more like a Denver. So they had enormous rent growth in '21, '22 into '23, but then they did get some supply. And so being smaller markets, they have been impacted a little bit by supply. That is tapering off. And as Grant noted, we see very little supply coming there. But that market really has had some equalization going on there as they work through that supply. And then also a little bit softer job picture there. Immediately post COVID, they had a pretty big influx of people working remotely, particularly in places like Rapid City. And so we've seen that pull back a little bit. The market is still strong, but we're not seeing the growth that we had been there. We've had a little bit of a pullback in those markets. Ami Probandt: Got it. That makes sense. And then just on retention, this has been really strong, remains ahead of historical. I was just wondering if you think that retention might come down at all and to what extent it might come down as you change over to pushing a little bit more on rate as we move into the peak leasing season? Anne Olson: Yes, this is a great question. I think the market has changed the last couple of years across the industry, we've really seen higher retention. So you're hearing that from all the multifamily peers. You're hearing that on the private side. Whether or not that there's some fundamental shift there, I think people are starting to lean into that, right? The renters are staying renters longer. The average age of a renter is increasing. And so I think there's a higher percentage of renters in the market, which is helping retention. Now as we look into this year, the one thing that we're really looking at is with a lot of absorption coming and a lot of absorption happening, there's actually going to be fewer choices for people to move to. And one of the things we noted is while retention was really strong in Q1, it actually jumped up pretty significantly in April. So I guess I'm -- my early leaning is that this is a little bit of a fundamental shift in the industry away from that 50% general retention rate into something a little bit higher. Operator: [Operator Instructions] Your next question comes from the line of Jeffrey Carr of Cantor Fitzgerald. Jeffrey Carr: Just wanted to ask about with the review ongoing and no acquisitions or dispositions in guidance, how are you thinking about capital allocation priorities for the rest of the year? And specifically maybe around the revolver balance and value-add spend? And how much does the review kind of influence those decisions, if at all? Anne Olson: Yes, this is a great question. I think capital allocation is job #1 of an executive team, and particularly when you have hard assets. And we -- while we maintained our guidance on value-add for the year and we do think that, that's an important part of our program here and our operating platform, really, most of the value-add that we're spending is are things that were started or identified last year. So as we think about capital allocation priorities going forward, we're very focused on managing the line of credit debt and keeping our balance sheet strong and flexible. Operator: Your next question comes from the line of Mason Guell of Baird. Mason P. Guell: Has there been any change to the outlook for any of your markets this year? And are any doing better or maybe worse than expected? Anne Olson: Well, as Bhairav said, we really expect revenue is coming in line with expectations, and that's unchanged for the year. I think maybe the components are moving a little bit. We'd like to see Denver picking up a little bit faster, but -- and they had awesome absorption in Q1, as we discussed in the prepared remarks. And if that continues, we're going to be right in line there. Minneapolis is a little bit better than we expected, but these are all very slight offsets. And overall, I think revenue is coming in right where we thought, and we expect that to continue for the year. Mason P. Guell: Great. And then could you provide some color on the real estate investment impairment line item on your income statement? Bhairav Patel: Yes, we can go through the impairment. So overall, from a GAAP standpoint, you typically book impairment when your -- on real assets when your cash flows are going to be less than your book value. Now from real assets, you don't typically tend to see it because they have long holding periods. So you usually see impairments when we have assets that are held for sale. But with the ongoing strategic review, the considerations change a little bit, and we have to kind of tweak the holding period for certain assets, which resulted in the impairment that we booked in the first quarter. It was truly driven by a change in the potential holding period in light of all the other activity that's being reviewed at the strategic level. So that's really what drove the impairment. It was on one asset and was driven by property-specific factors. Operator: Your next question comes from the line of Michael Gorman of BTIG. Michael Gorman: Maybe just a quick one for me on a more strategic level as you're thinking about the portfolio and you're thinking about the business. Obviously, Denver, I think, has been a challenge, and that's not unique to you at all. There was an article in The Wall Street Journal over the weekend talking about the regulatory environment for business in general in the state of Colorado and some increasing concerns about the regulatory burden among the tech ecosystem. And I'm just wondering, have you started to see any of those concerns? Have you started to think about those concerns and what that means for the job market in those kind of core metro areas in Colorado? Or is this just a little bit too far out on the horizon? Anne Olson: Michael, this isn't too far out on the horizon, and it is something that we're thinking about. As we consider -- you may recall when we -- before we bought in Salt Lake City, one of the things that we really look at with respect to markets is the business climate, right, the friendliness, the tax regime, the regulatory environment. In Colorado, you can even see -- and we discussed in our prepared remarks -- you can start seeing the results of some of the regulatory actions that they have taken with respect to real estate, the RUBS, the collection, our ability to get reimbursement for RUBS and utility costs. So we're already starting to see that there. And I do think that some of the other regulatory actions that they're considering or considering taking are impacting their job growth. As Grant noted, it's been flat there after a few years of really, really strong growth. So is this part of the natural kind of maturing of Denver, which went from 1 million people to close to 4 million people in a relatively short span of time? A lot of jobs came there. Did the infrastructure not keep up? Do they feel pressure to put these regulations in place? Will that abate over time? I think that remains to be seen. We're really happy with the portfolio we have there. We're very happy with the basis we have in it, having started to acquire that portfolio back in 2017. And we're optimistic because it's still a place that has a lot of cultural gravitas. People are still wanting to live there for access to the outdoor amenities and things that other cities can't offer. And on a relative basis to places like California, it is still very affordable. So -- but definitely something that we're watching, something we're already starting to feel the impacts of and really keeping a close eye on. Michael Gorman: That's really helpful color. And maybe just a follow-up. I just wanted to make sure I had it clear. It sounds like, to your point, job growth is a little bit slower in Denver, but it sounds like absorption is running at pretty high levels. So I'm just wondering, kind of what could be driving that mismatch and how durable that can -- that absorption level do you think can be with the current level of job growth? Grant Campbell: Yes. Mike, correct. Q1 absorption numbers were very strong, peak data, looking back to the pandemic period. So we continue to see strong inflows of resident and renter demand in the market. I think a big driver there is the high cost of homeownership in that market. And although job growth has been flat in 2025, as we talked about, we do continue to still see folks from out of state relocating to the market, maybe not at the same clip that they were from '21 to '23. We actually looked within our portfolio, '21 to '23, about 1/3 of our applicants within our same-store portfolio were from out of state. And in '24 and '25, that was 25%. So a reduction, but still a meaningful inflow of folks coming from out of state, and it is very expensive to own a home in that market. Operator: Your next question comes from the line of Ami Probandt of UBS. Ami Probandt: Maybe a follow-up to Mike's question that was just asked. There's maybe some bias for some coastal -- at least coastal people about what your Midwest markets might look like. And so I'm just kind of curious, what's the hiring outlook for recent college grads across your market? Do college grads, are they attractive to these markets? Or do they tend to go to some of the bigger Sunbelt markets or coastal markets and then move into the Midwest as they get a little bit older and want to start a family? Anne Olson: Yes. Ami, this is a good question. And there -- as you probably know, there has been some recent publication highlighting where the hot markets for new college grads are. Very few of them are in the Midwest, but we still do see really strong companies in our markets and across the Midwest. And so Minneapolis, we have Target, 3M, huge health care in UnitedHealthcare and all the subsidiaries, Cargill, which is one of the largest private companies in the world. And then on the North Dakota side, Grant mentioned, we're starting to see some growth there. And Grant, maybe you can just comment a little bit on what we're seeing in some of those markets with respect to job growth that would attract some of those new college grads? Grant Campbell: Yes. I think to Anne's comments on Minneapolis, 17 Fortune 500 companies, Cargill, largest private company that there is. We see a lot of folks that -- maybe Chicago used to be the place, if they were Midwest-centric, it was Chicago, or we're going coastal. We see more and more of those folks coming to the Twin Cities. A strong underlying higher education system in the Twin Cities also serves as a feeder for a lot of those organizations and companies in our backyard. In the case of our other Midwest markets that you alluded to, Rochester, the Mayo Clinic is undertaking a very significant expansion phase that is drawing a lot of folks. So that market driven by health care and education, we're seeing it play out on the ground. In our prepared remarks, we alluded to North Dakota, where we're seeing some pretty significant investment, both from folks in state as well as other folks, in this case, a European company desiring to put their first U.S. plant in that market. So I think these things, although maybe they don't register at the same level as some of the coastal updates that we hear about, the wheel is turning in these markets. Anne Olson: And Ami, just one more thought on that is when I look at recent data and recent news articles about it, it does -- there is a big highlight there, which is the new college grads aren't just looking for coastal markets and jobs. They're also balancing that with overall affordability, and that's where the Midwest can be a real draw. And over the past few years, we've seen markets like -- not just Minneapolis, but Milwaukee, Columbus, Kansas City really get an outsized share of those grads given the affordability of living there. Operator: There are are no further questions at this time. Anne Olson: Great. Well, thank you all for joining us today. We look forward to meeting with many of you at the upcoming BMO and NAREIT conferences, and we wish you all a great day. Operator: This concludes today's call. Thank you for attending. 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. 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: 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: Good day, and welcome to the DHI Group, Inc. First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Todd Kehrli of PondelWilkinson. Please go ahead. Todd Kehrli: Thank you, operator. Good afternoon, and welcome to DHI Group's first quarter earnings conference call for 2026. Joining me today are DHI's CEO, Art Zeile; and CFO, Greg Schippers. Before I hand the call over to Art, I'd like to address a few quick items. This afternoon, DHI issued a press release announcing its financial results for the first quarter of 2026. The release is available on the company's website at dhigroupinc.com and this call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical information, statements on today's call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect DHI management's current views concerning future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include the risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. DHI undertakes no obligation to update or revise any forward-looking statements. Lastly, on today's call, management will reference specific financial measures, including adjusted EBITDA, adjusted EBITDA margin, free cash flow and non-GAAP earnings per share, which are not prepared in accordance with U.S. GAAP. Information regarding those non-GAAP measures and reconciliations to the most directly comparable GAAP measures are available in our earnings press release, which can be found on our website at dhigroupinc.com in the Investor Relations section. With that, I'll now turn the conference over to Art Zeile, CEO of DHI Group. Art Zeile: Thank you, Todd, and good afternoon, everyone. We appreciate you joining us today. At DHI, our mission is simple. We help employers connect with highly skilled technology professionals through 2 platforms, ClearanceJobs and Dice, both of which serve critical roles in the tech hiring ecosystem. Our exclusive focus on tech occupations, combined with ongoing product innovation gives us a durable competitive advantage. Today, approximately 6,000 employers and staffing and recruiting companies subscribe to our platforms and approximately 90% of our revenue is recurring. ClearanceJobs is the leading marketplace for professionals with active U.S. security clearances, serving approximately 1,700 customers, including Lockheed, Booz Allen Hamilton, Leidos, Raytheon and many others. With 2 million candidates on our platform, we have the largest number of profiles of U.S. cleared professionals, giving CJ a significant competitive advantage as a platform for hiring cleared tech talent for the defense sector. Dice is essentially LinkedIn for tech hiring, built over 35 years with 7.8 million profiles in our database, representing the vast majority of technology professionals in the United States. While LinkedIn emphasizes a person's title, we focus on tech skills, of which there are over 100,000 distinct skills in our data model. Tech professionals on Dice actively update their profiles with new skills, making Dice the most relevant platform for recruiters who need to source tech talent. With these 2 platforms, we have become an essential software tool used by employers and recruiters to find top tech talent for their open positions. This quarter reflects a company executing well against a clear strategy with strong momentum in ClearanceJobs and encouragingly early progress across our strategic initiatives. Let me start with ClearanceJobs, which remains the primary growth engine of DHI Group. In the first quarter, we achieved revenue growth of 5% and bookings growth of 7% year-over-year. Additionally, CJ delivered an adjusted EBITDA margin of 40%. This underscores the strength of the underlying business and improving demand trends. We are also seeing a more positive market environment following the passage of the U.S. defense budget in late January. While there is typically a lag between budget approval and hiring activity, customer sentiment has improved significantly and we are beginning to see that reflected in stronger engagement and demand. The $1 trillion U.S. defense budget for fiscal year 2026 represents a substantial 1-year increase over the previous year's budget. Additionally, NATO countries are increasing their defense budgets, aiming to allocate 5% of GDP, which could lead to more than $500 billion in additional spending annually with U.S. contractors likely to receive a substantial share of this expenditure. These dynamics are promising for ClearanceJobs. With over 10,000 employers of cleared tech professionals and more than 100 government agencies in need of them, CJ has a significant growth opportunity as government contractors look to staff new projects. We believe we are in the early stages of this growth cycle. Consistent with CJ's expand the mission strategy, we acquired Point Solutions Group, or PSG, inside the quarter and are encouraged by the early results. In a short period, we have increased the number of contractors deployed and grown the number of active contracts with major prime contractors. We are also seeing strong engagement from those partners as we develop and deepen relationships and pursue additional opportunities. While still early, the initial performance supports our strategy to expand the ClearanceJobs platform into adjacent high-value services and further monetize the relationships we have built over the past 24 years. Our AgileATS business also continues to make steady progress. While still modest in scale, we are consistently adding customers and increasing sales investment to support future growth. We are also seeing early traction with our premium candidate subscription on ClearanceJobs. Since its formal launch in mid-February, adoption has surpassed expectations with quick growth in paid subscribers. Although the immediate revenue impact is modest, this is an important new long-term monetization opportunity. Stepping back, our strategy is clear. We are leveraging the strength of the ClearanceJobs platform and our long-standing relationships with top government contractors to grow into related services and talent acquisition and management. This platform-driven approach positions us for sustained long-term growth. Turning to Dice. We are in the beginning -- we are beginning to see the signs of stabilization in the tech hiring market. As CompTIA stated in its report on the month of March, companies are beginning to move away from the more conservative approaches of the past year and are considering investments in talent to support strategic digital initiatives. Leading indicators, including job postings and customer activity are improving, and we are seeing increased engagement from both staffing firms and commercial customers. There were more than 537,000 job postings for tech positions in March, including 254,000 new postings, an increase of 19% year-over-year. While we are not yet seeing a recovery in Dice bookings, the trend lines are encouraging. AI continues to be the most important long-term driver. As of March 2026, 67% or 2/3 of U.S. tech job postings required AI-related skills, more than double the 29% we saw a year ago. Over that same period, job postings requiring machine learning skills have increased 167%. We view this as a powerful validation of our strategy. Rather than reducing the need for talent, AI is increasing demand for highly skilled technical professionals. Dice is well positioned here with a deep skills-based model that allows employers to identify candidates based on more than 360 distinct AI-related skills. Rather than treating AI as a single generic category, Dice enables employers to identify and match candidates based on specific skill sets, an increasingly critical capability as AI roles become more specialized. We have also made it easier for candidates to access Dice job postings by being the first career platform with a Claude connector. This is only one of many Dice features that implement an AI model solution. As you recall, we enabled 2 self-service options for Dice late last year and we are already seeing a steady progression of transactions as we ramp our marketing campaign spend. While near-term performance will depend on the pace of recovery in the broader tech hiring market, we believe Dice is strategically well positioned, especially as demand for AI-related skills continues to grow. From a financial perspective, DHI continues to generate strong free cash flow, supported by our subscription model and disciplined cost structure. This allows us to take a balanced approach to capital allocation, investing in growth initiatives, pursuing strategic acquisitions and returning capital to shareholders through an active share repurchase program. As a reminder, our Board approved a $10 million share repurchase program in the first quarter, demonstrating our confidence in the company's long-term value. In summary, we believe DHI is uniquely positioned at the intersection of 2 powerful and durable trends; increasing global defense spending and growing demand for highly specialized technology talent, particularly in AI. ClearanceJobs continues to demonstrate strong growth and expanding opportunity as government and contractor demand accelerates, while Dice is well positioned to benefit from an eventual recovery in tech hiring, supported by our differentiated skills-based approach and continued product innovation. At the same time, we are successfully extending our platforms into adjacent services, creating new monetization opportunities and deepening our relationships with customers. Importantly, our highly recurring revenue model and strong free cash flow give us the flexibility to invest for growth while continuing to return capital to shareholders. Taken together, we believe we are building a more durable, high-growth business with multiple levers for value creation. With that, I'll turn the call over to Greg to walk you through the financial results in more detail. Greg Schippers: Thank you, Art, and good afternoon, everyone. I'll start with a brief overview of our first quarter results before walking through each of the segments in more detail. While total revenue and bookings declined year-over-year, our results reflect the continued strength of ClearanceJobs, which delivered both revenue and bookings growth as well as the benefits of the actions we've taken to improve efficiency across the business. Importantly, we delivered solid adjusted EBITDA growth and margin expansion in the quarter, along with strong free cash flow generation. Overall, our performance highlights the durability of our subscription-based model, the growth opportunity in ClearanceJobs and the significantly improved profitability we are seeing in Dice as we position the business for an eventual recovery. With that context, let's turn to our segment performance, starting with ClearanceJobs. ClearanceJobs revenue was $14.0 million, up 5% year-over-year and roughly flat compared to the prior quarter. Bookings for CJ were $18.0 million, up 7% year-over-year. PSG acquired at the end of February, contributed $700,000 of revenue and bookings in the quarter for CJ. We ended the first quarter with 1,741 CJ recruitment package customers, which was down 8% on a year-over-year basis and down 2% on a sequential basis. CJ accounts spending greater than $15,000 in annual recurring revenue increased versus the prior year. Our average annual revenue per CJ recruitment package customer was up 6% year-over-year and roughly flat on a sequential basis to $27,286. Approximately 90% of CJ revenue is recurring and comes from annual or multiyear contracts. For the quarter, CJ's revenue renewal rate was 88% and CJ's retention rate was 105%. The revenue renewal rate was negatively impacted by a customer with annual spend over $500,000 that did not renew in the quarter, but is expected to return later this year. The solid retention rate demonstrates the continued value CJ delivers in the recruitment of cleared professionals. Dice revenue was $15.7 million, which was down 17% year-over-year and down 10% sequentially. Dice bookings were $20.2 million, down 20% year-over-year. We ended the quarter with 3,832 Dice recruitment package customers, which is down 7% from the last quarter and down 15% year-over-year. Dice revenue renewal rate was 71% for the quarter and its retention rate was 100%. The reduction in customer count and Dice's renewal rate from the prior year quarter continues to be attributable to churn with smaller customers spending less than $15,000 per year, representing 80% of the total churn on count and who are more likely to be impacted by the difficult macro environment and uncertainty. We believe the introduction of our new Dice platform, which offers customers the flexibility of monthly subscriptions will offset the churn among smaller accounts by lowering upfront commitment and improving affordability. Our average annual revenue per Dice recruitment package customer was $15,466, down 6% year-over-year and down 1% sequentially. As with CJ, approximately 90% of Dice revenue is recurring and comes from annual or multiyear contracts. Deferred revenue at the end of the quarter was $44.5 million, down 12% from the first quarter of last year. Our total committed contract backlog at the end of the quarter was $99.0 million, which was down 8% from the end of the first quarter last year. Short-term backlog was $77.2 million at the end of the quarter and long-term backlog, that is revenue to be recognized in 13 or more months, was $21.8 million. Both brands onboarded notable clients in the first quarter. For CJ, this includes Akamai Intelligence, SynthBee and Michigan Technological University, while Dice landed Avera Health, Fourth Yuga Tech and Parkland Center for Clinical Innovation as customers in Q1. Now let's move to operating expenses. For the quarter, our operating expenses decreased $15.0 million or 36% to $26.6 million when compared to $41.6 million in the year ago quarter. Improvements to our operating efficiency, including the Dice Employer Experience platform, along with adjusting the business for the difficult market environment over the past few years has significantly reduced our annual operating expenses and capitalized development costs. For the quarter, we had income tax expense of $1.0 million on income before taxes of $2.5 million. Our tax rate for the quarter differed from our approximate statutory rate of 25% due to the tax impacts of stock-based compensation. Although our income subject to tax has grown, the tax law change in 2025, which allows for the immediate deduction of R&D costs will partially offset our 2026 cash outlay for income taxes. Moving on to the bottom line. We reported net income of $1.5 million or $0.04 per diluted share in the quarter. For the prior year quarter, we reported a net loss of $9.8 million or $0.21 per diluted share, which included a $7.8 million Dice goodwill impairment charge and a $2.3 million restructuring charge. Non-GAAP earnings per share for the quarter was $0.08 per share compared to $0.04 per share for the prior year quarter. Diluted shares outstanding for the quarter were 42.4 million shares, down 3.1 million shares or 7% from the prior year quarter as we continue to return cash to shareholders through our share repurchase program. Adjusted EBITDA for the quarter was $8.1 million, a margin of 27% compared to $7.0 million or a margin of 22% a year ago. On a segmented basis, CJ adjusted EBITDA remained strong at $5.7 million in the first quarter, representing a 40% adjusted EBITDA margin as compared to adjusted EBITDA of $5.7 million or a margin of 43% in the prior year period. Dice's adjusted EBITDA increased to $4.3 million, representing a 28% adjusted EBITDA margin compared to $3.4 million and an 18% margin last year. Operating cash flow for the first quarter was $8.4 million compared to $2.2 million in the prior year period. Free cash flow, which is operating cash flows less capital expenditures, was $6.8 million for the first quarter compared to $88,000 in the first quarter of last year. Our capital expenditures, which consist primarily of capitalized development costs were $1.6 million in the first quarter compared to $2.2 million in the first quarter last year, an improvement of 24%. Capitalized development costs in the first quarter for CJ were $577,000 compared to $362,000 a year ago, while capitalized development costs for Dice were $1 million this quarter as compared to $1.7 million a year ago. We are targeting total capital expenditures in 2026 to range between $7 million and $8 million as compared to $7.3 million last year. From a liquidity perspective, at the end of the quarter, we had $3.0 million in cash, and our total debt was $33 million, an increase of $3 million from the last quarter despite cash outlays in the quarter of $5 million for the purchase of PSG and $4.7 million for the purchase of 2 million shares under our stock repurchase programs. Leverage at the end of the quarter was 0.91x our adjusted EBITDA and we continue to target 1x leverage for the business. At the end of the quarter, we had $6.4 million remaining on our $10 million share repurchase program. Moving on to guidance. We continue to expect ClearanceJobs bookings to grow in 2026. However, we do not anticipate Dice bookings growth resuming until tech hiring improves. As a result, we expect DHI revenue of $124 million to $128 million for the full year. And for the second quarter, we expect revenue of $30 million to $32 million. For CJ, with the addition of PSG, we expect revenue of $62 million to $64 million for the full year. And for the second quarter, we expect revenue of $15 million to $16 million. At Dice, we expect revenue of $62 million to $64 million for the full year. And for the second quarter, we expect revenue of $15 million to $16 million. From a profitability standpoint, we continue to target full year adjusted EBITDA margin for DHI of 25% and margins of 40% for CJ and 22% for Dice. Our focus remains on delivering long-term sustainable and profitable revenue growth, along with strong free cash flow generation, averaging at or above 10% of revenues. To wrap up, although the hiring environment over the past few years has impacted our revenue growth, we remain optimistic about the road ahead. We anticipate the record-breaking defense budget will be a growth driver for CJ and that companies across all industries will steadily increase their investments in technology initiatives, creating a strong growth opportunity for both ClearanceJobs and Dice. We remain focused on strengthening our industry-leading solutions, optimizing our go-to-market strategy and executing with efficiency, ensuring we are well positioned to capitalize on the opportunities that lie ahead. And with that, let me turn the call back to Art. Art Zeile: I want to thank all of our team members once again for their outstanding work this quarter. It is a pleasure to be part of such a great team. That said, we are happy to answer your questions. Operator: We'll now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Gary Prestopino with Barrington Research. Gary Prestopino: Greg, what was the -- I'm sorry, I didn't get a chance to write down the capitalized development costs. What were they in the quarter? Greg Schippers: So in the quarter, the capitalized development costs were $1.6 million, Gary. Gary Prestopino: Okay. $1.6 million. And then with the acquisition of PSG, is that really entirely the reason for the revenue -- the increase in the revenue range at CJ? Or are you performing better than you expected from the start of the year? Greg Schippers: Yes. Good question, Gary. And that is purely related to the revenue from PSG at this stage. And we anticipated some improvement within CJ in the budget, but more in the bookings area as opposed to in revenue, which, as you may recall, had some revenue -- or had some bookings challenges in the mid- to latter part of 2025 for CJ. And so that -- as that converts to revenue, that is going to challenge revenue in 2026 minus PSG. Gary Prestopino: And then lastly, and I'll jump off and let somebody else go. Dice retention increased to 100% from 92%, which basically means you're getting good renewals and you're not losing that base business, I suppose, as I'm reading that right. Is that kind of a good leading -- somewhat of a leading indicator for Dice? Or am I just reading that wrong? Art Zeile: So Gary, you're reading that absolutely correctly. I think that we're seeing a stabilization in demand in the environment. And it's consistent with the fact that staffing industry analysts as well as a number of different resources have indicated that we've kind of crossed the line for tech staffing and it's going to be a growth area for 2026. And we're seeing that sentiment improve across our staffing firms. Operator: And our next question today comes from Max Michaelis with Lake Street. Maxwell Michaelis: First one for me. When we look at the CompTIA and the job postings, I think you said 537,000 jobs this month or month of March and then 254,000 new jobs. I know a lot of it's related to AI, but you said you haven't really seen an uptick in bookings from that. I figured you would have. Is there a reason why? Has there always been kind of a laggard effect with CompTIA and the impact on bookings? And then I guess with that, what are some of the things you're hearing from your customers? Is it going to be more of a late 2026 where they see more of their -- or more business coming on to your platform, I guess, lack of a better word? Art Zeile: Yes, that's a great question, Max. And I have to say that the number of new tech job postings is definitely a leading indicator. But you have to understand that the historical pattern of our customers have been to essentially have their contracts start in every month in the year, right? There is kind of a crescendo that takes place in December and January. So they're thinking about how they're going to renew in forward months based on what they're seeing as a leading indicator today in terms of new tech job postings. But it's pretty significant. Like I said, 19% growth of March 2026 over March 2025 is a pretty big signal. As an aside, staffing industry analysts just posted an article yesterday that's entitled IT staffing turning the corner. And Bloomberg, the same day yesterday, posted an article that's entitled companies increasingly favor temps over permanent hires and kind of they're both coupled. We believe that in this kind of environment, it's a less risky move to essentially go to a staffing agency for your tech hiring needs rather than going to permanent hire. So it's all kind of coming together right now. Maxwell Michaelis: So really, the impact of this, you really wouldn't see that towards the end -- until the end of 2026, correct? Art Zeile: I think it's -- that's correct. It's going to be playing out over the course of the year. And again, those folks that are intended to renew in third quarter and fourth quarter are probably now starting to factor this in, seeing that the demand is increasing. And like I said, 254,000 jobs is a significant increase over the roughly 200,000 jobs that we saw most of last year. So it's a pretty good signal. Maxwell Michaelis: Okay. That makes sense. And if we look at some of the acquisitions you've made, the Point Solutions, ATS, you said they were performing better than what you guys had originally expected. I mean is that with just a revenue standpoint? Or can you help me out or is there anything else you can offer that can kind of give me a better understanding of how these are actually outperforming better than what you originally expected? Art Zeile: So that comment in the earnings call was really intended to focus on AgileATS. And I would say that the bookings and revenue figure are performing better than expected, although it was a pretty small base when we bought the company back in July of last year. For PSG, Point Solutions Group, it's a little bit too early to tell. We closed that transaction right at the end of February. And so we're kind of moving into the integration phase. But the good news is we actually have now established 2 new relationships, 2 new subcontracts to primes even within that short period of time. So it feels like we're on our way. Maxwell Michaelis: All right. Last one for me, and then I'll hang up the mic. It seems to be a common thing you guys are acquiring companies kind of in the defense space. I mean is there an active pipeline right now where you guys could see yourself acquiring another one of these companies kind of in that defense adjacent landscape? Art Zeile: Yes. I would say that true to what we described, we view CJ as a platform and that we have these trusted relationships with 1,800 very important military contractors. We want to sell them more and especially sell them more in that talent acquisition and management space. So there is a view to additional tuck-in acquisitions over the course of time. Operator: [Operator Instructions] Our next question comes from Kevin Liu at K. Liu & Company LLC. Kevin Liu: I know on CJ, a lot of the traction there and momentum is going to be tied to kind of this defense funding. But I was curious if you guys had any exposure to DHS and whether you think kind of the recent funding approval there, if that kind of resuscitates any deals you had in the pipeline? Art Zeile: That's actually very insightful. I would have to say that one of our larger customers was the Cybersecurity Infrastructure Services Administration, CISA, which is a division of DHS. And they did not renew last year. I think that's based on 2 different factors. It was based on the fact that their funding was uncertain at the time, but also the fact that there is a hiring freeze across most government institutions. We believe, based on the fact that there was a leak that took place that indicated that they are down in terms of their staffing by 40%, that they will be allowed to kind of hire again and they're going to need a platform to do so. So there are elements of the government that I think that will be kind of freed by this funding of DHS and then the need to essentially plug holes in really critical areas in the government. Kevin Liu: Got it. And just related to that, you guys did reference kind of a large contract that hadn't renewed early in the year, but should come back later in the year. Was that related to this at all? Or is that just kind of a separate deal? Art Zeile: It was unrelated. In this particular case, the customer in a cost-saving move believed that they could move to a competitor of ours called ClearedJobs.Net. This is a platform that is roughly about 120th our size, and they've already admitted that this was probably not in their best interest. So we're still in discussions with them and we hope that they will essentially renew a subscription at their next budget cycle, which is in third quarter. Kevin Liu: All right. Sounds good. And then I was hoping you could put a finer point just on the contribution from Point Solutions Group. What's kind of the expected contribution to the revenue line, both in Q2 and the full year? Greg Schippers: Yes, this is Greg. Kevin, so we -- and you can really kind of see this in the guidance. We uplifted our guidance by approximately $6 million for the full year. And so that's roughly where we're anticipating for this 10-month period to land with PSG. Kevin Liu: All right. That's helpful. And then just lastly for me, as it seems like the environment starts to turn here, just wondering how you're thinking about kind of the timing of maybe investing a bit more on either the sales or marketing side. Art Zeile: That's a great question. I can tell you that we've always been pretty conservative, especially over the last 3 years as we're kind of waiting for this tech hiring recession to resolve itself. I would say that for ClearanceJobs because we see a clear signal associated with the defense budget being put into law this past January and kind of a robust amount of interest, that's where we would essentially hire more people into sales and have more marketing spend at this point in time. But it's early days. I would say that we want to see that play out, and we want to see the firming up and stabilization and increasing of demand before we do. So I would not assume that we're going to change our sales and marketing pattern for either brands for now, but we're assessing it real time for the remainder of the year. Greg Schippers: The one other thing I might just add to that is we do have some additional investment in marketing for Dice, specifically related to the self-service platform, the digital experience platform in the remainder of the year to drive some revenue from that platform. Kevin Liu: Congrats on a [ full expected year ]. Operator: And that does conclude our question-and-answer session. I'd like to turn the conference back over to Art Zeile for any closing remarks. Art Zeile: Well, thank you, Rocco, and thank you all for joining us today. As always, if you have any questions about our company or would like to speak with management, please reach out to Todd Kehrli, and he will assist you in arranging a meeting. Thank you, everyone, for your interest in DHI Group, and have a great Cinco de Mayo. Operator: Thank you, sir. And everyone, that does conclude our conference for today. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.
Operator: Please standby, your meeting is about to begin. Hello and welcome everyone joining today's Neurocrine Biosciences, Inc. Q1 2026 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. To register to ask a question at any time, please press 1 on your telephone keypad. Please note, this call is being recorded. We are standing by if you should need any assistance. It is now my pleasure to turn the meeting over to Todd Tushla, Vice President of Investor Relations. Please go ahead. Todd Tushla: Thank you, and happy Cinco de Mayo to everyone. Welcome to Neurocrine Biosciences, Inc. first quarter 2026 earnings call. Joining me today are Kyle Gano, Chief Executive Officer; Matthew C. Abernethy, Chief Financial Officer; Eric S. Benevich, Chief Commercial Officer; Sanjay Keswani, Chief Medical Officer; and Sameer Sadanti, Vice President of Strategy and Corporate Development. During today's call, we will be making forward-looking statements, including statements containing projections regarding future events, such as the anticipated closing of our acquisition of Solano Therapeutics. These statements are subject to certain risks and uncertainties and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. In addition, some of the information discussed today includes non-GAAP financial measures that have not been calculated in accordance with U.S. GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of Neurocrine Biosciences, Inc.’s website. Following prepared remarks, we will address your questions. With that, I will hand the call off to Kyle. Kyle Gano: Thanks, Todd. Good afternoon, everyone. Over the past several years, we have articulated a clear vision to become a leading biopharmaceutical company driven by growing and diversifying our revenue base while advancing and expanding our pipeline. Our first quarter performance reflects meaningful progress along that path. For the first time in Neurocrine Biosciences, Inc.’s history, quarterly net product sales exceeded $800 million, representing 44% year-over-year growth. These outstanding results were primarily driven by INGREZZA, now in its ninth year since launch and continuing to grow at a double-digit rate. With INGREZZA guidance reaffirmed at $2.7 to $2.8 billion, Cranesini now annualizing at over $600 million per year, and the pending addition of iCAT XR to our commercial portfolio, we are well positioned to deliver record net product sales in 2026. Regarding VICAT XR and the pending acquisition of Soleno Therapeutics, we will be limited in our ability to address questions today given the ongoing tender offer. The acquisition remains on track to close in the second quarter. That said, we have been impressed by the Solano team's accomplishments in delivering strong clinical results in a complex disease, enabling broad utilization with a simple label, and overseeing a strong launch of iCAD XR. We look forward to formally welcoming them to the Neurocrine Biosciences, Inc. team shortly. Together, we will remain focused on ensuring a seamless integration with a singular goal of serving patients with Prader-Willi syndrome in the United States. Beyond strengthening our commercial portfolio, we continue to invest in our R&D engine across neurology, psychiatry, endocrinology, and immunology. Our pipeline progress is evident by our plan for six new phase 1 and four new phase 2 programs this year alone. In 2027, we will report key data readouts for rosuvampodoro in major depressive disorder, dereclidine in schizophrenia, and MBIP 2118 in obesity, just to name a few. When you combine the durability and remaining growth opportunity for our commercial assets, our innovative R&D engine, and our strengthening financial profile, Neurocrine Biosciences, Inc. is uniquely positioned to deliver sustained value for both patients and shareholders. Enterprise-wide momentum has never been stronger, and we are just getting started. With that, I will turn the call over to Matt. Matthew C. Abernethy: Thank you, Kyle, and good afternoon, everyone. First, congratulations to our commercial and medical teams on an outstanding quarter. We delivered more than $800 million in total revenue, with over 40% year-over-year growth. Importantly, for both INGREZZA and Carnicity, this performance reflects strong underlying demand and the meaningful impact we are having on patients' lives. Starting with INGREZZA, first quarter 2026 sales were $657 million, up 20% year-over-year, driven by double-digit volume growth in new patient additions. When adjusting for one less order week in Q1 2025, growth was approximately 11%. We are encouraged by the strength of the business exiting Q1 and are reaffirming our 2026 INGREZZA guidance of $2.7 to $2.8 billion. Consistent with our historical approach, we will revisit guidance following the first half of the year. Turning to Cranesity, first quarter 2026 sales were $153 million, driven by strong persistency and consistent new patient enrollment forms compared to Q4. We continue to see broad prescriber adoption and favorable reimbursement dynamics. As anticipated, we saw some slight gross-to-net pressure in Q1 due to commercial copay resets. As we look ahead, we remain very encouraged by what we are seeing and continue to believe Princeton is well positioned to become a blockbuster medicine. Our revenue performance continues to support R&D investment while expanding profitability. During the first quarter, we generated around $200 million of net income on a GAAP and non-GAAP basis, respectively, reflecting strong operating execution. On a GAAP basis, these results included gains related to equity investments and the sale of the Diurnal business. On a non-GAAP basis, these results include $44 million in milestone expense and IPR&D. As you model operating expenses for the rest of the year, the full impact of the commercial expansion will be seen starting in the second quarter. So stepping back, INGREZZA and crenicity together provide a growing commercial foundation generating durable cash flows that enable continued investment in innovation and strategic business development opportunities. This aligns directly with our capital allocation priorities to, number one, drive revenue growth; number two, advance our pipeline; and three, invest in business development. Regarding the announced acquisition of Solenno and Bicat XR, we are excited to add this asset to our portfolio and strengthen our long-term growth profile. We are not providing financial guidance related to the transaction at this time and will limit commentary during Q&A. Assuming a second quarter close, we expect to provide additional financial details on our Q2 earnings call. Overall, the first quarter reflects strong momentum across both our commercial portfolio and pipeline, with multiple key data readouts expected over the next 18 months, including osavampitur, dereclidine, and our CRF2 obesity program. With that, I will hand the call over to Eric S. Benevich, our Chief Commercial Officer. Eric S. Benevich: Thanks, Matt. May 1 marked the nine-year anniversary of the INGREZZA launch. It is remarkable that, now nine years post FDA approval and launch, we continue to deliver record new patient starts. This is a testament to both our commercial execution and the high unmet need of the tardive dyskinesia community. Our ongoing investments in the sales force, marketing initiatives including DTC, and improved formulary access are clearly driving strong results. I want to acknowledge our commercial and medical teams who continue to make a meaningful difference for patients to relieve the burden of tardive dyskinesia or chorea associated with Huntington's disease. While proud of these achievements, we are even more encouraged by the significant opportunity that remains. Approximately 90% of the estimated 800,000 TD patients in the U.S. are currently not receiving standard-of-care first-line treatment with a VMAT2 inhibitor like INGREZZA. With continued rapid growth in antipsychotic utilization, the prevalence of tardive dyskinesia is expected to rise over time at a rate exceeding U.S. population growth. With an increased base of psychiatric health care providers to call on for our recently expanded sales force, we anticipate these tailwinds to support strong demand and sales through the back half of the year. Before I wrap up my comments on INGREZZA, I would like to remind everyone that May is Mental Health Awareness Month and this week in particular is TD Awareness Week, what we affectionately refer to as TDAW. This is an important week we circle on our calendar each year where we partner with key patient advocacy organizations in mental health along with state and local governments across the country to raise awareness and to deliver hope to the many thousands of people needlessly suffering from TD. Now returning to Crinesity, the strong momentum from 2025, the first year of our commercial launch, carried over into our Q1 2026 performance. The Crinesity launch continues to progress extremely well, with steady new patient starts, high persistency and compliance rates, and favorable reimbursement, consistent with the trends we observed in 2025. Importantly, we are seeing growing trial and adoption across all prescriber segments including CAH centers of excellence, pediatric endocrinologists, and community adult endocrinologists. Through Q1, we have seen over 1,200 health care providers prescribe Cranesiti. Adoption remains balanced across both pediatric and adult populations, as well as between female and male patients, with a modest ongoing skew toward pediatrics and females consistent with prior trends. As Sanjay will discuss in more detail, we continue to generate compelling long-term efficacy, safety, and tolerability data that further reinforce the value proposition and chronicity's emerging position as a standard-of-care treatment together with low-dose GCs for patients with classic CAH. With sales now annualizing at greater than $600 million, Cranesity is well on its way to achieving blockbuster status. With that, I will turn the call over to Sanjay Keswani, our Chief Medical Officer, to discuss progress with our exciting clinical pipeline. Sanjay Keswani: Thanks, Eric, and good afternoon, everyone. I would like to begin with highlights from two recent scientific conferences. Firstly, the American Association for Clinical Endocrinology 2026 annual meeting in Las Vegas. At this meeting, we presented new two-year KRONASTI data from the phase 3 CATALYST adult study demonstrating sustained and substantial reductions in glucocorticoid doses in adults with classic congenital adrenal hyperplasia. Approximately 70% of patients achieved glucocorticoid doses within the physiological range without compromising androgen control. Indeed, a similar proportion of patients, i.e., 70%, sustainably achieved normal levels of androgens. These two-year findings demonstrated that Cranespi provided durable androgen control while enabling meaningful reductions in glucocorticoid exposure, resulting in positive impacts on bone health, bone aging, hirsutism, acne, weight, and insulin resistance. Importantly, these benefits were sustained over time with greater than 80% study retention and no new safety or tolerability signals were observed. Collectively, these findings support chronicity as a long-term treatment that meaningfully advances the standard of care for people living with classic CAH. We look forward to providing additional two-year data across a broader set of clinical endpoints and outcomes at upcoming medical meetings, including ENDO 2026 in June. Also in April, at the Academy of Managed Care Pharmacy 2026 annual meeting, we presented the first real-world head-to-head claims data comparing INGREZZA to deuterated tetrabenazine. These data demonstrated greater treatment persistence with INGREZZA capsules, including higher rates of long-term treatment continuation and lower rates of switching between medications among adults with tardive dyskinesia. Importantly, this higher persistence with INGREZZA was observed early in treatment and sustained over a six-month follow-up period. As a first real-world comparison of its kind, these findings provide meaningful evidence to inform decisions in clinical practice and further reinforce INGREZZA's differentiated profile. Turning to our clinical portfolio, our focus this year is on building and advancing the pipeline. We have initiated three phase 2 studies, all of which are currently enrolling. These include NBI 890, our next-generation VMAT2 follow-on in tardive dyskinesia; dereclidine, our selective M4 muscarinic agonist in bipolar mania; and NBI 570, our selective dual M1 and M4 muscarinic agonist in schizophrenia. Our fourth phase 2 study will be for crinecerfont in patients under four years of age with classic CAH. This study is on track for initiation in the coming months. In addition, we currently have a total of nine phase 1 programs underway, including NBIP 2118, a corticotropin-releasing factor type 2 receptor peptide agonist for obesity, with top-line data expected in 2027. We plan to initiate four additional phase 1 studies in 2026, including NBIP 1968, our proprietary triple G agonist in combination with NBIP 218 for obesity; NBIB 223, our gene therapy program for Friedreich's ataxia; and NBI 188, our CRF1 antagonist for an indication in women's health. This strong pipeline momentum in 2026 positions Neurocrine Biosciences, Inc. for multiple significant data catalysts in 2027, including top-line phase 3 readouts for osavapitor in major depressive disorder and the first phase 3 study of direct renal schizophrenia, with a second phase 3 study readout anticipated the following year. In summary, our execution in 2026 is focused on advancing a broad and diversified pipeline, setting the foundation for significant clinical and commercial value creation beginning in 2027. And as we highlighted at our 2025 R&D Day last December, this is just the beginning. With that, I will hand the call back to Kyle. Kyle Gano: Thanks, Sanjay. Nikki, I think we are ready for questions now. Operator: Thank you. If you would like to ask a question, please press 1 on your keypad. To leave the queue at any time, press 2. And once again, that is star and 1 to ask a question. We will take our first question from Tazeen Ahmad with Bank of America. Please go ahead. Your line is open. Tazeen Ahmad: Hi, guys. Thanks for taking my question. Congratulations on a strong quarter. I wanted to ask about KRONESTEDY growth relative to where you thought it would be at this stage. How is that launch progressing, and can you talk to us about what the physician activation efforts have been? Are they reactivating older patients, and where are most of their scripts currently coming from? Thanks. Kyle Gano: Thanks, Tazeen. I will let Eric take that question. Eric S. Benevich: Tazeen, hi. I would say overall that we are ahead of where we expected to be at this point, approximately five quarters into the launch. Certainly, we are very pleased with the continued adoption that we saw in Q1. I would describe the new patient starts as very steady and consistent with the trend that we saw in Q4, along with continued strong persistency, compliance, and favorable reimbursement. As a result, the prescriptions and the sales are really accumulating nicely. I will point out, though, that most physicians that have prescribed Cranesiti have only treated one patient thus far. And even though we have made great progress in the first year of the launch, the majority of patients have yet to be treated. So we see substantial opportunity ahead. Operator: Thank you. We will move next to Paul Andrew Matteis with Stifel. Please go ahead. Your line is open. Paul Andrew Matteis: Great. Thanks very much, and let me add my congrats on a great quarter. For INGREZZA and KRONESITI, can you confirm that there were not any material changes in inventory build or other one-offs that would have temporarily boosted the results for this 1Q? And then as a second part, for INGREZZA, in prior years there has been some nuanced seasonality considerations and headwinds in 1Q that have been problematic for you temporarily in January and February, but then ultimately lead to some tailwinds into 2Q. I was wondering if you can speak to what that seasonality dynamic might have been this quarter. Has it gotten better now that you have contracted, and what could the cadence look like sequentially this year versus prior years? Thank you. Matthew C. Abernethy: Yes, so on the inventory, there was nothing material, nothing to note. A really clean quarter reflecting very strong underlying demand. The team did a really good job managing through seasonality this quarter. We would expect it to be somewhat similar to what you have seen historically, so well done to the team, and we are set up for a nice growth year the rest of 2026. Operator: Thank you. Our next question comes from Brian Corey Abrahams with RBC Capital Markets. Please go ahead. Your line is open. Brian Corey Abrahams: Hey. Good afternoon. Thanks for taking my question, and my congrats on the strong quarter as well. On KRONESTENESITI, it sounds like the new patient start forms have been steady and consistent. I was wondering if you could elaborate a little bit more on that, and maybe what is the right way we should be thinking about the expected cadence going forward just based on the trends that you have been observing of late? Thanks. Kyle Gano: Thanks, Brian. I think Eric did a nice job articulating what we have seen in terms of new patient starts for Q1. As we mentioned previously, we are moving away from sharing specific numbers and focusing more on top-line net sales moving forward, which would be consistent with other companies that sell orphan medicines. But leaning into that and providing color where we think it is relevant, in terms of Q1 we did see good steady new patient starts going from Q4 to Q1, and that extended to persistency and compliance as well, and then continued good reimbursement rate of dispensed scripts. With that, there has been broad accumulation of patients over time since launch, and that is what has given rise to our strong performance in Q1. We look forward to building on that with our expanded sales team for the remainder of the year. Operator: We will move next to Cory William Kasimov with Evercore ISI. Please go ahead. Your line is open. Cory William Kasimov: Great. Thanks. I appreciate you taking the question, and yeah, it was a great quarter, but I do want to switch gears a little bit and ask about the pipeline. I am curious if there is anything you can say as to the accrual of your ongoing phase 3 neuropsych assets in both MDD and schizophrenia, and when do you think you might be in a better position to provide more granular or narrow guidance on timing of these top-line readouts that might attract a little bit more attention there? Thank you. Sanjay Keswani: Thanks. I appreciate the question. With respect to our current phase 3 programs, specifically osafampitur for MDD and dereclidine in schizophrenia, they are all enrolling really well. We are very happy with the current enrollment rate, and indeed they should be reading out next year for losobambital, all three phase 3 studies. As for dereclidine, we are expecting the first phase 3 next year, with the second phase 3 the following year. So everything is on track as originally envisaged. Operator: Thank you. Our next question comes from Corinne Johnson with Goldman Sachs. Please go ahead. Your line is open. Corinne Johnson: Thanks, good afternoon, guys. I was just curious if you could talk a little bit about the reauthorization processes you saw for KRONESITI in 1Q and if you could provide any kind of commentary on reimbursement trends you are seeing in that population. Thanks. Eric S. Benevich: Hi. As a reminder, the patient population with classic CAH that are starting chronicity are quite different from a payer perspective than what we see with tardive dyskinesia. The CAH population is primarily commercially insured, and secondarily Medicaid is the second biggest segment. So we do not see a surge in reauthorizations at the beginning of the calendar year like we do with INGREZZA because of the low Medicare exposure. Typically, when a patient gets authorization for their first prescription, it is normally either six or 12 months, and then those reauthorizations happen as that initial set of prescriptions runs out of authorized fills. Overall, we have seen a really high rate of reauthorization approvals, just like we saw with initial approvals for crinesidine. It is going very well. Operator: Our next question comes from Philip M. Nadeau with TD Cowen. Please go ahead. Your line is open. Philip M. Nadeau: Good afternoon. Let me add my congratulations on a good quarter. I want to follow up on the answer that you gave to Tazeen’s question. I think in answer to her question, you said that the vast majority of physicians have only written for Clinicity once. We are curious to have a little bit more detail on where the patients starting are coming from, whether it is community or expert centers. Our own checks suggest there have been a decent proportion of patients coming from expert centers. Is that likely to continue? Do you feel like you have begun to saturate that part of the market and are moving more on community, or is there still a lot more room to go at the expert centers? Thanks. Eric S. Benevich: In a nutshell, we have not saturated any part of this market yet. It is still early days with the commercial ramp for Crinesity. As a reminder, thinking about the three segments of prescribers out there—the centers of excellence, the pediatric endocrinologists, and the adult and community endocrinologists—what we estimated was about roughly 15% of the patients are currently under the care of one of those centers of excellence. In general, the distribution of the business so far has been proportional in terms of sources of business. Ultimately, we recognize that probably the biggest rate limiter for getting patients started is the flow of patients through these practices. Most of these patients only see their physician once a year if they are an adult patient, and if it is a pediatric patient, it could be two or three times a year. I think that contributes to this very steady rate of new patient adds. Being early in the launch, some of these physicians are getting their initial experience and they have additional patients; they are just waiting for them to come through. I think the sales force expansion is really going to allow us to increase not only the depth of prescribing, but also the breadth of the prescriber base. Operator: Thank you. We will move next to Brian Peter Skorney with Baird. Please go ahead. Your line is open. Brian Peter Skorney: Hey, good afternoon, everyone. Thanks for taking the question. Great quarter. It seems like we have become pretty adept at modeling the first quarter headwind that INGREZZA faces. You have spoken about much of an impairment for Carnassity, but I am just wondering if you could give any color or even quantification of any sort of seasonality you are seeing there. Should we look at this as a step-up here on out that would be somewhere in the $20 million per quarter range? Matthew C. Abernethy: On the gross-to-net front, maybe a couple points of improvement coming off of Q1. But overall, we are still pretty early in this launch cycle, so to be able to tag a normal seasonality would be hard for us to say. Eric S. Benevich: We do know, as I was mentioning earlier, the flow of patients is pretty consistent quarter in, quarter out, just because of how constrained the prescriber universe is. I would not necessarily point to massive levels of seasonality like you see with INGREZZA. We do not have the bolus of reauthorization in Q1 like we do for INGREZZA, and it is still early in the commercial ramp for crinicity. We are learning a lot about the patient dynamics and the ebbs and flows, but the overarching theme has been really consistent adoption across the community. With the sales force expansion, we will be able to get deeper with the existing base and also expand that base over time. Operator: Our next question comes from Anupam Rama with JPMorgan. Please go ahead. Your line is open. Anupam Rama: Hey, guys. Thanks so much for taking the question. Just a quick question about the upcoming ENDO meeting. What are some of the key market or physician outreach initiatives that you are going to have at the conference, as well as any reminders of any data updates we could be expecting for Kinesseti at the meeting? Thanks so much. Eric S. Benevich: Anupam, I will handle the first part of your question. We are looking forward to ENDO coming up in June as an opportunity to engage with the broader endocrinology community. In fact, we were just at a couple of important endocrinology meetings these past few weeks. This past weekend, the Pediatric Endocrine Society meeting was in San Francisco, and I was there and was really impressed with the energy and enthusiasm that we were seeing from the pediatric endocrinologists that had experience with Crinesity. There were two different seminars on CAH at that meeting, and both of them were packed rooms, which I think is indicative of the level of interest. We had a bunch of KOL engagements at that meeting, and we certainly came away with a lot of momentum. We expect to have similar momentum coming out of the ENDO meeting in June. Sanjay Keswani: I will answer the second part of the question, Anupam. The community continues to be enthused by our two-year open-label data showing the impact of decreased doses of glucocorticoid and also decreased androgen levels. That relates to better weight control, decreased insulin resistance, as well as decreased issues of virilization like decreased acne, and also decreased advancement of bone age, which is incredibly important in terms of attainment of adult height for children. This is all in the context of really good safety and tolerability. We have now had 35,000 patient-week exposures. All in all, we are really excited about the reception we are getting from the community, both at recent ENDO conferences and at future ones this year. Operator: Our next question comes from Jay Olson with Oppenheimer. Please go ahead. Your line is open. Jay Olson: Hey. Congrats on all the progress, and thank you for providing this update. Since you are planning to move your Friedreich's ataxia gene therapy program to the clinic this year, can you talk about the phase 1 study design and what sort of initial data we should expect in 2027? And then separately, for your NLRP3 program that you recently licensed, if you could maybe talk about the timeline for moving that into the clinic and where that model fits into your core therapeutic areas. Thank you. Kyle Gano: Jay, thanks for the question. I will focus on the Friedreich's ataxia program, and we can catch up offline on the other programs in the portfolio. We are looking at starting the FA program here shortly. Once we have all the details ironed out, you will see that up on clinicaltrials.gov. We will talk in more detail, but we are planning on sharing patient-level data toward the end of next year. Consider this a phase 1b trial. We will be starting initially in the patient population. We are excited to potentially offer curative therapy for patients and look forward to talking more about this later this year, in particular at R&D Day, when we can go over the program in more detail. Operator: We will move next with Myles Robert Minter with William Blair. Please go ahead. Your line is open. Myles Robert Minter: Thanks, everyone, for taking the question. Congrats on the quarter. Just wanted to get your updated thoughts on your GGG agonist here. We have Lilly’s type 2 diabetes data, which is pretty impressive but did show pretty high rates of vomiting, diarrhea, and nausea. Considering you are still proposing to put this in a combo with a CRF2 agonist, what are your updated thoughts on the therapeutic window here as you put that into phase 1 development this year? Thanks. Sanjay Keswani: Thanks for your question, Myles. It is still early days for us. We are very excited about the readout for our CRF2 agonist for obesity next year, and we are assuming that will be a core constituent of a number of different combinations, including one with the triple G program. The GGG program we are targeting for first-in-human this year, and we will have the potential to look iteratively at clinical data for both programs to understand the ideal combination as it affects the risk-benefit profile. Operator: We will move next with Ashwani Verma with UBS. Please go ahead. Your line is open. Julian: This is Julian on for Ash. Thanks for taking our question. For INGREZZA payer coverage standpoint, we saw that a state of XR has lost preferred coverage with a few key plans recently. We wanted to understand the implications of that for INGREZZA for the rest of the year and next year. Do you think it is possible that PBMs are switching commercial coverage in front of the IRA or to defend their rebates? Thank you. Kyle Gano: I will take this question. Our coverage as it relates to 2026 is very similar to where we exited 2025. We have about 70% of all TD and HD Medicare beneficiary lives covered for INGREZZA, and that puts us in a good spot. In terms of the loss of deuterated tetrabenazine on certain plans, I think on a relative basis, things are approved for INGREZZA, but we would not expect any wide changes out there in terms of reimbursement for INGREZZA. Operator: We will move next with Analyst from Leerink. Please go ahead. Your line is open. Basma: Good afternoon. This is Basma on for Mark. Thank you for taking our question. To follow up on the 24-month data: can you remind us again of the prevalence of insulin resistance and obesity in pediatric CAH patients and also in adults? How was this data received by physicians and how clinically meaningful did they find it? Regarding persistency, it has also been very strong to date. Can you remind us what are the main reasons for patients discontinuing Chronicity? Thank you. Sanjay Keswani: With respect to the first part of the question, unfortunately weight gain as well as issues with insulin resistance and other cardiometabolic issues are quite common in the pediatric CAH population, and this largely relates to the high doses of glucocorticoids that they receive. It is also thought that the elevated androgen levels can contribute to this cardiometabolic morbidity. The impacts we have seen with Cranesity in our two-year data have been really well received by the community as clinically meaningful. Eric S. Benevich: I would emphasize that we have seen very strong persistency and compliance with Crinesiti in the real-world setting, consistent with what we saw in our phase 3 trials. As a reminder, in the adult and pediatric studies, around 95% of patients completed and rolled over. In the two-year open-label data we have been presenting recently, over 80% of patients completed two years. It has been very favorable in terms of patients continuing to stay on treatment, and that is a big contributor to the accumulation of prescriptions and sales we are seeing this early in the launch. Operator: We will move next with Analyst from Wells Fargo Securities. Please go ahead. Your line is open. Susan: Hi. This is Susan on for Mohit. Congrats on the solid quarter. Two questions. One on Carnestine: did you quantify new patient starts versus persistent patients? If you cannot give a specific answer, just high level, what does that look like? And then on pipeline, for schizophrenia and MDD, how do you envision positioning the drugs? Eric S. Benevich: I will handle the first part of your question. No, we did not give a specific number of new patient starts. What we did say is that the rate of new patient adds in Q1 was very steady, and the trend was very consistent with what we saw in Q4 of last year. Sanjay Keswani: For the second part, our current phase 3 MDD patient population includes patients who have not done well on an antidepressant. Typically, they are on an antidepressant that has not achieved a good response, and we are essentially adding on to that antidepressant to achieve a superior response. This is potentially the niche we could occupy in the marketplace as well. Clearly, we are also looking at other life-cycle opportunities with respect to this molecule. Operator: We will move next with Analyst from Needham. Please go ahead. Your line is open. Puna: Hi. This is Puna on for Ami. Thank you for taking our question, and congrats on a great quarter. For Chronicity, you have previously noted that you have penetrated approximately 10% of the addressable market, with higher demand in pediatric, followed by other females and other males. How do you see those trends evolving this year? And for NBIP 2118, what would you need to see in the phase 1 data that would support further development? Thank you. Eric S. Benevich: We are not at the point yet where we are giving guidance on KRONESITY. We are still early in the commercial ramp and are learning a lot about this patient population and this prescriber base. We saw a very steady and consistent rate of new patient adds in Q1. With the sales force expansion, we expect we will be able to build depth in the prescriber base and continue to add new prescribers. There are also many patients not under the care of an endocrinologist. With our patient-finding efforts, we expect to reach and activate some of those patients this year as well. We feel very good about where we are with the launch of Crinesity, and there is a lot of room for organic growth going forward. Kyle Gano: On NBIP 2118, we are just getting that study up and running, and we will have data on that in 2027. Operator: We will move next with David A. Amsellem with Piper Sandler. Please go ahead. Your line is open. David A. Amsellem: Thanks. Wondering if you could talk more about 1435 given that you are going to have phase 2 data in CAH next year. Can you talk about relative potency versus crinesity at the CRF1 receptor, and what do you need to see in terms of differentiation versus crinessity in terms of clinical outcomes and biomarker outcomes in order to justify further advancement? Sanjay Keswani: We are really excited about our 1435 program. For context, this is an injectable peptide. The nice thing is we could administer this infrequently to individuals. We have some nice preclinical data with respect to durable efficacy that relates to both the length and the depth of efficacy as well. One of the nice things from a drug development point of view is that we have good biomarkers in CAH. We can directly compare the biomarker readouts, including androgen reduction, for this phase 2 program compared to our prior results with Crinesity. Kyle Gano: To add more here, recall at our R&D Day, we outlined a tiered strategy for our endocrine franchise as it relates to diseases of HPA axis dysregulation. Quineste is going to be the foundational therapy that is part of this for many years into the future, so you can consider that first line. NBIP 1435 offers patients an alternative route of administration and potential other types of differentiation as we identify them in the clinical program. You can think of that as second line, and it is part of a whole series of programs that can target different patient populations for CAH moving forward. Operator: We will take our next question from Yigal Nochomovitz with Citi. Please go ahead. Your line is open. Yigal Nochomovitz: Hi. Thanks, and congrats on the strong quarter as well. I was curious with regards to the 90% of TD patients that are not currently on a VMAT2 inhibitor. With the recent consensus recommendations on TD screening in the long-term care setting, to what extent might that help advance gains in market share in that 90% segment? Eric S. Benevich: Certainly, it is going to help. Over time, in part due to our educational efforts, we have raised awareness of tardive dyskinesia, and we more commonly see routine screening for tardive dyskinesia across different care settings, including long-term care more recently. Having consensus around the need for screening and how to screen, especially for residents in long-term care, raises that index of suspicion in nursing homes, and we can get more people helped. I will also reinforce that the month of May is Mental Health Awareness Month, and this week in particular is TD Awareness Week. Our sales and medical teams are leveraging TD Awareness Week to really raise the energy and excitement around TD screening across all care settings, including long-term care. Matthew C. Abernethy: Yigal, I will follow up with you after the call. Thanks. Operator: We will move next with Sumant Satchidanand Kulkarni with Canaccord. Please go ahead. Sumant Satchidanand Kulkarni: Thanks. It is a two-parter. What are your thoughts on developing CRF antagonists in cognition and working memory–related indications? And you have a lot of pipeline programs now that target several therapeutic areas. Are there some that are already earmarked for external partnering depending on how they progress? Kyle Gano: I will take the partnering piece. Our goal right now is to move forward programs across our key therapeutic areas—neurology, psychiatry, endocrinology, and immunology. Right now, our pipeline is more weighted to psychiatry, but as our R&D engine moves more programs into the clinic, you will see that evolve into other modalities—small molecules, proteins, peptides—as well as therapies across disease modification and symptomatic treatment. We will follow the science into these different therapeutic areas as we have expertise across them. Right now, we do not have anything slated for partnering, but as time moves along and we see how these programs progress, we would certainly consider those types of relationships. It is not foreign to us; Neurocrine Biosciences, Inc. was built on partnerships, both in- and out-licensing. Sanjay Keswani: With respect to the first question, it is a really interesting concept. Anecdotally, in our CAH patients, we have reported improvements in executive functioning, suggesting there may be a link to CRF and cognition. That is an area of study for us, and we expect to produce data on that down the road. Operator: We will move next with Yatin Suneja with Guggenheim. Please go ahead. Your line is open. Yatin Suneja: A really quick one for Matt. Can you help me understand the tax rate? I think last year was about 30% for the year. How should we model this year and maybe in the long term? Thanks. Matthew C. Abernethy: I always love tax questions. I would expect our non-GAAP effective tax rate to be between 22% and 24% this year and within the low 20s going forward. I think that is the appropriate way to model. Operator: Thank you. We will move next with Danielle Brill Bongero with Truist Securities. Please go ahead. Danielle Brill Bongero: Hi, guys. Good afternoon. Thanks so much for the question, and congrats on the strong quarter. You mentioned with KRONESITY that you have slightly more traction with females and pediatrics as expected, but what additional clinical or real-world evidence would help drive broader buy-in from male and adult CAH patients? And was there any rationale behind the Diurnal sale—anything to read into on that? Thank you. Kyle Gano: I will start with the Diurnal piece. Looking at the opportunity in Europe, which is primarily where the medicine is currently available, we felt it was better suited in an organization that had other products in the commercial landscape. We will consider looking at our own medicines as they evolve through the pipeline, but we felt that was the right move earlier this year. Eric, on the other question? Eric S. Benevich: Thinking about different patient segments, it is clear there is high motivation to treat pediatric patients. At the Pediatric Endocrine Society meeting this past week, the theme was that with younger patients you need to protect bone age, protect the growth trajectory, and prevent early-onset puberty. For older patients, depending on gender, the rationale for treatment is a little different. For adult patients, there is concern about bone mineral density, potential for increased cardiovascular risk, mood disorders, etc. Depending on one’s gender and stage of life, there is benefit from treatment with chronicity. For males in particular, as an adult male myself, we are not the best at seeing our doctors frequently and we are not very compliant. Our expectation from pre-approval work was that it would probably take a little bit longer to onboard adult male patients relative to female and pediatric patients. Operator: We will move next with Laura Kathryn Chico with Wedbush Securities. Please go ahead. Laura Kathryn Chico: Hey. Thanks very much for taking the question. I have one on Trinicity. I will not ask about the pace of new patient adds the remainder of 2026 versus 2025, but I might ask about your expectations for maintaining compliance and persistence this year versus last year. You mentioned the expanded field force and gains on the reimbursement side. How should we think about the persistency and compliance rates in 2026? Thank you. Eric S. Benevich: Thanks, Laura. We have been looking at compliance and persistency throughout the first year of the launch, and it has been very consistent regardless of when patients started on treatment—early last year, mid last year, or the latter part of last year. I think it is really a function of two things: one is the really great tolerability profile of crinesity that emerged in the clinical trials and the open-label extension; and two, the fact that we have a single pharmacy distributor, Panther, that does a great job of reaching out to patients and following up with them. They have had a lot of success in terms of contacting patients when it is time to get a refill and getting it authorized. Operator: We will move next with Analyst from Deutsche Bank. Please go ahead. Your line is open. Sam: Hi. This is Sam on for David. Thanks for taking my question. Just a quick one on crinecerfont in CAH patients under the age of four: the impending phase 2 study—how should we be thinking about the opportunity for this patient subset, perhaps in terms of patient numbers or unmet need, or potential contribution to the existing CAH franchise down the line? And is there anything else you can share in terms of the regulatory or commercial timeline for this development? Thanks. Eric S. Benevich: I will tackle the unmet-need part. For these younger patients, the earlier you can intervene, the better, in terms of protecting the growth trajectory and bone age, and so on. Right now, the labeling is limited to patients age four and above. We have gotten a fair number of inquiries from parents with children under four asking about the availability of treatment, and certainly from their pediatric endocrinologists. We recognize that there is an unmet need there, and we would like to be able to address it. Sanjay Keswani: With respect to the regulatory path, we clearly need data in patients less than four years of age. That is the main rationale for starting this U.S.-based study. With respect to timelines, assuming things proceed as planned, in the next couple of years we will have the data to potentially expand the label. Operator: We will move next with Analyst from Wolfe Research. Please go ahead. Your line is open. Analyst: Thanks for taking my question. Congrats again on the strong quarter. I have a follow-up on INGREZZA. We touched on seasonality already. Can you provide more color on the pattern for the remaining three quarters, especially given the relatively stronger 1Q versus prior years? And did you notice any changes in the market dynamics following the IRA negotiation? Eric S. Benevich: In general, we expect 2026 to be similar to prior years, where we experience seasonal payer disruption in Q1 primarily related to Medicare patients needing to get reauthorized and commercial patients having a reset of their out-of-pocket copay. Thankfully, we have moved through that phase already. This year, we were also in the midst of a sales force expansion, and our team did an incredibly great job of continuing to keep the momentum going with our business. The expansion became effective in early Q2. Generally after Q1 payer seasonality, we see a strong focus on execution and driving new patient starts through screening initiatives over the balance of the year. With an expanded field sales team, as I mentioned in my prepared remarks, we expect to see tangible lift and benefit as we get into the latter part of the year. Operator: We will move next with Evan David Seigerman with BMO Capital Markets. Please go ahead. Malcolm Hoffman: Hello. Malcolm Hoffman on for Evan. Thanks for taking our question, and congrats on your quarter. Doubling back on the persistence and compliance rates for Pranesti: you noted these have been really strong and consistent since the launch. For the few discontinuations that do occur, are those mostly due to insurance-related issues or product profile? Have those changed over the course of the first year at all? Thanks. Eric S. Benevich: It is hard to comment on what has turned out to be a very low rate of patients discontinuing. In general, we have not seen people discontinuing due to insurance reasons. In fact, out-of-pocket costs are really low—less than $10 per patient per month—and many patients pay nothing at all. Affordability has not been an issue or a reason to discontinue. There have been instances where patients have moved or have been lost to follow-up, but those are very few and far between. We have been very pleased with the persistency we have seen about five quarters into this launch. Operator: At this time, there are no further questions in the queue. We will now turn the call back over to Kyle Gano for closing comments. Kyle Gano: Thanks, Nikki, and thanks, everyone, for joining the call today and for your continued interest and support in Neurocrine Biosciences, Inc. We are very encouraged by the strong start to the year that gives us a lot of momentum when we think about the remaining quarters, and likewise our continued momentum across our commercial portfolio, the progress to advance our clinical pipeline, and we are very much looking forward to connecting with you all at upcoming investor conferences and events. Thanks again, and talk to you soon. Operator: Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, everyone, and welcome to today's AdaptHealth First Quarter 2026 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. Before we begin, I would like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2026 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. AdaptHealth Corp. has no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, organic growth and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in the presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster. Suzanne Foster: Good morning, everyone. Thank you for joining us today. The opening months of 2026 has set the stage for what will be a defining year for AdaptHealth. We made significant progress in three areas this past quarter. First, we successfully completed the transition of hundreds of thousands of active patients to our platform under our new capitated agreement. The second highlight of the quarter was the progress we are making on infrastructure investments as our AI-enabled initiatives and patient-facing digital platform reached meaningful milestones, and we are beginning to drive improvement in our operating metrics. And third, in April, we refinanced our credit facility with improved terms, further strengthening our balance sheet and providing financial and strategic flexibility. Starting with our new capitated agreement, we navigated through one of the most ambitious operational undertakings by completing the largest patient transition in the history of home medical equipment. No HME company had ever taken on a capitated contract of this scale from an incumbent. Over the past couple of months, we established 35 de novo locations and are now the exclusive HME provider for more than 10 million new members. We had planned to work through this transition over the first a result of completing this transition on a more aggressive time line and delivering strong performance across our legacy business, we delivered revenue significantly ahead of our guidance with solid organic growth across all four segments. Regarding the contract, covered membership count, revenue per member, utilization and product costs are all meeting our expectations. However, we maintained heavier-than-planed labor costs to ensure a responsible transition. In the first quarter, that amounted to $12 million of elevated labor expense, of which $8 million was variable labor to accelerate the transition, and that should normalize by the end of the second quarter. The $4 million of elevated wages and benefits that will decline as we rightsize and operating -- rightsize to the operating model and to meet the service requirements. Given that this is a 5-year contract with a potentially longer horizon, the extra implementation spend was the right decision for the relationship and the patients. As for Q1 financial results, first quarter revenue of $819.8 million grew 5.4% versus the prior year quarter and exceeded the midpoint of our guidance range by approximately $22 million. On an organic basis, adjusting for the impact of acquisitions and dispositions, we delivered 9.1% year-over-year growth. Of that, about 500 basis points came from the new capitated contract. The other 400 basis points came from the base business with each of our four segments delivering positive organic growth in the quarter. Sleep Health net revenue of $358.5 million grew 13.3% versus the prior year and PAP new starts set another new record. We anticipate that as accumulating evidence highlights the significance of sleep in overall health, there will be corresponding increase in demand for therapies aimed at improving sleep quality. Currently, up to 80% of individuals with obstructive sleep apnea are undiagnosed. However, patient awareness is rising, driven by expanded access to home sleep studies, the development of wearable devices for early detection of obstructive sleep apnea and the integration of dual therapies. As more patients experience the advantages of sleep therapy, our commitment remains on focusing -- remains focused on delivering high-quality care and supporting treatment adherence to fully capture the health benefits. Despite a very mild flu season, Respiratory Health net revenue of $178.1 million grew 7.6% versus the prior year and oxygen new starts grew 12.8%. Diabetes Health net revenue of $142.2 million grew 2.4% versus the prior year. Our investments in talent, process improvement and technology over the past year have taken hold. We had particularly strong results from resupply, further demonstrating that our centralized resupply team is performing well and providing quality and timely care to these patients. Wellness at Home net revenue of $141 million declined 10.3% on a reported basis, reflecting $35.8 million of disposed revenue from noncore assets exited during 2025. Over the past 2 years, we have carefully pruned our portfolio to product categories that support growth in our Sleep and Respiratory Health segments. After adjusting for these dispositions, Wellness at Home delivered 11% organic growth. In Q1, capitated net revenue made up 9.2% of the total consolidated net revenue. Capitated membership increased 7x year-over-year to about $15 million. Adjusted EBITDA of $121.2 million fell short of guidance, driven by the previously mentioned labor and benefit costs. While labor costs will keep decreasing post transition, we started a cost containment initiative to stay on track. As a result, we are comfortable raising our full year net revenue projections and maintaining our full year 2026 guidance for adjusted EBITDA and free cash flow. Stepping back from the quarter, I want to spend a few minutes on the playbook we are following because the industry dynamics at work right now are among the most favorable we have seen for a company of our scale. The business we have built over the past several years is well aligned to these dynamics, which leaves us well positioned to grow in the coming years. Interest in capitated arrangements among payers is increasing as a way to align incentives and lower health care costs, a trend we anticipate will persist. Securing and implementing these agreements is complex, demanding nationwide coverage, strong clinical practices, robust technology and operational expertise. We possess these strengths, which the market acknowledges. Our discussions regarding new capitated deals remain active and promising, and we are optimistic about announcing additional partnerships soon. The regulatory environment is evolving in ways that benefit scaled compliant operators. The government is actively working to root out fraud and abuse in home medical equipment, and we think that effort is long overdue and unambiguously what is needed for patients, for the Medicare program and for the broader health care ecosystem. The many legitimate hard-working home medical equipment companies that serve millions of patients managing chronic conditions at home deserve to operate in an industry with a reputation be fitting this critical mission. So we applaud the government's efforts, and we see an opportunity and frankly, a responsibility to be a constructive partner as it pursues these aims. The direction of travel here is clear. Greater scrutiny and clearer standards will, over time, separate operators who have made those investments in the systems, process and clinical infrastructure that proper compliance requires. We have made these investments, and we are committed to helping lead the industry toward that standard. Our balance sheet following the refinancing of our credit facility gives us the flexibility to pursue tuck-in acquisitions from a position of strength where it makes sense in attractive geographies for assets that expand our access to patients focused on our core Sleep and Respiratory Health segments. These must be at returns that soundly meet or exceed our thresholds. The last two years reflect that discipline. We have deployed capital selectively, and we have terminated as many deal processes in due diligence as we have closed. Technology is creating a real separation. We have invested in our patient-facing and operational platforms, and those investments are improving the patient experience and time to therapy. Our conversational AI platform has moved beyond pilot and in Q1 is handling live calls across sleep scheduling, our contact center and resupply use cases. Scheduling that was entirely manual a year ago is now 25% touchless. Order conversion times have shortened materially, a meaningful improvement in the experience for referring providers and patients alike. Our patient portal, MyApp crossed 412,000 users in Q1. These capabilities matter more as volume scales. In summary, our focus for the rest of 2026 is to manage patient growth and control costs. We aim for sustainable, profitable organic growth while maintaining excellent service for over 4.5 million patients. With that, let me turn it over to Jason to review the financials. Jason Clemens: Thank you, Suzanne, and thanks to everyone for joining our call today. I'll cover our first quarter 2026 financial results, followed by our balance sheet, capital allocation and outlook. For Q1 2026, net revenue of $819.8 million increased 5.4% versus the prior year quarter. Organic growth was 9.1% for that same period with broad-based growth across all four segments. Capitated revenue of $74.9 million outperformed our expectations as we met go-live dates for our new agreement faster than we originally anticipated. Covered membership count, revenue per member, utilization and product costs were all in line with our expectations. First quarter adjusted EBITDA was $121.2 million, representing an adjusted EBITDA margin of 14.8% and coming in about $7 million lower than guidance. Although it required additional labor to start the capitated contract sooner, the elevated labor cost is already declining, and we expect to return to baseline in the next few months. First quarter cash flow from operations of $93.7 million was essentially flat versus the prior year quarter. First quarter free cash flow of negative $27.5 million was in line with our expectations and driven by capital expenditures of $121.2 million, reflecting patient equipment start-up purchases to stock inventory in support of the new capitated contract. As we move into steady-state operations with the capitated arrangement, we expect CapEx to normalize and free cash flow to improve in the back half of the year. Turning to the balance sheet. We ended the quarter with unrestricted cash of approximately $48 million. Net debt stood at approximately $1.84 billion, and our consolidated net leverage ratio was 3.0x from 2.75x in the fourth quarter of 2025. The increase reflects the $100 million we drew on our revolving credit facility to acquire certain assets from a provider of home medical equipment to support our new capitated arrangement for a total consideration of $84.7 million. We intend to pay down the balance on our revolver in the coming quarters and remain committed to achieving our target of 2.5x net leverage. In April, we completed a $1.1 billion refinancing of our senior secured credit facility, consisting of a $325 million Term Loan A, a $325 million delayed draw term loan and a $450 million revolving credit facility, all maturing in April 2031. The new facility extends our term loan maturity, lowers our weighted average cost of debt and provides incremental operating flexibility with expanded capacity on the revolving credit facility. It also provides committed capital through the delayed draw facility that we intend to use to redeem our 2028 notes following the call premium expiration in August 2026. The favorable pricing reflects the recent credit upgrades we received from both S&P and Moody's as well as our commitment to further delevering. Our capital allocation priorities remain unchanged, investing to accelerate organic growth, reducing leverage and pursuing disciplined tuck-in acquisitions. Subsequent to the end of the quarter, we completed the disposition of our remaining custom rehab assets, a small but consistent step in concentrating our portfolio around Sleep, Respiratory and the related product categories that support growth in our core. Turning to guidance. We are raising our full year net revenue projection by $10 million to $3.45 billion to $3.52 billion. This reflects the first quarter revenue outperformance, offset by the revenue of the custom rehab disposition. Given the steps we are taking to moderate labor costs related to the capitated arrangement, we are maintaining our full year guidance for adjusted EBITDA of $680 million to $730 million and free cash flow of $175 million to $225 million. For the second quarter of 2026, we expect net revenue of $840 million to $860 million and an adjusted EBITDA margin of approximately 19%. We expect free cash flow to be modest as we incur elevated CapEx to support the new contract. With that, I'd like to pass the call back to Suzanne for closing remarks. Suzanne Foster: Thank you. This really has been a monumental quarter for us. Our team went to extraordinary lengths to complete the largest patient transition in the history of this industry and over an incredibly short period of time. So I want to close by saying thank you to all the adapters that worked nights, weekends, overtime, whatever they needed to do to stand up our new capitated partnership. And a special thank you to all the adapters who ensured that our base business continued to perform. This was truly a team effort. The progress we made this quarter is just another proof point that this team has what it takes to achieve our aspiration of becoming the most trusted and reliable partner in home health care, the one patients depend on and physicians choose first. That brings me to the end of our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Pito Chickering with Deutsche Bank. Pito Chickering: On the organic revenue side, are you realizing all the revenues from the capitated arrangements, the 9.1%? Or should we assume acceleration in 2Q from those levels? And also, any color on what organic revenue growth would be, excluding the capitated arrangements? Just trying to figure out sort of what core growth is after all the capitated arrangements are fully realized. Jason Clemens: Sure, Peter. This is Jason. So on the organic split, a little over 4% growth in the core business ex capitation, ex the new contract. And to your question on Q2, we do expect acceleration specifically of capitated revenue. That is where we are providing the raise of net revenue for the full year. So we do expect that we're -- we'll be assuming an entire quarter of capitated revenue growth from this new contract in the second quarter that we will accelerate organic growth. Pito Chickering: Okay. And then you talked about the $8 million of variable labor from the acceleration and the $4 million of rightsizing. There's just a lot more sort of moving parts, and it's been a little challenging in 4Q and 1Q to sort of model EBITDA. So can you give us some color on how EBITDA should ramp 2Q and then ramp into 3Q and 4Q just because of all these moving parts around these costs? Jason Clemens: Sure. Thanks, Pito. So in our Q2 guidance, we are projecting $840 million to $860 million of revenue at an adjusted EBITDA margin of approximately 19%. So that translates to a little over $160 million of EBITDA for the second quarter. The reason for the big ramp is really twofold. Firstly, we will have an entire quarter of revenue from the new capitated arrangement, very different from Q1, where we had portions of that revenue as the staggered start dates rolled out. And so that revenue is going to come in at a very high margin as the fixed costs are already in the P&L as we enter Q2. The second component is really around putting controls around the labor spend. Certainly, as we were exiting March, we had a surge in variable pay. So incentive pay bonuses, contract labor and as such to support the transition. That came with a lot of call volume as patients were moving from the incumbent provider over to Adapt and a lot of questions about how to continue to access their care and how to work with AdaptHealth going forward. So as that volume settles down as we're moving into Q2, we do expect to get some of this cost out that we referenced in Q1, and we expect to get all of it out at the time of Q3. Operator: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: I just want to make sure I understand. So you said you missed Q1 EBITDA by roughly $7 million, but you also said that labor expenses are moderating. Is there anything else improving in the underlying EBITDA outlook ex contract onboarding? Meaning whether it's mix, you cited some AI initiatives. Just trying to understand if those are helping the underlying trends as we see the ramp over the course of the year or if it's just simply the onboarding stuff? Jason Clemens: Well, it's certainly the onboarding, Kevin. Secondly, as we get in Q2, we typically see a little over 1 point of improved collections and therefore, lower reserves on our revenue. So that number alone is about $10 million, and that all drops to the bottom line as a pure collections and rate on the revenue side of things. The AI that we referenced this morning, Suzanne may expand on a little more. It's important to see that we're moving out of pilot phase and first starting go-lives as we were exiting the first quarter. So that's going to take some time to scale over the course of the year and into '27. But maybe Suzanne wants to add some color on one specific. Suzanne Foster: The technology that we're deploying has been -- the goal has been to improve the patient experience and time to therapy. Now obviously, referencing things like going scheduling 25% touchless does come with some benefit. We have been reinvesting that back into the business where we have gaps. And so I've been out there saying that any financial benefit from implementation of technology will be back half of the year, but really more of a 2027 story because we've needed to make some investments in the rest of the business as we rightsize places that we're underinvested in. Kevin Caliendo: That's helpful. Can I ask a quick follow-up? Have you seen any changes to sleep apnea coverage amongst payers? Is that -- did anything hit in 1Q that was different? Suzanne Foster: No, that's all consistent. Sleep apnea has enjoyed a stable quarter. Nothing on the horizon that we see in terms of changes at this point. Operator: We will take our next question from Ben Hendrix with RBC Capital Markets. Michael Murray: This is Michael Murray on for Ben. With the capitated contracts expected to reach 20% EBITDA margin at full ramp and the base business continuing to improve, what's the right way to think about Adapt's steady-state EBITDA margin over the next 2 to 3 years? Is there a path to low 20% on a sustained basis? Jason Clemens: Yes, sure. This is Jason. I guess I'd start with our expectations for 2026. At the midpoint of our guidance, we're showing just a touch over 20% for our adjusted EBITDA margin. And as we get into 2027, a couple of key items to note. Firstly, in the first quarter, of course, we'll have a full quarter of capitated revenue versus the first quarter of 2026. And the lab -- the variable labor that we discussed and some of the fixed costs that we saw in the first quarter, we expect at that point that we'll have pulled that back out of the P&L, thus increasing margin profile as we get into '27 and beyond. Suzanne Foster: And I think just adding on to that, how we think about it is assuming a fairly stable fee-for-service reimbursement landscape, coupled with increased capitated revenue over the next couple of years, driving additional census and the underlying operational improvements, including the technology I referenced, those things over the next 12 months really into 2027 will allow us to hold that EBITDA slightly improvement as we move forward. Michael Murray: That's helpful. And then do you have any update on the pipeline or timing of potential new capitated arrangements? Are you seeing any acceleration in inbound interest? Suzanne Foster: Yes, sure. Well, like I said, we're very positive about the movement of our pipeline. It's moving through. And you should expect that we'll be coming out with an announcement soon on that. Operator: We will move next with Brian Tanquilut with Jefferies. Brian Tanquilut: Maybe I'll ask first on the de novo. I think you mentioned that expansion with the de novos is well ahead of guidance. So just curious what you can share with us in terms of what operational milestones kind of like allowed this acceleration during the quarter? Jason Clemens: Yes, you're talking top line, right, Brian? Brian Tanquilut: Yes, yes. Jason Clemens: Yes. So this capitated arrangement came in multiple stages or phases as we stand here today, all phases are complete, but they were staggered. And so they were back half weighted to the first quarter. That's really why we're seeing the raise of revenue, particularly in the second quarter as we'll experience the entire quarter with that full revenue flowing. So at this point, the contract is fully operational across all 8 states. And as Suzanne said, 35 new locations in support of that business. And so we're very pleased to report the successful delivery, and we're looking forward to moving forward. Suzanne Foster: And the milestones that we focused on, remember, this is a three-way transition. And so all three parties had to be ready. And given that the other two parties were ready, we had to step up and make sure that we accelerated our go-live. And so getting those new -- getting all the new employees in place A lot of the labor that was in one region or allocated to one phase of go-live, we had to repeat very quickly. So we couldn't -- they were not done onboarding in the first phase, and we couldn't use them for the second phase. So we had duplication in onboarding based on the region. That's why we say we're confident that will be coming out because there's not only is there a lot of labor, but there's duplication. Brian Tanquilut: Okay. That makes sense. And then maybe, Jason, just thinking of free cash flow here. I think you said in the prepared remarks, it's in line with expectations, but also you mentioned some of the asset purchases slipped into Q1. So just curious how we should be thinking about the makeup of free cash flow for the quarter and how we should be thinking about the cadence of it for the rest of the year? Jason Clemens: Sure, Brian. So for the first quarter, we came right in line. We had guided negative $20 million to negative $40 million. And so at negative $27.5 million, we were pleased with the cash flow performance despite the additional cost on the P&L. I'd say as we get into Q2, we are signaling a step-up in CapEx for the second quarter versus where we were 90 days ago. Again, that's to support the capitated arrangement and just ensuring that we've got all inventory locations stocked and fully ready for all new patient volumes that are coming in. So that's going to steer the second quarter down from what we were originally thinking. We still think we'll be positive for the second quarter, but it will likely be modest. As we get through that normalization of CapEx, we're very confident that the third and fourth quarter will both be very strong in the neighborhood of $100 million in each. Operator: We will move next with Richard Close with Canaccord Genuity. Richard Close: Congratulations. Just maybe hitting on potential new capitated business going forward. Obviously, a large portion of this most recent agreement was relatively new territory for you. So as you think about potential announcements of new business this year, next year, how are you thinking about the level of investment that that's going to require for any potential new wins? Jason Clemens: Richard, on the investment side, we do see elevated CapEx, particularly as we're starting up the arrangement. Now the reason for that is if that business is taken or won from an incumbent provider, of course, there's patients that are still on service. So there's a CapEx requirement typically to start up the arrangement. And then there's an ongoing CapEx commitment that is priced right in line with our standard CapEx, so call it, 11% to 12% of revenue is what to expect for ongoing operations for those businesses, but it does require some start-up CapEx to get into the new market. Suzanne Foster: And let me address the part about how and where we're looking at this. So this, the one we referred to today, our new agreement was primarily in a geography new to us. which we knew we had to make investment to set up the fixed cost, the locations, et cetera. And obviously, long term, right now, those new locations are only servicing our new strategic partner. And over time, as we stabilize, it will give us a footprint to expand upon, of course. With the pipeline that we have in place and now with this new footprint, there's very little area where we don't already have existing locations with teams that know how to do this business. For example, when we took on the first phase of this new capitated agreement, it was on the East Coast where we have a dense grouping of locations. And really without a blip, we were able to onboard that effectively. And so as we consider new capitated agreements, we're looking at where do we have locations or can we buy locations to pick up operations. And we expect that it will be a much different and obviously a much smoother than opening up 35 de novo locations to service hundreds of thousands of patients on day 1. Richard Close: Okay. That's helpful. And then just on diabetes, obviously, progress there. Can you talk how you're thinking about diabetes business as we progress through the rest of the year? Any updates would be helpful. Suzanne Foster: Sure. So we're super happy with the team, positive growth. As I mentioned, I can't applaud them enough for digging in. All of the improvement has been on execution. We're not seeing anything different in the marketplace. There's -- it's pretty much the same in terms of pharmacy and med benefit, referral patterns, all of that. So the improvement that the team has made over the last year has been the internal focus on us doing the best job possible. I have said that diabetes is -- in the past, I said, first, we got to fix it, which to check the mark. And two, we're always looking at do the -- what in our portfolio is strategically fitting for AdaptHealth, and we'll continue to review diabetes for a strategic fit as we do all our portfolio. Operator: And this concludes our Q&A session as well as our conference call. We appreciate your time and participation. You may now disconnect.
Operator: Good afternoon, and welcome to Alight, Inc.'s first quarter 2026 earnings conference call. Following their prepared remarks, we will open the call for questions. Instructions will be provided at that time. There is a presentation accompanying today’s call available on the Alight, Inc. Investor Relations website. I will now read the safe harbor statement. Today’s discussion includes forward-looking statements within the meaning of the federal securities laws. These statements reflect management’s current views and expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Factors that may cause such differences are described in today’s earnings release and in Alight, Inc.’s filings with the Securities and Exchange Commission, including in the Risk Factors section of its most recent Annual Report on Form 10-K. The company undertakes no obligation to update any forward-looking statements except as required by law. In addition, during today’s call, the company may reference certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the earnings release available on the company’s website. I will now turn the call over to Rohit Verma, Chief Executive Officer of Alight, Inc. Please go ahead. Thank you, Sachi. Rohit Verma: Good afternoon, and welcome to Alight, Inc.'s first quarter 2026 earnings call. Joining me today is Gregory Giometti, our interim Chief Financial Officer, and Susan Davies, our Chief Accounting Officer. It has been a busy and productive first few months for me, and I am pleased to have this opportunity to share my thoughts with you. Today, we will cover my perspective on our results, some further transparency into the business, a view of the opportunity ahead, some reflections of what I have heard from clients, including its role in shaping our strategy, a view of the team we are building, and finally, a perspective on AI. Our first quarter financial performance was solid, as we exceeded the guidance shared during the last earnings call, which, as you will recall, took place just over 30 days into my time as CEO. Our outperformance was driven by higher-than-expected project revenue, as well as better-than-expected performance of partner revenue in the quarter. While our Q1 performance was better than expected, we will continue to see a difficult revenue comparison to the prior year due to the commercial execution over the last couple of years. It will take the next several quarters for that revenue pressure to completely work through our P&L. For these reasons, the team and I are intently focused on improving commercial execution by retaining clients and winning new clients. I am pleased to share that we are already seeing improvement in our new sales activity as well as our renewal execution. First quarter revenue of $534 million was comprised of $498 million in recurring revenue and $36 million in project revenue. As you all have observed before, our project revenue has been the major driver of volatility in our results. Project revenue was up 29% compared to Q1 2025, and this comes in succession to Q4, where project revenue was down 27% to Q4 2024, showing the volatility we have discussed before. Our recurring revenue was 4% below last year, resulting in a consolidated revenue decrease of 3%, which was better than expected. Adjusted EBITDA of $104 million benefited from the revenue flow-through and lower-than-expected employee health care expenses in the quarter, which kept the margin decline to only 200 basis points. All in all, we are happy with where we landed compared to expectations and glad to see the progress we are making. We are maintaining strong liquidity and generating significant cash. We exited the first quarter with more than $500 million in total liquidity. This is after our Q1 2026 TRA payment. At the end of Q1, we had $178 million in cash on our balance sheet and $330 million available on our revolver. Additionally, we generated free cash flow of $53 million in the quarter, a 20% increase compared to the same period last year, and we believe we will continue to see solid cash generation through the end of the year. This provides us the foundation to execute our core strategies. Additionally, it gives us the flexibility to invest in our business to accelerate the service and customer excellence initiatives that are critical to enabling industry-leading outcomes for our clients. I, along with our team, have operated with considerable intensity and urgency in the first quarter. I have met 90+ clients to date in 2026, made critical senior hires, and launched initiatives all focused on strengthening our market position and demonstrating our commitment to relentless execution. As I have met with clients over the last quarter, I have been increasingly energized about the strength of our solutions and quality of our customer base. Their feedback has been instructive and insightful. What is evident is that our clients want to work with Alight, Inc., and we believe we are really the only company that can truly service the needs of a diverse client base. On many occasions, the exact quote of our clients was that they want to see Alight, Inc. successful. These interactions have reinforced my confidence in our client retention and ultimately cash generation capabilities. During the quarter, we made key hires across the organization, including the Head of Delivery Transformation, Head of Specialty Sales, Head of Account Management, and Head of Marketing, along with making some critical additions deeper in the organization. Following the close of the quarter, we announced our new Chief Technology Officer, Naveen Bhawaja, who previously led technology at the Consumer Products division of Disney. I cannot think of anyone better to help reimagine customer experience and translate technology leadership into meaningful business and customer outcomes. Additionally, last week, we announced the appointment of Dinesh Solsiani as President of Employer Solutions. Dinesh previously served as Alight, Inc.'s Chief Strategy Officer and played an integral role in the company’s strategic evolution. In his new position, he will collaborate with other key leaders across the business to continue to advance Alight, Inc.'s strategies to deliver outcomes for clients at scale. We also launched multiple initiatives across the organization to maximize operational excellence and drive consumer-level client experience. Notably, we have expanded from our previous strategic coverage of the top 100 accounts to now include our top 400 accounts that represent just over 90% of our ARR in aggregate. Our increased coverage gives us a greater handle on serving those clients even better, building stronger partnerships, improving retention, and building a deeper pipeline. We provide market-leading solutions derived from our full-service integrated approach to managing health, wealth, and leaves on behalf of our clients. Within our Health solution, we provide comprehensive health benefits, including spending accounts, as well as point solutions like health care navigation services. Our primary focus is on ensuring a seamless consumer-level experience, whether the consumer is simply checking their benefits eligibility or scheduling a physical, or contending with a life-changing diagnosis. We also integrate 50+ partners across the ecosystem, which positions Alight, Inc. at the critical nerve center of the benefits ecosystem. Wealth comprises a portfolio of solutions for financial planning, including defined contribution plans, retirement savings, and pension plans to enable employees access to a pathway for financial preparation. We administer pensions both for corporations as well as various carriers who take on pension risk from corporations. The Leaves business handles absences due to short- or long-term disability, military leave, or family and medical leaves, which are not always straightforward or easy to navigate. Our Leap Pro and Absence Connect platform help our clients and their employees develop appropriate solutions to meet the needs of both the individual and the organization when an extended absence is necessary. As we move through 2026, we are focused on leveraging our scale, market recognition, and financial strength to capitalize on attractive industry dynamics and grow our leadership role. Benefits programs are a fundamental, nondiscretionary offering for most organizations, creating a large addressable market for our capabilities. Our ability to provide effective outsourced benefits administration is an attractive alternative to employers who often lack the in-house expertise to manage the demands of compliance, delivery, and technology. Additionally, because benefits programs are fundamental and nondiscretionary, our business tends to be more resilient through economic cycles. We believe our expertise across the benefits administration landscape, coupled with our scale, experience from a diverse client base, and disciplined execution creates a competitive advantage for us to win customers and establish long-term relationships with predictable revenue. We remain energized and committed to expanding our market-leading position and believe that the market opportunity in front of us is substantial. Alight, Inc.'s opportunity in the marketplace is unique. We have established a leadership position as the only company to effectively service our customer base ranging from large Fortune 500 companies to smaller, more Main Street operations as well as organizations in the public sector. These companies and organizations are all unique in their own way and require benefits offerings that match their structures, legacy, and priorities. We have more than 30 million participants on our platform, including corporate executives, field operators, young new employees to retirees, and our products and solutions are designed to deliver the reliability and personalization these employees deserve. We understand the challenges inherent in navigating the benefits ecosystem, and we are well positioned not only to provide solutions but to manage complexity and drive adoption. In addition to human expertise, we are leveraging enterprise AI adoption to capture efficiencies and further improve service excellence and user experience. To that point, we have all heard a lot about AI and its potential impact on a variety of industries. At Alight, Inc., we are uniquely positioned to deploy AI that is personalized, predictive, assistive, and grounded in real-world data while drawing on information from our large user base, participant interactions, and decades of domain expertise. We view AI not as a stand-alone solution, but as a force multiplier across our scale platform. By strategically implementing AI, we can turn data into guidance, turn guidance into action, and action into better outcomes in the moments that define health, wealth, and leave decisions. It is important to understand that we deal with situations of varying complexity that include unions, grandfathered plans, or multiple enrollment dates. We are also embedded in our clients’ workflow as the core system of record for their benefits. Accountability is essential since regulatory compliance and outcomes both matter in our space. Health, wealth, and leaves all have a significant regulatory component. That accountability needs clear definition and ownership that cannot be made by an AI agent alone. AI is not a replacement for what we do; rather, it is a mechanism to unite the data, insights, and human expertise our clients depend on. A meaningful portion of our participants are navigating decisions related to managing a life-changing development, and those decisions cannot be made with the support of AI alone. Some of these are happy life events, and some require the empathy and guidance of the human touch. I expect to share more with you about our AI journey and its impact in coming quarters. As I mentioned on our last call, we are driving the business forward with our commitment to three clear operating principles: deliver service and operational excellence; innovate products that create value and actionable insights; build relationships that result in enduring, trusted partnerships. These operating principles are the compass as we continue to pioneer this space. We are the only company of our size and scale with a singular focus on benefits administration, providing a full range of health, wealth, and leave solutions, and we believe we have a substantial advantage in the industry where most of our competitors take a more singular approach, providing health, or wealth, or leave solutions, or where benefits administration is a small non-core part of their business. Our focus on benefits as a whole allows us to provide deeper engagement, effective solutioning, and targeted investments. I am confident that our team’s commitment to these guiding principles and our leading position in the marketplace will drive favorable results for our clients and for Alight, Inc., and we are already seeing notable progress to enhance execution. I will now turn the call over to Gregory Giometti for the financial results. Gregory Giometti: Thanks, Rohit, and good afternoon, everyone. I will now walk you through our first quarter 2026 results. Echoing Rohit’s comments a moment ago, we delivered stronger-than-expected first quarter revenue, adjusted EBITDA, and free cash flow. Revenue for the first quarter was $534 million, a decrease of approximately 3%. We had anticipated a revenue decline in the high single digits for the quarter, and we were pleased to achieve a more favorable result. As you know, we think about our revenue mix in two distinct categories: revenue from recurring, renewable business and nonrecurring, project-based business. In the first quarter, we recorded recurring revenue of $498 million, which was a decrease of 4% compared with the first quarter of last year, reflecting higher partner network revenue in the quarter that was originally expected later in the year. Project revenue for the quarter was $36 million, up 29% compared with the first quarter last year, exceeding expectations. Adjusted gross profit in the first quarter was $189 million, down $11 million from the prior-year period, reflecting an adjusted gross profit margin decline of 110 basis points. First quarter 2026 adjusted EBITDA was $104 million, or adjusted EBITDA margin of nearly 20%, as compared to $118 million, or adjusted EBITDA margin of nearly 22%, in the prior-year period. The first quarter adjusted EBITDA decrease was less than anticipated due to flow-through from the better-than-expected revenue performance and timing of expenses. Adjusted net income in the first quarter was $35 million, with adjusted EPS of $0.[inaudible], compared to $52 million of adjusted net income and adjusted EPS of $0.10 in 2025. Looking forward, with our visibility today, we expect second quarter 2026 revenue in the range of $490 million to $505 million, adjusted EBITDA between $80 million and $90 million, and free cash flow ranging from $35 million to $45 million. Our guidance reflects the continued impact of prior commercial execution, which is expected to work its way through our P&L over the coming quarters. Turning to capital and liquidity, we closed the quarter with strong liquidity of more than $500 million. At the end of Q1 2026, we maintained significant financial flexibility including $178 million in cash and equivalents, $330 million of availability on a revolving credit facility, and free cash flow of $53 million. With cash flow growth in Q1, we have continued to strengthen our liquidity, providing us flexibility to pursue our capital allocation priorities, which include investing in the long-term growth of the business, deleveraging, and opportunistic share repurchases. With that, I will turn the call back to Rohit. Rohit Verma: Thanks, Greg. My first few months at Alight, Inc. have been educational and productive, allowing me to synthesize the valuable customer feedback we received with what I have learned about the scope of our solutions and the scale of our capabilities. Since January, our team has made excellent progress executing our core operating principles and building on our solid foundation to strengthen our organization. Our success depends on our focus as a client-centric organization, and that starts from the top with me. As I mentioned, I have met with 90+ clients since joining Alight, Inc., and regular engagement with our client base will remain a top priority for me. We are assembling a leadership team that brings significant industry experience and who embrace a commitment to client engagement and service excellence. We are moving quickly and are building a team that can accelerate the pace of play. Key initiatives to decidedly strengthen our market leadership are underway. These are focused on reimagining the user experience and driving AI-based service that will help define the new standards for the industry. Our ability to deliver reliability and personalization in a scaled benefit management solution that provides value to our clients and better outcomes to their employees is a competitive advantage in the marketplace. I am confident that we have the right people and strategies in place to continue building momentum across the business, and I am optimistic about what the future holds for Alight, Inc. Finally, our CFO search is progressing well, and we expect to have some news to share shortly. Susan Davies, Alight, Inc.'s Chief Accounting Officer and Global Controller, will step in as interim Chief Financial Officer as Gregory Giometti leaves Alight, Inc. to pursue a new opportunity. We thank Greg for serving as interim CFO for the past several months and wish him all the best. Sachi, you can now open the call for questions. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. The first question is from Kyle Peters from Needham & Company. Please go ahead. Ross Cole: Hi. This is Ross on for Kyle Peterson. Thank you for taking my question. I was wondering if you could provide any commentary on how the RFP season looked in the past quarter. In other words, have you won any business here? Thank you. Rohit Verma: Thank you. As I mentioned in my remarks, our execution, both from a renewal perspective and new business, is getting better and better. We had a very good new business as well as renewal activity season in Q1, and it was better than Q1 last year. Ross Cole: Great. Thank you. And if I can ask another question, could you talk a little more on the working capital dynamic and if it should start becoming a source of cash? And also, what percent of the book is up for renewal this year? Gregory Giometti: I can take the first part, Rohit, and then I will let you comment on renewals. We definitely did see some working capital benefits in the first quarter across a variety of areas, including cash taxes and general working capital, that helped drive the free cash flow result. Rohit Verma: And then the second part of the question was the size of renewals for the year. I would say it is definitely less than last year. I would put it somewhere within the 25% to 30% range of the total book, which is in the normal range that we would expect. Operator: Thank you. The next question is from Curtis Nagle from Bank of America. Curtis Nagle: Great, thanks very much. Maybe any help you might be able to give in terms of expectations for cadence of recurring revenue year-over-year growth? Then would you be able to size how much that influx of partner revenue—earlier partner revenue—helped in the Q1 recurring revenue in the quarter? Rohit Verma: Sure. As we have mentioned, we have been giving revenue under contract at the start of the quarter. If you recall, when we started Q1, the recurring revenue under contract was about $1.97 billion. Our recurring revenue for the start of Q1 is just over $2.0 billion, so that effectively sets a floor for where we are in terms of revenue under contract. Just to clarify, that is total revenue under contract, 94% of which is recurring. On the partner revenue side, it was about $4 million to $5 million that we had expected to come over the full year, and that came in pretty much all in the first quarter. It is recurring, but it does not recur every quarter. Curtis Nagle: Okay, great. And then any guidance you might be able to give for free cash flow for the year—expectations? Rohit Verma: We believe that we will continue to see solid free cash flow generation for the year. We saw $53 million this quarter, which was about 20% higher, and Greg shared with you that we are expecting $35 million to $45 million in the second quarter. That is as much guidance as we are prepared to give right now. Thank you. Operator: The next question is from Peter Heckmann from D.A. Davidson. Please go ahead. Peter Heckmann: Good afternoon. Thanks for taking my questions and good to see the stronger-than-expected first quarter results. In terms of your EBITDA range for the second quarter—down significantly more than the first quarter—should we infer that, number one, you do not expect quite as strong a professional services quarter, and number two, some of the timing of expenses, some of those expenses that you plan to make, will kick in? Any other factors playing into the year-over-year decline in EBITDA in the second quarter that were not present in the first quarter? Gregory Giometti: Yes, I think that is right. If you think about the guidance that we gave in terms of expectations around first quarter profitability, the second quarter guide is relatively in line with that. The exceeded expectations in the first quarter—given the high profit margin on project revenue—certainly drove higher margin in the first quarter. We are expecting a more muted project revenue at this point in the second quarter, which drives more consistency with what we had expected for the first quarter from a profitability perspective. And to your point, yes, we do see some of those expenses shifting between quarters. As a follow-up on free cash flow conversion, generally speaking, 44% to 50% is a reasonable range. There can be some variability quarter to quarter, especially with the seasonality of some of the commissions business and things we have in the back half of the year, but as we think about averages, that is a reasonable measure. Peter Heckmann: Okay. I will get back in the queue. Thank you. Operator: The next question is from Sharon House from KeyBanc Capital Markets. Please go ahead. Analyst: Hi. This is Summer on for Scott. I was just wondering if you could talk more about the momentum you are seeing building out the new team and the impacts you have seen so far. Thank you. Rohit Verma: Thank you so much for the question. We are very excited about the team that we are building. It is not just the senior hires that we have made, but also deeper in the organization. The most important piece for us is increasing the coverage of accounts. As you heard me say, we were covering about 100 strategic accounts for us with a true designated account executive. That number is up to 400 and covers 90%+ of our ARR. We believe that kind of coverage really gives us a good view of our clients, a good view of the health of our clients, and helps increase our ability to retain clients and build a pipeline along with them. As I mentioned earlier, we have had a good renewal season in Q1, we have had good commercial execution in Q1, and we are expecting to continue to build on that momentum. We still have a lot of work to do, as the team is new and we are building a newer muscle in the organization, but we feel good about the progress that we have made. Operator: There are no further questions at this time. I would like to turn the floor back over to Rohit Verma for closing comments. Rohit Verma: Thank you, Sachi, and thank you all for joining. I would like to thank our clients for their trust and confidence in us, and importantly, our employees who have been relentless in their efforts. I appreciate your continued interest in Alight, Inc., and I look forward to updating you on our progress in the quarters ahead. Thank you so much, and God bless. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, ladies and gentlemen, and welcome to the Exelixis, Inc. first quarter 2026 Financial Results Conference Call. My name is Sherry, and I will be your operator for today. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Andrew Peters, Senior Vice President of Strategy and Investor Relations. Please proceed. Andrew Peters: Thank you, Sherry, and thank you all for joining us for the Exelixis, Inc. first quarter 2026 financial results conference call. Joining me on today's call are Michael M. Morrissey, our President and CEO; Christopher J. Senner, our Chief Financial Officer; Dana T. Aftab, our Executive Vice President of Research and Development; and Patrick Joseph Haley, our Executive Vice President, Commercial, who will review our progress for the first quarter 2026 ended 03/31/2026. During the call today, we will refer to financial measures not calculated according to Generally Accepted Accounting Principles; please refer to today's press release, which is posted on our website, for an explanation of our reasons for using such non-GAAP measures as well as tables deriving these measures from our GAAP results. During the course of this presentation, we will be making forward-looking statements regarding future events and the future performance of the company. This includes statements about possible developments regarding discovery, product development, regulatory, commercial, financial, and strategic matters, potential growth opportunities, and government drug pricing policies and initiatives. Actual events or results could, of course, differ materially. We refer you to the documents we file from time to time with the Securities and Exchange Commission which, under the heading Risk Factors, identify important factors that could cause actual results to differ materially from those expressed by the company verbally and in writing today, including, without limitation, risks and uncertainties related to product commercial success, market competition, regulatory review and approval processes, conducting clinical trials, compliance with applicable regulatory requirements, our dependence on collaboration partners, and the level of costs associated with discovery, product development, business development, and commercialization activities. With that, I will turn the call over to Mike. Michael M. Morrissey: All right. Thank you, Andrew, and thanks everyone for joining us on the call today. Exelixis, Inc. is off to a strong start in 2026, with meaningful progress across our discovery, development, and commercial activities. Our strategy has a singular focus: to build a multi-franchise business in solid tumor oncology focused on GU and GI histologies, based on the depth of the cabozantinib business, the potential breadth of the zanzalintinib opportunity, and the scope of our early-stage pipeline. Key highlights for the quarter include: first, we saw continued strong performance of the cabozantinib business in 2026. CABOMETYX continued to grow in revenue, demand, and market share, as the leading TKI for RCC and the market leader for neuroendocrine tumors in the oral second line plus segment. Importantly, we expedited the buildout of our GI sales team in the first quarter to accelerate the growth of the CABOMETYX NET opportunity before ZANZA could come online for CRC later in 2026. First quarter 2026 U.S. cabo franchise net product revenues grew 8% year-over-year to $555 million compared to the first quarter 2025. Continuing its role as a worldwide leading TKI, global cabo franchise net product revenues generated by Exelixis, Inc. and its partners grew 12.5% year-over-year to $764 million in the first quarter 2026. Chris and PJ will share our financial and commercial highlights in their prepared remarks. Second, ZANZA is in the pole position as our next potential oncology franchise opportunity. The NDA for the ZANZA + atezo combination in third line plus CRC based on the STELLAR-303 data is currently under review and is the top priority for the entire Exelixis, Inc. organization. The ZANZA development program is rapidly advancing with seven ongoing or soon-to-start pivotal trials, along with additional Phase II trials planned in prostate cancer and lung cancer. Dana will review the highlights for ZANZA and our extensive pipeline of early-stage assets in his prepared remarks. Third, the goal of our development effort is to establish ZANZA as the TKI of choice in the 2030s for RCC and other important indications that could surpass the impact of cabo in the 2020s. ZANZA already has a meaningful development footprint in RCC, with three ongoing Phase 3 studies across multiple lines of therapy, underscoring both the breadth of our ambition and the confidence we and others have in this molecule. At the same time, as our experience with COSMIC-313 highlighted, and as was also recently seen with news from competitive trials, navigating the complexities of first-line RCC to improve upon existing regimens is a challenging endeavor at best and requires careful selection of combination partners to improve efficacy parameters while managing tolerability and safety considerations. We remain committed to raising the bar in first-line RCC and continue to prioritize orthogonal MOAs to combine with ZANZA. In parallel, we seek to expand the breadth and depth of our ZANZA pivotal trial efforts, positioning ZANZA for durable leadership in RCC and other important tumor types. Fourth and finally, we remain committed to running the business at the highest level of efficiency as we advance our R&D priorities, and at the same time generate substantial free cash to invest in the pipeline through the right targeted BD at the right price to access external sources of innovation and to continue our share repurchase program, including an additional $750 million that was just authorized by the Exelixis, Inc. Board. See our press release issued an hour ago for our first quarter 2026 financial results and extensive list of key corporate milestones achieved in the quarter. I will now turn the call over to Chris. Christopher J. Senner: Thanks, Mike. For the first quarter 2026, the company reported total revenues of approximately $611 million, which included cabozantinib franchise net product revenues of $555 million. CABOMETYX net product revenues were $552.8 million and included $3.6 million in clinical trial sales. As a continued reminder, clinical trial sales have historically been choppy between quarters and we expect this to continue into the future. Gross-to-net for the cabozantinib franchise in 2026 was 30.2%, which is higher than the gross-to-net we experienced in 2025. This increase in gross-to-net deductions in 2026 is primarily related to higher 340B volume, higher Medicare Part D discounts and rebates, and higher co-pay assistance when compared to the fourth quarter 2025. Our CABOMETYX trade inventory was slightly lower at 2.1 weeks on hand at the end of the first quarter 2026 when compared to the fourth quarter 2025. Total revenues in the first quarter 2026 also include approximately $45.9 million in royalties earned from our partners Ipsen and Takeda on their sales of cabozantinib. Our total operating expenses for the first quarter 2026 were approximately $359 million compared to $363 million in 2025. The sequential decrease in these operating expenses was primarily driven by lower clinical trial costs, offset by higher FTE-related costs and stock-based compensation expense. Provision for income taxes for the first quarter 2026 was approximately $57.2 million compared to a provision for income taxes of approximately $8.2 million for the fourth quarter 2025. This increase in tax provision was related to certain items that were recognized in the fourth quarter 2025. The company reported GAAP net income of approximately $210.5 million, or $0.81 per share basic and $0.79 per share diluted, for the first quarter 2026. The company also reported a non-GAAP net income of approximately $232.8 million, or $0.90 per share basic and $0.87 per share diluted. Non-GAAP net income excludes the impact of approximately $22.3 million in stock-based compensation expense, net of the related income tax effect. Cash and marketable securities for the quarter ended 03/31/2026 were approximately $1.4 billion. During the first quarter 2026, we repurchased approximately $430.8 million of the company's outstanding common stock, resulting in the retirement of approximately 10 million shares of the company's outstanding common stock at an average price per share of $42.99. As of the end of the first quarter 2026, we had $159.4 million remaining under the $750 million stock repurchase plan authorized by the company's board in October 2025. We expect to complete the October 2025 stock repurchase plan this month. Additionally, in May 2026, the company's board authorized a new $50 million stock repurchase plan that expires on 12/31/2027. Finally, we are reiterating our full-year 2026 financial guidance, which is detailed on slide 16 of our earnings presentation. I will now turn the call over to PJ. Patrick Joseph Haley: Thank you, Chris. The CABOMETYX business continued to grow in 2026. The team is executing at an extremely high level, with CABOMETYX continuing to be the number one prescribed TKI in renal cell carcinoma, the number one TKI plus IO combination in first-line RCC, and the number one oral agent in second line plus neuroendocrine tumors. Importantly, Q1 had the highest number of new patient starts in a quarter ever for CABOMETYX, representing strong momentum in the business. At the same time, CABOMETYX plus nivolumab had the highest quarterly first-line RCC market share to date. This is an exciting time for the team with zanzalintinib on the horizon as we prepare to launch our next franchise molecule, which would also expand the Exelixis, Inc. GI franchise. The prescription data in the oral TKI market basket of cabo, lenvatinib, axitinib, sunitinib, and pazopanib convey the strength of cabo relative to the competition. Looking at 2025 to Q1 2026, CABOMETYX grew three share points from 44% to 47%. Additionally, CABOMETYX TRx volume grew 14% in Q1 2026 compared to Q1 2025, outpacing the growth rate of the market basket, which was 7% for the same period. Physicians are responding positively to the broad NET label and the contemporary trial design, and perceive the efficacy and tolerability of cabo as favorable relative to other small molecule therapies in the space. Both academic and community prescribers are using cabo broadly across patient and tumor characteristics, including patients with neuroendocrine tumors arising in the pancreas, GI tract, and lung, across all tumor grades, functional and SSTR status, and those who have received prior treatment with Lutathera. Turning to new patient market share for second line plus neuroendocrine tumors in the first quarter, we are pleased that CABOMETYX remains the market leader in the oral therapy segment. Additionally, our research indicates that there is opportunity to continue to grow market share, particularly in the community. For that reason, we expedited the expansion of our GI sales team in Q1, and the team was in the field providing greater reach into the community in order to continue to grow NET market share for CABOMETYX. Our new representatives joined us with significant oncology sales experience, particularly colorectal cancer and GI oncology. Importantly, the expanded team will be able to gain valuable experience selling cabo before we turn our focus to the potential launch of zanzalintinib in colorectal cancer. If we are thinking about building on and expanding our GI franchise, we are thrilled with the results of STELLAR-303 and the PDUFA date set for later this year. Pending regulatory approval, we believe that these data would provide Exelixis, Inc. with a compelling commercial opportunity in one of the big four tumors. The third line plus CRC setting consists of approximately 23,000 patients in the U.S. and represents an overall market opportunity of approximately $1.5 billion in terms of contemporary pricing. Our market research and advisory boards demonstrate positive feedback and excitement for the STELLAR-303 data. Physicians reiterate the significant unmet medical need for patients in the third line plus CRC setting and are excited for the potential to have an ICI option available for the broader population of CRC patients. In closing, we are pleased with the growth of the cabo business both in RCC and NETs. In neuroendocrine tumors, prescribers see CABOMETYX as a more favorable choice versus other previously approved generic small molecule therapies. Simultaneously, our internal team is in full launch preparation for ZANZA, and the excitement around these efforts is palpable. We look forward to the opportunity to launch the next Exelixis, Inc. franchise later in the year to be able to help appropriate patients with colorectal cancer. Beyond STELLAR-303, we are enthusiastic about the significant development plan for ZANZA, which could position the ZANZA franchise to far exceed cabo in terms of the number of patients that could be impacted across tumor types and settings. With that, I will turn the call over to Dana. Dana T. Aftab: Thanks, PJ. Our strategy in R&D continues to focus on developing ZANZA as a multidimensional solid tumor oncology franchise molecule. As you will hear in my upcoming remarks, we continue to be focused on maximizing our productivity with disciplined investment in high-value opportunities for ZANZA as well as the rest of our portfolio. Today's update provides a little more clarity on the seven ongoing or soon-to-start pivotal studies for ZANZA, so my update today will be focused mostly on those trials, but I will also spend some time on additional exploratory studies that we have designed to investigate ZANZA's potential in certain patients with prostate or lung tumors. Starting with our NDA for ZANZA plus atezo in colorectal cancer, which is based on the results from the STELLAR-303 trial, our team has been highly engaged during the review process, and from our standpoint, the review has been proceeding on schedule toward the PDUFA date in early December. As a quick reminder, the trial has dual primary endpoints designed to assess overall survival both in the broad intention-to-treat, or ITT, population, which includes patients both with and without liver metastases, as well as more specifically in the population of patients without liver metastases, which we refer to as the NLM patients or population. The study met one of its dual primary endpoints, demonstrating a 20% reduction in the risk of death with the combination in the broad ITT population at final analysis, while data pertaining to the other dual primary endpoint of overall survival in the NLM population showed a trend in overall survival favoring the combination. The NLM data were immature at the data cutoff, and the trial has been proceeding to the planned final analysis for this endpoint, and we continue to expect to have those top-line results around the middle of this year depending on event rates. The level of excitement here is really high right now about what a potential approval would mean for this large and underserved patient population. As you heard from PJ, our preparations for launch are in full swing. We will be ready to go the moment we receive a positive decision. But as we have discussed since late last year, we believe there is significant additional franchise potential for ZANZA in colorectal cancer in an earlier stage of the disease. To realize that potential, our team has been highly focused on launching the STELLAR-316 trial, which will investigate ZANZA with and without an immune checkpoint inhibitor in patients with resected stage 2 or 3 colorectal cancer who, following definitive therapy, have tested positive for molecular residual disease, or MRD, and have no radiographic evidence of disease. About 20% of patients are MRD positive following definitive therapy, and these patients typically have a poor prognosis, with median disease-free survival times in the six- to eight-month time frame. Critically, these patients have no therapeutic options that have been shown in a Phase 3 trial to prevent or delay metastatic progression of their disease, so this represents a significant opportunity in the colorectal cancer landscape. As we have communicated in the past, MRD in STELLAR-316 will be determined with the Signatera circulating tumor DNA test, with Natera as our diagnostic partner. Their database, built from testing thousands of patients each year, has been incredibly helpful to us in terms of prioritizing activation of clinical trial sites that are already known to have the highest cadence of testing and the highest numbers of eligible patients. We are quite pleased with the level of enthusiastic feedback on STELLAR-316 that we have gotten from key opinion leaders and other stakeholders, and we are on track for initiating the trial around midyear. Moving on to kidney cancer, ZANZA's target profile, including the TAM kinases, MET, and VEGF receptors, positions ZANZA for success given the known roles played by these kinases in kidney tumors. STELLAR-304 is our first pivotal trial for ZANZA in kidney cancer, evaluating the combination of ZANZA plus nivolumab versus sunitinib in patients with locally advanced or metastatic non–clear cell renal cell carcinoma. The non–clear cell RCC space is underserved, with no positive readouts from a Phase 3 study specifically focused on these patients, despite them representing approximately a quarter of all RCC cases. If positive, 304 could potentially establish the first standard of care based on a randomized controlled Phase 3 trial for these patients. We completed enrollment last year and, given current event rates, we now expect top-line results from the study in 2026, and, if positive, those results could lead to our second NDA filing for ZANZA. In terms of opportunities in the clear cell RCC space, progress continues with regard to the two pivotal studies that Merck is running in clear cell RCC evaluating ZANZA in combination with belzutafan. LightSpark-033, which compares ZANZA plus belzutafan versus cabo as first-line therapy in patients who received anti–PD-1 or anti–PD-L1 therapy in the adjuvant setting, was initiated last year. In addition, Merck recently initiated LightSpark-034, a global Phase 3 pivotal trial evaluating ZANZA plus belzutafan versus belzutafan plus placebo in second- or third-line patients with advanced RCC who have progressed on or after both anti–PD-1/PD-L1 and VEGFR TKI therapies, in sequence or in combination. We are certainly excited to see these Phase 3 studies in clear cell RCC moving forward, and based on our franchise experience in this indication, we believe there are other important opportunities to explore. As we have mentioned previously, we continue to have discussions with potential collaborators to investigate novel combinations pairing ZANZA with other modalities and orthogonal mechanisms when there is strong scientific rationale for the combination. Given the demonstrated clinical differentiation we have seen with ZANZA and its potential to be the TKI of choice for combinations with immunotherapies and other mechanisms of action, we are looking to advance novel combinations in the future that have significant potential to move the needle for clear cell RCC patients. We hope to give further updates on these activities in the future as we get closer to launching the trial. Moving on now to neuroendocrine tumors, STELLAR-311 is our Phase 3 trial evaluating ZANZA compared to everolimus as an initial oral therapy in patients with pancreatic and extrapancreatic neuroendocrine tumors. That study was initiated last year, and we have been quite pleased by the speed of enrollment in the trial. In fact, we are now far ahead of our initial enrollment projections. The sites and investigators are very enthusiastic about the trial, given their growing experience with cabo in later-line disease and the opportunity presented by STELLAR-311 to improve on the current treatment landscape in earlier lines, which has not seen anything new for over a decade. That enthusiasm appears to be driving the very strong momentum we are seeing in the trial. Another opportunity for ZANZA that we have been discussing since late last year is in meningioma, which is the most common primary central nervous system tumor, accounting for approximately 40% of cases. Most meningiomas are benign, slow-growing neoplasms; however, up to 22% will recur after primary therapy, which consists of surgery and radiation. Importantly, there are no approved systemic therapies for meningioma that is refractory to local therapies, so this represents a very high unmet need in neuro-oncology. Today, we announced that we have now initiated STELLAR-201, our Phase II trial evaluating ZANZA in patients with recurrent meningioma who are no longer responsive to or eligible for local therapies. The primary endpoint of the trial is objective response rate, with secondary efficacy endpoints including duration of response, progression-free survival, and overall survival. The trial will enroll up to 100 patients, and given the extremely high level of interest and enthusiasm for the trial among neuro-oncologists, we anticipate enrollment to be brisk. Pending favorable results and given the absence of any approved systemic therapies in this setting, the STELLAR-201 trial represents an important opportunity for ZANZA to become the first systemic therapy that could improve outcomes for these patients. Today, we also announced two additional studies exploring ZANZA combinations in indications where significant unmet need exists. STELLAR-202 is a planned Phase II trial in squamous non–small cell lung cancer that will explore the addition of ZANZA to pembro in the maintenance phase after induction with pembro plus chemotherapy. Part of the rationale for this trial comes from data we obtained from cabo plus atezo in the CONTACT-01 trial, where the subgroup of non–small cell lung cancer patients with squamous histology appeared to derive substantial benefit from the combination compared to chemotherapy. This is an important opportunity given the relatively short PFS in the maintenance setting and the lack of any new approvals in frontline squamous non–small cell lung cancer since KEYNOTE-407 established the current standard of care with pembro plus chemo. We are also planning an additional expansion cohort in the ongoing STELLAR-2 study to evaluate ZANZA in combination with docetaxel in patients with metastatic castration-resistant prostate cancer who have measurable disease. This is also based on initial observations with cabo, where a small Phase II study showed favorable outcomes when combined with docetaxel in metastatic CRPC patients. This cohort in STELLAR-2 is particularly meaningful because, if ZANZA in combination with chemotherapy is shown to be safe and active, that could open up a number of opportunities across a range of solid tumors where chemo or potentially even ADCs carrying chemo payloads are standard of care. Our teams are super focused on launching these new studies soon, and we expect both to be initiated in the second half of this year. Now shifting to our early clinical pipeline, we have four molecules in this space that are currently in clinical development, namely XL309, XB010, XB628, and XB371, and the Phase 1 studies for these early molecules are progressing well. In terms of earlier-stage development candidates, we are continuing to advance exciting new small molecule and ADC programs, and I look forward to sharing more details as these early pipeline programs advance. Our strategy with the early pipeline is focused on identifying the next potential franchise molecules beyond cabo and ZANZA, so we will continue our approach of getting to go/no-go decisions quickly and efficiently, leveraging our expertise to pick the winners and ultimately maximize impact for patients. With that, I will turn the call back over to Mike. Michael M. Morrissey: All right. Thanks, Dana. I will wrap up here by thanking the entire Exelixis, Inc. team for their outstanding efforts in the first months of 2026. We think 2026 could be a potentially transformational year for the company, and everyone at Exelixis, Inc. is working together to move the needle for cancer patients and continue building value for all our stakeholders. We are focused on growing the cabo business, at the same time advancing ZANZA as our second potential franchise opportunity, all while continuing to investigate our early-stage pipeline. As always, I want to thank everyone at Exelixis, Inc. for their individual and collective efforts, great teamwork, and positive energy as we work every day to exceed expectations on our mission to help cancer patients recover stronger and live longer. We look forward to updating you on our progress in the future. Thank you for your continued support and interest in Exelixis, Inc. We will now open the call for questions. Operator: Thank you. To ask a question, you will need to press 11 on your telephone. To withdraw your question, press 11 again. Due to time restraints, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Paul Choi with Goldman Sachs. Your line is open. Analyst: Thank you. Good afternoon, and thanks for taking the question. My question is for Dana. In light of the recent miss from the LightSpark-012 study, can you comment on your updated thoughts or learnings from that trial for your belzutafan plus ZANZA combination development program, specifically LightSpark-033 and -034? Any learnings or potential trial considerations that you have had in the wake of that data? Thank you very much. Dana T. Aftab: Sure. Thanks for the question, Paul. First of all, our strategy with ZANZA is to really focus on creating the next franchise molecule in RCC and the top TKI combination therapy in clear cell RCC in the 2030s. The results from LightSpark-012, which evaluated the triplet of pembro + lenva + belzutafan versus pembro + lenva, highlight that triplet therapy in clear cell renal cell carcinoma is not an easy game. Our strategy is focused on trying to establish a standard of care that covers multiple possible outcomes based on trials that are going on now. We have multiple shots on goal with LightSpark-033 and -034, and we have the STELLAR-304 data coming in non–clear cell carcinoma. As I mentioned earlier, we are evaluating a number of other potential novel and innovative combinations to further explore the clear cell RCC space, including molecules from our own early pipeline. If XB628, which is our novel and innovative bispecific with multiple IO arms on it, pans out, that could be a very interesting combination to explore in these patients. We have multiple shots on goal to really establish and drive the ZANZA franchise into clear cell RCC in the future, focused on the 2030s. Operator: One moment for our next question. That will come from the line of Yaron Werber with TD Cowen. Your line is open. Analyst: Hi, team. Congrats on the quarter, and thanks so much for the question. Two quick questions: first, could you please provide some color on the contribution in renal cell carcinoma versus NET for cabo? And second, I recall that cabo failed as a monotherapy in advanced unselected non–small cell lung cancer and also on OS in Phase 3 for pancreatic, even though it showed a response and PFS. You touched on some of the combo regimens that are showing early data, but could you expand on the rationale for testing combo therapies in STELLAR-202 and STELLAR-2? Michael M. Morrissey: I think you were talking about prostate cancer as well. Dana, why do you not take that second question first—going into Phase II in non–small cell and then prostate cancer? Dana T. Aftab: Sure. As I mentioned, data that support our hypothesis for testing zanzalintinib in patients with non–small cell lung cancer come from the CONTACT-01 study, the Phase 3 study evaluating cabozantinib plus atezolizumab versus docetaxel in a broad population of non–small cell lung cancer patients. In that study, the subpopulation of patients with squamous histology actually did quite well and appeared to have a favorable benefit compared to the control arm. For that reason, the STELLAR-202 trial is focused 100% on the squamous patient population. The current standard of care is platinum-based chemotherapy plus pembrolizumab during induction, then pembrolizumab maintenance. We are looking to add zanzalintinib onto the maintenance arm of pembrolizumab. We have already shown that ZANZA can sensitize patients to benefit with IO in the STELLAR-303 trial, a population of colorectal cancer patients historically refractory to IO, so we think this is a very rational exploration. In prostate cancer, there was a small Phase 1 study combining cabozantinib with docetaxel that showed favorable outcomes in metastatic CRPC patients. Based on those results, we believe there is rationale to pursue that combination in the Phase 1 STELLAR-2 trial. Once we get data showing safety and potentially activity, that opens up a lot of avenues of exploration, including in castration-resistant prostate cancer, potentially in lung cancer, and potentially in other indications where chemo or chemo-based therapies, including ADCs, are standard of care. Operator: Thank you. One moment for our next question. That will come from the line of Sudan Loganathan with Stephens. Your line is open. Analyst: Hi, thank you for taking my question. First, could you comment on the quantifiable metrics regarding cabo sales in NETs and how the sales team has grown over this time and how it will continue to? Second, on ZANZA ahead of the CRC launch, what are some quantifiable metrics we can keep in mind ahead of the potential launch toward the end of this year? Thanks. Patrick Joseph Haley: Great, thanks. With regards to NET, we are really pleased with how the business is going. As I mentioned, overall in the first quarter we had our highest new patient starts ever for CABOMETYX in a quarter, which is a really strong sign of the health of the business. As those new patient starts translate to refills going forward, it puts us in a really good position. Our business in NET is broad, across all segments, and is viewed very favorably by physicians. Importantly, we are the market leader in the second line plus oral segment, and our research and feedback indicate that we have opportunity to continue to grow, particularly in the community setting. That is why we expedited the buildout of our GI sales force to have deeper reach into the community and drive further business there. We brought in a very strong team with GI and CRC experience in sales, and we are already seeing impact from that team. Importantly, the team gets to know the customers in the GI segment and gains experience selling cabo and a TKI, which is fantastic as we look forward to the potential approval of ZANZA in CRC. Our launch preparation is in full swing, and the team is focused on optimizing that launch and helping patients with CRC. This is a big and exciting opportunity for us in one of the big four tumors. The third line plus CRC setting is approximately 23,000 patients and, at contemporary pricing, a $1.5 billion opportunity. We are thinking about ZANZA as a franchise: the initial launch will be important, but we are focused on expanding the CRC franchise with an earlier study such as STELLAR-316 and building it out in RCC, and potentially in lung, meningioma, etc., with many exciting opportunities. Operator: One moment for our next question. That will come from the line of Sean Laaman with Morgan Stanley. Your line is open. Analyst: Hi, good afternoon. This is Catherine on for Sean. We just had one on the updated STELLAR-304 data readout timing. Could you provide a bit more color on whether the slower event accrual reflects better-than-expected disease control within a mix of the enrolled histologies, or other trial dynamics? As a quick follow-up, given that the population is highly heterogeneous, how are you defining success across histologies, and are there specific subtypes where you believe the rationale is strongest? Dana T. Aftab: Thanks for the question, Catherine. Regarding 304, this is our Phase 3 study comparing zanzalintinib combined with nivolumab versus sunitinib, and it is the first Phase 3 trial to address this high unmet-need patient population. Currently, there is no level one evidence supporting a standard of care in these patients, so we see a huge opportunity for ZANZA plus nivo. Regarding the slight change in timing for events, I do not want to speculate on what is driving that. We are in the late stages of collecting events and expect results in the second half of the year. Operator: One moment for our next question. That will come from the line of Andy with William Blair. Your line is open. Analyst: Thanks for taking our question. Talking about the 316 a little bit: there was an AdCom recently discussing a progression definition based on non-radiographic progression. For the adjuvant CRC study, what was the back-and-forth with the FDA agreeing on MRD positivity as a way to change therapy? How did you conclude this is a regulatory-approvable approach? Dana T. Aftab: Thanks for the question, Andy. We have discussed the STELLAR-316 trial since December. We are super excited because it addresses a high unmet-need population: patients with resected stage 2 or 3 colorectal cancer who have completed definitive therapy and are now in a watch-and-wait game to see if they develop late-stage disease. The Signatera test has shown in a number of studies to, with a high degree of accuracy, predict rapid progression. Patients who are positive for the test typically have a median disease-free survival of around six months, so it is a very high unmet-need population. The trial has been well designed with a large degree of input from key opinion leaders, other stakeholders, as well as the agency. We are very confident in our design and will release more details as we get closer to launch and when it is posted to clinicaltrials.gov. Please stay tuned for more information. Operator: One moment for our next question. That will come from the line of Michael Schmidt with Guggenheim. Your line is open. Analyst: Hey, thanks for taking my question. On RCC, I want to understand the size of the opportunity for LightSpark-033. What percentage of patients would be qualified? Beyond 033 and 034, are there any other studies you are considering for RCC specifically with ZANZA? Patrick Joseph Haley: Thanks for the question. With regards to LightSpark-033, we are thinking about RCC broadly and establishing ZANZA as a franchise in RCC and beyond. In the first-line setting, approximately a quarter of patients may be coming off adjuvant therapy, and that can evolve as more patients receive adjuvant therapy. More importantly, we are doing multiple studies—LightSpark-033, -034, and STELLAR-304—drawing off our experience with cabo, where we did multiple studies in RCC to establish ourselves as the leading TKI in the 2020s. We are building toward our vision of establishing ZANZA as a leading TKI of the 2030s. As Mike and Dana mentioned, we are looking at combinations with orthogonal MOAs and different approaches to continue to raise the bar in the first-line setting and in RCC generally. Operator: One moment for our next question. That will come from the line of Sylvan Tuerkcan with Citizens. Your line is open. Analyst: Good afternoon, and thanks for taking my question. More broadly on your strategy around allocation: you are running one of the broadest development strategies for an unapproved drug and even expanded it now. How do you balance that broad strategy with buybacks and potential M&A, which has not happened yet? Christopher J. Senner: Thanks for the question. From a capital allocation perspective, we look at how we allocate capital across R&D, BD opportunities, and share repurchases. We are a financially strong company with significant cash flows. We are prioritizing our R&D spend on a constant basis so we understand which projects are sticking their heads up and saying, “fund us,” and we will continue to do that. Andrew and Stefan and the team are continuing to look at BD opportunities. We also have access to capital. All of that allows us to execute on R&D investments, BD investments, and share buybacks. From a share buyback perspective, we believe Exelixis, Inc. is a great opportunity, that our opportunity is not being fully appreciated generally, and we think we are undervalued, so we are going to continue to buy back shares. Operator: One moment for our next question. That will come from the line of Jay Gerberry with Bank of America. Your line is open. Analyst: Hey guys, this is Chi on for Jason. On LightSpark-034, can you contextualize the choice of using belzutafan monotherapy as the control arm as opposed to an alternative TKI monotherapy or perhaps even tivozanib plus lenvatinib given the pending sNDA review there? I also noticed that OS is listed as a dual primary endpoint—would PFS alone be sufficient to support approval, or would you need an OS win, based on the recent LightSpark-011 data? Dana T. Aftab: LightSpark-034 is Merck's study evaluating ZANZA plus belzutafan versus belzutafan plus placebo in the second-line-plus setting in patients who have progressed on both an IO-based regimen and a VEGFR TKI regimen, either in sequence or in combination. The dual primary endpoints are two different efficacy endpoints. In clear cell RCC, OS has really become a gold standard. Having two different efficacy endpoints typically requires both to hit, but it depends on the data and timing. Regarding the population and control, this study, as well as many others ongoing now or planned for the future, anticipates multiple potential treatment landscapes. It focuses on patients who are candidates for belzutafan alone or belzutafan in combination with a TKI after having progressed on both a TKI-containing regimen and an IO-containing regimen. That represents an important unmet need when this trial reads out. Operator: One moment for our next question. That will come from the line of Leona Timischev with RBC. Your line is open. Analyst: Thanks for taking my question. Sticking with the franchise approach by 2030 you have been talking about: you mentioned RCC. I wanted to focus on NETs and how you are thinking about the franchise there in the future. You are running 311, but are there any other combinations you are looking at, especially as the treatment landscape evolves with radiopharmaceuticals and ADCs? How are you envisioning building out ZANZA into the 2030s in that setting? Patrick Joseph Haley: Thanks for the question, Leonid. Regarding how we are thinking about 311 in the marketplace, cabo is off to a really strong start in the second line plus setting, and that study is designed to go head-to-head with everolimus as an active comparator, which is a first in the setting. It positions ZANZA in earlier lines of therapy and a larger patient population, with potential to beat an active comparator head-to-head. There is a lot of excitement around the study design, and we are excited about ZANZA’s opportunity. Dana T. Aftab: Beyond that, we are very committed to this patient population. We have seen how much benefit cabo brings and the excitement around STELLAR-311. We are focused on how else we can address this population. As we discussed at R&D Day, we are looking at other opportunities earlier in the discovery pipeline to address neuroendocrine tumor patients who require treatment with an SSTR2 agonist—mainly patients with functional tumors, but also others who express the receptor. We are developing a small molecule that we hope to file an IND on later this year, which could be a novel approach to offer in combination with ZANZA if STELLAR-311 is successful. We are also broadening to other neuroendocrine carcinomas, namely tumors that express DLL3—primarily small cell lung cancer but also a range of other neuroendocrine carcinomas in the GI tract and prostate. We presented data this year for XB773, a DLL3-targeted ADC with a very small, novel format and a topoisomerase inhibitor payload that we think is differentiated. If it shows interesting activity, we can also explore combinations with ZANZA. We have multiple irons in the fire across histologies and patient populations. Operator: One moment for our next question. Our next question will come from the line of Kalpit Patel with Wolfe Research. Your line is open. Analyst: Good afternoon, and thanks for taking the questions. On the LightSpark-012 trial, there was no benefit of the triplet compared to the doublets in the first-line setting. For your and Merck's strategy, would you ever entertain a triplet in that exact same first-line setting, and what would that future study look like in ccRCC? Dana T. Aftab: Thanks for the question, Kalpit. We are collaborating with Merck on LightSpark-033, which is evaluating ZANZA plus belzutafan in the frontline setting versus cabozantinib. This is a different hypothesis; there is no IO in this combination because it assumes or requires prior adjuvant IO. As for other potential combinations, especially triplets, that requires very specific and focused scientific rationale. We are not opposed to doing it; it just has to be the right molecule in the right setting. As mentioned earlier, we have been looking at orthogonal MOAs to pair with ZANZA and will investigate ZANZA plus our novel bispecific IO (XB628) in its Phase 1 study. We will disclose more details as those trials come to fruition. Operator: One moment for our next question. That will come from the line of Esther DeRoot with Barclays. Your line is open. Analyst: Hi, thanks for taking my question. First, how are you planning to leverage the non–liver metastases data from STELLAR-303 given the December PDUFA date? Are you going to update your NDA to include that data? Also, thoughts around the investigator-sponsored trial coming up at ASCO of cabo + nivo in non–clear cell renal cell carcinoma, and how to think about that dataset relative to ZANZA and 304? Dana T. Aftab: Thanks for the question. Regarding STELLAR-303, as mentioned, we are on track to see the results of the non–liver metastasis subgroup primary endpoint around midyear. Regarding sharing data with the FDA, we certainly plan to share those data as well as any other data the agency might ask for as part of the ongoing review, which from our standpoint is progressing on schedule toward the PDUFA date in early December. On the cabo + nivo IST in non–clear cell RCC, we are aware of those data and look forward to seeing them. STELLAR-304 is a randomized Phase 3 designed to establish level one evidence, and we believe it represents a significant opportunity for ZANZA plus nivolumab in this underserved population. Operator: One moment for our next question. That will come from the line of Ash Verma with UBS. Your line is open. Analyst: Hi. I wanted to get your latest thoughts on combo competitiveness in RCC. Given the earlier LightSpark-022 study had a PFS-positive result, do you think it is unlikely to show OS separation because of enough alpha not being attributed to that analysis? Patrick Joseph Haley: Thanks for the question. We are pleased with where we are competitively in RCC. Generally, we would not want to speculate on how other trials will read out. We have built a franchise in RCC with strength across segments. This quarter we saw the highest frontline market share for CABOMETYX plus nivolumab in the first-line setting, and we continue to see strong momentum there given the breadth and depth of the data and the long-standing prescriber experience with this combination. We see potential to continue growing in RCC, particularly in the first-line setting. Operator: At this time, there are no further questions. I will turn the call over to today's host, Andrew Peters. Mr. Peters? Andrew Peters: Thank you, Sherry, and thank you all for joining us today. We welcome your follow-up calls with any additional questions you may have that we were unable to address during today's call. Thank you all again, and have a great rest of your week. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Ladies and gentlemen, greetings, and welcome to the Surgery Partners First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty, Surgery Partners' Chief Financial Officer. Please go ahead. David Doherty: Good morning, and thank you for joining Surgery Partners First Quarter 2026 Earnings Call. I am joined today by Eric Evans, our Chief Executive Officer; as well as Justin Oppenheimer, our Chief Operating Officer, who joined the company in January. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in this morning's press release and the reports we file with the SEC. Company does not undertake any duty to update these forward-looking statements. In addition, we reference certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. we reconcile these measures to the most applicable GAAP measure in this morning's press release. With that, I will turn the call over to Eric. Eric? J. Evans: Thank you, Dave, and good morning, everyone. Before we get started, I'd like to introduce Justin Oppenheimer on the call this morning. Justin joined the company as our Chief Operating Officer in January and has made an immediate positive impact on the organization. By way of background, Justin was previously an executive at Hospital for Special Surgery, the world's leading academic system focused on musculoskeletal care, where he held several roles overseeing operations and strategy. Justin will be available to answer questions during the Q&A portion of our call, and we look forward to using to know him better in the months ahead. Now moving to our first quarter operational and financial performance. I'll start with a brief overview of our first quarter results, followed by additional color on our progress across the 3 pillars of our growth algorithm, organic growth, margin improvement and capital deployment. Let's start with the highlights. We are encouraged by our start to the year. First quarter performance broadly in line with our internal expectations, reflecting improved stability across the portfolio and initial signs of recovery in areas that were pressured towards the end of 2025. As a reminder, we ended last year with a select number of clearly identified addressable headwinds, particularly within a small subset of our surgical hospital portfolio. Entering 2026, our focus has been on restoring operating consistency and predictability, better supporting physician transitions and positioning the business for sustainable growth. We believe our first quarter results reflect early progress we have made and position us well to meet or exceed our 2026 objectives. At a high level, during the quarter, we delivered approximately $811 million of net revenue, same-facility revenue growth of 4.4% and adjusted EBITDA of approximately $102 million, as we continue to execute against the foundational drivers of our long-term growth strategy. Dave will walk through the financial details shortly. Tracking our first pillar, organic growth. Same-facility case growth of 0.6% in the first quarter was modest and below our long-term growth algorithm driven by primarily by temporary weather-related disruptions early in the quarter that led to case losses or deferrals in several higher volume but lower acuity markets. Importantly, these impacts were not broad-based and did not materially affect the higher acuity portion of our portfolio. We would also note that this performance is relative to a strong prior year comparison where we delivered approximately 6.5% same-facility case growth in the first quarter of 2025. As we have noted in the past and given the continued acuity shift in our space, we believe the total same-facility net revenue metric remains the best to assess our growth as it reflects both total cases, acuity and rate improvements. At 4.4%, our same-facility revenue growth was in line with our first quarter and long-term expectations. We remain focused on executing our organic growth strategy centered on expanding surgical case volumes while strategically shifting towards higher acuity procedures. To this end, we continue to see favorable trends in our musculoskeletal service line with total joints performed in our ASCs growing 14.6% year-over-year. Our investment in surgical robotics continues to support this momentum. Our portfolio consists of 73 surgical robots, further supporting higher acuity procedures, we can perform safely and efficiently across the platform. We remain focused on thoughtfully deploying this technology to enhance our capabilities where it drives clinical value and enables us to earn more complex, higher acuity cases. Physician recruiting remains another key driver of long-term growth. During the quarter, we recruited approximately 140 physicians with a strong concentration in orthopedics, ophthalmology, GI and other priority specialties. While new recruits take time to ramp, these additions position us well for accelerating volume and acuity as the year progresses. De novo development continues to provide one of the highest returns on capital across our portfolio. During the first quarter, we opened one de novo, bringing our total openings to 9 over the trailing 12 months. Our de novo ASCs are heavily weighted towards MSK, aligning closely with our long-term strategy to expand higher acuity capabilities in attractive markets. Turning to margin expansion. Our adjusted EBITDA margin was 12.6%, in line with our expectations for the seasonally lower margin first quarter. Overall, cost management was solid in the quarter, with both labor and supply costs showing sequential improvements as a percentage of net revenue relative to the first quarter of 2025, which Dave will provide greater detail on in his comments. Our proactive efforts allowed us to partially offset the onetime pressures related to reestablishing incentive compensation, increased provider taxes and tariff pressures that are detailed in our posted slides. Regarding payer mix, while we did see modest payer mix pressure in the first quarter, the trend is moderating from the second half of 2025, and we are continuing to take action to both recover and grow our commercial market share as well as to reduce our expenses to improve our Medicare case profitability. Importantly, regarding the 3 surgical hospital markets we discussed on our fourth quarter call, they are executing their plan through the first quarter, and I am confident that our new leadership teams that are in place will continue to drive progress. Moving into -- on to our third pillar, capital deployment towards M&A. During the first quarter, we deployed approximately $4 million of capital. Our pipeline remains active, and we continue to target deploying approximately $200 million in capital annually. While first quarter deployment was modest, we continue to have a healthy pipeline and remain optimistic about our long-term opportunity to be an accretive consolidator in the very fragmented ASC landscape. As a reminder, our full year 2026 guidance does not factor in any potential impact of M&A. In parallel to continued execution of disciplined M&A, we have made progress on our portfolio optimization initiative. Our efforts remain focused on a small number of larger surgical hospital markets that have broader services than our core short-stay surgical focus. We are in advanced discussions on one key opportunity in a larger surgical hospital market and are working through customary diligence and transaction considerations. Our Board is actively engaged in this process, and we continue to target an announcement in mid-2026. As we continue to advance our portfolio optimization efforts, our focus remains on unlocking financial benefit to the company through reduced leverage and improved free cash flow conversion. Before turning the call back to Dave, I want to thank our teams across the organization as well as our physician partners for their focus and execution, particularly in navigating a dynamic operating environment. We remain confident in the durability and value of our model, the strength of our physician partnerships and our ability to execute against our strategy as we move through the remainder of the year. With that said, I will turn the call back to Dave. Dave? David Doherty: Thanks, Eric. Adjusted EBITDA for the quarter was $102 million. Compared to last year, results reflected the planned impact of payer mix and provider tax items discussed on our fourth quarter call and embedded in our 2026 outlook. Against that backdrop, overall performance came in modestly ahead of expectations and in line with our underlying assumptions for the year. Supply expense represented approximately 27.2% of net revenue during the quarter, while SWB expense was approximately 30.5% of revenue, both showing modest improvement year-over-year. Both professional and medical fees and G&A expenses were broadly in line with the prior year. Other operating expenses were 7.3% of revenue, higher year-over-year, reflecting the provider taxes we have previously discussed. While these items contributed to margin pressure during the quarter, they were fully contemplated in our internal expectations and full year outlook. Collectively, expense ratios were generally consistent with the prior year and our expectations. Same-facility case growth was 0.6%, with several specialties contributing above 2% growth, including vascular and orthopedics. These trends helped offset case deferrals driven by weather-related disruption in higher volume, low acuity markets early in the quarter, which we estimated affected growth by approximately 40 basis points. Working capital performance remained solid. Days sales outstanding were approximately 66 days, consistent with both the fourth quarter of 2025 and the first quarter of 2025. Interest expense increased year-over-year by approximately $7 million, reflecting higher rates following the expiration of our interest rate swap. This increase represented a meaningful cash headwind during the quarter, though it was partially offset by base rate reductions we executed on our credit facility in 2025 and by improved working capital performance. Operating cash flow for the quarter was approximately $12 million, an increase from $6 million from the prior year period, reflecting improved underlying performance consistent with typical first quarter seasonality and timing-related movements in working capital. Capital expenditures during the quarter included $9 million of maintenance-related spend, largely associated with equipment refreshes, information technology and routine facility investments necessary to support ongoing operations. In addition, we made $58 million of distributions to our physician partners, consistent with the historical patterns and our partnership-based model. Net leverage under our credit agreement was approximately 4.3x, which is consistent with the fourth quarter. GAAP net debt to adjusted EBITDA was approximately 5.1x. We remain focused on disciplined capital allocation and expect to continue to drive gradual deleveraging over time, supported by earnings growth and ongoing portfolio optimization. During the quarter, we deployed approximately $4 million on acquisitions. Based on internal development reporting, we estimate these acquisitions will contribute approximately $7 million of revenue in 2026. Regarding our share repurchase authorization, we did not repurchase shares during the quarter. As discussed previously, we will remain disciplined in the use of this program and we'll evaluate repurchases opportunistically based on valuation, liquidity and alternative uses of capital. We are reiterating our full year 2026 revenue guidance of $3.35 billion to $3.45 billion and adjusted EBITDA guidance of at least $530 million. For the second quarter, we expect revenue to represent 24% to 24.5% of the annual target and adjusted EBITDA to be 23% to 23.5%. We -- as you've heard from us today, we continue to manage the business prudently with a focus on enhancing execution and protecting and growing margins. While we know there is still work to be done as we continue to navigate near-term market dynamics, we believe our early efforts have laid solid groundwork for continued improvements in 2026. In addition to disciplined execution of our organic growth strategy and continuing to drive operational efficiencies, progress on M&A and our portfolio optimization initiative represents additional potential levers to accelerate our return to our long-term growth algorithm. We remain confident in our full year outlook and more broadly, our ability to return to consistent and sustainable growth, fueled by the strength of our unique short-stay surgical platform. With that, I will turn the call back over to the operator for questions. Operator? Operator: [Operator Instructions] We take the first question from the line of Brian Tanquilut from Jefferies. Brian Tanquilut: Congrats on the quarter. I know it was tough. So maybe I'll start with Justin, since you're new to the earnings call, just curious, I mean, you've been here about 4 months now. Anything you can share with us in terms of what you see -- what you've learned about the company, the operations and then what areas of opportunity you see in terms of like blocking and tackling or areas of further productivity and efficiency gains where you can make a difference in the operations. Justin Oppenheimer: Thank you for the very first question. Maybe what I'll do is just highlight 3 categories of early observations just to stay organized, maybe one around people second around our organization's positioning and three, our operational priorities. So the first, our people, I've spent nearly every week on the ground in our markets, spending time with our people and physician partners. And very impressed with the positive culture of Surgery Partners. It's palpable. Everyone is committed to their patients, to their physician partners to each other. We have talented people who want to have an impact and create value for our physician partners and our shareholders. And so I think just a level set summary on our people, and I think our culture is very strong. Initial talent assessment as our core operators are strong. There's always places to shore up, but that's to be expected. The second category just around our organization's positioning. One of the reasons I joined Surgery Partners is its positioning in the market. The tailwinds in this sector are real, and you can really see them on the ground. Patients want and appreciate the convenient high-value care that we're producing. Physicians want to bring their patients to our efficient facilities and partnered facilities and payers want the procedures done in the right setting. And so you can really see this on the ground. And what's more positive from my mindset is Surgery Partners is the only company at scale focused solely on the management of surgical facilities into the future. So this has been all confirming. To get to your question about operational priorities, with the cultural foundation and these industry tailwinds, the priority is really on execution. And I do believe there are a lot of embedded earnings with better execution, a real focus for our teams coming out of the first quarter is on organic growth and operational excellence. And those have been the central themes coming out of my first 100 days. Growth means physician recruiting and physician relationships, operational excellence means hardwiring cost management and really pulling the key levers that make surgical facilities. And so both our teams and you all hear this drumbeat of growth and operational excellence from me throughout the year. So maybe I'll end with that. Brian Tanquilut: That's very helpful. Maybe, Dave, just shifting gears quickly. As I look at the P&L, a lot of progress here on SWB, supplies cost and even profits. So just curious, I mean, how do we think about, number one, what those levers were pulled during the quarter? And second, the sustainability of these levels of cost essentially its operations level. J. Evans: Yes. Thanks, Brian. I may jump in here, and then I'll let Dave add a little color if he wants to. First of all, thank you for the comments on the quarter. Glad to have a solid start to the year. I think when we look at the cost controls and Justin has been jumping in with this, our team has been focused on cost management for a long time. But we came out of last fourth quarter with a real focus on driving some cost out of the business to improve margins on the Medicare business. You're seeing that show up in SWB and supply management. We do think there's still opportunities there. We've talked about -- if you look across the business the last 5 years, we have consistently improve margin over time. We do have some near-term headwinds. We've outlined in our slides, but we still feel really good about the team's ability to continue to take advantage of our scale in efficiency to drive those costs down as a percent of net revenue. So I don't know, Dave, if you have anything to add to that. But I mean I would say we believe Q1 with a lot of confidence in our ability to manage those costs and to find ways to drive improvement around margins. David Doherty: Yes. I'd just supplement that with a couple of things maybe to highlight where we're going to see some of this pressure coming through on those headwinds that we've cited. And we experienced a little bit inside the first quarter. So those are legitimate headwinds that we're seeing. Reestablishing the bonus is a big one that will start to show up in the second quarter, and you'll really start to see that more significant in the third quarter. So you'll see a little bit of pressure really more of a return to normal on that SWB line as a result of that. The provider tax pressure that we'll see will pop up in our other expenses, and that's a net new item for us. I think historically, that number has been around $200 million for the year. That number will be a little bit elevated this year as we overcome those new -- those new pressures that we've talked about before. Offsetting all of that is exactly what Eric was talking about and what we alluded to in our fourth quarter call as we adjust to the payer mix that we've talked about, cost containment is the other way that we're doing that in a strong partnership. That's what we're really excited about the early work that Justin has done. That we'll see kind of across the board supplies G&A and SWB improvement accelerating more in the second half of the year. Operator: We take the next question from the line of Matthew Gillmor from KeyBanc Capital Markets. Matthew Gillmor: I appreciate the comments on the 3 markets showing some recovery. I just wanted to see if there's any additional details to share, especially with respect to some of the payer mix dynamics that you called out last quarter. J. Evans: Yes. Thanks for the question, Matt. And Justin has actually been on the ground a lot as have I in those markets. What I would say is, look, the pressures have moderated, although there are certainly -- it sounds like we've bounced back completely. We've talked about a little bit. We've got new leadership teams in those markets. We've also got a just -- we've had a lot of time to sit down with our physician partners and focus on the fact that despite all their hard work and growth efforts, they didn't necessarily see it flow through. And so the focus on really, really coordinating closer and tighter to make sure we're competing appropriately for each and every commercial patient to maintain and grow that market share has been there. We've also done a lot of work around just timing of physician transitions, and that continues to be a focus area for us. I would say pretty pleased with the first quarter. Those 3 markets are in line with where we expected them to be making progress. And again, I will reiterate, while those 3 markets had pressure, they are really great markets for us overall. They continue to have really strong payer mix in general, despite the pressure. They also have really, really strong market positions. But yes, no, it's encouraging to see those get back online. Obviously, the fourth quarter was an unexpected kind of challenge in those 3 markets, and we're excited to kind of see the early progress. David Doherty: Great. And then following up on the comment you made about surgical robots and the contribution to total joints. Can you maybe just sort of paint the picture in terms of the growth in surgical robots over the past maybe a year or 2? And how many you think you can add to the portfolio over the next couple of years? J. Evans: Yes. Great question. I mean surgical robots really over the last 4 or 5 years have been an unlock for us and largely with physicians that might have already been partners are using our facility. And we did not feel comfortable bringing those higher acuity cases until they had the matching technology. We continue to see technology in general robotics, whether it be orthopedic robots in some cases, some of the new soft tissue robots that are coming out. The ability for us to make it easy for physicians to move patients safely and have the same level of technology they get in the traditional acute care setting has been a big unlock. And we still see opportunity there. Again, roughly 70% of our total facilities have the ability to do MSK. And a lot of those over time have added robots. We still have a ways to go there. I mean you see that even -- we're still seeing strong double-digit growth in total joints. I don't see that changing in the near future. There's still a lot of cases to transition. When you think about -- we talked a little bit in the opening comments about our de novo pipeline, again, very, very MSK heavy. I think you can expect to see robotic expansion there as well. So we think we're in the early innings. Over the last several years, I mean, we've added double-digit robots on average most every year, continue to find opportunities for that. And in some cases, as we're out recruiting, one of the things we have to be very focused on is how do we match up technology and capacity in a way that's attracted to physicians. And I think our team does that very, very well. Operator: We take the next question from the line of Ben Hendrix from RBC Capital Markets. Benjamin Hendrix: I just wanted to talk a little bit about the lower acuity deferrals weather-related that you saw in the first quarter, just how you're thinking about those getting back on the schedule. Should we expect some skewness in the second quarter in terms of the case growth versus rate balance? And how do you expect that mix to kind of track through the rest of the year? J. Evans: Ben, thanks for the question. So as far as the weather-related deferrals, obviously, I think you've heard all of our peers and everyone talk about January and February, certainly had some weather where it hit us tended to be in markets where we had a lot of kind of high volume, lower acuity procedures, think GI and eyes. About -- Dave mentioned in the script, about 40 basis points of impact on our growth. So instead of 60 basis points, we would have been at 1%, still not where we expect to be long term. As far as getting those cases back, some of them will probably come back over the course of the year. The reality of it is when you lose those cases for weather, you lose a day, it's hard. A lot of those really busy facilities. They're full most of the time. And so yes, we'll capture some of that, but I wouldn't think it's going to lead to any kind of real skewing. The good news is we've seen really strong growth within high acuity. So I don't know, Dave, if you would add anything to that. David Doherty: Yes. Maybe just one thing, just a reminder on the calculation for same-store rate, particularly on a business that has high-acuity business and lower acuity business. And it's not a return of those cases, but a return to normalcy sequentially between the first quarter and second quarter, we'll put a little bit of pressure on that rate just sequentially, if you're looking at net revenue per case. Benjamin Hendrix: And just to follow up. We're getting some incomings on the cash flow from operations print. Just any more detail you can provide on the working capital dynamics you're expecting? And how should we about timing of cash flow realization through the year? J. Evans: Yes, I'll let Dave dive into the details. I'd just say high level on free cash flow, we're very, very focused on driving improvement there. First quarter was an improvement over last year. This business produces a lot of cash. We've got to make sure we continue to convert that and grow with our business along the way we see lots of opportunities in working capital. I'll let Dave talk about a few of those that he's working on this year. David Doherty: Yes. Yes. So first off, just dissecting the first quarter cash flow from operations. We did have some benefit from working capital relatively marginal. I'll talk about that in just a quick second. But other factors that you can kind of look at lower below-the-line spend year-over-year as that number comes back down as we've been guiding to more in line with long-term historical perspective. And interest cost is interesting. There's 2 components of our corporate debt. As you might recall, last year, we did refinance our term loan and the revolver, bringing that down to very good interest rates of SOFR plus 250 basis points. That generated a net positive for us in the quarter of about $9 million. However, in the quarter, that was offset by pressure from unwinding the last quarter's benefit of the interest rate swap that we had last year and then marginally higher debt that we hold related to our refinancing of last year. So working capital, we will now kind of overcome that. Starting in the second quarter, you won't see that interest pressure from the interest rate swap termination. So that unlock should start to happen there. On a working capital basis, again, something I'm super excited about working with Justin and his team on is embedding greater working capital discipline at the facility level. Our days sales outstanding was 66 days in the quarter. That's the same as it was in the fourth quarter. We need to make that better as we progress throughout the course of the year, and we've got plans in place. That's the single largest lever that we have at the facility level in order to unlock that cash flow. Our physician partners are aligned with that because they get better distributions when that happens. So we do expect that, that unlock should happen over the course of the year. Operator: We take the next question from the line of Whitt Mao from Leerink Partners. . Benjamin Mayo: I may have missed this, but how much were the provider taxes in the quarter, both revenue and other operating expenses? David Doherty: Yes. Thanks, Liz, for the question. Yes. So as a reminder for the large group, we did talk about new headwinds that we're facing this year that fall into kind of 2 categories. In one state, the -- pretty much the only state where we have any exposure to Medicaid that was in across the board, 4% rate reduction that started to impact us in the fourth quarter of last year and did impact this year. That had a very small impact on revenue, almost inconsequential, but of course, that flows all the way down to the bottom line. And we also had provider taxes introduced in 2 new states, for which we have virtually no Medicaid business just for the fact that we carry the title hospital in those 2 markets. The combined pressure on the adjusted earnings line for those 2 things is estimated to be around $8 million for the full year, a little bit more front loaded because of that Medicaid rate pressure only affects 3 quarters of the year. So we're a little bit more than 25% of that number impacting our results, split between revenue and other operating expenses. Benjamin Mayo: Okay. So divide it by 4, so more than 2 in the quarter year-over-year was the pressure... David Doherty: That's fair. Benjamin Mayo: Yes. Okay. And my other question is just around like what we're seeing with a lot of the payers that continue to push this campaign around prior authorization. And I'm just wondering if you're seeing any changes with the plan's behavior? And then just also any comments you have around CMS' prior of demo with the Wiser model, whether or not that's having any impact one way or the other. J. Evans: Yes. Thanks, Whit. Appreciate the question. Look, we are certainly all on board and in favor of all the work the payers are talking about when all of the prior authorizations. We do see in markets one of the great things about our model is we are aligned with payers and saving the system money. So this idea of payers making it harder to get approval in the wrong setting of care is a great thing for us. We obviously fully supportive this push to reduce prior authorization burden going back to that 66 DSO days and all the other complexities we face, obviously, would be a welcome headwind -- or a welcome tailwind for cash flow. So we do see payers making real efforts there, and I do think that benefits our business moving forward just because of our cost position. With regard to the Wiser program, that has gone in place the Medicare demo. We have seen -- early on, there were some learnings there just to make sure, as you know, it add some more administrative, unfortunately, work on our side. But we feel like we're through understanding the program. We don't see any material impact. And we understand the goals of that program, which, again, I want to make sure patients are getting the care they need the right care in the right place. All of those efforts align perfectly with our mission, which is really to provide high-value care at the right setting, right care, right place, right price. And so we think those are going to be long-term tailwinds. We haven't seen tremendous impact there yet, although there are certainly markets where we are hearing that it's harder for physicians to get their patients into a hospital when there's an ASC option, and that's great. Operator: We take the next question from the line of Joanna Gajuk from Bank of America. Joanna Gajuk: So can you give us an update on the portfolio optimization and selling or, I guess, reducing exposure to your surgical hospitals? J. Evans: Sure, Joanna, thanks for the question. Obviously, it's something we've talked about for last several quarters is portfolio optimization. We remain committed to reviewing those opportunities within our portfolio to do several things. I just want to remind everyone what we're looking to accomplish with this. One is to make -- to actually delever faster, so finding a way to help us delever improving free cash flow conversion. Some of those places are a little bit more capital intensive than our core business. The third is really to improve our growth rate going forward. And then lastly, just simplify the business to our core short-stay strategy. So we do see opportunities there. It has been -- as you bring up here, the timing of this, it's been hard to predict. We do have a large market, we mentioned in my comments earlier that we are in the final stages of, we are still targeting midyear. But I'd be clear on that, that we're going to be very disciplined on making sure these are good assets, making sure we get the right value while we're committed to portfolio optimization. We want to do it in a way that's accretive to shareholders and make sure we accomplish those things that I talked about earlier. So there's one market that's in the very advanced stages there. We're targeting midyear. We'll see. Obviously, nothing is done until it's signed. And then there are a couple of other markets that we're going to be exploring and we'll give you the right -- we'll give you the updates as those are appropriate. Joanna Gajuk: And I guess with that, if I can, any update on your Investor Day that you were planning? I guess, is it still in the works? So are you waiting to complete more of these before you have this meeting? J. Evans: Yes. No, we're definitely still committed to doing an Investor Day. As we've said before, we are tying that to having something meaningful done within our portfolio optimization. We do plan to do that later this year. And so we're staying very closely tied to that timing. And as we have something to update you on there, we'll obviously do it quickly. Operator: We take the next question from the line of Andrew Mok from Barclays. Unknown Analyst: This is Thomas Walsh on for Andrew. You shared some of the deliberate actions taken to address payer mix pressures from the back half of 2025. How did commercial mix come in, in the quarter? And could you comment more broadly on the view of the strength of the consumer wallet and employment trends in your markets? J. Evans: Sure. So commercial came in about 50% for the first quarter, which was -- had a little pressure. If you look at sequentially, and we always have a little bit of pressure. Obviously, our population is aging. We've got to take commercial market share to stay even. But I feel pretty good about the moderation of that. We are seeing some -- again, some improvement signs there. It was not nearly the same pressure we saw in the fourth quarter, but also did not totally abate. So we're very, very focused on that. I think from your question around just the consumer wallet, it's interesting, the pressure we saw in cases in the first quarter relative to kind of lower acuity, higher volume rates was mainly around weather. I think it's a little early to say. I mean the economy still seems to be holding up relatively well. I'm not ready to say that we're seeing consumers make different decisions. But again, one of the hardest things in health care is to determine why patients don't walk into your doors. But we feel good about the start year for growth. When it comes to -- I think you're kind of alluding to some of the pressure, too, that's been on exchange -- the exchanges and kind of patients transitions there. We've mentioned before because of the nature of our business. We don't really have ERs. It's purely elective. We have not historically in most markets, seen a lot of those HIX patients. And so we haven't really felt a material pressure there, but we continue to watch that. The good news is we're not exposed to kind of payer mix weakening. The only thing that we would have to watch closely is there some kind of dampening or postponing of procedures. And I think it's too early to say we've seen any of that. We continue to believe have great confidence in our outlook for cases this year, which admittedly is a bit below our kind of long-term algorithm of 2% to 3%. Unknown Analyst: And following up, you provided second quarter revenue and EBITDA outlook, that appears slightly below your normal revenue seasonality and some below consensus estimates. Are there any timing elements in the second quarter to consider or for the remaining of the year? J. Evans: Yes. Thanks for the question. I mean there's always some timing elements. I would say -- let me start off by saying we were very confident in our full year guidance. The second quarter guide is just a prudent guide from where we sit today. We feel it's -- actually, if you look at the longer-term seasonality, it's relatively in line with what we've said historically. Certainly, we're entering Q2 with confidence in how the business is progressing this year. We feel good about our ability to meet or exceed our outlook. And I think you should just say that -- I should say it's early in the year. It's a prudent guidance for Q2. I don't know, Dave, if you would add anything. David Doherty: Yes, perhaps just a point of emphasis when you're doing a comparison year-over-year. In the second quarter of last year, we -- I'm sorry, in the third quarter of last year, we announced one of our initial portfolio optimization efforts that took a surgical hospital from a consolidated position down to a deconsolidated position. So that revenue would have been in the second quarter last year, not in the revenue for this year. Any other factor that's going to affect your year-over-year performance inside the second quarter are those headwinds that we've highlighted in our financial supplement. Operator: We take the next question from the line of Sarah James from Cantor Fitzgerald. Sarah James: I want to continue that topic a little bit more. Can you help us bridge the first half to the second half, the EBITDA ramp there? How much of that depends on payer mix recovery versus your cost actions? J. Evans: Yes. Thanks for the question, Sarah. I think look, if you want to -- if you're thinking about bridging the first half performance second half performance, we are not -- there's nothing embedded in there that's some dramatic improvement in our payer mix. So we do have -- again, we're seeing moderation so that is contemplated, but it's -- the second half does not depend on that. From a cost standpoint, we're always working on ways to more efficiently run the business. We do expect to continue to drive improvement on that throughout the year. But I think what I would say is from a seasonal adjustment standpoint that this is a relatively normal spread. And we feel really confident in our ability to deliver not only on Q2, but on the full year. David Doherty: Maybe if I just add just to that fair -- for your benefit. As a reminder, I mentioned this a little bit earlier on the call, but some of those headwinds that we've noted are more front-end loaded and the biggest one being that Medicaid cut, which will not affect our year-over-year performance in the fourth quarter. And the other thing is -- the other 2 things, Eric did mention the focus on cost containment in the industry as those pick up, and we kind of mature into those, those will have an impact inside the second half of the year. And then finally, that portfolio optimization work that we talked about a little bit earlier in my last question, the increase that comes from an earnings perspective, as we talked about last year, is mostly back half of the year weighted. So those are the key components that would drive better performance in the second half of the year, all relatively marginal. But when you add them together, that's how you get north of 50% of the earnings in the second half of the year which is normally the case. It's normal, yes. Operator: We take the next question from the line of A.J. Rice from UBS. Albert Rice: First question around the deal activity, you did $4 million in the quarter, you're saying you're still reiterating the $200 million spend. That's been an area of volatility the last 2 years, 2 years ago above expectations last year, well below. Can you comment on visibility on that deal spend, what the pipeline looks like, what the competitive landscape looks like? J. Evans: Sure, A.J. And it's a great question. Actually, the point you're bringing up is exactly why we don't have it in guidance this year, right? I think we've struggled the last several years with kind of over and under and the timing of M&A is fickle. We'll say, look, we feel good about our pipeline. We continue to see new things coming in. And certainly, it's a very fragmented industry. So big picture that $200 annual number is one that we are continuing to talk about long term. Obviously, off to a little bit of a modest start this year, but we do feel good about the pipeline. It's always a little bit fickle. I would remind everyone that anything we do on the M&A pipeline is pure upside to guidance. And so we do -- look, I expect we're going to make progress. I think last year, we ended up finishing not too far off A.J. I think we had up spending about $180 million had some great deals. We finished up with a big one in the fourth quarter. it was back-end weighted, obviously. And this year, it looks like we're going to end up being a little back-end weighted to given the first quarter. But look, I would say we're were the last kind of only stand-alone short-stay surgical operator. We're well positioned in the market that need -- that is going to continue to consolidate. We think we're well positioned to be one of those consolidators. And so like I don't -- long term, nothing's changed, but the timing is fickle and admittedly, it's been a slow start. Albert Rice: Okay. The other thing I was going to ask you about, you mentioned that you recruited roughly 140 physicians in the quarter. I usually think of the heavy recruiting periods more in the second half of the year, the back half of the year, but maybe not in your case. But just give us a perspective on that. Is that sort of normal course? Or are you -- is that a step up? And anything to call out on where their focus is in terms of any kind of surgical specialty or anything? J. Evans: Yes. Great question. I would say the 140 is kind of -- is basically in line with where we would expect in the first quarter. You're right, we are back-end loaded when it comes to recruitment. That's always the case. And so our physicians that we recruited in August through December of last year, obviously contributing into this year, that will be where you'll see that number raised in the back part of the year. Very focused still on MSK. We spend a lot of time on those higher acuity services and so the team is focused on driving growth there. I would say as a kind of a positive of those 140 doctors this year, they are, by doctor, higher net revenue in total than last year's recruiting class. So again, we very much closely watch kind of that performance. And we've got a very targeted list we're going after. The good news is with technology and with the inpatient only list coming off, that eligible list of proceduralists who can bring all their cases continues to grow. We continue to stay focused on going after the right docs. But definitely back-end loaded, I feel good about the early start. Operator: We take the next question from the line of William Spivack from TD Cowen. Will Spivack: Can you just talk about your expectations for the split between case growth and revenue per case growth as the year progresses? David Doherty: Yes. Thanks, William, for the question. So what we have implied in our guidance for the year continues to be approximately 3-plus percent same facility revenue growth, which is how we prefer to look at this. As you saw in the first quarter, we had just under 1% same-facility case growth. I think you'll skew more positively on the rate side as the year progresses. Of course, as I mentioned earlier, with the return to normalcy in the second quarter, that may be pressured a little bit. But -- so that -- I would consider that to be normal fluctuations. But you'll roughly get an equal contribution between both of those, perhaps skewing a little bit more towards the rate side. Will Spivack: Okay. Just as a follow-up, just to clarify a question from earlier on the other OpEx and provider taxes. So I think you said that was about a $2 million headwind maybe a little bit more to EBITDA in the quarter. So I think other OpEx was up about $15 million. Can you break out how much of that other OpEx increase was the provider tax side so we can kind of back into the revenue as well? J. Evans: Yes. So there's a lot of moving parts there because of all the different states and how they flow through. If you think about in total at a gross level, that OpEx expense related to provider taxes is about $11 million, with the biggest part of that being the new states that we've added. But we'll certainly -- we're happy to go through those details. Then I would also say that other operating expense, if you look at it over time, it does fluctuate quite a bit. This year, though, that change is driven by those provider tax changes, not only in existing states, but importantly and the biggest contributor this year as the new states that added those. And unfortunately, added those without any Medicaid benefit for us. We're obviously still going to be very active in advocacy on some of those areas. So I don't think those things are necessarily forever, if we can work on them, but that's where that's showing up, and that's roughly the numbers. David Doherty: Yes. Yes. I would say a large majority of that year-over-year increase is related to provider taxes, roughly a little bit less than half of that relates to the new provider taxes associated with those programs from which we get no benefit. The good news is those -- even though there may be a big number on provider or other operating expenses, they are in facilities that we don't have a significant ownership interest in some cases, they're relatively small. So that does move down to -- in line with kind of what our long-term growth algorithm, the way I answered with question earlier. So the adjusted earnings piece of that is going to be a little bit lower -- a lot lower, I should say. Operator: We take the next question from the line of Bill Sutherland from the Benchmark Company. William Sutherland: Just want to think about the de novos for a second. Can you give us a sense of kind of what's in the pipeline and maybe how they're sort of moving towards consolidation as a group? J. Evans: Bill, I appreciate the question. We are excited about the de novo pipeline. We have 5 expected to open later this year, 7 more in the pipeline, and we continue to see interest in that area. It is a place where we see the opportunity for accretive growth. Unfortunately, it takes a while to show up. As we've talked about, it takes 12 to 18 months to syndicate and 12 to 18 months to build, a year to get to cash flow breakeven, but the return on these is quite good. And so we're getting into that point where we've been doing this now for a couple of years, it will start becoming run rate. We are not yet to the point, Bill, where we're doing buy-ups in those facilities. We've got about half of those that are with health systems about half that are independent although that independent number, I think, is going to go up over time. In those independent centers, there will be an opportunity as they ramp, we expect to buy up and consolidate those centers. But we're not to that level of maturation, but we're super excited about where those are heading. And feel good about the opportunity to continue to have that be a nice lever to help meet our growth. Operator: Ladies and gentlemen, we take the last question from the line of Benjamin Rossi from JPMorgan. Benjamin Rossi: Just following up on your physician recruitment comment, in the language from the final OPPS rule, much of the logic stream from CMS' discussion about removing the inpatient-only list come from this concept of greater physician autonomy over where they treat their patient case load. Just taking a step back, when thinking about the changes that allow physicians to take a greater portion of their book of business into the outpatient setting, what do you consider to be some of the remaining obstacle they're paying points for doctors that prevent them from treating their entire caseload of Medicare and commercial patients in the outpatient setting at this point? J. Evans: Yes. Great question, Benjamin. I appreciate the question. So the inpatient only [indiscernible], we are very excited about the fact that the government has decided to put the decision back in the physician's hands. As you probably know, over the last 10 years, the government has spent a lot more money than it needed to because they were behind on getting Medicare caught up with what was happening with commercial patients. It happened with total joints. It certainly happened in vascular procedures. And so you I think you look at some of these things, and the government has seen repeatedly where commercial has moved faster and doctors that move patients safely based on technology in front of their list on the Medicare side. So we're always excited when the government leans in to prefer our setting because we know we create great value. We've got great outcomes. So continue to see that as a nice tailwind for the business going forward. Some of the obstacles that still remain. There are some states that haven't caught up with CMS in certain areas of vascular and EP. There are -- in cardiovascular. There are -- I think there's obviously always different parts of the country that physicians have. It's a little bit sometimes going to be a little bit of gill mentality. They have their own reasons they think patients can't be safely treated and certain side of care that we have to go through. Technology is sometimes a barrier. There are certain specialties where the technology, the robotics technology, for instance, is sometimes a limiting factor for ASCs to be able to afford the capital. We think there's real opportunity with payers and with some of the new technologies coming out to fix that issue. So There are some minor things left. I do think that a lot of those things continue to melt away as physicians experience our side of care, continue to have great outcomes with patients and higher acuity. And we're thrilled that no matter which administration has been in democratic, republic and they've supported the ASC space. But in particular, this administration with the removement of the inpatient-only list, that plays perfectly into our thesis, perfectly into what we're trying to deliver for the health care system, and we expect that, that's going to be a nice tailwind for us in the coming years. With that, I appreciate -- go ahead, sorry. Benjamin Rossi: No, sorry, I just wanted to say appreciate the color there. Just real quick then. Now 140 new additions on physician recruiting. Any comments on if these are replacing retirees and departures versus being truly additive? J. Evans: Yes. So I think in the first quarter, we feel really good about the additions we have had. Some of those would be replacing retiring some of them are pure net adds. I don't have that net number. We haven't released that. But I would say we're pretty happy with our start around this recruiting. We do see it as additive to the -- to our growth profile going forward. We're going to be closely watching that this year. Obviously, last year, we had a bit higher retirement rate than we've seen in the past, and we are adjusting to that to make sure we manage that very, very carefully. But super excited about kind of the early reads on recruitment this year. And again, I think as technology and as government regulation allows us to target additional procedures, it certainly continues to open up that world of recruits for us, and we're being very focused on that. So -- appreciate the question. I think that was our last question. I appreciate everyone's time today. And look, I'll let you enjoy the rest of the day. Thanks so much for your time. See you. Operator: Thank you. Ladies and gentlemen, with that, we conclude today's conference call of Surgery Partners. Thank you for your participation. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to Wolfspeed, Incorporated Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to [ Ed Goodwin ], Investor Relations. Please go ahead. Unknown Executive: Thank you, operator, and good afternoon, everyone. Welcome to Wolfspeed's Third Quarter Fiscal 2026 Conference Call. Today, Wolfspeed's Chief Executive Officer, Robert Feurle; and Chief Financial Officer, Gregor van Issum, will report on the results for the third quarter of fiscal year 2026. We would also encourage you to reference the slides that were published on our IR website today. Please note that we will be presenting non-GAAP financial results during today's call, which we believe provide useful information to our investors. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website, along with a historical summary of our other key metrics. Today's discussion includes forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially. With that, let me turn the call over to Robert. Robert Feurle: Thank you, and good afternoon, everyone. We appreciate you joining us today. We are pleased to see that our strategy is building meaningful momentum. The third quarter of fiscal 2026 delivered revenue of $150 million, in line with the midpoint of our guidance. We continue to make strong progress on the areas of our business within our control, addressing our capital structure, improving our operational efficiency and deepening engagement with customers across the broad set of end markets. As we move forward, we remain focused on 3 key strategic priorities: advancing technology leadership, demonstrating strict financial discipline and driving operational excellence. We have made strong progress in each of these areas this quarter. Starting with technology leadership. We continue to accelerate innovation across our silicon carbide platform to create a fundamental technology advantage. We are maintaining a disciplined approach to R&D, focusing our investments on high-return programs in the fastest-growing markets, and our efforts are delivering tangible results. This quarter we introduced the first commercially available 10-kilovolt silicon carbide power MOSFET and launched our next-generation TOLT portfolio. These innovations, particularly 10-kilovolt will help to cement Wolfspeed's position as a leader in high-voltage applications. At the same time, we are making progress on our materials capabilities. After shifting all device production to 200-millimeter at Mohawk Valley, our Durham facilities anchor our materials capabilities. The infrastructure, talent and floor space there today support at least our near-term growth ambitions, including commercial scale 300-millimeter development as the market evolves. Now turning to financial discipline. We took an important step this quarter to further optimize our capital structure through the refinancing of a portion of our first lien senior secured notes. This refinancing was supported by both new and existing institutional investors, demonstrating confidence in the long-term growth prospects of Wolfspeed and silicon carbide technology more broadly. Gregor will provide more on the specific financial implications shortly. This brings us to our third priority, driving operational excellence. We remain focused on differentiating through quality, customer responsiveness, time to market and supply chain resilience. We continue to refine our manufacturing processes to improve quality, cost and speed across everything we do. As mentioned last quarter, we completed the shutdown of 150-millimeter device production at Durham ahead of schedule. This creates optionality to redeploy that space. This approach allows us to increase output and improve our earnings potential by leveraging our current tooling base without the heavy incremental capital investment that would otherwise be required. The Durham campus can currently support all commercial materials activities as well as our emerging 300 millimeter platform. We are also leveraging AI within our own operations. Through our expanded partnership with Snowflake, we have unified factory, supply chain and enterprise data on a single platform, and we've deployed AI-driven tools that enable real-time insights and faster decision-making across the organization. Last quarter, we outlined the realignment of our go-to-market strategy around 4 verticals: auto, I&E, aerospace and defense and materials. During the quarter, we have sharpened our approach with the completion of recent leadership additions, including Daihui Yu as Regional President for Greater China; Stefan Steyerl as Vice President of Sales for EMEA, and, most recently, Yasuhisa Harita as Regional President for Asia Pacific. These leaders strengthen our ability to scale our go-to-market efforts globally, and we are encouraged by early traction we are seeing across each of these end markets. In auto, global EV adoption continues to grow, though more modestly in certain regions. Silicon carbide revenue doesn't necessarily scale in lockstep with vehicle sales due to design-in and qualification cycles. As the industry evolved, we believe that we needed to retool the approach as the market entered its next phase. Therefore, we strengthened our team with experienced automotive executives and launched a focused strategy targeting key global accounts with high electric adoption, positioning Wolfspeed to capture the next wave of design wins. Given the qualification cycles of EV programs, our success from these engagements are expected to translate into revenue over time. In I&E, momentum in AI data center applications continues to build. Our TOLT portfolio is purpose-built for AI rack power, and we are actively collaborating with AI ecosystem partners on the transition from 400-volt to 800-volt architectures. While it represents a moderate portion of our business today, we have continued to see strong sequential growth in AI applications with approximately 30% sequential growth from Q2 to Q3 and increasing customer engagement, which gives us confidence in the long-term trajectory of this opportunity. In aerospace and defense, growth is supported by electrification trends and increasing demand for secure domestic supply chains. In addition, we continue to expand our presence in emerging applications such as electric aviation. Our partnership with a leading manufacturer of electrical vertical takeoff and landing aircraft is a strong example of how our solutions enable higher efficiency and power density in the next-generation platforms. Finally, in our materials business, we continue to serve our 150-millimeter materials customers, including under the LTA framework. In addition, we are making progress with qualification on 300-millimeter materials. At the same time, we are engaging with AI ecosystem companies to explore how 300-millimeter substrates can address thermal, mechanical and electrical challenges in next-generation AI and high-performance computing packaging architectures. We continue to engage on 300-millimeter as a longer-term opportunity. I want to thank the team for their continued execution against our strategic priorities and for the excellent progress against our technological, operational and go-to-market objectives. With that, I will turn it over to Gregor. Gregor Issum: Thank you, Robert, and good afternoon, everyone. Before walking through our financials, I want to highlight the benefits of our recent refinancing. We took a significant step to strengthen our capital structure through the private placements of new convertible 1.5 lien senior secured notes, common stock and prefunded warrants, generating approximately $476 million of aggregate gross proceeds. We used the cash on hand to cover fees associated with the private placement, directing the full aggregate gross proceeds towards reducing our existing senior secured note balance by approximately 43%. These actions reduced total debt principal by approximately $97 million and are expected to lower the annual interest expense by approximately $62 million. Our first debt maturity remains in 2030, providing runway to execute our strategic plans as we continue to optimize our capital structure. Additionally, during the quarter we received CFIUS clearance that resulted in the release of equity to Renesas. CFIUS approval, coupled with our strategic refinancing, primarily drove the more than $400 million increase in the company's equity position during the quarter, significantly improving our debt-to-equity ratio. Now I will turn to our third quarter results. We generated $150 million in total revenue for the quarter, in line with the midpoint of our guidance. Power revenue was approximately $100 million, of which 90% was from our Mohawk Valley 200-millimeter device fab. The remaining 10% of power device revenue was last time buys of our 150-millimeter device inventory. Materials revenue was approximately $50 million, flat sequentially. Next, our gross margin for the third quarter was negative 20.6%, representing a double-digit percentage point improvement compared to the last quarter, partially driven by a more favorable product mix as well as beneficial impact from digesting the fresh start accounting inventory in the last quarter. The impact of underutilization across our manufacturing footprint was approximately $46 million in Q3. Underutilization continues to be the primary driver of our gross margin profile and improving factory utilization remains one of the most important levers to drive margin expansion going forward. One point worth highlighting is as our operation performance continue to improve, we are producing the same revenue with less capacity consumed. These continuous efforts position us to keep expanding our earnings potential per dollar of invested capital even if it makes the reported underutilization look larger. Non-GAAP operating expenses totaled $61 million in the quarter. With headcount reduction actions largely complete, we expect to maintain approximately this level of OpEx moving into the next quarter. Adjusted EBITDA for the quarter was negative $62 million. Now turning to cash flow, which remains one of our top priorities. Operating cash flow for Q3 was negative $84 million, driven by improvement in precious metal reclamation, interest income and continued working capital improvements. Capital expenditures were approximately $5 million on a net base in the third quarter, reflecting $38 million of gross CapEx, mostly coming from previous commitments we have made. These investments were nearly entirely offset by $33 million of incentive receipts from the New York State related to Mohawk Valley. We ended the quarter with approximately $1.2 billion in cash and short-term investments, allowing us to continue to pursue our strategic priorities with confidence. Whilst we've taken meaningful steps to strengthen our balance sheet, we recognize there is more work ahead. Looking ahead, while near-term demand in automotive remains uncertain, we continue to see encouraging momentum in high-growth areas such as AI data centers and other I&E applications. These markets represent meaningful long-term opportunities, though it will take time for them to scale and offset current softness in automotive. During the fourth quarter of fiscal year '26, we are targeting revenues between $140 million and $160 million. We expect non-GAAP gross margin to remain negative in the fourth quarter and OpEx to be roughly flat quarter-over-quarter. On the long term, our objective remains clear: to return to above-market revenue growth driven by a more diversified customer base and to achieve EBITDA and cash flow profitability. Robert Feurle: Thank you, Gregor. This quarter reflects continued progress against our 3 strategic priorities: advancing technology leadership, demonstrating strict financial discipline and driving operational excellence. The actions we have taken this quarter, strengthening our balance sheet, launching industry-leading products, deepening our leadership team in the region with a focus on customer centricity and enhancing our operational capabilities are all directed towards one objective, positioning Wolfspeed to capture growth and expand earnings power as the market environment improves. With that, operator, we are now ready to take questions. Operator: [Operator Instructions] Your first question comes from the line of Christopher Rolland with Susquehanna. Christopher Rolland: I guess my first one is going to be around AI and your opportunities to address AI very specifically. If you could talk about perhaps the AI power tree, what's available in your view for silicon carbide, what applications you might address earliest, whether it might be PSUs or power delivery boards or solid-state transformers or the 300-millimeter kind of future applications that you spoke about in your prepared remarks. If you could just talk about what you think actually comes to revenue first and what might be meaningful for Wolfspeed, that would be great. Robert Feurle: Thank you. So that's a great question. Let me quickly start kind of answering, you discuss 2 things. The one is on the device side here. It's everything which is, I call it, 650 volt up, right? Then if you look at from an application perspective, these are the power supplies in the data center, the traditional new customers around that space. And this is, of course, battery backup storage, kind of powering also the air conditioning in the data centers consuming silicon carbide. And then outside of the data center, more of the transmission piece where pretty much you will see the future adoption of solid state transformers, right? So this is really a significant driver of future silicon carbide demand. And we are engaged, I would say, the whole chain from energy generation to up to the kind of 650 volt level. Below that, that's then a different wide bandgap technology kind of taking that space. But up to that space, I think we are engaged with everybody in the ecosystem. Lower voltages are primarily, I'll call it, component and discrete approaches and the higher voltage are modules. So the qualification times are also a little bit different between modules and improving reliability of a solid-state transformer versus pretty much selling components to the power supply. So the one which is probably ramping faster is more the power supply stuff while then solid-state transformers, I think, will kick in kind of over time. And second piece to the second answer to your question is around 300-millimeter. So again, we started these, we call it beyond power activities, and we see quite some really good momentum here with a lot of ecosystem partners on using silicon carbide's unique property around thermals and mechanicals in various aspects, but all of them come around packaging, co-packaging, interposers, heat things in that kind of application area. I think people are looking like, wow, there is really unique properties being super conductive while also being insulating, and I think here, the discussions have started here. This is early discussions. Also as we've indicated, there's nothing where we see revenue short term. But we believe here the technology has certainly a right to play. Christopher Rolland: Excellent. Maybe as a follow-up, I think the legacy for Wolf for silicon carbide has primarily been automotive. I was wondering if you could speak to how the end markets might change under your management, particularly between automotive, industrial and AI. And AI, in particular, might you be able to offer maybe an aspirational AI target for revenue at some point in the future? Robert Feurle: No, absolutely, very good question here. Look, when I came in, I mean the company was organized around products. There was one gentleman running modules, one gentleman running discrete. And so what I said is we got to change this to be application-oriented because, look, at the end of the day the focus was all around EVs. And then we did an organizational change and said let's move to an application-focused go-to-market approach. And so the business lines are now pretty much we've got an automotive business line, the gentleman from Onsemi running that business line. And there's an I&E business line and that I&E business line is kind of with some substructures around renewables, AI data center and then generally drives business, which is pretty much all of what we call industrial here. And then we have a segment around aerospace and defense, and then there's the materials business. And this is kind of how we view kind of the go-to-market to really support a more differentiated view of how do we approach customers, but also how do we service the customers because the design cycles are different, the requirements are different and the dynamics are certainly different. I think that's something which we really see that organizational change which I put in place last year is really starting to pay off to get that focus on it. And as you've probably seen here, previous quarter, Q1 to Q2, we grew 50% on the data center side. This quarter, Q2 to Q3, we grew 30%. So it's really growing here. Again, it's not a huge size of revenue yet, but it's certainly the growth shows putting the focus on it. We got the product portfolio, yes, and we are making really, really good progress. Operator: Your next question comes from the line of Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Robert, a question for you, just maybe a little bit on the go-to-market strategy. Some of your competitors, I mean, everybody is talking of the use in AI in terms of 800 voltage. But utilization at some of the competitors has actually come down, which tells me that auto is still the main driver. So I'm just -- I guess my question for you is, as you think about your go-to-market strategy on the product level for AI applications and maybe also for solid-state transformers, how much absorption do you think you can -- what type of utilization do you think you can get to in Mohawk Valley? And then I have a follow-up question. Robert Feurle: Yes. Look, I mean, at the end of day, first of all, we're not disengaging from automotive, yes. Let's make this very clear here. Automotive is a very, very important part of our business. And I think, look, the cars are becoming electric and the cars are becoming connected. So we will clearly focus on, I call it, technology leadership around really penetrating these, let's say, high-end sockets. And quite frankly speaking, the customers are really appreciating kind of what we're doing on the technology side. And you will see here some announcement at PCIM. PCIM is the upcoming trade show on the power side here, beginning of June here, and you will see some announcement around the technology side coming out on that trade show. Then on your question on AI data center, again, this is being driven out of our I&E business line. And again, it really represents a significant growth for us in a sense that really diversifying Wolfspeed away from pretty much being a pure-play auto company and really diversifying the revenue. And then within I&E, like I already mentioned, right, it goes pretty much everything from 650 volts upwards. So a 650-volt discrete, it's pretty much 1,200-volt discrete. And then kind of in the 2.3 kilowatt, 3.3 kilowatts, you look into modules. And these are pretty much modules which are used for the solid-state transformers. And as these transitions in this transformer space happens, I think we are very, very well positioned here with the customers in this ecosystem. And then, of course, we see demand picking up and that then also will increase the loading effectively in our Mohawk Valley. I mean the good news is, quite frankly speaking, that the restructuring on our, let's say, device side is done. We talked about we phased out 6-inch. We pretty much exited our Durham facility. This means we have completely made the move over to Mohawk Valley, which means also it's the ability to scale, yes, because a lot of -- if I look at the competition here, a lot of them are still on 6-inch. A lot of them are really trailing in that conversion. And I think this puts us in a unique position that we can also tell the customer, look, there is no PCN. We don't have to move the product anywhere to go through as kind of the demand picks up on these applications. Jonathan Dorsheimer: Great. And then maybe as a follow-up for Gregor, just it looks like you've been able to restructure a little bit more than half of the L1. I'm just curious what your intentions are in terms of that. Can you -- is the goal to -- and I may have missed this in the remarks, but get that completely restructured before the June time frame or July time frame? Gregor Issum: Yes. Obviously, you saw that we took a first big step by taking out 43% of the first lien debt. That is the most expensive debt we have. It's around 14% interest rate. And there will be a further step up to 16%. So clearly this is the prime focus to address. We felt it was very important to take this first step, and we are very pleased with the signal of strength with new long holders coming in and even having a part of equity at a premium be part of this mix of taking a part of the L1 out. The size of the L1 was, however, such that doing this in one go would have been too costly, particularly because we expected that the stock would rerate after taking a first step and showing the signal of strength that we have disability. We think we see some of that over the last couple of weeks. And what we're doing right now is evaluating which exact steps we're going to take and when. We are not in a rush because of the maturities in 2030, but obviously I'm keen to do something. We're not going to put a specific time line against that. That is not necessary to put that pressure on ourselves. We will take the best possible approach when the market conditions are optimal to get the best cost of capital for the company. Operator: There are no further questions at this time. I will now turn the call back to Robert for closing remarks. Robert Feurle: All right. Thank you also for joining us on the call, and thank you for the very constructive questions. Gregor Issum: Thank you. Bye-bye. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham. Graham Stanley: Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the first quarter of 2026. With me on today's call are Fred Lowery, Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that is forward-looking. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading and they're also in our quarterly earnings presentation posted on the Investor Relations website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 5, 2026. And Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q&A session, please limit yourself to a single question so that we can accommodate questions from as many of you as possible. And with that, I'd like to turn the call over to Fred Lowery. Frederick Lowery: Thank you, Graham, and good morning, everyone, and thank you for joining us today. I'm honored to lead Henry Schein as a CEO, and I look forward to building on the strong foundation and proud heritage that define this company. While at the same time, taking a fresh look at people, process and technology to advance the culture of continuous improvement. I'm also pleased to report our strong financial results for the first quarter. But before we turn to these I want to highlight some key observations that I've had as I progressed through my 100-day plan. First, I am impressed by the strong competitive advantages Henry Schein has built over the years. Globally, we successfully serve hundreds of thousands of independent private practices with responsive, consistent overnight delivery. In the U.S., we are the primary distributor for most national DSOs a position that reflects years of being a trusted and reliable partner. Our reach provides us with supply chain flexibility and sourcing advantages as well as access to a broad global customer base for our suppliers. Secondly, pursuant to our BOLD+1 strategy, we deliver an extensive integrated offering, which includes a broad portfolio of quality corporate brands and specialty products, software, equipment products, technical services and business solutions, this differentiated offering makes us the platform of choice for office-based practitioners. And third, our ability to deliver an excellent customer experience really sets us apart. Our field sales consultants, they really know their customers deeply and are genuinely and invested in their success, and they're supported by our equipment service technicians. And when you put that together, we provide a service that is difficult to replicate. When you put all these things together, our technology, our products, our value-added services, and our people, we create a significant competitive advantage, which we will continue to enhance over time. So over the last 2 months, I've immersed myself in the business, and I've spoken with lots of customers and suppliers and employees and a few things that I've heard. One thing is clear from customers, the dental market remains healthy. with demand continuing to outpace supply. Therefore, efficiency and workflow optimization are important for our customers to be able to see more patients. What's encouraging is how well our strategy aligns with our customers' needs through the development of open architecture integrated solutions that create a platform allowing our customers to deliver better care while running more productive and more profitable practices. Turning to the medical market. procedures continue to shift to nonacute care settings, which also aligns well with our unique capabilities to supply the right quantities to all nonacute settings, including ambulatory surgical centers, community health centers, private practices and home solutions. I also received feedback that our dental and medical supplier partnerships remain another source of competitive differentiation. And I'm committed to providing a broad product offering to our customers supported by strong national brands as well as through our own value-added owned brand products. Suppliers recognize that our deep customer access and trusted relationships make us the partner of choice for driving growth in their businesses. Through exclusive and targeted promotional programs, we create value for suppliers and customers alike. Now while it's still pretty early days for me, I intend to sharpen our operational execution, build a stronger performance culture and create a leaner, more agile Henry Schein, allowing us to respond faster to customer needs and translate our market strength into accelerated growth and improve financial results. As I continue to dive deeper into the business, I expect to identify opportunities to drive growth, to streamline processes and to enhance execution. I'd like to highlight a couple of examples for you today. The first is to enhance the cadence of new products and service offerings. This includes AI solutions, which are transforming the industry rapidly. And Henry Schein has a tremendous opportunity to develop further value-enhancing solutions. I think you're starting to see this with some of the recent product launches from Henry Schein One. The second is to align our commercial efforts to accelerate overall growth across each of our businesses. This is contemplated in accelerating the leverage priority of our BOLD+1 strategy, and we've already started. It's clear that Henry Schein has great assets with a differentiated platform to serve as a trusted partner to health care practitioners worldwide. As we look ahead, I'm excited by the significant opportunities to accelerate growth through the use of technology, improved operational excellence and becoming a more agile company. Now let's turn to the first quarter results. I'm pleased with our strong first quarter results that reflect continuing momentum from the second half of last year as we grow market share and expand gross margins. Sales strengthened in the U.S. dental and global technology businesses overcame softness in the medical business. The dental markets remain stable and healthy, and we are gaining market share. While merchandise prices have increased, particularly in the U.S., procedure volumes are holding steady. We anticipate further merchandise price increases in the second quarter as a consequence of higher oil prices. Dental practices and, in particular, DSOs are continuing to invest in equipment, and we are seeing DSOs gaining market share in the overall dental market. The nonacute care U.S. medical market remains strong, and our Home Solutions business continues to grow well. Our medical business had good underlying growth. However, the quarter was impacted by a decline in demand for point-of-care diagnostic test products related to respiratory illness, resulting from a light flu season. Our specialty products underlying markets remain healthy, with European volumes ahead of the U.S. Demand for premium implants is being driven by strong clinical engagement, most recently demonstrated at our BioHorizons Global Symposium last month where over 40 internationally recognized speakers presented the latest innovations in tissue regeneration, digital workflows and implant-based tooth replacement therapies to more than 1,100 clinicians from around the world. Growth in value implants driven by our S.I.N. and biotech dental businesses continues to outpace premium implants. Our Global Technology business again posted really good growth, reflecting continued demand for our cloud-based software technology solutions. The development pipeline of AI solutions has increased, and these are mostly integrated into our global suite of practice management software solutions. Last week, I had the opportunity to attend our Thrive Live event in Las Vegas which brings together dental professionals to get really hands-on training and education and to showcase our range of equipment and software solutions. This year, we had over 1,000 attendees and we launched our next-generation AI clinical workflow at the event, which generated significant excitement. The broad level of interest in our AI solutions was a clear signal that our customers are ready to embrace these tools and that Henry Schein is well positioned to lead that transition. Now let me give you a few highlights into the initiatives that advanced our strategic plan during the quarter. As I mentioned, our overall operating margin expanded, and we stabilized margins compared to a year ago. Our high-growth, high-margin businesses are now approaching 50% of our total operating income, and we remain on track to exceed our goal of 50% by the end of our strategic planning cycle in 2027. We are just beginning to unlock value from our value creation initiatives. These not only provide a clear path to both cost efficiencies and margin expansion, but I expect them to fuel our growth and further support an enhanced customer experience. Execution is really well underway. Let me give you a couple of examples. We've appointed an outsourced partner to centralize, select back-office functions and we expect to see benefits beginning later this year. We continue to strategically buy out minority partners to unlock integration opportunities across the specialty products business. We are starting to generate additional savings from our indirect procurement processes by leveraging our scale advantage. And finally, we are implementing gross profit initiatives, including value pricing and enhanced growth of our corporate brands. Therefore, I am committing to the company's goal of achieving greater than $200 million of annual operating income improvement within the next few years with $125 million run rate by the end of 2026. These initiatives, along with continued execution of our strategic plan will contribute to us achieving high single-digit to low double-digit earnings growth in the coming years. We have also successfully rolled out our global e-commerce platform, henryschein.com to our Canadian and U.S. laboratory customers. We are well advanced in implementation across the U.S. with over 80% of our U.S. dental e-commerce sales now transacted over henryschein.com. We expect to complete the U.S. rollout by the end of August and to extend the platform to new customers after we plan to shift our focus to the broader international deployment. Over the past several weeks, I have worked through the details of our financial plan. Our growth outlook, combined with the progress made on value creation initiatives and a strong start to the year reinforces my confidence and my commitment that we will deliver on our 2026 financial guidance. Looking ahead, I plan to continue learning more about the business and identify opportunities to accelerate our momentum. I look forward to sharing updates in our next calls. Now with that, I'll turn the call over to Ron to review in more detail our first quarter results. Ron? Ronald South: Thank you, Fred, and good morning, everyone. Today, I will review the financial highlights for the quarter. Starting with our first quarter sales results. Global sales were $3.4 billion, with sales growth of 6.3% compared to the first quarter of 2025. This reflects local currency internal sales growth of 2.5%, a 3.1% increase resulting from foreign currency exchange and 0.7% sales growth from acquisitions. Our GAAP operating margin for the first quarter of 2026 was 5.41%, a decrease of 12 basis points compared to the prior year GAAP operating margin. On a non-GAAP basis, the operating margin for the first quarter was 7.53%, up 28 basis points compared to the prior year, driven by gross margin expansion within the global distribution and global technology products groups as well as business mix. First quarter 2026 GAAP net income was $107 million or $0.92 per diluted share. This compares with prior year GAAP net income of $110 million or $0.88 per diluted share. Our first quarter 2026 non-GAAP net income was $153 million or $1.32 per diluted share. This compares to prior year non-GAAP net income of $143 million or $1.15 per diluted share. Foreign currency exchange favorably impacted our first quarter diluted EPS by approximately $0.03 versus the prior year. Adjusted EBITDA for the first quarter of 2026 was $289 million compared to first quarter 2025 adjusted EBITDA of $259 million or 11.6% growth. During the first quarter, we successfully completed a transaction that provides us a controlling interest in S.I.N. 360, the U.S. distributor of S.I.N. Brazil's value implant systems. We are excited about this transaction as it provides us with greater control over our U.S. implant product portfolio, especially in the faster-growing value implant market. and allows us to unlock growth and back-office integration efficiencies across these businesses. As we had previously held a noncontrolling interest at S.I.N. 360, the transaction did result in a remeasurement gain of $11 million this quarter or approximately $0.07 of diluted earnings per share. We will continue to evaluate strategic opportunities to further integrate some of our joint ventures to unlock growth and efficiencies. Some of these opportunities may result in additional reregimen gains. However, further gains from such transactions, if any, are not expected to be recognized until the second half of 2026. Turning to our sales results. The components of sales growth for the first quarter are included in Exhibit A in this morning's earnings release. We will now walk through key sales drivers for each reporting segment. Starting with our global distribution and value-added services group, whose sales grew by 6.1%, reflecting continuing strong momentum in the U.S. Looking at the components of that growth, U.S. dental merchandise sales grew 5.6% or 4.1% internal sales growth, reflecting ongoing acceleration of sales growth. Data from our Henry Schein One eClaims activity indicated signs of modest procedure growth in the U.S., and we believe that in general, patient traffic remained stable to leaning positively in the quarter. Our sales volume growth resulted in market share gains and prices increased further with the introduction of some additional price increases in January. U.S. dental equipment sales growth of 3.4% was driven by sales of traditional equipment as practitioners, particularly DSOs, remain confident in investing in their dental practices, and we expect this solid growth to continue. U.S. equipment growth was supported by some exclusive supplier initiated opportunities as our suppliers continue to view Henry Schein as their best opportunity to expand market share. This helped drive sales in the traditional and digital imaging categories. Overall, digital equipment sales were essentially flat due to continued softness in sales of Interroll scanners and treat printers. This was driven by lower average selling prices from new market entrants despite higher sales volume. U.S. medical distribution sales grew 1.3% or 1.2% internal sales growth. with strong growth in Home Solutions and dialysis, partially offset by lower sales of point-of-care diagnostic test products related to respiratory illness as a result of the light flu season. This category represents roughly 15% to 20% of our medical business. Excluding the impact of the diagnostic test products category, sales growth would have been in the mid-single-digit range. International dental merchandise sales grew 12.5% or 1.8% LCI sales growth driven by sales growth in the U.K., Italy and Brazil. International dental equipment sales grew 13.4% or 3.6% LCI sales growth, with solid growth in traditional equipment. Equipment sales growth was especially good in Germany, U.K. Canada, Australia and New Zealand. Finally, global value-added services sales grew 10.6% or 7.8% LCI sales growth. Turning to the Global Specialty Products Group, sales grew 8.1% or 1.7% LCI sales growth. Our implant sales were driven by high single-digit growth in value implant systems. The sales mix of value to premium implants also resulted in a lower gross margin compared to the prior year. We expect to achieve improved growth in the Specialty Products Group going forward this year. Our Global Technology Group continued to post solid results, with total sales growth of 7.0% or 6.9% LCI sales growth. In the U.S., we had strong revenue growth in our Dentrix Ascend practice management software business. Internationally, sales growth was driven by our Dentally cloud-based practice management software product. The number of cloud-based customers increased by roughly 25% year-over-year, primarily from new accounts, and we now have more than 13,000 Dentrix Ascend and Dentale subscribers. Regarding our restructuring program, the company recorded restructuring expenses of $12 million or $0.07 per diluted share during the first quarter of 2026 as we advance our value creation initiatives. With reference to capital deployment, during the first quarter of 2026, the company repurchased approximately 1.6 million shares of common stock at an average price of $77.64 per share for a total of $125 million. At the end of the quarter, we had approximately $655 million authorized and available for future stock repurchases. Turning to cash flow. Operating cash flow was negative $97 million in the first quarter of 2026 due to a normal seasonal decrease in accounts payable and accrued expenses from the year-end. Cash flow is typically lower in the first quarter than the rest of the year, and we still expect operating cash flow to exceed net income for the full year. Turning to our 2026 financial guidance. At this time, we are not able to provide about unreasonable effort and estimate of restructuring costs related to ongoing value creation initiatives. Therefore, we are not providing GAAP guidance. Our 2026 guidance is for current continuing operations and does not include the impact of restructuring expenses and related costs and other items described in our press release. Guidance assumes stable dental and medical end markets during the year that foreign currency exchange rates will remain generally consistent with current levels and that the effects of changes in tariffs and higher oil prices can be mitigated. We have implemented a number of measures designed to offset the potential financial impact of rising oil prices at this time, which affect both freight costs and cost pricing. Our 2026 full year guidance remains unchanged. Total sales growth is expected to be approximately 3% to 5% over 2025. We expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5.23 to $5.37. We are assuming an estimated non-GAAP effective tax rate of approximately 24%. We expect benefits from value creation programs to be weighted towards the second half of the year. Adjusted EBITDA is expected to grow in the mid-single digits versus 2025 adjusted EBITDA of $1.1 billion. and we continue to expect remeasurement gains recognized in 2026 to be less than recognized in 2025. So with that overview of our business and recent financial results, we're ready to take questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: I've got a couple, and I'll just ask them both upfront or somewhat connected. When I look across first quarter performance, I guess, what really stood out to me was that gross margin result, a really nice start to the year. Can you unpack maybe a bit some of the drivers there? Is that a function of value creation benefits that we can expect to persist through the year? You're already seeing some of that? And then how do we think about this result in the context of these rising shipping costs that are just better obviously happening just with where oil has moved. And Ron, just if you could maybe unpack some of those comments you made near the end of your prepared remarks on mitigation actions, any rules of thumb we should have in mind on what oil above $100 a barrel or a one kind of barrel means for your margin profile, just so we can have a little bit of an idea on sensitivity to this metric just in, I guess, last thing here, too. Just what's -- if you can help us what's included in guidance around what you're assuming for oil. Ronald South: Sure, Jason. I think on the -- with reference to the gross margin, yes, we are pleased with the improvements that we were able to get in gross margin the year-over-year is about 25 basis points and then the gross -- the total gross margin improvement versus the fourth quarter is about 86 basis points. So you are seeing a little bit -- some of the early benefits perhaps of the gross profit initiative from value creation to more -- we have, I would say, a slightly more dynamic pricing environment that's allowing us to react in a more timely basis. But it also reflects, I believe, the fact that our own brand products continue to -- the growth of those products continues to outpace the rest of the portfolio. where we do get better margins with those products as well. So we're seeing some mix benefit. We're seeing some strategic benefit and just, I think, a greater consciousness of how well we can work with our suppliers to assure that we get competitive costs and improve our margins accordingly. With reference to the price of crude oil and what's happening in terms of some of the disruption in the energy industry, I mean, it's an area where we're watching closely. It does impact a little bit some of the freight costs coming in. We are working closely with our customers. We're not just defaulting to increasing prices or looking at fuel surcharges but there are some things that -- some measures we're trying to take to try to protect the margins a little bit as our -- as we see those costs go up. Nothing that we're seeing out there yet that we believe is creating a significant issue. We have some plans in place that we could initiate if we think we need to. But right now, like we're seeing in our guidance, we feel like based on the current situation, we are able to mitigate any related cost increases. Jason Bednar: Okay. And sorry, just to clarify, your guidance assumes oil stays where it is or you have some error bars around where oil currently is? Ronald South: It assumes that we can mitigate rising. Obviously, there's a tipping point out there, right? But it assumes that we can mitigate the changes in the cost of oil. Operator: Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I was wondering about how to think about the cadence of specialty growth over the course of the year? Just in terms of anything to call out seasonality-wise, or some of those pricing changes, Ron, that you mentioned? And then, Fred, one for you. Maybe can you talk about some of the biggest sort of positives that confirmed your sort of expectations coming into Henry Schein and then maybe some of your biggest surprises? Ronald South: Certainly. Elizabeth, I'll start, and then I'll have Fred answer your second question. I think that -- on the specialty side, the results in the quarter were in line with our expectations. There was some timing of some buys from customers that we knew would impact Q1 somewhat. But we do expect improved growth in specialty going forward in terms of what the -- what we saw in the first quarter. I think that the products there, like we still remain very positive on what we're seeing on the value implant side and the high single-digit growth we're seeing in the sales of value implants. I think gives us the confidence that we can continue to improve that growth going forward. Fred, I'll let you to answer the second one. Frederick Lowery: Yes. Elizabeth, great to hear you. Thanks for the question. When I just take a step back and think about the positives, the biggest positive to me, and I sort of said it in the script, has been the confirmation that the set of assets that Henry Schein owns that we own are incredibly important to customers. And the ecosystem that we've built here through these assets really do help customers improve their practices. And that has been confirmed from the many custom business that I've been on. And I think that's incredibly exciting. I would say it's also an opportunity because I don't think it has been exploited to the extent that we can. I think we can do a better job of improving our customer value proposition so that our customers really understand what we can do for them. and that it's not just about us helping them save costs but about helping them have more profitable practices by driving productivity and helping them with their own pricing and seeing more patients. So that's quite exciting. I would say surprises, I don't know that I would characterize anything as a major surprise, but maybe things that I was quite encouraged by would be as it relates to our team Schein members, it's been a very consistent feedback, as I've talked to many, many different employees. The feedback has been 3 things. One, we love the company. We love the culture, the strong culture in the company; two, we love Stan, and we hate to see Stan go. But three, we know that we need to change in order to be better. And that has been like a really great starting point to see people leaning in and excited about the future of the company. I would say from a customer standpoint, without a doubt, every customer visit I've been on, customers enjoy doing business with Henry Schein, and they want to do more business with Henry Schein. And they think that we can help them more and they're depending on us to help them more, which really plays into our opportunity set as we develop new products and services that support them managing and running more profitable and higher growth practices. And then the third will be with our suppliers. Without a doubt, I talk to all of our top suppliers and they all see Henry Schein as a great place for them to grow their business. So those will be the things that I would say I was -- I've been most encouraged by and excited. It gives me some confidence in the future. I'm excited about a bright future for the company. Operator: Our next question comes from the line of Jeff Johnson with Baird. Jeffrey Johnson: Welcome, Fred. So I know it's only been a couple of months in the job now, and I'm sure you're going to get a lot of focus today on the 3-year profitability improvement plan, good to see that you're reiterating that $125 million run rate by the end of this year. But I'd love to hear your thoughts on how Schein gets back maybe to delivering stronger earnings growth in the absence of these one-off kind of restructurings we've been seeing every couple of few years out of the company. How do you think about building and investing in the muscle memory of this company so we can get back to kind of that upper single, low double-digit EPS growth longer term without having to go through kind of these bigger programs every couple few years. Frederick Lowery: Jeff, thank you for the question. And I'd first start with just characterizing the value creation not as just a one-off. We're building real capability that will stay with us over a long period of time. For example, our gross profit programs are -- will be ongoing. So we will be better at value pricing in the future than we are today. We have new techniques and new capabilities there that will stay with us. So I think you'll see that continue over time. We'll continue to benefit from that. The same with the programs that we're focused on driving our own brand products or our corporate brand products. So those things will continue over time. So I would start with that. Secondly, my focus is on developing a continuous improvement process here where we don't have an episodic approach to taking cost out, but where we continue to streamline our processes really for the benefit of our customers, streamlining our process so we become easier to do business with, so we support our customers better, so we grow our business faster. And as we do that, we will actually take some cost out and become more productive. So those are the 2 ways that I think about the question. And then as we do take costs out of the business, over time, we'll be able to reinvest into areas that are going to drive greater growth and thinking about the Henry Schein One portfolio where we're investing in AI capabilities that will help us grow over time. And then finally, our high-growth, high-margin products are growing faster. As I said during the prepared remarks, we're approaching the 50% mark for operating income from those products, and we expect to reach that as expected by 2027 at the end of our strategic plan period. So I think those things will support us getting back to continuing to deliver margin expansion over a period of time. Operator: Our next question comes from the line of Michael Cherny with Leerink Partners. Michael Cherny: Maybe if I can just go into the mitigation efforts a little bit more. You've obviously had situations in the past on a macro basis, I'm thinking back to COVID, where price increases were a component to offset your business. I know you said -- I think it was Ron that you don't want to just do price increases, but how much do you preview some of those dynamics? I can't imagine your customers would be surprised if there are price increases, short-term price increases, surcharges put in place. But how do you think about going through those conversations, the engagement to make sure that if and when you do have to push price increases as an offset, that it's taken in a way that's not necessarily deleterious to the customer relationship? Frederick Lowery: Listen, I'll take that one, and thank you for the question. So just to clarify, listen, we're taking the appropriate pricing actions based on what's happening in the macro, whether that's fuel surcharges, whether it's increasing the price of a particular product that may be oil-based like gloves, for example. And so we'll have those conversations with customers where it makes sense and give customers visibility as to what's driving the change. We also will offer customers alternatives. That's part of what makes us a really great partner and to say, hey, listen, there's some other alternatives that can help you without receiving such a high price increase by looking at the entire portfolio that we have. So we'll take the appropriate actions with our customers and have those direct conversations as we see things materialize in the market. Operator: Our next question comes from the line of Jonathan Block with Stifel. Joseph Federico: Joe Federico on for John. Maybe just to look at implants a little bit closer. I think that the specialties internal growth was low single digits and implants is the majority of that. I think you mentioned high single-digit value implant growth to an earlier question. So does that mean that premium was more flat to down? And is that possibly a function of the consumer? I think premiums heavier weighted to the international business. So any color on some of those dynamics would be great. Ronald South: Yes, Joe. So I think that -- yes, like we said, the value implants did experience higher growth, keeping in mind that of the mix within implants is about a 2:1 mix premium to value for us, right? We did see some flatness in the premium implants. And I would say more so in the U.S. versus Europe, but both were in the, say, lower single digits to flat. And so I do think that there is a -- there is some -- whether it be a little consumer pressure there or whatever it might be. But like I said, there was also some timing on some transactions that where the quarter itself came in, in line with our expectations within that segment. And we do believe that we'll see improved growth within that segment as the year progresses. Operator: Our next question comes from the line of Daniel Grosslight with Citi. Frederick Lowery: Daniel, you may be muted. We can't hear you. Matthew Miksic: Sorry about that. Global Dental growth was relatively strong across both merchandise and equipment. You mentioned a couple of times that you're taking share here, but also the underlying market seems to have recovered somewhat. So I'm curious how much of the dental strength is due to share gains versus just the overall market improving? And what your visibility is into the sustainability of that momentum through the remainder of the year? Ronald South: Certainly. I think that most of our market commentary is really fairly U.S.-centric because it's difficult to kind of talk to the international markets as a whole. Within the U.S., we think there was -- we said a slightly more positive tone to the market, still relatively low market growth. But what we're seeing is that we -- our data indicates that we are taking market share there. So we got a little bit of volume growth. We got a little bit of pricing favorability within the quarter within merchandise. And in the end, in the U.S., with a local internal growth of greater than 4% is a number we're pretty happy with. Outside the U.S., you do get a little bit of some pressure that has occurred in some countries, but we had I would say, especially outside of Europe, when you look at the growth we had in Brazil and in Canada, we had very good merchandise growth there. So there's a lot of pockets of positive whether it be from the market or from us taking market share, and I think it's probably more from us taking market share in those countries where we're getting this, seeing the growth in dental. Operator: Our next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: I want to follow up on that last question around the sources of share gains in dental. The U.S. merchandise sales were a little bit better than we expected and specialty was a little bit softer. Can you talk about where you're gaining share. Ron, I think you mentioned that you're gaining share in the merchandise sales. But have the pockets where you've been gaining market share in general? Have they -- in the U.S. market, have they changed or evolved over the past year or the past couple of quarters between merchandise and specialty? And then how do we think about what you expect for share gains or the sources of share gains for the remainder of 2026? Ronald South: Well, I mean, I don't know if there's any one -- when you say pockets, I don't know if you mean product categories, but I don't think there's anything like any specific product category I would point to. I think it's broader than that. I would say if you're looking for something specific, we are seeing better growth of our own brands than we are with the -- versus the balance of the portfolio. So that is an area that has I think, given us some opportunity to provide some growth that exceeds that of the market. We're also kind of continuing with I think some of the success of the promotional activity we did last year, and that has provided us with some momentum, and we've been able to retain a lot of those customers that we picked up and that increased share of wallet that we picked up with some existing customers that -- so some of that growth you saw in Q3 and Q4 has continued into Q1. Operator: Our next question comes from the line of John Stansel with JPMorgan. John Stansel: Just following up on that point around maybe DSOs in particular. I think you've said over the last couple of months that they're gaining share or growing faster than the market. Is there anything particularly driving their growth above market growth rates? And then maybe just for Fred, as you've had discussions with them, particularly, what are they looking for that you see as opportunities for Schein to provide to the DSOs. Frederick Lowery: Yes. I'll take maybe -- I'll start, and Ron, you can add to this. But one thing to consider about even the last question on market share is that we're growing with DSOs. We have a strong position with all the national DSOs, the most of the national DSOs, almost all of them and they're growing faster. And so we're seeing the benefit of that growth. But when I've spoken with the DSO leaders and I've spent quite a bit of time with them. They appreciate the fact that we're able to support them nationally. They appreciate the fact that we're able to help them improve their efficiency. They appreciate the fact in many cases, that they're leveraging our technology to improve their profitability. And we've got access to some of the best exclusives in the market that are helping to drive their growth. So I think that total platform that we've built to support, particularly in this case, dental, that DSOs are benefiting from that. And so those are the kind of the feedback points that I've received from DSOs. Operator: Our next question comes from the line of Glen Santangelo with Barclays. Glen Santangelo: Fred, I want to talk a little bit about the organic sales growth at a high level. I mean, as you sort of highlighted in your prepared remarks, the second half of the year was particularly strong. And looking at the fourth quarter, we exited at a pretty robust rate. Now you obviously moderated a little bit from that trend and you spoke about medical. And I'm just kind of curious, can you give us some color about how the quarter maybe played out sequentially kind of thinking about the fact that other companies have sort of commented that weather may have impacted January we have the war now in March. And I'm kind of curious if you could give us any early view on sort of April and how things have played out. Frederick Lowery: Yes. Thanks for the question, Glenn. Looking at the quarter sequentially, we saw better performance sequentially through the quarter. So March was stronger than February. Part of what you're seeing in Q1 is the softness related to our respiratory business or because of the light and flu season. And maybe there's a little bit of weather, I would say it's more of the flu season than weather for us. But sequentially, we saw that get better and even that continued in April. So April continues to be strong. Operator: Our next question comes from the line of Kevin Caliendo with UBS. Kevin Caliendo: The remeasurement -- excuse me, not the remeasurement, the cost savings program, what -- can you just give us a little bit of a cadence? I understand the exiting of the year at $125 million is great. Can you size what the costs were in 1Q? When do you think it's going to be breakeven within the P&L? Just trying to understand the cadence. I know you don't like to give quarterly guidance, but just this part of the of the business would be really helpful to understand. Ronald South: Yes, Kevin, I think that the financial impact, at least with reference to the G&A portion of this was, I would say, was relatively nominal in the first quarter because we incurred some costs associated with the programs. We saved some costs associated with the program. we're going to start seeing that savings begin to accelerate as we get into the second quarter and then even more so in the third and the fourth quarter. So that's the root of our of our comment when we say we expect to see better earnings in the back half of the year than the first half of the year because it will be largely driven by some of those G&A cost reductions. I think equally, but it's -- I don't want to forget about the gross profit optimization as well because we do think that there were some benefits in Q1 from it. We think that those benefits can continue to grow as we get into the year. and we'll continue to accumulate into the -- especially into the back half of the year. So in terms of the quarterly cadence, it's really more to what's the back half versus first half, and we still expect the back half of the year to have better earnings in the first half. Kevin Caliendo: Got it. If I can ask a quick follow-up just on the remeasurement stuff. So there's $11 million this quarter and your guidance assumes that from an operational perspective, it will be less than last year, right? So that would imply single digits the rest of the year. Is that -- am I thinking about that the right way? Ronald South: Single digits in terms of EPS? Kevin Caliendo: No, in terms of dollars, in terms of EBIT impact or EPS, however you want to describe it. I'm just trying to understand what's sort of embedded for the rest of the year. Ronald South: Yes. I mean we're -- like I said, we're contemplating a range. And I believe in the prepared remarks, we said any remeasurement gains, if any, I mean there's no guarantee we will have any more remeasurement gains this year, but that's the -- we look at the opportunities there. We look at the strategic initiatives we're taking and which of these joint ventures would it make sense for us to consolidate, and that is contemplated in the overall guidance that we've provided. Operator: Our next question comes from the line of Brandon Vazquez with William Blair. Unknown Analyst: It's Max on for Brandon. Just one quick one for me. On the medical supply side of the business, are you guys seeing any impacts from noise around ACA or Medicaid work requirements or do you have any concerns about this impacting procedural volumes going forward? Ronald South: I would say that clearly, there's going to be -- I'm sure there's some impact, but we -- we're not seeing it as having a material impact at all really on the business. I mean, I think that at the end of the day, the more people who have access to care, the better off we are on the medical side. But this is really a, I think, a relatively small part of a lot of our customers' business, and we don't expect it to be that -- have a significant impact. Operator: And now we have time for one last question coming from the line of Michael Sarcone from Jefferies. Michael Sarcone: I was hoping you can just elaborate a bit more on what you're seeing on the equipment demand side, particularly for the digital equipment? Ronald South: Yes. On the digital side, we're still seeing very good demand for intraoral scanners. That's really the -- to me, that's the key product in digital. But we continue to see lower-priced entrants to the market, which is actually helping drive demand of intraoral scanners. And the beauty of intra-oral scanners, and I've said this before, is once a practice is investing in intraoral scanners, they become a digital practice, and then they are now they become a customer to buy other digital equipment. So while those prices have depressed a little bit and do hurt a little bit of that top line growth, it does give you an opportunity to sell additional digital equipment to those customers going forward. Traditional equipment still had very good growth in the quarter, and that's a very good indicator of the confidence and practices who are investing in their practices, either adding a chair or renovating a chair. And we continue to feel like the backlog on our traditional side is healthy and will help gives us the confidence that we can continue to see growth in equipment as the equipment sales as the year goes on. Frederick Lowery: Well, thank you, again, for joining us today. And I'd like to maybe just give a few concluding remarks. First, we delivered a strong first quarter. Sales momentum continues and the U.S. Dental and Global Technology businesses delivered strong sales growth, more than offsetting the softness in medical. Margins are also expanding, driven by favorable business mix and some early impact from value creation. Secondly, I'm encouraged by the progress we've made on our value creation initiatives. I do remain very realistic about the work that's ahead but we are committed to achieving the $200 million target and the $125 million run rate by the end of the year. The early progress gives me confidence that these initiatives will be a meaningful driver of operating margin expansion over the next several years and will contribute to achieving future high single-digit to low double-digit earnings growth. And third, I believe the full year 2026 financial guidance is appropriate. It assumes stable end markets and takes into account potential macro uncertainty. While our fundamentals are strong, I see meaningful opportunities to enhance our operational execution and performance culture. This will take time, but the work is actively underway, and I'm confident it will drive sustained value creation. I'm optimistic about what lies ahead, and I look forward to updating you on our progress throughout the year. Thank you for your interest in Henry Schein, and enjoy the rest of your day. Operator: Thank you. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve Group First Quarter 2026 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 during this time, 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 now like to turn the conference over to Erik Randerson, Senior Vice President of Investor Relations. You may begin. Erik Randerson: Good afternoon, everyone, and thanks for joining us to discuss Revolve Group, Inc.'s first quarter 2026 results. Before we begin, I would like to mention that we have posted a presentation containing Q1 2026 financial highlights on our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements including statements related to our future growth, inventory balance, our key priorities and business initiatives, industry trends, our marketing events and their expected impact, our physical retail stores, our own brand expansion, our use of AI, our partnerships, and our outlook for net sales, gross margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption “Risk Factors” and elsewhere in our filings with the Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended December 31, 2025, and our subsequent Quarterly Reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information including Adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions because we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information presented and prepared in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures, as well as the definitions of each measure, their limitations, and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Michael Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we will open the call for your questions. With that, I will turn it over to Michael Karanikolas. Michael Karanikolas: Hello, everyone, and thanks for joining us today. Outstanding execution by our team within a dynamic operating environment led to strong first quarter results and continued market share gains, highlighted by our net sales increasing 16% year over year, our highest growth rate in nearly four years. This growth acceleration, particularly in the current environment, is evidence that our investments in brand, technology and AI, site experience, and category diversification are paying off. In addition to our strong top line growth, diluted earnings per share increased 25% year over year despite a several-million-dollar increase in marketing investments year over year to support our growth initiatives, including the launch of Revolve Los Angeles, our first ever namesake label that we are incredibly excited about. And we generated $49 million in operating cash flow, significantly strengthening our pristine balance sheet with cash and cash equivalents increasing to $336 million at quarter end. Our core underlying business metrics illustrate our increased engagement and deepening connection with next generation consumers. Year-over-year growth in active customers accelerated in Q1 and we are generating increased revenue per active customer, fueled by our success in capturing a greater share of the consumer's wallet and a lower product return rate year over year. Beyond the numbers, I am most excited about our visible progress in longer term initiatives, such as international expansion and advancing our use of AI technology, that have become key contributors to our momentum and reinforce my confidence that we will continue to drive profitable growth in the future. Continuing with our longer term initiatives, Michael will talk about the exciting new chapter for our own brands assortment with Revolve Los Angeles, as well as an important new milestone in our physical retail expansion. We view each of these initiatives as potential game changers for our business over the long term. Our ability to invest in and execute on many exciting initiatives simultaneously underscores that our strong cash flow and balance sheet are key competitive advantages, particularly at a time when many peers with weaker financials are stuck playing defense. With that as an introduction, I will step back and provide a brief recap of our Q1 results before reviewing the progress on our longer term initiatives. Net sales for the quarter were $343 million, an increase of 16% year over year, a more than five-point sequential improvement from our 10% year-over-year growth rate in 2025. Gains were broad based as year-over-year growth rates improved across REVOLVE, FORWARD, domestic, and international compared to the year-over-year growth rates in the fourth quarter, with double-digit growth across the board. Also notable is that our dresses category net sales accelerated by 13 points compared to 2025 performance and we delivered even stronger growth in fashion apparel, validating the momentum behind our category diversification strategy. The strong start to the year puts us on a good path to our goal of double-digit revenue growth in 2026. By segment, REVOLVE net sales increased 15%, FORWARD net sales increased 17% year over year. These were our highest growth rates since 2022. By territory, domestic net sales increased 15%, and international net sales grew 20% year over year in the first quarter. We achieved these outstanding international results despite a meaningful slowdown in the Middle East that has continued into the second quarter amidst significant geopolitical uncertainty. Shifting to our bottom line results, net income was $14 million and diluted earnings per share was $0.20, an increase of 25% year over year. Adjusted EBITDA was $21 million, an increase of 9% year over year, all while investing in a number of meaningful growth initiatives including investments to position the new Revolve Los Angeles assortment for long term success. Most exciting is that our profitable growth once again converted very strongly to cash flow. Our business generated a $33 million increase in cash and cash equivalents in the first quarter alone, even while investing $11 million in January for a synergistic minority investment. Now I will conclude by recapping our progress against our longer term strategic priorities and growth vectors. We have many exciting initiatives underway, and the team has done a great job executing to position us to deliver meaningful value for shareholders over the long term. First, we continue to efficiently invest to expand our brand awareness, grow our customer base, and strengthen our connection with the next generation consumer. I could not be more excited about our recent brand wins that Michael will talk about in his remarks, ranging from the impactful and well received launch of Revolve Los Angeles to an incredible and efficient Revolve Festival held last month attended by countless A-listers. The recent launch of GrowGood Beauty, developed in partnership with Cardi B, also serves as a powerful demonstration of our brand building capabilities, one that exceeded our highest expectations, amassing several billion impressions and 140,000 Instagram followers within days of the official launch. Second, we continue to successfully expand our international penetration, highlighted by 20% growth outside of the U.S. in the first quarter. It was the thirteenth straight quarter that international growth has outpaced the U.S., and we are still very early in our journey. I am particularly excited about a strong growth resurgence in Mexico following our launch of elevated service levels and impactful new marketing playbooks in recent months. In fact, new customers in Mexico increased more than 80% year over year in the first quarter, contributing to our improved growth in active customers. Third, our first quarter results provide further confirmation that our investments to capture market share in the luxury segment are paying off. FORWARD net sales grew 17% year over year, our highest growth rate in four years, and FORWARD gross profit increased 36% year over year. Notably, at a time when the world's largest multi-brand luxury retailer is closing most of its store locations, we are rapidly expanding our customer base, attracting coveted new brand partners, and having particular success in generating increased sales from high value customers. Finally, we continue to leverage AI to drive growth and efficiency across the company, including to further elevate the shopping experience and drive higher conversion. I am pleased to report that we have successfully tested and recently launched into production our internally developed generative AI feature discussed last quarter that surfaces contextually relevant questions and answers about our products. This new feature is now live on our REVOLVE mobile channel for our vast assortment of dresses and delivering meaningful gains. The conversion lift was so compelling that our team is already hard at work to expand our A/B testing to include additional channels and product categories, consistent with our efforts to continuously raise the bar on the customer experience. Also notable, we used generative AI to significantly assist in the creation of marketing collateral for the incredibly successful launch of GrowGood Beauty that Michael will talk about in his remarks. Another great example of how we are able to leverage our data-driven culture and AI technology innovations to drive revenue and efficiency throughout the company. To wrap up, I would like to thank our passionate and innovative Revolve colleagues for their incredible efforts in driving strong results in the first quarter while also advancing our exciting longer term initiatives that further strengthen our foundation for future profitable growth. It is gratifying to see our team so energized by these growth opportunities, such as physical retail, international, and AI expansion, which we believe give us the opportunity to accelerate our market share gains. The current momentum in the business and the great progress on our initiatives reinforce my confidence in our ability to drive profitable growth in 2026 and beyond. Now over to Michael. Michael Mente: Thanks, Mike, and hello, everyone. We delivered an outstanding first quarter with strength across geographies, segments, and categories. It is gratifying to see the strong results from the investments we have been making over the recent quarters. Our top line is accelerating, brand heat is building, and customer connection is strengthening. We believe this momentum in the business illustrates our core competitive advantages that position us for continued success over the long term: our technology- and data-driven DNA and proprietary technology infrastructure, our operational excellence and agility, and our powerful brands and connection with the next generation consumer. With that as an introduction, I will focus my remarks on some of the strategic areas we are investing in and that we are especially excited about: the launch of our first ever REVOLVE label, our ninth annual Revolve Festival, physical retail expansion, and our joint venture with Cardi B. First, Revolve Los Angeles. For years, Mike and I have talked about launching a Revolve namesake label. Over the past 23 years, we have diligently focused on building Revolve as a brand — a true brand beyond just a fashion retailer. With this focus and disciplined investment, we have earned the trust and loyalty from millions of Revolve consumers, resulting in incredible brand power. We are truly unique as a multi-brand retailer that consumers completely trust to provide fashion discovery. As background, our customers rarely search for a specific brand on REVOLVE. In fact, less than 10% of products added to shopping carts on REVOLVE originate from a brand page. Instead, our community views REVOLVE as their preferred destination to discover what is new and on trend from our edits of more than 1.6 thousand brands, which is very different from other retail destinations. On countless occasions, I have met customers who are excited to share that they are wearing REVOLVE. They cannot remember which brand they are wearing, but know they bought it on REVOLVE. With that as context, we could not be more excited to leverage our brand strength, design talent, and operational excellence to provide our customers with a true REVOLVE label. In March, we introduced Revolve Los Angeles, our first ever namesake label, that features elevated apparel and eveningwear to fill a genuine gap in the market. It aligns with our expansion into physical retail, allowing customers to engage with our brand in real life and in a more permanent, meaningful way. We believe this new collection could expand our market opportunity and create a halo effect on the entire business. Revolve Los Angeles is just the beginning of a new REVOLVE-branded assortment that will extend across categories and price points over time. Since we see incredible potential for this initiative, we are investing incremental brand marketing dollars to drive its success. We have invested in elevated print, billboard, YouTube, and connected TV brand advertising featuring Revolve Los Angeles brand ambassador Bella Hadid, who perfectly embodies the brand's quintessential Los Angeles energy. We estimate that the impactful campaign has already generated more than 200 million impressions, creating one of the most powerful brand moments in our 23-year history. REVOLVE and FORWARD also sponsored the ultra-exclusive and prestigious Vanity Fair Oscar after party, where Amelia Gray impressed in a striking black gown from Revolve Los Angeles. These longer term investments are already creating favorable awareness and moving the needle. During March, consumer interest in the “Revolve” search term increased more than 40% year over year, according to Google Trends. We are also continuing to see strength in REVOLVE mobile app downloads, which increased by more than 50% year over year in March. This is particularly exciting considering that our mobile app converts at a much higher rate and app customers have the highest expected lifetime value by a wide margin. Second, Revolve Festival. On April 11, we hosted our ninth annual Revolve Festival in Coachella Valley, an exclusive experience where everything we are known for comes to life, blending fashion, community, and culture. Every year, we push ourselves to create something more immersive, more unexpected, and more iconic than the last. Our team met the challenge and again raised the bar, delivering an incredible lineup featuring Don Toliver, Kehlani, and Mustard that captivated the crowd of A-listers and kept the energy buzzing throughout. Built for the next generation of fashion consumers, Revolve Festival ensures that our brand stays connected and strong with the trend-setting young consumers who define what is next. In true REVOLVE fashion, our event transforms every detail into a story worth sharing on social media, with curated photo moments and immersive brand activations that put REVOLVE and FORWARD looks at the center of the cultural conversation. Our brand-elevating event delivered an incredible experience to our community of celebrities, brands, content creators, partners, and fans attending what one editor called the real main stage of the weekend. The impressive range of A-listers in attendance included Teyana Taylor, who looked stunning in a futuristic gown from our Revolve Los Angeles label; BLACKPINK members Jennie and Lisa; Emma Roberts; Gabriette; Becky G; members of Cat's Eye; Damson Idris; Charli and Dixie D'Amelio; members of Bini; Dwyane Wade; Paige Bueckers; Cameron Brink; Tyga; Big Sean; Thomas Doherty; Shaun White; Wiz Khalifa; Rachel Zoe; Victoria Justice; Ty Dolla $ign; Alandra Carthan; Leah Kateb; and Dylan Efron. The proof of our success is in the incredible numbers. REVOLVE generated the highest earned media value among all brands during both weekends of the Coachella Music Festival, even though our Revolve Festival was only held during the first weekend, according to CreatorIQ, an influencer marketing analytics firm. As icing on the cake, the top performing post during the entire Coachella Festival generated nearly $25 million in earned media value for REVOLVE, according to Meltwater, a media intelligence firm. Third, physical retail. We remain very excited about the growth opportunity in physical retail over the long term. As we approach its two-year anniversary, our Aspen store continues to achieve great progress on the top line and conversion gains year over year. We are especially pleased with our recent performance considering that Aspen tourism has declined year over year in recent months, coinciding with well below average snow conditions during the ski season. Our investments in the team, operations, and retail technology platform are clearly paying off and further raising the bar on our go-to-market retail strategy. While our Los Angeles store at The Grove is just getting started, several of the early metrics are encouraging. The owned brand mix of net sales at The Grove in Los Angeles is meaningfully higher than online and improving month over month. Also very exciting, even in our LA roots where the REVOLVE brand has the highest consumer awareness, we are seeing a measurable lift in ecommerce sales in the local community surrounding The Grove. This illustrates the halo effect synergies between retail stores and our core ecommerce operations and further validates physical retail as a key growth strategy for increasing brand awareness, acquiring new customers, and expanding our market share, as stores generate over 60% of global retail spend on apparel and footwear. With these positive signals and the momentum of our brands bolstering our confidence, I am thrilled to share that we have signed a lease for an incredible retail store location in Miami. We expect to open our doors by year end in what has become one of our strongest U.S. markets. At a recent Miami event held for our VIP clients, our vibrant community of local customers were beyond excited to learn we were opening a store nearby. Before I close, I will provide an update on our joint venture with Grammy Award-winning performer and global style icon, Cardi B. The partnership leverages our strong operational, brand-building, and marketing expertise with Cardi's powerful brand, trend-setting fashion and beauty inspiration, and a global audience that extends well beyond our current core target demographic. We recently launched the GrowGood Beauty assortment of hair care products with Cardi, and early results have exceeded expectations. In fact, every product sold out in less than an hour during a March presale event and sold out again in less than an hour when we officially launched the GrowGood brand in April. Cardi's and our teams did a great job driving awareness leading up to the launch, promoting GrowGood on impactful social channels, during Cardi's sold-out tour of 30 cities across North America and at Revolve Festival. The brand was also prominently featured during Cardi's appearances on the Today Show, The Tonight Show Starring Jimmy Fallon, and in press features including WWD, Allure, Essence, Marie Claire, and People. Most striking is GrowGood's rapid ascent to over 640 thousand Instagram followers in a matter of weeks. But compared to Cardi's 164 million Instagram followers, the gap underscores the brand's extraordinary untapped potential as we look ahead. The market response has been exceptional, and we are moving aggressively to scale on the back of that early demand. We are just getting started and are very excited to build on this early momentum. Wrapping up, our continued profitable growth and strong balance sheet are strategic advantages that give us the capacity to invest for long term success from a position of strength. With the acceleration in the business, it is clear that our investments are working, setting us up for our next phase of growth. We have incredible momentum, and I am more excited than ever about our many initiatives underway that we believe will enable us to gain further market share in 2026 and beyond. I will turn it over to Jesse for a discussion of the financials. Jesse Timmermans: Thanks, Michael, and hello, everyone. I am very proud of our first quarter results, highlighted by strong double-digit growth in net sales and earnings per share, and meaningful cash flow generation that further solidifies our balance sheet. I will start by recapping our first quarter results and then close with updates on recent trends in the business and guidance for the balance of the year. Starting with the first quarter results, net sales were $343 million, a year-over-year increase of 16% and a more than five-point improvement from our net sales growth in 2025. REVOLVE segment net sales increased 15% and FORWARD segment net sales increased 17% year over year in the first quarter. By territory, domestic net sales increased 15% and international net sales increased 20% year over year. Growth in trailing twelve-month active customers accelerated to 8% year over year, increasing to 2.9 million. Contributing to the strong top line was 12% growth in total orders placed year over year to 2.6 million. Average order value was $298, an increase of 1% year over year. The increase was driven by growth in average selling price, or ASP, that was partially offset by lower units per order. Consolidated gross margin was 52.7%, an increase of 68 basis points year over year that primarily reflects meaningful margin expansion in our FORWARD segment. The slight margin decline year over year in our REVOLVE segment primarily reflects a slightly lower mix of full-price net sales compared to 2025, partially offset by shallower markdowns and an increased mix of owned brand net sales year over year. Now moving on to operating expenses. Fulfillment costs were 3.1% of net sales, outperforming our guidance and a slight decrease year over year. Selling and distribution costs were 16.8% of net sales, outperforming our guidance by 30 basis points and a slight decrease year over year. Contributing to the better-than-expected result was a decrease in our return rate year over year, partially offset by higher shipping costs. Our marketing investment grew to 15.8% of net sales, an increase of 152 basis points year over year. Consistent with our guidance, we meaningfully increased our marketing investments to support exciting growth initiatives such as the launch of our Revolve Los Angeles label. For the second straight quarter, we achieved operating leverage year over year in general and administrative expenses. All while making meaningful investments in various growth initiatives. In dollar terms, G&A expense of $42 million exceeded our guidance. Most of the overage, however, reflects costs that are excluded from Adjusted EBITDA, including nearly $700 thousand in non-routine costs that were not factored in our outlook, and higher-than-anticipated stock-based compensation expense as our business momentum drove an increase in equity compensation tied to performance objectives. To align our interests with shareholders, a meaningful portion of our equity grants are performance based with vesting tied to achievement of long term targets. Below the operating line, other income increased to $2.7 million from $900 thousand a year ago. Our tax rate was 25% in the first quarter, a decrease of approximately one percentage point from the prior year. Net income was $14 million, and diluted earnings per share was $0.20, an increase of 25% year over year. Adjusted EBITDA was $21 million, an increase of 9% year over year. Moving on to the balance sheet and cash flow statement. We generated $49 million in net cash provided by operating activities and $45 million in free cash flow, an increase of 95% year over year, respectively. The healthy cash flow generation has further strengthened our balance sheet and liquidity. As of March 31, 2026, our balance of total cash and cash equivalents increased by $33 million, or 11%, in just three months compared to year end 2025, and we continue to have no debt. Inventory at March 31, 2026 was $245 million, an increase of 15% year over year, broadly consistent with our 16% net sales growth for the first quarter. Now let me update you on some recent trends in the business since the first quarter ended and provide some direction on our outlook to help in your modeling of the business for the balance of the year. Starting from the top, we are off to an encouraging start with net sales through the month of April 2026 increasing by approximately 14% year over year. For modeling purposes, I want to point out that we face more difficult prior-year comparisons for the rest of the second quarter, as net sales in April 2025 were softer than normal due to peak tariff uncertainty before rebounding into the low double-digit growth territory for the months of May and June 2025. Shifting to gross margin, we expect gross margin in the second quarter of 2026 of between 54.1%–54.6%, which implies an increase of 25 basis points year over year at the midpoint of the range. For the full year 2026, we now expect gross margin of between 53.5%–54.0%, which also implies a year-over-year increase of around 25 basis points at the midpoint of the range. The slight decrease from our prior full-year guidance reflects the first quarter results and slightly lower trending of full-price mix of net sales year over year. Fulfillment: We expect fulfillment as a percentage of net sales of approximately 3.2% for the second quarter of 2026, consistent with 2025. For the full year 2026, we continue to expect fulfillment costs of between 3.2%–3.4% of net sales. Selling and distribution: We expect selling and distribution costs as a percentage of net sales of approximately 17.5% for the second quarter of 2026, an increase of approximately 10 basis points year over year. For the full year, we continue to expect selling and distribution costs of between 17.1%–17.3% of net sales. Marketing: We expect our marketing investment to be approximately 15.7% of net sales in the second quarter, and between 15.3%–15.8% for the full year 2026, unchanged from our prior guidance. General and administrative: We expect G&A expense of approximately $43 million in the second quarter of 2026 and now expect G&A expense of between $164 million and $168 million for the full year 2026. Approximately half of the increase from our prior G&A outlook is due to increased performance-based equity compensation expense resulting from our business momentum. We are also increasing our investments in the Cardi B joint venture to capitalize on the incredible recent launch of GrowGood Beauty that we believe has tremendous upside potential. And lastly, we continue to expect our effective tax rate to be around 24% to 26% for the full year 2026. To recap, I am very excited about our strong momentum and confident in the promising growth initiatives we are investing behind and that we believe position us well for continued profitable growth and market share gains in the years ahead. We will now open the call for questions. Operator: And, again, if you would like to ask a question, press star and then the number one on your telephone keypad. And our first question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Analyst: Great. Thank you so much for taking our question, and congrats on a nice brand momentum. Jesse Timmermans: Yeah, thanks, Anna. I think you hit all of the points. First of all, for the second quarter, we are factoring in a consistent trend on what we have been seeing for the full-price mix. Second, to your point, we are seeing higher input costs both on the freight side and also on materials for those petroleum-based products that are impacting margin, and that has a bigger impact on REVOLVE than it does on FORWARD given the owned brand mix on REVOLVE. Those are the big drivers when it comes to the forecast looking forward. For tariffs, we are factoring in the current tariff rate, which is the incremental 10%. That said, as we have talked about before, we have been really successful in mitigating the vast majority of tariffs. We do not see that as a significant driver one way or another. And just stepping back, really happy with the overall results on margin with the 70-basis-point increase year on year, and particularly on the FORWARD side, which increased almost six points. So overall good results, and we are just seeing some of that increased input cost pressure. Michael Karanikolas: On your follow-up regarding the high value consumer, we think the opportunity in the high value customer segment is very large for us over time, not just at FORWARD, but also at REVOLVE. REVOLVE is a premium price point, and a lot of our top FORWARD shoppers shop significantly on REVOLVE as well. We are seeing strength across both websites with that high value consumer. We do not release a specific mix percentage publicly, and of course it depends where we put the cutoff, but we are seeing that as a real area of strength in our business. Operator: And our next question comes from the line of Rick Patel with Raymond James. Your line is open. Analyst: Thanks for taking my question. I would love any color on monthly cadence through the quarter, what you are seeing thus far in Q2, and how to think about operating expense leverage as we move through the year. Jesse Timmermans: Thanks, Rick. On the monthly cadence, as you recall, we were plus 16% for the first seven weeks of the year, and we closed at plus 16%, and that was on tempered comps. So really great progress as we moved through the quarter, and we had some really great marketing activities — Revolve Los Angeles, for example. Really pleased with the cadence of the growth throughout the first quarter. On the go forward for April, we are seeing some pressure, specifically in the Middle East regions as a result of the geopolitical uncertainty there. That definitely has an impact. That started in March, and it is continuing to have an impact in April, and likely, as you have heard, some consumer confidence and sentiment impact building as a result of that conflict. On operating expenses and leverage, we are investing in a number of growth initiatives, so that is a big driver in the Q1 results and for the full year. If you take marketing, for example, up 150 basis points year on year, that was largely due to the growth initiatives we have been driving — Revolve Los Angeles, GrowGood, etc. That impacts G&A as well. It is really impressive that we got 60 basis points of G&A leverage while investing. If you pull those growth initiatives specifically out of G&A, G&A would have been up kind of mid-single digits, call it, so we would have had more than a point of leverage on G&A. For the year, at the high end of the G&A range, it would be plus 7%, so anything north of that on revenue we would get leverage on that line item. The other line items are largely variable. In marketing, we are continuing to invest, so that will be an investment point for this year, and as we look ahead to future years, that marketing will balance out after this initial investment year. Operator: And our next question comes from the line of Peter McGoldrick with Stifel. Your line is open. Analyst: Thanks. Can you elaborate on early learnings and strategy for Revolve Los Angeles and any color on full-price mix trends? Michael Mente: On the Revolve Los Angeles brand, given the strong, beloved nature of the REVOLVE brand itself, having the REVOLVE brand will be a very powerful owned brand. This allows us to focus and attack with a strong halo that drives product sales in those zones, but also gives greater awareness and affinity for the overall REVOLVE brand, which should halo into all other categories. REVOLVE LA is really the beginning of multiple REVOLVE-oriented brands that allow us to touch a range of categories that we currently are not active in. That is very important for us over the course of the next 12 to 24 months. We will be attacking very high-margin categories that will be a whole new white space for us. This is a multiyear roadmap. If you fast forward two to three years from now, you will see this is going to be the next chapter for our business. We are super excited about this, and everything is going perfectly according to plan with that first launch. Jesse Timmermans: On the full-price mix, it fluctuates month to month and quarter to quarter, so I would not put too much weight toward any significant shift. There could be some consumer sentiment and confidence impacting that, but over time we have driven that up, and although it is down year on year, over the past few years it is meaningfully higher than it was in the pre-COVID era. It is still in a very healthy zone. We saw a double-digit increase in full-price sales and a really healthy increase in full-price customers. At this point, we feel good about the inventory composition and the mix, although it was lower year on year and a little bit lower than our expectations. Operator: And our next question comes from the line of Michael Binetti with Evercore. Your line is open. Analyst: Hey, guys. Could you expand on input cost pressures you are seeing and how returns initiatives are trending? Jesse Timmermans: Thanks, Michael. On input costs, on the product side we are seeing it both in freight and in product — any petroleum-based products are seeing increased cost, and that is just starting, so that impacts the go-forward guidance on gross margin. It is more of an impact on REVOLVE, as I mentioned, given the owned brand mix there has a more direct impact than the third parties where we are marking up. We are also seeing higher freight costs within selling and distribution. We have done a really good job managing fuel surcharges and rates with the carriers, but there have still been increased surcharges, especially international, that we are battling against right now. Offsetting that, return rate was down nicely in the first quarter — 80 basis points — on top of a 280-basis-point reduction in Q1 2025. Even sequentially, historically we see an increase from Q4 to Q1 around 150 basis points, and this year the sequential increase was half of that. We do have a number of initiatives still in play, with a couple more rolling out around the middle of this year. We will continue to work on it and try to drive that down in the right ways without impacting the experience. Operator: Our next question comes from the line of Nathan Feather with Morgan Stanley. Your line is open. Analyst: Thanks for taking the question. Could you update us on GrowGood scaling plans and any future categories with Cardi? Michael Mente: On GrowGood, the current limitation is really inventory. We have a big wave of inventory coming sequentially over the next few months, so we will definitely see a sales ramp-up there. Sales velocity is so fast that predictability will be interesting to see over time, but we have nothing but the highest momentum we have ever had for a product or a brand. We also have an extremely exciting roadmap for the GrowGood brand in product introductions and beyond. Cardi has been nothing but the best partner — as locked in as possible — so we could not be more excited. There will be an apparel brand planned for the future, which we will not get into too many details yet, but that is extremely exciting as well. It hits a zone that is a complete white space in our universe, so we are excited to do something very special there as well. Operator: Great. Thank you. And our next question comes from the line of Oliver Chen with TD Securities. Your line is open. Analyst: Hi. This is Julie Shalansky on for Oliver Chen. I am curious if you could walk us through the main drivers of the improvement in the return rates from this quarter, and how you think about that evolving as categories like beauty and owned brands continue to scale. Second, how much of the 1Q step-up in marketing is recurring infrastructure versus one-time costs for Revolve LA? Michael Karanikolas: With regard to the return rates, there are a couple of factors at play. Certainly, there are things we have been working on over the longer term to get return rates down, including some preexisting initiatives that we were able to step up in a bigger way during the quarter. You will also have some fluctuation quarter to quarter in the return rate number, just like the gross margin number, depending on category mix shift and other factors, and that played a bit of a role. On marketing expenses, I would not say there is any structural change in marketing, but to the extent that we have exciting things to launch that we think could be big growth drivers for many years to come — such as Revolve Los Angeles, which is incredibly strategic, and GrowGood, which is quite exciting as well — we are going to make sure we fuel those initiatives with the proper marketing support, and we think it will deliver nice returns. Operator: And our next question comes from the line of Janine Stichter with B. Your line is open. Analyst: Thanks so much. How are you thinking about sustaining growth from here, and any notable consumer behavior callouts? Michael Karanikolas: We have seen really nice execution the past couple of quarters in terms of delivering growth numbers, and it is certainly our intention and expectation that should continue. REVOLVE itself has huge continued opportunity in just the REVOLVE core. Our brand awareness is still relatively low compared to much larger premium brands, and we are still adding active customers at a good rate with a lot of new areas of marketing we are investing into. Category expansion is a strong driver for us. International expansion has been strong, with 13 consecutive quarters of international outpacing the U.S., and we saw strong growth internationally across pretty much every major region in Q1 despite some weakness in the Middle East. On top of that, you have physical retail, which is completely untapped for the brand and can have a huge impact on our overall TAM and revenue; Revolve LA, which opens things up from both a marketing and product category perspective; and brand partnership opportunities like GrowGood, which had an incredible launch and can be substantial in value and revenue. The core growth algorithm has a ton of upside, and we have huge opportunities on top of it, and I think we are positioned very well. Jesse Timmermans: From a consumer lens, nothing significant to call out outside of the obvious Middle East impact. We also talked about the high value customers continuing to really perform, especially on the FORWARD side, so it is more of the same. Operator: Our next question comes from the line of Simeon Siegel with Guggenheim. Your line is open. Analyst: Hey, everyone. Could you provide more detail on the $11 million minority investment and trends in AOV? Michael Karanikolas: On the $11 million minority investment, first and foremost we will be disciplined and opportunistic. In this case, we found a brand that we felt was very strategic for us in terms of the category it operated in, and we felt like it was an incredible brand with an incredible team behind it, with investment terms that made a lot of sense. Those are the sorts of opportunities we are looking for. We are really excited about the partnership and hopeful it will work out quite well. Jesse Timmermans: On AOV, it was up 1%. It was up across both REVOLVE and FORWARD. We saw a higher increase in average selling price partially offset by units per order. Looking ahead, we saw a similar trend in April, and we would expect flat to slight increase in AOV for the balance of the year. Operator: And our next question comes from the line of Dylan Carden with William Blair. Your line is open. Analyst: Thanks. How should we think about the marketing cadence versus revenue and the mix of performance versus brand? Jesse Timmermans: We had the marketing plans in place ahead of that revenue growth, and the revenue growth came through very well for us, so we are really happy with the way that played out. I would not say that we are taking excess revenue and investing it back into marketing, but when we see something working, we will continue to invest, so you could see that going forward. Most of the step-up was to support these initiatives, and it impacted both performance and brand. As we discussed in the prepared remarks, we made investments in billboard placements, connected TV, and other areas that we typically have not done in the past but have been playing out very well with a really good ROI on those incremental investments. Michael Karanikolas: On beauty, the GrowGood launch and sales did not hit the GAAP numbers for the first quarter because any sales that occurred in the first quarter were all presale. Beauty as a whole saw strong growth excluding the GrowGood launch, which was incredible, and that is really just a continuation of a trend we have seen for a number of years now, and of course we think that business has a lot more room to grow. Operator: And our next question comes from the line of Jay Sole with UBS. Your line is open. Analyst: Thanks for taking the question. Any key learnings from retail stores so far and thoughts on locations and owned brands in-store? Michael Mente: On retail, probably the most notable thing is that our customer loves our owned brands. We are pushing the limit there and pushing further. Owned brands perform better on their own for shelf space and rack space, so we will continue to ramp there. This insight has helped us invest more into owned brands, launch Revolve Los Angeles, and expand into categories that we have not historically been active in because they were more suited for physical retail versus ecommerce. Those two coming together over the long term will be incredibly powerful. Thus far, we feel quite confident on our choice of locations. We want to be very disciplined about locations that we feel are extremely de-risked. Our Miami location in Aventura is one where we are 100% positive that we will get our customer. Michael Karanikolas: On AI, there is a whole host of areas where it is impacting the business in a very positive way, enabling revenue growth and our ability to go after opportunities quickly and make better decisions. Recent launches include the new generative AI Q&A section on portions of our website. We saw really strong performance there, and it was launched only on dresses and only on a subsegment of our property, so there is a lot of room to expand and roll out. We also used AI to accelerate our ability to produce high-quality marketing collateral quickly — we mentioned that with GrowGood, but it is true across the business. AI virtual styling tools we have discussed on previous calls are seeing strong consumer reception and are not fully rolled out yet. Across the business, we are developing better internal tools and algorithms to make better decisions. You have seen a lot of gross margin gains through the years in terms of full-price/markdown ratios and margins on markdowns. We have incredible internal tools for reporting that can unlock quicker decision making. Over a multiyear period, we have rolled out AI search enhancements and improvements to merchandise and personalization algorithms — it is really impactful across the entire business. Operator: And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of Matt Koranda with ROTH Capital. Your line is open. Analyst: Hi, everyone. Could you talk about full-price mix volatility and any updates on active customer growth drivers? Michael Karanikolas: Regarding the lower mix of full-price sales, these percentages will fluctuate quarter to quarter. Over longer periods of time, we have driven that percentage up significantly, and it is extremely favorable versus a lot of the competition in multi-brand retail. It is important to note that we manage it largely algorithmically. There can be product mix shifts that affect the full-price/markdown ratio from quarter to quarter and some shifts in consumer behavior, but overall we think it is in a very healthy place. The combined business had gross margin gains for the quarter, so nothing particular of note to call out with regards to the fluctuations. Jesse Timmermans: On active customers, that plus 8% was driven by both new customers and existing customers. We saw orders per active and revenue per active go up, which shows really good engagement from existing customers. On new customers, growth was across the board: REVOLVE, FORWARD, domestic, international, full price, and markdown. It all goes back to the execution and the investments we have been making over the past few quarters, and specifically this quarter we were very active in marketing, and Revolve Los Angeles creates a nice halo effect for the entire business. Operator: And our final question comes from the line of Ashley Owens with KeyBanc Capital Markets. Your line is open. Analyst: Thanks for squeezing me in. Any additional detail on international performance and tariff refunds timing? Michael Karanikolas: On international, we saw broad strength. Every major region was up year over year, so it was not any particular one region driving growth, including the Middle East, which was up for Q1. If you pull the quarter apart, March was down for the Middle East and that continued through April, but as a whole, we saw strong growth across the board. Mexico is an outlier contributor — we are having incredible growth there as a result of service enhancements and new marketing initiatives. We are really pleased with that region, and it drove a very significant portion of overall international growth, but again, all major regions were up year over year. Jesse Timmermans: On tariff refunds, the team was very on top of this. The refund application process started on April 20, and they filed everything within a day or two of that. Claims have been filed, and we are starting to receive responses. Timing is TBD — we have heard 60 to 90 days — but there is some tiering, so we do not think we will see it all in one fell swoop. It is not included in the guidance, so that would be upside, but timing is TBD. Operator: And that concludes our question and answer session. I will now turn the call back over to management for closing remarks. Michael Mente: Thank you for joining this quarter, and a big thanks to our team for the hard work and focus. It is very clear to me that our multiyear strategic plans and investments are going exactly as planned. Continued focused execution quarter after quarter will undoubtedly result in phenomenal results. Michael Karanikolas: Excited for the next quarter ahead and the many years ahead. Thank you.
Operator: Good morning, and welcome to the IDEXX Laboratories First Quarter 2026 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Mike Erickson, Executive Vice President and incoming Chief Executive Officer; Andrew Emerson, Chief Financial Officer; and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our first quarter 2026 results and 2026 financial outlook, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent prior year period, unless otherwise noted. [Operator Instructions] Today's prepared remarks will be posted to the Investor Relations section of our website after the earnings conference call concludes. I would now like to turn the call over to Andrew Emerson. Andrew Emerson: Good morning. I'm pleased to take you through our first quarter results and provide an updated outlook for our full year 2026 financial expectations. During the first quarter, IDEXX delivered exceptional financial results through continued execution in our companion animal business with benefits from IDEXX innovations. Revenue increased 14% as reported and 11% organically supported by over 11% organic growth in CAG Diagnostics recurring revenues, reflecting nearly 11% gains in the U.S. and approximately 12% growth in international regions. CAG Diagnostic recurring revenue growth in Q1 was negatively impacted by declines in U.S. same-store clinical visits of approximately 1%, with slightly positive growth in non-well visits more than offset by pressure on wellness visits. Strong premium instrument placements in the quarter resulted in 28% organic growth of CAG instrument revenues and included 1,100 IDEXX inVue Dx analyzers. IDEXX's operating performance was also excellent with comparable operating margin gains of 100 basis points, supported by gross margin expansion, which benefited from strong reoccurring revenue growth. Strong operating profit gains enabled earnings per share of $3.47 in the quarter, resulting in EPS growth of 15% on a comparable basis. Performance during the first quarter built confidence to increase our full year revenue range to between $4.675 billion to $4.76 billion, an increase of $42 million at midpoint or an outlook for overall reported revenue growth of 8.6% to 10.6%. Our updated full year overall organic revenue growth outlook is for 7.7% to 9.7% with an organic CAG Diagnostic recurring revenue growth of 8.7% to 10.7%. These organic growth ranges represent approximately 70 basis point increase at midpoint to our previous guidance, supported by strong global execution and modest improvement in our sector outlook for the CAG business. We're also updating our full year EPS outlook to $14.45 to $14.90 per share, an increase of $0.13 per share at midpoint net of a $0.05 negative impact from a loss on an equity investment in Q1, reflecting 11% to 15% comparable EPS growth. We'll provide further details on our updated 2026 financial expectations later in my comments. Let's begin with a review of the first quarter results. First quarter organic revenue growth of 11% was driven by 12% CAG revenue gains and 7% growth in both our Water and LPD businesses. Strong CAG results were supported by CAG Diagnostics recurring revenue growth of 11% organically, including approximately 50 basis point benefit related to equivalent days, an average global net price improvement of approximately 4%. CAG diagnostics instrument revenue increased 28% organically, with another strong quarter of inVue Dx analyzer placements aligned with our expectations. U.S. organic CAG Diagnostics recurring revenues grew nearly 11% in Q1 including strong volume gains and net price realization aligned with full year expectations. U.S. same-store clinical visits declined minus 1% in the quarter, reflecting an IDEXX U.S. CAG Diagnostics recurring revenue growth premium to U.S. clinical visits of approximately 1,100 basis points, highlighting outstanding performance by the IDEXX commercial teams. During the quarter, the industry continued to see green shoots from aging pets, with growth in clinical visits for pets 5-plus years old. Non-well visits also continued to show signs of improvement, increasing 20 basis points year-over-year, while wellness visits declined minus 3%. IDEXX benefited from overall quality of clinical visits with increased diagnostic frequency and utilization per visit, demonstrating expansion of diagnostics and care protocols. International CAG Diagnostics recurring revenues grew 12% organically in Q1, with revenue performance driven by volume gains, including benefits of net new customers and same-store utilization. International regions performed incredibly well with steady growth of CAG Diagnostics recurring revenues through ongoing engagement with customers and expansion of IDEXX innovations while we see similar macro pressures affecting visits in most geographies. IDEXX also delivered strong organic revenue gains in major global testing modalities in the first quarter. IDEXX VetLab consumable revenues increased 15% on an organic basis reflecting double-digit growth in both U.S. and international regions. Consumable revenue growth included double-digit volume expansion driven by net new customer gains in our premium instrument installed base and expanded testing utilization, including benefits from innovations. InVue Dx utilization continues to track well to our reoccurring revenue estimates previously provided and progression of our controlled rollout of F&A is in line with our expectations. CAG premium instrument placements reached 4,650 units during the first quarter, an increase of 12% year-over-year and the quality of placements remains superb reflected in over 1,000 global new and competitive catalyst placements, including nearly 320 in North America. Globally, we placed 1,100 IDEXX inVue Dx instruments as we track to our full year expectations for 5,500 placements. Our success in placing instruments while maintaining high customer retention levels supported the 12% year-over-year growth in our premium instrument installed base in the quarter. IDEXX Global Reference Lab revenues increased 10% organically in Q1, driven by solid volume growth across regions with benefits from both net customer gains and same-store utilization each doubling from prior year levels. IDEXX Cancer DX has continued to support these categories, attracting new customers and broadening the use of diagnostics in both sick and wellness panels. As an example, approximately 20% of Cancer Dx customers are non-primary IDEXX reference lab accounts. Global Rapid assay revenues were flat organically. Rapid Assay results continue to be impacted by customers shifting pancreatic lipase testing to our Catalyst instrument platform, which we estimate to be an approximately 2% headwind to Q1 revenue growth. Veterinary software and diagnostic imaging organic revenues increased 11% driven by recurring revenue growth of 11% during the quarter and strong nonrecurring growth from placements of diagnostic imaging systems, setting a record with approximately 330 installations benefiting from the launch of DR50 PLUS platform. Veterinary software expanded double digits supported by cloud-based PIMS installations and adoption of related reoccurring services. Water revenues increased 7% organically in Q1, with strong growth in the U.S. and low single-digit growth in international regions. International growth in the business was impacted by supply chain dynamics in the Middle East. Livestock, poultry and dairy revenues increased 7% organically in the quarter, with solid gains across regions. Turning to the P&L. Strong recurring revenue growth enabled 15% comparable operating profit gains in the quarter. Gross profit increased 16% in the quarter as reported and 13% on a comparable basis. Gross margins were 63.4% up approximately 90 basis points on a comparable basis. These gains reflect benefits from strong recurring revenue growth in IDEXX VetLab consumables and Reference Lab volumes along with operational productivity. Pricing benefits offset inflationary cost pressures and foreign exchange, net of our hedge positions had a negligible impact on reported gross margins in the period. On a reported basis, operating expenses increased 17% year-over-year including both lapping a discrete Q1 2025 expense for concluded litigation matter as well as a $5 million loss on an equity investment in the current period. Comparable operating expenses increased 11% year-over-year as we advance investments in our global commercial and innovation capabilities. Q1 EPS was $3.47 per share, reflecting a comparable EPS increase of 15%. EPS in the quarter included $7 million or $0.09 per share benefit related to share-based compensation activity, and a $0.05 negative impact related to a loss on an equity investment. Foreign exchange added $14 million to operating profit and $0.14 to EPS in Q1, net of hedge effects. Free cash flow was $234 million in Q1, reflecting normal seasonality. On a trailing 12-month basis, the net income to free cash flow conversion rate achieved 99%. For a full year, we're maintaining our outlook for free cash flow conversion of 85% to 95% of net income, including full year capital spending of approximately $180 million. We finished the period with leverage ratios of 0.6x gross and 0.5x net of cash and continue to deploy capital towards share repurchases allocating $361 million during the first quarter, supporting a 2.1% year-over-year reduction in diluted shares outstanding through Q1. Turning to our full year 2026. As noted, we're increasing our outlook for overall revenue to $4.675 billion to $4.76 billion. At midpoint, this reflects approximately $32 million in constant currency improvement from our initial guidance, building on strong first quarter performance, including CAG Diagnostic recurring revenue expansion and a modestly improved industry outlook. Our updated reported revenue outlook includes $10 million or approximately 20 basis points growth benefit related to foreign currency changes compared to our prior estimates. This reflects our revenue growth outlook for 8.6% to 10.6% as reported, including approximately 90 basis points for full year growth benefit from foreign exchange at the rates outlined in our press release. As a sensitivity, a 1% strengthening of the U.S. dollar would reduce revenue by approximately $12 million and EPS by $0.04 for the remainder of the year. Our updated overall organic revenue growth outlook of 7.7% to 9.7% includes an organic growth range of 8.7% to 10.7% for CAG Diagnostics recurring revenue, including approximately a 4% benefit of global net price realization. At midpoint, we're updating our estimate for U.S. clinical visits to a decline of minus 1.5% after a third sequential quarter of clinical visits trending between minus 1% to minus 2% and aligned with the trailing 12-month average. In terms of key financial metrics, we're updating our reported operating margin outlook to 32.1% to 32.5% for 2026, reflecting increased expectations of 50 to 90 basis points of full year comparable operating margin improvement. Operating margin was impacted by a 30 basis point headwind related to a discrete litigation expense from 2025 and the current year loss on an equity investment. These were offset by a 30 basis point benefit from foreign exchange effects. Our updated full year EPS outlook is $14.45 to $14.90 per share, an increase of $0.13 per share at midpoint. Our EPS outlook incorporates increased projections for operational performance of $0.13 per share at [ midpoint ] compared to our prior guide as well as a $0.05 negative impact from a loss on an equity investment and a $0.05 benefit from updated foreign exchange rates outlined in our press release. For the second quarter, we're planning for reported revenue growth of 7.3% to 9.3%, including approximately 60 basis point growth benefit from foreign exchange impacts. This operational outlook aligns with an overall organic revenue growth range of 6.7% to 8.7% and CAG Diagnostics recurring revenue growth of 8.5% to 10.5%. Organic revenue includes a negative 50 basis point impact from equivalent days in the second quarter, and at midpoint, we're planning for the U.S. clinical visit growth in line with the full year estimate. Overall organic revenue growth is impacted by expectations for declines in CAG instrument revenues as we begin lapping significant placements of InVue Dx during 2025 and modest revenue pressure from regional and placement mix. Second quarter reported operating margins are expected to be 33.9% to 34.3%, reflecting expansion of 10 to 50 basis points on a comparable basis as we expect increased spending during Q2 related to timing of projects. That concludes our financial review. I'll now turn the call over to Jay for his comments. Jay Mazelsky: Thank you, Andrew, and good morning. IDEXX delivered an exceptional start to 2026 with first quarter results reflecting disciplined commercial execution, continued benefits from innovation and expanded diagnostics utilization across a global customer base. These results were achieved despite headwinds from clinical wellness visits, underscoring the durability of our growth model and the importance of diagnostics to excellent veterinary care. The quarter also highlights the strong foundation we have built with strong customer relationships, where a commercial partnership is central to advancing our mission and supporting practice success. The economic value of instruments placed in the quarter, for example, grew double digits year-over-year, reinforcing the long-term value we are creating through our installed base growth. More broadly, companion animals are seen as members of the family and a large majority of pet owners prioritize their pet's health and happiness, creating pull for higher quality health care. This commitment is reflected in the continued expansion of diagnostics frequency during both well and non-well visits. Customer retention remains in the high 90s reflecting the trust veterinarians place in IDEXX as both a diagnostics provider and long-term partner. This loyalty underscores the strength of our integrated model, combining diagnostic software and medical support. We work alongside veterinarians and practice teams to better integrate diagnostics into everyday care protocols, supporting workflow optimization, increasing clinical confidence and demonstrating the economic value of diagnostics. When practices engage at this level, diagnostics utilization increases. Testing becomes more seamlessly embedded in care protocols, technicians gain confidence running diagnostics during the visit and clinicians make faster, more informed decisions, driving greater productivity across the practice. All 4 country expansions announced last year were in place at the start of Q1. And as a result of a well-established approach to training and new hire support, we saw initial contributions in line with expected productivity. Momentum with IDEXX inVue Dx continues with another solid placement quarter well on our way to our target of 5,500 placements for the year. Internationally, we are seeing a solid ramp in the installed base and adoption as awareness builds and commercial team support integration into practice workflow. Customer feedback remains highly consistent across regions, with veterinarians highlighting consistent performance, easy use and workflow productivity gains as key benefits. Utilization across ear cytology and blood morphology remains aligned with expectations, reinforcing the everyday clinical value of the platform. We continue to engage with customers to drive further adoption of these important testing categories through our professional service veterinarians and clinical staff trainings. At the same time, we are advancing the inVue Dx algorithm with monthly software updates to our installed base, enhancing performance and improved time to results, just another part of our Technology for Life promise. For example, the menu advanced in Q1 for blood morphology, the ability to detect and report [indiscernible]. These are red blood cells associated with severe underlying diseases such as with liver, clinic or kidney disease. We're also pleased with the solid progress of our controlled rollout of F&A. Early customer response to F&A remains very encouraging. Practices are seeing the value of evaluating lumps and bumps during the patient visit with rapid cytology insights supported by AI analysis and optional expert pathologists review available with a single click. This workflow enables clinicians to evaluate more lumps and bumps by reducing clinical effort and cost of the consumer. We continue to gain insights on customer behavior and experience during the controlled launch. Early adopters are very pleased with the high-quality training experience and follow-up support. These learnings and positive experience and support further broadening of the launch in Q2 as we ran volume and anticipate full volume ramp in the second half. Overall, F&A utilization is tracking to our planning assumptions, and we remain excited about the potential of F&A as a platform capability that can expand over time beyond mass cell tumor detection. Turning to IDEXX Cancer DX. Momentum continues to build behind this important innovation as veterinarians increasingly incorporated into both diagnostics and screening workflows. During Q1 in North America, nearly 70% of cancer DX tests were run as part of a panel, reflecting the growing clinical relevance of this test. Now with over 7,500 practices ordering since launch, Cancer Dx is a major differentiator for our [ reference ] business, and we believe it is one of the many elements driving competitive lab transitions at IDEXX. A major milestone this quarter was the international launch of Cancer DX for [indiscernible] and lymphoma in Europe and Australia. This represents an important next step in expanding access to early cancer detection globally and builds on the strong adoption we have seen in North America. Early international interest has been strong and reinforces the global need for accessible oncology diagnostics. Our global field teams are partnering with customers, both independent and corporate to develop wellness protocols. As an example, a large corporate group in Australia recently announced the inclusion of Cancer DX within their senior wellness plan. no additional charge for their members. We're also seeing continued use in monitoring applications, particularly in cases where serial testing can support treatment decisions. With the addition of mast cell tumor detection for later this year and a third test by the end of '26. Cancer diagnostics will continue to expand its clinical relevance and reinforce IDEXX's leadership in veterinary oncology diagnostics. We continue to expand our Catalyst customer base, adding over 1,000 new and competitive customers in the quarter. In each one of the now nearly 79,000 Catalyst customers have access to our new and expanded menu such as Catalyst pancreatic lipase and Catalyst cortisol. We continue to see strong adoption and utilization of both these tests as practices incorporate the test into routine real-time workflows to support pancreatitis and endocrine disorder diagnoses. Our software and diagnostic imaging businesses also delivered solid performance in Q1. Our cloud-native PIMS platform installed base grew double digits in the quarter, as we continue to see strong interest with virtually all placements now cloud-based. Practices are looking to software solutions to realize workflow optimization, staff productivity and digital client communications. Vello, IDEXX's pet owner engagement application continues to gain traction, growing double digits from last quarter as practices recognizing the importance of driving client deployments. Clinics using Vello report improved compliance with recommended diagnostics and treatments reinforcing the connection between engagement and medical outcomes. In our Diagnostic Imaging business, we launched our newest digital radiography system in January, the ImageVue DR50 PLUS combining high definition AI-powered imaging with up to 60% lower dose than premium competitors. Strong customer reception to the DR50 PLUS, coupled with excellent commercial execution, led to an all-time record imaging systems placements for the quarter, the fifth consecutive quarterly placement record. IDEXX Telemedicine also delivered very strong volume growth, supported by modernized integration with IDEXX Web PACS that reduces submission clicks by almost 50% saving time for clinical teams and delivering board-certified expert interpretation directly inside Web PACS. Software is a powerful enabler of diagnostics growth helping practices translate clinical insight into action and customers who use all of our diagnostic software and imaging solutions experienced faster clinical revenue growth and diagnostics usage. This will be my final earnings call as CEO before I transition to the Executive Chair role following our annual meeting next week. As I reflect on my experience as CEO and the state of the company today, I remain incredibly optimistic about the future of IDEXX and the multi-decade opportunity ahead for the company. The fundamental drivers of this industry have never been stronger. The human animal bond continues to deepen. That bond drives sustained commitment from pet owners to seek high-quality care, earlier diagnosis and better outcomes for the pets they love. Diagnostics is the foundation of this evolution. As medicine continues to advance the need for clinical insights to guide care decisions will only grow reinforcing the long runway ahead for diagnostics innovation and utilization. IDEXX is in a position of strength with a clear strategy, a powerful innovation pipeline and exceptional people. I believe the company's best days lay ahead. And I'm excited for the next chapter of IDEXX's growth to unfold. I would be remiss if I didn't highlight the role that our people play in the company's success. Our approximately 11,000 IDEXX employees around the world are purpose-driven and our talent fuels the company's growth. IDEXX is deeply committed to innovation, our customers and their success and operating the company as if it was their own. It has been an honor to lead IDEXX, and I want to thank all employees past and present for their commitment to improving the lives of pets across the world. Now before I turn it over for Q&A, I'd like to give Mike Erickson the chance to say a few words. I've worked with Mike for a long time, and I have tremendous confidence in him as he steps into the CEO role. He brings deep experience, strong leadership and a clear commitment to our purpose and strategy. With that, I'll turn it over to Mike. Michael Erickson: Thank you, Jay, and good morning, everyone. I'm humbled by the opportunity to lead IDEXX at such an exciting time in our company's history. As Jay mentioned, the sector remains highly attractive and I see a meaningful opportunity ahead to further accelerate our innovation-driven platform growth strategy. We will continue to focus on diagnostics and software where our platforms empower customers to see more and do more in their practices, uncovering deeper patient insights and driving next level productivity. We will also continue to advance commercial reach through investments to expand our field-based presence in key geographies around the world. This enables our talented commercial team to work even more closely with customers side-by-side, supporting accelerated adoption of innovations that expand care while driving a reliable return on investment. Another priority for us is AI. We have a well-established AI capability at IDEXX with AI embedded in platforms such as inVue Dx and our ezyVet software. Looking forward, I see advancements in AI as incredibly promising to further accelerate our innovation, expand testing access and utilization and drive deeper patient level insights. I plan to share more on this at our upcoming August Investor Day. Across these priorities, we're fortunate to have a talented team of IDEXXers globally that wake up every day focused on our customers and shaping the future of diagnostics software and AI in animal health. I want to close by thanking Jay for his leadership and service to IDEXX over the past 14 years. Under Jay's leadership, the organization has accelerated the innovation agenda, launching valuable new platforms like Cancer DX and inVue Dx, growing our cloud-native software platform offerings, significantly expanded customer reach internationally and delivered strong results and shareholder value, all while positioning IDEXX for sustainable long-term growth supported by a robust future innovation pipeline. I am grateful to have worked with Jay and I look forward to his continued support as he transitions to Executive Chair of IDEXX's Board. I'll now turn it over to the operator for Q&A. Operator: [Operator Instructions] We'll go first to Michael Ryskin of Bank of America. Michael Ryskin: Congrats on the quarter, and I [indiscernible] the comments. Jay, congrats. Been a pleasure. I want to kick things off on inVue. You had a lot of comments in the prepared remarks on strong performance. But just that placement number, 1,099. You reiterated the 5,500 for the year, but we would have expected you to do a little bit more in the first quarter. Is there just some pacing dynamics there to think of that maybe the first quarter tends to be a little bit slower. Is there anything in the funnel you can talk about just to give us confidence that these placements will be there for the full year? Jay Mazelsky: Yes. Michael. The -- we -- Keep in mind, we came off a very strong year in 2025 and Q4. We have a high degree of confidence in the 5,500 number. It tends to be -- you get some choppiness quarter-to-quarter, just based on customer mix of independents versus corporates. But the receptivity we see in the market amongst customers is very strong. So we have a lot of confidence in the overall 5,500 projection for the year. Michael Ryskin: Okay. Great. And for my follow-up on just sort of underlying market assumptions and what you've seen you had about 2% visit decline in the first quarter was to be expected in a lot of expectations. You talked about, I think, in your prepared remarks, modestly [indiscernible] the industry outlook -- just would be great to drive into that a little bit more. Is that U.S. or OUS? Is that something you're seeing now? Just expectations as you go through the year? Just parse that part a little bit more. Andrew Emerson: This is Andrew. Yes, so from a clinical visit perspective, we highlighted a minus 1% in the first quarter. So that's about a point better than what our initial guide had laid out from that standpoint. We continue to see positive momentum from the aging pet population, pets that are 5-plus years and older continue to add some positive momentum just to the overall industry. And I think what we're trying to do is capture the multi quarter perspective that we've started to see the green shoots in that area into our outlook. I hear more directly. I think if you look at the past trailing 12 months, the average is now very similar to what we're anticipating for the full year, which is about minus 1.5% decline in clinical visits. A lot of that is really from the wellness visit area and areas like the discretionary types of categories. We continue to see pressure related to the macro dynamics and consumers making trade-offs, whether they come into the clinic. But the positive side of that is when they are coming into the clinic, we're seeing really strong quality of care within those visits. So diagnostic frequency and utilization continue to expand at really healthy rates. And so you're seeing the diagnostic care protocols really continue to play out positively from that perspective. So we feel like we've kind of captured the range of outcomes here on the industry, but it is a little bit better than we had anticipated for the full year. Jay Mazelsky: Yes. Maybe just one comment on those pets 5 years and older. It is modestly positive. This is now the third quarter that we've seen that. So that's very encouraging. The other thing is it's been positive across both non-well and wellness visits. And so that cohort of pets said we know it's a very large cohort are coming into the practice, not just for sick visits, but also for well visits. Operator: We'll take our next question from Chris Schott of JPMorgan. Christopher Schott: Jay, Mike, congrats on the new roles. Just -- maybe just two for me. First on ex U.S. dynamics, another very strong quarter there. I'm just curious how much of this is commercial execution on IDEXX's part versus just maybe healthier broader market trends and just how you're thinking about kind of the directional growth for the ex U.S. business? And then maybe the second one for me is just coming back to inVue and the F&A rollout. I know you made some comments in the prepared remarks, but just elaborate a little bit more on how that initial utilization and uptake has ramped relative to your expectations? And just how we should be thinking about the broader rollout of that offering as we move through this year. Jay Mazelsky: Sure. Chris, I'll take the international market comment, then I'll ask Mike to handle the F&A rollout and how we think about that. The international markets just from a overall macro impact and performance side, we don't see broad differences between international and our domestic market. There's a macro impact, obviously, on wellness as a whole. Wellness is less a dominant [indiscernible] -- it's at a much lower rate than typically what we see in the U.S. just from a development standpoint. The really solid growth we're seeing in CAG recurring revenue, instrument placements internationally is a function of long-term investments that, as a company, we've made. So it's not just in terms of commercial expansion. So that's an important part of that, and we've done double-digit expansions over the last 5 years or so, it's building out. Our Reference Lab business, it's localizing software solutions like VetConnect PLUS. It's really building out the entire IDEXX ecosystem so that we can serve our customers at the level of experience, customer experience that they desire, but also making sure that they have full solutions. And if you look at our product road map and what we've rolled out over the last couple of years, a lot of our solutions have been from a design and development standpoint, targeted at these international customers. ProCyte One, for example, though it's been extremely successful in the U.S. Initially, we saw the opportunity footprint cost and performance to go more from a value standpoint. I think on the Rapid Assay business [indiscernible] is another example, really tailoring solutions for some of our international markets. And we're realizing I think that the success of all those efforts combined, and we've seen sustainable double-digit growth. We're very optimistic about the long-term opportunity in these international geographies. diagnostics utilization is just at an earlier state and that our experience has been with the right approach, creating awareness and education and working with customers in a [ tight ] partnership model that there's a lot of runway in front of us, and we feel like from a playbook standpoint, we really have a very successful and effective playbook we're executing. I'll hand it over to Mike to talk about F&A's [ controlled launch ]. Michael Erickson: Chris, thanks for the question. We're very happy with the controlled launch process for F&A. It's on track. And in fact, we're broadening it as we head into the second quarter here, we also would move to a more of an unconstrained launch posture later this year. Keep in mind, I mean, we've successfully been launching instrument platforms for many years here at IDEXX. We've done 4 of these just in my time. And this staged control launch process is what enables us to ensure we deliver the kind of outstanding experience that our customers expect from us, not just from the instrument, but from all aspects, end-to-end implementation, training and all of those things. And F&A, as Jay mentioned, it's really a very exciting platform within a platform, not just what it can do on the instrument with AI and detection of mast cell tumor cells, but also the one-click workflow if a customer wants added interpretation from an IDEXX board-certified pathologists. And we're seeing our controlled launch customers give us great feedback and really make use of all of that functionality. And then the final thing I'll just say here is that, as you know, these products have very long tails. We want to get it right up front because we know that the value creation really comes over time as we continue to expand what the platforms can do, and that's what customers really love about the solutions that we provide them. Operator: We'll go next to Erin Wright with Morgan Stanley. Erin Wilson Wright: So the consumables momentum was strong. It accelerated from the fourth quarter. I guess can you remind us kind of unpack that a little bit for us. I guess remind us what actually would be in view related or directly associated with inVue consumables? Is that really moving the needle yet? Or is this really about you locking in those customers into those IDEXX 360 contracts and having that sort of indirect impact from the inVue launch? And just when should we think about kind of inVue, I guess, moving the needle from a consumables perspective? Like what are you seeing in terms of the consumables flow-through so far relative to your expectations? Jay Mazelsky: Yes. The inVue consumables is definitely contributing to the strong growth and momentum we see in the VetLab consumables portfolio with ear cytology, blood morphology, we've communicated this before. It's well within expectations. Customers are enjoying it. It represents 100% new growth in the consumables area that we didn't have before. So we think that with F&A, we'll continue to build off that and can help sustain good momentum in that part of the portfolio. The other thing to keep in mind is because we've had very successful high single-digit, double-digit installed base growth across all the premium instruments. Every time we come out with a new slide. In the case of Catalyst, for example, with pancreatic lipase or cortisol, where we're able to market that into a very large installed base. And customers have grown to trust our solutions and the performance of the solutions and workflow of it is really load and go. So what we're seeing is a rapid uptake of these innovations across a large installed base globally. And these are -- in the case of my pancreatic lipase and cortisol, these are measurements or parameters that customers have been asking for. They see every day, dogs, cats coming into their practices that require these types of measurements. And the same really is true across the portfolio. We've seen a nice, I think, build in SediVue, for example, internationally, which started a little bit later than when we introduced it in the U.S., hepatology is typically sold as part of a chemistry and hematology suite. So we're benefiting from that focus on placing instruments, creating a seamless experience and continuing to evolve the menu through a Technology for Life approach. Erin Wilson Wright: Okay. Great. And then just on F&A again. And just on kind of the building a broader launch there. I guess, do you have a backlog or preorders to speak of on that front that customers are waiting for F&A, like what do you hear from the field as kind of you more broadly launched that throughout the year? And then what is your expectation? Or when should we hear more on the next menu expansion for inVue and how meaningful full that could be to the platform? And also just to know kind of thanks, Jay. It's been also great working with you, and thanks for the support over the past few years. Jay Mazelsky: Yes. Thanks, Erin. Why don't I -- I'll take the commercial aspect of it and then maybe have Mike talk a little bit about the F&A and why we think virtually all customers would be interested in it. From a commercial standpoint, what we launched at what customers, I think, focused on was, obviously, the ear cytology and blood morphology, it felt like from a menu standpoint that, that offered a degree of completeness that supported the placement of the instrument and overall utilization, and that's certainly played out. And they -- of course, we communicated the fact that we weren't going to stop at that from a menu standpoint that it was kind of -- we were going to broaden it to F&A, first on [indiscernible] and then over time, continue to expand the menu because the architecture and the technology enables us to do that. And I think we've communicated at one of the -- our last Investor Day that there's over 100 million, 150 million cytology done on a global basis, manually. So there's a very, very sizable opportunity still in front of us. Mike, why don't you talk a little bit about the F&A and how customers think about that? Michael Erickson: Yes. Thanks, Jay. I mean F&A, just like blood morphology and ear cytology, I mean these are all complementary care episodes, applications, if you will, on the inVue Dx platform. And really, every practice that you see is doing all of these things. And so we know there's a lot of excitement out there with fine needle aspirate. It's very common for practices to have pets coming in on a weekly or daily basis, dogs with lumps and bumps that are suspicious. We know today there are around 12 million of these of F&As being done, but we know that 90% or more of the masses that come in actually don't get investigated because it just takes a lot of work to do it manually with cytology. And frankly, it's pretty expensive. And so we're really excited about F&A on inVue Dx as an opportunity to not only elevate the standard of care, but also expand access to muted care and we see a long runway for doing that. As Jay shared and as I shared previously at our Investor Days, we see 100 million cytologies, beyond what we're talking about already around the world. And so we see a long road map, a very exciting road map ahead on inVue Dx and we'll continue to share more about that as we move forward. Operator: We'll go next to Jon Block with Stifel. Jonathan Block: So -- when I factor in the 2Q '26 guide, the first half CAG Dx recurring looks like it's expected to be about 10.25%. That's the [indiscernible] at. And the midpoint for CAG Dx recurring for the year is now after the raise 9.7%. So slightly below the [indiscernible] in a quarter but the comps get much more difficult in [ 2 age ] and it doesn't look like you're assuming the visits improve off the 1Q number. So Jay or Andrew, can you just lay out the drivers that allow the CAG Dx recurring call it, 2-year stacks to accelerate into the back part of the year, again, because it doesn't seem like there's a big uplift at least embedded in the visits from the 1Q number. Andrew Emerson: Yes. So I think from an overall perspective, if you look at the full year guide. We're really planning for solid growth. And we've actually increased the outlook both at midpoint and the overall range on an organic basis by about 70 basis points. That confidence really stems from continued execution that we see on a global basis. Our commercial teams continue to support our customers exceptionally well. We've also seen really strong and solid benefits from the new innovations that we've launched in recent years. Jay highlighted some of those earlier on the call, the contribution between inVue Dx as well as some of the new menu that we've added to our Catalyst platform. We've certainly seen expanded utilization as well, both in terms of the industry metrics as you highlighted, we are thinking that clinical visits are slightly improved from our initial guide, which is partly playing a role in there. But we continue to see really strong quality of visits. And I think that diagnostic frequency and utilization certainly benefits the overall growth rate that we have outlined as part of our long-term guide. Keep in mind, guidance continues to be a range. I think if you look at the upper bound of the guidance range, certainly more consistent trends with what we have now. And again, I think that comes back to confidence in our business execution and continuing to maintain strong relationships with our customers. Placement trends on instruments are really positive. We've seen growing benefits from utilization across our key modalities from a business standpoint. So I think we have really captured kind of a range that we feel confident with going forward here. But maybe I'll let Jay talk to a couple of the specifics just from a broader business perspective. Jay Mazelsky: Yes. One thing we haven't spent a lot of time talking about is the momentum also in the Reference Lab business. It's been very strong. We've seen that globally. Part of it comes down to a lot of differentiation. Cancer DX has given us, obviously, something to go in and talk to customers about, but leveraging that to talk about the broader differentiated portfolio in Reference Labs, not just from a menu standpoint, but from a service standpoint and being able to serve all of our customer needs. And what we've seen is we've been able to grow successfully the entire IDEXX portfolio. So point of care, Reference Lab, software, the integration that provides. And the business just has a lot of momentum because of that. And we've been, I think, transparent with customers in terms of the innovation agenda around what's coming, the expansion of IDEXX cancer diagnostics as an example, continued to build into more of a full volume posture with inVue Dx F&A in the second half of the year. I think that gives us a lot of confidence in terms of being able to sustain good momentum in the business. Jonathan Block: Okay. That's helpful. And maybe just a quick follow-up. For inVue, the way you guys frame it makes it seem like you're not yet in that [ 3,500 to 5,500 ] revenue per box band yet. And I guess maybe a couple of parts to the question. One, is that an accurate statement? You're not there yet, you're, I guess, trending to it or however, some of the verbiage is laid out? And then when do you expect to be in that band? And do you need sort of that full launch unrestricted launch of F&A to get there. Andrew Emerson: Yes. Thanks, Jon. Maybe I'll start and then Mike can add in here. But just from a recurring revenue perspective and utilization of the instrument, I think what we are seeing is very much in line with what we had anticipated as part of our build. Certainly, the range that we've given, again, is a range. I think it wasn't a precise number and it did include the launch of F&A, which we've started while that's in a controlled basis, we continue to ramp. We're within the band that we've highlighted here on a per instrument placement perspective. And I think, again, we'll continue to provide more insights and updates. We would like to see us more broaden out the F&A launch and then we can continue to identify exactly how that's playing out over time. But I think we're within that band, and we feel confident about the range that we provided. Michael Erickson: Yes, Jon, Mike here. I'll just underscore. We're well within the range that we've communicated. We're happy with that. And that's really before moving to an unconstrained launch position with F&A. So we see more opportunity ahead. And as I mentioned earlier, only 10% of the masses that come in today get looked at. And so we see -- if you look at it kind of the TAM for F&A, if you will, is very, very large. So we see lots of opportunity ahead of us there. Operator: We'll go next to Daniel Clark with Leerink Partners. Daniel Christopher Clark: Just wanted to ask on the updated visit guide. What are you thinking in terms of the macro and in terms of fuel prices? Do you assume sort of no change in that dynamic going forward through the rest of the year? And then I'll ask my follow-up upfront as well. When we think about performance in the first quarter, were there any changes in either visits or diagnostic frequency between January and February and March when we saw fuel prices pick up? Andrew Emerson: Thanks, Dan, for the questions. Maybe I'll start on this one. So from a visit guide perspective, certainly, fuel could have kind of an impact on consumers. I think obviously, the range that we provide, again, is a bit of a range, the lower end. You may assume that, again, you see continued constraints on the consumer demand side. But I think overall, what we know now is it's a pretty volatile and evolving dynamic in the Middle East and how fuel prices are going to play out and energy costs are going to impact the consumer, a little bit hard to predict that piece of it. But I think from a longer-term trend perspective, we're calibrated more on where we're -- what we've seen here over the last recent quarters on visits. Certainly, the wellness category and discretionary categories are the predominant driver of declines that we're seeing at this point. In the last 3 quarters, we've been relatively flat on non-well visits, meaning that as pets experience issues that they need to be dealing with. Consumers are willing to prioritize that spending. What we have seen though is that trade-off of consumers maybe not coming in for wellness or discretionary visits that have been more impacting just their overall decision-making here. But again, I think it's a bit dynamic on the fuel side. We'll see how that plays out. But I think we've captured what we believe is a good range at this point. Jay Mazelsky: Yes. Just the one thing I would add to Andrew's comments is we've seen very consistent international growth for a long time now. And that's been through Obviously, there's been a war in Europe, and there's been inflation and macro pressures. And we've been able to -- it's not that it's not real. We've been able to out-execute that through innovation and commercial partnership with customers and commercial expansion. So we've got a lot of confidence in the health of the business and our ability to continue to bring innovations to our customers. Andrew Emerson: And then maybe the second part of your question, just in terms of Q1 performance. We don't typically break out the monthly dynamics just relative to visits. It can be really noisy. There's a lot of factors including things like day accounts, et cetera, that can play out in a month. We just see a lot more variability on a week-to-week or month-to-month basis. So not something that we give too much stock in from that perspective. But certainly the quarter had a minus 1% decline, majority of that being the wellness side, I think, is pretty consistent with what we would have expected on the wellness side and a little bit better on the non-well side, just in terms of the quarterly results. And again, we're guiding to a minus 1.5% for overall clinical visits for the year. So I think we've captured expectations for continued pressure in those areas. Operator: We'll go next to Ryan Daniels with William Blair. Ryan Daniels: Congrats on the leadership changes. Maybe another one just on what we're seeing in the end market. It's interesting, as you said, we've seen somewhat of an inflection towards positive non-wellness visits. I'm curious if you've dug into that any deeper? Does it really relate to this aging pet population, is it anything with maybe some pent-up care demand because of the lack of wellness volume? Just anything you see there and how sustainable that might be would be helpful. Jay Mazelsky: Sure. Yes. We have seen -- we break it out through different age cohorts. And initially, if you go back some quarters, we have seen it in that 5- to 7-year cohort. So these are pet adoptions that largely occurred during the pandemic, where we had that huge step up. And what we've seen in terms of the type of breeds that were adopted during the pandemic is they're more heavily medicalized. The doodles, for example, frenchies. Dogs just require more care. And that's been -- in talking to customers, especially the corporate customers who track that sort of thing. They've also validated that, that's a real thing but we're beginning to see the front end of that very big pandemic adoption that we've seen. So we think that that's sustainable. Ryan Daniels: Okay. That's helpful. And then one just clarification. You mentioned some supply chain disruption impacting, I think, international growth. So maybe a multifold question there. Can you go into that? And was it for CAG or for Water and LPD? And then has that abated or how is that incorporated in your guidance looking forward? Andrew Emerson: Yes. Thanks for the question. So really, that was related to the Water business, specifically, and that was related to the Middle East. The Middle East region certainly have seen some dynamics going on where supply chain has gotten disrupted. We continue to work through that, but there was modest pressure in the water business that we factored into our outlook here. Operator: Our last question will come from Daniel Grosslight of Citi. Daniel Grosslight: I wanted to go back to the improved CAG Diagnostics revenue outlook for this year. Something you can maybe bifurcate a little bit more or force rank the contribution from volume, price and innovation on the improved outlook. And as we look to the [indiscernible] top end of the range now, what's the biggest swing factor between those 3 contributors, volume, pricing, innovation? Andrew Emerson: Yes. So we haven't actually updated anything from a pricing perspective at this point. What we highlighted on our initial guide and certainly in this outlook is approximately 4% net price realization for our CAG Diagnostic recurring revenues. In the U.S., that's modestly lower than we've highlighted before as well. But there's nothing new there in terms of change. This is all volume driven. I think the positive news here is we continue to see an outlook for expanded volumes, and that's largely the 70 basis points. That is a combination just of our overall business performance, the execution against some of the new innovations and our ability to continue to partner with customers to grow the use of diagnostics. We see, again, the diagnostic frequency or blood work conclusion continue to expand, which benefits the business as well as a modest improvement in the declines that we expected associated with the clinical visit flow through. So those are the components that we've highlighted specifically here but a lot of this comes back to the volume that we're able to drive as an organization for CAG Diagnostic recurring revenues. Jay Mazelsky: Yes. Just to build off that. It really is a volume-driven growth trend on the point-of-care side, we note that we've been able to grow double digits our installed base over a period of time, that's the flywheel in which customers drive utilization. I referenced that business is very healthy. All the investments that we've made, cancer, IDEXX cancer diagnostics, I think, has put some additional visibility to that business. The ability to really, I think, continue to support double-digit international growth as a result of the investments made in that area as well as commercial expansions, I think, give us confidence that it's a -- we're in an attractive part of the market with good momentum. And so with that, thank you for your questions. We'll now conclude the Q&A portion of the call. It's been a pleasure to share how IDEXX executed against our organic growth strategy, while delivering strong financial results in the first quarter. Thank you for your participation and engagement this morning, and we'll now conclude the call.
Operator: Ladies and gentlemen, welcome to BWX Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead. Chase Jacobson: Thank you. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Mike Fitzgerald, Senior Vice President and CFO. On today's call, we will reference the first quarter 2026 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the safe harbor provision found in the investor materials and the company's SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex. Rex Geveden: Thank you, Chase, and good evening to all of you. We had a great start to 2026 with very strong first quarter results. Revenue grew 26%, 11% of which was all organic. Adjusted EBITDA grew 14% and earnings per share grew 22%, all ahead of expectations. Outperformance in the quarter was driven by improved throughput, favorable pacing of work and exceptional operational execution across our business lines. We ended the quarter with a backlog of $8.7 billion, up 77% year-over-year and 19% sequentially. Supported by robust bookings in government and consistent backlog in commercial, providing clear visibility to future growth. Demand for commercial nuclear power components and services continues to accelerate across the U.S., Canada and Europe. As projects launched, we believe that localized manufacturing capacity will increasingly differentiate BWXT, making the establishment of U.S. commercial manufacturing footprint to complement our Canadian operations a strategic priority. To that end, in April, we announced the acquisition of Precision Components Group, PCG, a U.S.-based manufacturer of complex heat transfer components for the U.S. naval and commercial nuclear markets with 2 facilities in more than 400 highly skilled employees, PCG represents our first step toward building domestic U.S. commercial nuclear manufacturing capacity. While most of PCG's current revenue and backlog is related to naval programs, its facilities have immediately available capacity that we intend to utilize for the commercial market. With products such as reactor internals, pressurizers, heat exchangers and reactor head assemblies. Beyond the PCG acquisition, we intend to expand our U.S. commercial manufacturing footprint likely with a greenfield plant at our Mount Vernon, Indiana site on the Ohio River. This facility will be capable of producing larger heavy nuclear equipment, including steam generators and reactor pressure vessels. Ultimately, our goal is to build scalable U.S. commercial nuclear manufacturing operations that can serve U.S. and global SMR and large reactor projects. By adding domestic capacity, we are positioning BWXT to meet rising commercial demand while creating meaningful synergies with our existing U.S. operations. Beyond commercial power, we are making disciplined growth investments across the portfolio, supporting existing businesses, adding new technologies and capabilities and pursuing opportunities in advanced nuclear and other national security applications. Turning to segment results and market outlook. Government Operations revenue was up 4% and adjusted EBITDA was up 1% in the quarter, slightly ahead of our expectations. We had strong bookings, including $1.4 billion from the second portion of the pricing agreement for Naval reactors awarded last year and long lead material procurement contracts for out-year production. This led to segment backlog of nearly $7 billion up 25% sequentially and 93% year-over-year. In naval propulsion, we are driving operational efficiencies in our plants, which contributed to our good margin performance in the quarter. We anticipate continued revenue growth with a steady pace of Virginia-class production, growth in the Columbia class and early work on the next Ford class ship set. The President's FY '27 budget request supports these programs and ship building generally, further reinforcing our confidence in longer-term growth rates. In special materials, our legacy programs delivered solid results and our defense fuels enrichment and HPDU programs are progressing in line with early program schedules. Specific to defense fuels enrichment, we completed construction of the Centrifuge manufacturing development facility earlier in the year and have begun prototyping the first units. In April, we engaged with the NRC regarding our plans to build an HEU enrichment facility in Erwin, Tennessee. This engagement is an important milestone as it creates alignment with regulators in the NRC approval process. For our new large HPDU contract, we are organizing the supply chain and preparing for construction of the new facility in Jonesborough, Tennessee. That program will ramp through 2026 and continue over the next several years before transitioning to commissioning and production. The growth potential in special materials is exciting, and we continue to pursue new scopes with existing customers and evaluate entry points to new markets. Technical Services has delivered strong equity income growth over the past few years with multiple strategic wins. We are pursuing new opportunities in the DOE market and in other new markets with the next wave of contract awards expected over the next 12 to 18 months. Moving to microreactors and advanced nuclear fuels, the market is evolving rapidly in land-based defense, commercial and space markets. We continue to see strong demand across the board, including TRISO fuel for demonstration reactors and future commercial projects with multiple reactor developers. Of note, Kairos with whom we have a collaboration agreement on TRISO recently began construction of its Hermes 2 reactor for Google in Oak Ridge, Tennessee. Finally, we are continuing our close engagement with the Army on the Janus Program. Turning now to commercial operations. Results in the quarter were well ahead of our expectations. Organic revenue grew 39% and total revenue rose 121% with robust double-digit growth in commercial nuclear and medical and contribution from Kinectrics. While the outperformance was partially due to timing of outage work and progress on large component manufacturing, we also improved operational performance with accelerated throughput and reduced lead times. Following an 85% increase in backlog in 2025, backlog was flat sequentially in the first quarter, but still up 33% year-over-year, supporting our expectation for low teens organic growth in commercial power this year. The outlook for new build nuclear projects remains very positive. Notably, the U.S. and Japan announced plans to invest up to $40 billion to build up to 3 gigawatts of GE Hitachi, SMRs in the Southeastern United States. Our role is the reactor vessel supplier on the first GE Hitachi BWRX-300 SMR in Canada puts us in a good competitive position for these future projects. Given BWXT's industrial scale and engineering and design capabilities, customers are increasingly coming to BWXT to supply critical nuclear components for their current and future SMR and large-scale nuclear projects, which should lead to further backlog growth over the next 12 months. Kinectrics continues to exceed the acquisition business case having delivered another very strong quarter. A key highlight in the quarter was Kinectrics being selected as the design and fabrication partner for a U.K. Tritium loop facility, which will be the world's largest and most advanced tritium fuel cycle facility. This presents an entry point for engineering services and specialty equipment manufacturing and the exciting nuclear fusion market. With that, I will now turn the call over to Mike. Michael Fitzgerald: Thanks, Rex, and good evening, everyone. I'll begin with total company financial highlights on Slide 4 of the earnings presentation. First quarter revenue was $860 million, up 26% year-over-year with 11% organic growth. Strong performance in commercial operations was complemented by steady growth in Government Operations. Adjusted EBITDA was $148 million, up 14% year-over-year driven by robust growth in commercial operations and modestly higher Government Operations, partially offset by higher corporate expense relative to an unusually low level in last year's first quarter. Adjusted earnings per share were $1.12, up 22%, reflecting strong operating performance and approximately $0.08 of higher nonoperating contributions. Our adjusted effective tax rate for the quarter was 15.8%, benefiting from timing of stock compensation. Our updated full year tax rate guidance of less than 21.5% is modestly higher than last year's rate, reflecting strong growth in international earnings, mainly from Canada. First quarter free cash flow was $50 million, a strong result for what is typically our seasonally weakest quarter, reflecting solid earnings and effective working capital management. Capital expenditures in the quarter were $43 million. We continue to expect our full year capital expenditures to be around 6% of sales. However, it is possible that CapEx may exceed that level in future periods as we advance targeted growth investments including expansion of U.S. commercial nuclear manufacturing capacity and advanced nuclear and fuel capabilities given the significant business we expect to capture. We are carefully balancing these strategic investments with our financial return metrics as we evaluate the numerous growth initiatives across the business. Moving to the segment results on Slide 6. In Government Operations, first quarter revenue was up 4% with growth in special materials and naval propulsion offsetting lower microreactor volumes. Adjusted EBITDA in the segment was $118 million up 1%, resulting in an adjusted EBITDA margin of 20.4%, has better revenue, solid operating performance and timing of technical services income benefited margin. Given first quarter performance, we now expect government operations margins to exceed 19% for the year. Turning to Commercial Operations. Revenue was up a robust 121% including 39% organic growth, reflecting increases in both commercial power and medical and contribution from Kinectrics. Growth exceeded expectations due to increased throughput on large commercial nuclear component projects, mainly associated with the Pickering life extension and better-than-expected performance from Kinectrics. Adjusted EBITDA in the segment was $36 million, up 162% from last year. Adjusted EBITDA margin in the quarter was 12.9%, with higher sales and strong execution, offsetting the impact of growth investments as we continue to scale the business. Turning to our 2026 guidance on Slides 7 and 8 of the earnings presentation which I will note does not include contribution from the recently announced PCG acquisition. We expect revenue of at least $3.75 billion, up high teens compared to 2025. In Government Operations, we expect low teens growth with over half coming from the defense fuels and HPDU contracts. In Commercial Operations, we increased our revenue growth expectation to approximately 30%, driven by low teens growth in commercial power, high teens medical growth and a full year of contribution from Kinectrics which as mentioned, has outperformed our expectations to date. For adjusted EBITDA, we are increasing the guidance range by $5 million on each end, resulting in revised adjusted EBITDA guidance of $650 million to $665 million. Regarding the cadence of operating earnings, we continue to expect our full year results will be slightly more back half weighted than usual with about 55% of full year EBITDA anticipated in the second half, and we expect second quarter EBITDA to be roughly in line with to slightly below first quarter levels. These assumptions lead to non-GAAP earnings per share guidance of $4.60 to $4.75 with the increase driven by higher operating earnings. We expect free cash flow of $315 million to $330 million, inclusive of mid- to high teens operating cash flow growth supporting continued reinvestment and long-term shareholder value creation. Regarding the recently announced acquisition of PCG, the business generated approximately $125 million of revenue with low double-digit EBITDA margins in 2025, and we anticipate mid-single digits revenue growth in 2026. The acquisition, which will be included in our Commercial Operations segment, is expected to close in the second half of the year. As such, our annual financial guidance does not include contributions from PCG at this time. Overall, we're off to a strong start in 2026. Our robust backlog provides us great visibility for the remainder of the year, allowing us to focus on margin expansion cash generation and capturing new high-value contracts across the defense and commercial nuclear markets. With that, I will turn it back to Rex for closing remarks. Rex Geveden: Thank you, Mike. It is an exciting time at BWXT. We are delivering on our commitments to customers and shareholders in driving value through process optimization, technology adoption and disciplined growth investments. Our 2026 guidance supports meeting or exceeding the medium-term financial targets, we introduced at our Investor Day in February 2024. We look forward to providing an update at our next Investor Day this fall. As I wrote in a recent Washington Times op-ed, BWXT is not betting on a horse. We are betting on the race. We participate across the nuclear value chain in defense and commercial markets and as a merchant supplier and a technology provider, enabling us to win across a broad range of competitive outcomes. We have record backlog, unprecedented demand and the financial strength to continue investing for growth. We intend to build on our market-leading position in nuclear solutions for defense and commercial nuclear markets, thereby driving long-term shareholder value. And with that, we look forward to your questions. Operator: [Operator Instructions] Our first question comes from Matt Akers from BNP Paribas. Matthew Akers: I may have missed this, but did you say how much you're planning to pay for PCG. And then I guess another, just a question on the sort of footprint build-out because you mentioned this is sort of the first step towards building out the footprint. And sort of how should we think about what's left? Is it more kind of capacity driven? Is it technology? Is it head count? And just kind of what -- how to think about that? Michael Fitzgerald: Yes. Thanks, Matt. So from a purchase price standpoint, we didn't put it in the public release, but it was roughly around $200 million. So in line with the multiples that we've seen in some of our more recent acquisitions. And so ultimately, depending on the time line, we'll see when that will close out this year, but fully expect that to move along pretty rapidly. I would say when you look at this from a kind of first step, there's a couple of different ways to think about this. One, we like the capabilities. We like the workforce. We certainly need the square footage from a capacity standpoint. However, this is going to be primarily focused on manufacturing of certain aspects. It's not going to be able to handle some of the large, heavy, very large scale components that we need to manufacture. So we're looking at kind of a multiple approach step, which we announced in our last earnings call, the potential for a new facility may be adjacent to our Mount Vernon location which could handle some of the heavier large components. And so we're looking at this both from a capacity and workforce standpoint. Matthew Akers: Great. I was wondering if you could touch a little bit on kind of the space end market and the opportunities that you're seeing there. I saw you just added Dan, to the Board recently, you remember from Maxar. But just curious what you kind of think of it as kind of the opportunities coming up in the pipeline there. Rex Geveden: Yes. So I kind of -- this is Rex. So kind of divided into 2 areas. There is a civil space opportunities and NASA seems interested in really 2 things: nuclear electric propulsion and then also efficient surface power for a lunar based. And then there's a long-term commitment to nuclear thermal propulsion according to the NASA Administrator, Jared Isaacman. And so we have opportunities to play in all of that. Certainly on the fuel side and on delivering a reactor for any of that. So interesting -- it's an interesting opportunity. It's an interesting market for us. It's kind of a one-off market in the sense that you do one of those systems typically. I think probably the more fertile ground for us is national security space. I believe we'll see more applications for power and propulsion there, and we're locked in on that opportunity. Operator: Our next question comes from Jeffrey Campbell from Seaport Research Partners. Jeffrey Campbell: Congratulations on the strong quarter. My first one is, would your new commercial facility, the one that you have not yet reached FID, and would it have any limitations regarding components that it could build for customers such as, again, Hitachi Westinghouse or Rolls-Royce? Michael Fitzgerald: No limitations at all. I mean I think when we look at our demand signals, we're certainly seeing some capacity constraints even in our Cambridge facility as we look out multiple years. The other thing that I think we're finding is that being kind of localized in the U.S. creates a competitive advantage, and we're excited to add some of those capabilities to make sure that we have a U.S. presence and we think that, that's a differentiator when we look at it from a market standpoint. So ultimately, the idea is to set up potentially centers of excellence, where you would have certain facilities that are focused on things like reactor internals and tanks and pressurizers and you would have other facilities that would be focused on kind of the large steam generators, reactor pressure vessels, those types of things. And so we would think of it there, but we would ultimately make that across multiple customers and multiple platforms. Jeffrey Campbell: Okay. Great. I appreciate that color. My other question is you've made the case for PCG's acquisition for the budding U.S. commercial activity. I just wondered if the acquisition has any positive effects for your naval business as well? Rex Geveden: Yes, I think it could, Jeff. It's a nice business in the sense that it has an existential qualified nuclear workforce. It has plenty of capacity, as we alluded to in the script, and we'll make immediate use of that capacity. But I think the more important thing is nuclear manufacturing credentials are rare and hard to get. So you have to go through certifications to get stamps for it to get things like N stamps and NPT stamps and U stamps. These are ASME certified factories that also have nuclear quality systems. And so that's hard to get, and it's an immediate capability for us. And so certainly beneficial to our Navy customer, which has been using that -- has been using that capability for a long time, but more importantly, I think, is the commercial case because as we expand into the U.S., we need that kind of manufacturing capacity capability, and we'll get going with it right away. Operator: Our next question comes from Bob Labick with CGS Securities. Bob Labick: Congratulations on the results and the exciting outlook as well. I just wanted to expand on the questions on kind of U.S. capacity build-out. Have you decided yet? Or do you know how much capacity do you want to add? And could you give us a sense of the capital needed for a U.S. greenfield and how long that might take to build out? Rex Geveden: Yes, Bob. We're going -- we're presently going through a 60,000 square foot capacity expansion at our Cambridge plant. And the capacity we're looking for in Mount Vernon would be 50%, 60% more than that, let's rough it out at 100,000 square feet and then to outfit that factory. So now the expansion that we're doing in Cambridge is brownfield this would be quasi greenfield. And so it will be more expensive than our Cambridge build-out. But that -- the reason we're attracted to the Mount Vernon site is because we've got rail spur there, we've got crane capacity 1,000 metric ton crane pass, radiography facilities. So there's some natural cost synergies that would go with our Navy business that's there, not to mention workforce that's nuclear qualified in a plant next door. So that's kind of the thesis behind it. In terms of budget, it would be -- think of it as kind of twice what we're doing at Cambridge in rough terms. Bob Labick: Okay. Great. And then there's obviously so much demand out there, and it just seems to keep growing and growing. Is there any thought about, I guess, exploring customer funding for commercial capacity growth? Or how do you derisk building out incremental capacity on the commercial side versus on the government side? Rex Geveden: Yes, I'd say we have got the balance sheet to do what we need to do in terms of capacity. Operator: Our next question comes from Pete Skibitski from Alembic Global. Peter Skibitski: You talked, I think, in both segments about improved throughput. I was just wondering if you could put some color to that, if there's certain initiatives you have in place to help with throughput or if it's just net hiring or something? Rex Geveden: Yes, Pete. We did have formal initiatives in-house called Driving Performance Excellence is what we call a DPX, that's our -- that's sort of our name for operational excellence. And we've had that kind of process going on in the plants for a long time. We've now expanded across the entire enterprise. So we're using things like supply chain and human capital and other areas. But yes, we do have some dedicated throughput projects, including, for example, the Pickering steam generators, TheraSphere, we had an important throughput project in our Lynchburg plant last year, having to do with an area called -- that we call higher tier. So yes, we're highly focused on that because of this basic fact, we need more capacity than we have, and we can get capacity in 1 of 2 ways. We can get capacity from increasing our throughput, which is the cheapest and best way to do it or we can get it by adding square feet. Doing acquisitions or doing brownfield and greenfield plants. We're doing all of the above because we need so much capacity. But that's how we're thinking about it, and that's the reason we focused on throughput. Peter Skibitski: Okay. Okay. Great. And last one for me. I guess Air Force DIU had this recent ANPI awards, Radian, Westinghouse and Antares. Just was wondering, were you guys disappointed you didn't get an award here? Are there going to be further ANPI opportunities? Or is the focus really more so on Janus and on your BANR reactor. Just wondering if you could kind of -- these initiatives seem to have some relationship to each other. So I was just wondering if you could kind of sort it out for us. Rex Geveden: Yes, sure, Pete. So no disappointment because we didn't pursue those opportunities. Those were more about some smaller scale reactors for lower power output. And none of those reactors is transportable like our Pele reactors. So we have our transportable Pele reactor that fits certain use cases, and it's very interesting, but not for those particular opportunities. And then we have commercial derivative of Pele, you might say that's called BANR, which is a 20-megawatt electrical output, a much larger microreactor than you see out there in most case and that one fits a completely different use case. So that was -- those competitions weren't really for us. We are focused on Pele follow-on work. We're focused on Janus, and we see plenty of opportunities for microreactors and for microreactor fuel for TRISO fuel. Operator: Our next question comes from Marc Bianchi from TD Cowen. Marc Bianchi: Maybe Rex, following up to the last point there on TRISO. There's been some more focus on it now with some other companies that are involved in manufacturing coming public. Can you talk a bit about your process there and how you think your competitive positioning would stack up over time? I know currently, you're doing it. So that's a good sign. But maybe just as you think about the next few years and stamping out your competitive position? Rex Geveden: Yes, I'll try and put some color on that one. Yes, we are the only producer of TRISO at any scale at this point. We're producing hundreds of kilograms a year, we made all the fuel for our Pele reactor. We're making fuel for Antares and some other clients we haven't disclosed yet. So we're in the commercial business on TRISO. I would say that, that is sort of the limit of our capacity now, a few hundred kilograms a year. So there's only so much you can do with that. In order to scale that, we are considering brownfield and greenfield opportunities. And we've talked publicly about doing something on a larger scale in Wyoming. And that's what the market needs. We need a very large-scale plant so that we can drive down the cost on TRISO to help make these reactors commercially viable. I will just maybe add to that point that I think this is a really interesting place to be in the market to be able to be in the fuel side of microreactors and small modular reactors is a pretty nice place to be. I said it in the script, but we're betting on the race, not on the horse and that posture enables us to win in a variety of competitive outcomes. And for TRISO, we're positioned exactly where we want to be, which is we produce it for our own purposes, but we also produce it for the market, and we intend to do that in the future. Marc Bianchi: Okay. And then the other one I had was just on the Japan announcement, the $40 billion for GE Hitachi, when would it be realistic for awards to be made to the market for that equipment? Like just -- I know you still need to win it, but just in terms of thinking of a time line for when that could potentially be added to backlog. Rex Geveden: I think it's -- I mean I think of this one and the AP1000 one is fairly near term as far as nuclear projects go, I'm in touch with the top leadership of GE, and we're in touch with the top leadership of Westinghouse. And these deals are being negotiated at a -- with urgency is the way I would put it with the Department of Commerce. And so I think -- I said it on prior call, it wouldn't surprise me if we started to receive orders this year related to those large -- to those sort of bulk reactor buys. But there's a lot of things that -- a lot of hurdles that need to be cleared between now and then. Operator: Our next question comes from Jeff Grampp from Northland Capital Markets. Jeffrey Grampp: Rex, it seems like conviction and proceeding with the commercial expansion at Mount Vernon, I'm curious how long might something like that take to get operational from when you ultimately decide to move forward there? And how important do you guys sense is having something like that operational to winning U.S.-based business? Rex Geveden: Yes. You said a couple of key things there, Jeff. So on the time line, that's something that will take us 2 or 3 years to complete. And that should be in the right time frame for being able to take some of these large orders and get going. But you made a key point there on the end, which is around how important it is to have U.S. industrial capacity. I do believe that localization of supply chain is kind of going to be the way it is in nuclear. It's certainly a strong emphasis in Canada where we play strongly and we have local capabilities in there. I think you'll see the same thing play out in Europe. I think they're going to favor local supply because of the economic development impacts. And so I do believe that localization in the U.S. will matter. And I think it will particularly matter on some of these government projects like the 10 AP1000 and up to 10 X-300s. And that's one of the reasons we're doing it. We don't have orders yet, obviously, but we're trying to skate to where we think the puck is going because these are such long cycle projects and you have to have the capacity, the existential capacity when the order comes. So that's how we're thinking. We're very bullish on it. And by the way, I don't think in the long run about 10 reactors or 4 reactors at Darlington. If you think about what the global industrial base did -- nuclear industrial base did in the 70s, 80s and 90s, it built 600 large reactors. And I think if we're going to decarbonize the grid to meet the energy needs of AI, meet the energy needs of electrification, we're talking about hundreds and hundreds of reactors globally, large reactors, translate that into thousands of small modular reactors. And so that's the kind of opportunity set we think about. And so we're very bullish on that outcome, and we're building capacity in advance of the orders. Jeffrey Grampp: Super helpful detail. I appreciate that. My follow-up is on the enrichment side. Can you just give us maybe a high-level flavor for kind of, I guess, general timing or progression points on the Centrifuge Manufacturing Facility, that NRC licensing engagement, things like that? Just anything we should kind of keep our eyes peeled for to gauge kind of moving that project forward? Rex Geveden: Yes, I think I've said publicly that, that will progress over the next few years. We've obviously completed our Centrifuge Manufacturing development facility in Oak Ridge, Tennessee. We are outfitting it and working on prototypes right now, that will progress. So the technology transfer from Oak Ridge National Laboratory to BWXT occurs over the next few years. The licensing for the HEU part of it should progress normally over the next few years. I think the more interesting part of it is when we get into Centrifuge Production, which we need to do for the high enriched uranium cascade. And I think in the long term, what will be interesting for us is how do you fill the gap for low-enriched uranium and high-assay low-enriched uranium. That gap is very evident and fundamentally very interesting from a business development perspective. Operator: Our next question comes from David Straus with Wells Fargo. Joshua Korn: This is Josh Korn on for David. I wanted to ask about Medical. I think you had said strong double-digit growth in the quarter. I just wanted to ask about any specific products or markets to call out kind of the outlook there. And then any update on the Tc-99? Rex Geveden: Yes, we didn't give much detail on the script on medical, but that's still a good news story for us. We've got good growth all across the board. And following 3 years of 20% compounded growth, we're forecasting high teens growth this year and we see strength in strontium. We see it in germanium. We see it in TheraSphere. Actinium-225 is growing at an outsized pace, but that's off a pretty small revenue base and we're ramping up production of stabilized isotopes with ytterbium 176. That production is going quite well. And we've got some new therapeutic products in the pipeline like lead-212 and other products that are interesting. Tc-99 is progressing. There's fundamentally no different news on that. We mentioned on the last call that we're evaluating some approaches to the market based on the particularities of our product. And we don't have -- we don't have anything in the 2026 forecast for Tc, but we're continuing to push that towards the finish line. Joshua Korn: Okay. And then wanted to ask on defense. You had been a recipient on the SHIELD contract for Golden Dome. So with all of that money in the '27 budget, kind of what -- if you could provide any color on what that -- what your work may involve and then kind of what the addressable market is for you? Rex Geveden: Yes. We are a Golden Dome contract recipient awardee. That's not uncommon. They certainly awarded to several hundred companies, as I recall it, ours was for some broad infrastructure scope, which I think is pretty interesting for us because of the nuclear capabilities that we have. So to the extent that Golden Dome would need microreactors to drive missile defense sites or radars or whatever it is, distributed power even up to small modular reactors we could play there as a fuel supplier, I think there's a lot there for us potentially in the future, but it's pretty undefined at this point for us. But we've got sort of -- we've sort of got a license to go hunting and we'll turn it into something. Operator: Our next question comes from Scott Deuschle from Deutsche Bank. Scott Deuschle: I think Kinectrics brought with it some revenue connected to the broader power and grid infrastructure space, including in areas like high-voltage testing and cable commissioning. Would you be able to give us a sense as to how big of a business that is for them and what the growth outlook is there? Rex Geveden: Yes, it's about 10% of the total Kinectrics business right now and growing faster than a lot of the parts of that portfolio. That -- yes, that's a very interesting business super high voltage capability, testing components for the grid for component supplier to the grid, kind of an underwriters' laboratory type of thing. But I think the real shoots of -- the real green shoots of growth are around cable testing for wind power in Europe. We have some portable test sets, and we've invested in some more portable test sets, and we've got a nice share of that market, and it's growing smartly. So pretty interesting business obviously exposing us to a different market than we had before, and we like where that's going. Scott Deuschle: Do they have any direct exposure to the data center build-out given these high-voltage data centers that are now coming up? Rex Geveden: Yes. I don't know the details on that. I suspect that we do. Scott Deuschle: Okay. And then Mike, when you talk about CapEx potentially exceeding 6% of sales in the future, is there a maximum threshold you could share with us as to what that excess might be? Like would it still be less than 8% of sales? Or could it exceed that as well? Michael Fitzgerald: No, I think that's about it, that's about right. I mean we feel pretty comfortable with the 6% for what we're seeing for 2026, the comment is really just if we make the decision to have a greenfield facility for another kind of large-scale manufacturing component facility in the U.S. we may exceed that 6%. But I would see it somewhere around the 7%-ish range. What we don't want to do is go back to closer to the kind of 9%, 10% that we saw over the last decade and we were going on a large kind of CapEx spend. So we're going to keep it pretty reasonable, but I could just see it going up in the maybe 7% range. Operator: Our next question comes from Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Good job pronouncing that name. So Rex, I guess, if I read between the lines here, it sounds like Mount Vernon is a bit more of a signal on -- I mean I know the administration's meeting with supply chain companies, including yourself, and it sounds like you're a bit more balanced, not that you're ever imbalance, but a bit more balanced in terms of AP1000 versus SMR. So I guess my question is, how are you thinking about the E&C part of the equation, where you build out or spend the CapEx to build out the capacity. And in terms of the labor to get these things stood up, which I know Scott over GE has talked about one of his concerns. So a broad question, how are you thinking about this whole supply chain and kind of the pieces of the puzzle and am I thinking about this correctly in terms of the body language on around Mount Vernon and AP1000? Rex Geveden: Yes. So if you're talking, Jed, broadly about delivery risk for nuclear projects, I do think that is an existential and important risk. And I think it's probably the biggest risk in the market just to be able to deliver those projects and we've got some poor examples of project delivery Vogtle and others. That said, the counterpoint to that is the refurbishment projects in Canada, both at the Bruce site and at the Darlington site so far have delivered ahead of schedule and under budget. So there are some examples we can point to where the industry stood up and delivered the project according to the plan, and I'm hoping that the industry can get to that point. If you're talking about the sort of the construction delivery risk of a project like Mount Vernon, we've demonstrated the ability we can do that. We are doing very well with our Cambridge project that will come in under budget. It will come in on time. We delivered the Centrifuge Manufacturing Development facility, which, by the way, a hell of an impressive facility from the first shovel in the ground until the completion of it, and that was in 7 months. And so I think we've got a -- we really got sort of a high skill set for being able to deliver projects that are internal to the need of BWXT. Now that's apart from the complexity of the nuclear power plant, but we can build our facilities with a good risk posture. Jonathan Dorsheimer: Yes. That's fair. My question was for the former, not the latter in terms of more industry not worried about you standing up Mount Vernon and getting that burn and getting that on time. And so I guess just to the broader -- so far, we've seen the LPO. We've seen the administration kind of through EOs. What would you think would help solve the -- one of the key components in terms of -- it sounds like you're going to get -- the supply chain is getting stood up. Is it just a sequencing or do you see something else in terms of how the government could step into trying to assuage risk here? Rex Geveden: Again, you're talking about delivery risk for the balance of plant in the nuclear island, Jed. Jonathan Dorsheimer: To the other question, specific to BWX have already been asked. So I'm just curious, using my second just to think from a more macro broader perspective, given that you are in late-stage discussions with -- or I'm assuming that. Rex Geveden: Yes. So maybe I'll break it into 2 pieces. I think the supply chain risk is manageable. I think we're demonstrating BWXT as a company that we can deliver the components on schedules that our customers need reactor pressure vessels, steam generators, whatever it is. We're organizing around that. And I think the industry can stand up and do that. And of course, I'll remind you that we've delivered 420 roughly small module reactors to the nuclear Navy. So we know how that's done. I do think -- I agree with you that the bigger risk is on the engineering procurement and construction side, and that's a problem that the Bechtels and the Fluors of the world are going to have to solve. They're just going to have to do it. And I think it's going to require the injection of higher levels of talent. Maybe AI can help on the planning side of it, maybe even on robotic construction in the long run, but it's something the industry has to address. It's not a thing, I don't think BWXT can address, but I do recognize it as a gating item for the success of the nuclear resurgence. Operator: Our next question comes from Peter Arment with Baird. Peter Arment: Rex, Mike, Chase. Nice results. Rex, could you give us maybe the latest update or your thoughts on overall schedules? I know OPG just recently had an update on Darlington at the end of March. And there was also an update regarding the foundation or the basement module getting installed. So how does that line up with your first reactor pressure valve delivery schedule and if everything tracking according to plan there? Rex Geveden: You're talking, Peter, about the small modular reactor at Darlington? Peter Arment: Correct. Correct. Correct. Rex Geveden: Yes. I don't have detailed insight to how that project delivery is going, but I hear that it's reasonably on track, and I have the expectation that the following units will -- order for those will be coming relatively shortly. Peter Arment: Okay. And when -- and just as a reminder, when the delivery is, for your first pressure valves there? Rex Geveden: Let's see, next year, as I recall it. Yes, I think it's next year. Peter Arment: Okay. And then just, Rex, at a high level, kind of Department of War and Department of Energy budgets out in detail. Anything that stood out to you, whether it's on microreactors or enrichment or anything to call out that you're encouraged by? Rex Geveden: Yes. I'm encouraged by all of it, Peter. Good support for Pele, good support for defense fuels, there's some long lead procurement in there for a couple of extra Columbia-class submarines. So I think we're starting to hear about adding Columbia units to the submarine force. And I think that's pretty encouraging. So when you add AUKUS in additional Columbia, I think our naval nuclear propulsion program looks more robust and more interesting than it did even a couple of years ago. So yes, I'm very excited about what I'm seeing. Operator: Our next question comes from Ron Epstein with Bank of America. Ronald Epstein: Have you seen any changes on the front with doing work for the Koreans on some sort of Korean nuclear submarine? Rex Geveden: No, we haven't seen anything on that, Ron. Are you talking about submarines? Ronald Epstein: Yes. Right. At some point there was some talk about the Korean doing something nuclear and my guess would be right that you guys have helped them, maybe not, I don't know. Just survey. Rex Geveden: Yes. Again, yes, yes, certainly, there's a discussion between the White House and the Koreans about having nuclear-powered submarines. The Korean ambitions are real. I think they will have nuclear-powered submarines, There's, let me call it, sovereign intent there. I think the question is, where do they source their fuel. I think that probably comes from the U.S. And if it does, I think maybe there's something interesting there for us but super early days, and we'll have to get that demand signal from our customer at naval reactors, should that ever come. So yes, I like the possibility of that, but I would say it's very immature at this point. Ronald Epstein: Got you. And then on the M&A front, it seems like you still -- you guys still have a dry powder? Is there any areas that you're particularly interested in today? Or if you could give us a sense of what you might be thinking about? Rex Geveden: I'm sorry, Ron, the audio was a little weak. What was the front end of the question? Ronald Epstein: M&A. Rex Geveden: Yes, lots in the pipeline there. Mike, do you want to take that one? Michael Fitzgerald: Yes. I would say -- I mean we started the year off really focused on the expansion of capacity and that continues to be a priority. But we also are looking at a number of other adjacent opportunities really to expand our capabilities. I think when we look at this, we want to focus on driving opportunity set within the full life cycle of nuclear and how we support our customers from end to end. And so anything that would continue to enhance our capabilities there, we're very interested in. Operator: Our next question comes from Andre Madrid with BTIG. Andre Madrid: I wanted to refocus on PCG for a second. I know initially, it seems like the customer sets, mainly government and navy focused, but the capacity is highly fungible. I mean just can you provide us some context to how quickly you can pivot that mix to more commercial? And maybe what the margin or utilization uplift could look like as a result? Rex Geveden: Yes, Andre, I'll start with that and maybe Mike will add to it. First off, it's about 70-30 maybe in commercial nuclear at this point, and scattered across 2 sites, New York, Pennsylvania and Florence, New Jersey. Both of them are good sites. There's a lot of manufacturing capacity and we mentioned in the script that there are 400 employees there. There's more capacity, there's plenty of available capacity. So one of the things that we can do right away is we can move some work that we've been outsourcing from our commercial business right into those plants. And in so doing, we can capture the profits that are otherwise going to the supply chain. And so that's an immediate opportunity for us. And let me also say, we're absolutely going to satisfy the needs of our existing customers with the Navy and other government -- the government customers. We're under contract to deliver. We will absolutely deliver, no question about that. But over the course of time, we'll probably change the complexion of the portfolio in that business more toward commercial because that's where we need the capacity. Mike, do you have? Michael Fitzgerald: Yes. So Andre, just the way I would think about it, we have roughly -- we believe about 50% capacity that can be utilized. Now the reality is it's going to take some time to ramp up and hire the workforce. You've got 400 people. Let's assume that we can hire a few folks per week. I mean it's still going to take a few years to get to kind of a whole ramp. So I think there's some -- as Rex mentioned, there's some immediate opportunities for us to move some things in-house, and I think that will be accretive from a margin standpoint. But when we looked at the business case, we looked at kind of a longer ramp and just making sure that, that still made sense financially and it certainly did. I think on margin side, we disclosed it's low double-digit EBITDA margins today. We certainly think as we have opportunities to increase that slightly as we increase scale and we focus on kind of in-sourcing certain aspects of -- from a supply chain perspective where we can capture that margin as well. So there's certain opportunity to expand over time. Andre Madrid: Got it. That's really helpful. I think you also mentioned AUKUS. It's been a while since we've heard a more fleshed out update there. Any color you can provide us on the conversation that you're maybe having and how you're gearing up to support the effort. I know you kind of have a lot of shots on goal there. Michael Fitzgerald: I don't think there's anything really new to disclose. I would say we continue to -- our build from an infrastructure standpoint to support from an AUKUS. We've seen good funding support for that. And so we continue those capacity build-outs and we're anxious for future awards. But a lot of good support for its continuing, but I don't think anything else to really disclose at this point. Operator: There are no further questions at this time. I will now turn the call back over to Chase Jacobson for closing remarks. Chase Jacobson: Yes. Thank you, and thank you, everyone, for joining us today. We look forward to speaking with many of you and seeing you at upcoming investor events we will be on the road and at a few conferences over the next month or so. If you have any questions, feel free to reach out at investors@bwxt.com. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Takeshi Horikoshi: So this is Horikoshi, CFO. I'd like to share with you the financial results for the third quarter of FY 2025. So Page -- Slide 4, this is a summary of the 3-months period of the third quarter FY 2025. The FX rate were JPY 152.8 per U.S. dollar, JPY 177.5 per euro, and JPY 100.2 per Aussie dollar. Compared to this year-on-year, the yen depreciated from the previous year. And also the sales increased and the OP increased by -- net sales increased 3.5% to JPY 1.02 trillion. OP decreased by 12.7% to JPY 142 billion. Operating income ratio declined by 2.5 points to 13.9%. Net income decreased by 13.1% year-on-year to JPY 94.1 billion. Slide 5 shows sales and profit by segment for the third quarter. Sales in the Construction, Mining & Utility Equipment business increased by 3% year-on-year to JPY 945.8 billion. Segment profit decreased by 17.9% to JPY 120.7 billion. The segment profit ratio declined by 3.2 points to 12.8%. In Retail Finance, revenues increased by 6.2% year-on-year to JPY 32.1 billion and segment profit increased by 29.9% to JPY 9.1 billion. Sales in the Industrial Machinery & Others business increased by 11.8% year-on-year to JPY 55.8 billion, and segment profit increased by 47.7% to JPY 10.7 billion. I will explain the factors behind these changes later. Slide 6 shows sales by region for the Construction, Mining & Utility Equipment business for the 3 months period. Sales in this segment increased by 3% year-on-year to JPY 943.2 billion. While sales decreased in Asia, mainly due to sluggish demand for both mining and general construction equipment in Indonesia, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales remained flat year-on-year. Slide 7 provides a summary for the 9 months period of FY 2025. The FX rates were JPY 148.5 to the dollar, JPY 170.4 to the euro and JPY 96.3 for the Australian dollar. Compared to the same period last year, the yen appreciated against the U.S. dollar and the Australian dollar, however, depreciated against the euro. Net sales decreased by 1.4% year-on-year to JPY 2.915 trillion. Operating income decreased by 10.1% to JPY 419 billion. The operating income ratio declined by 1.4 points to 14.4%. Net income decreased by 13% year-on-year to JPY 269.8 billion. Slide 8 shows sales and profit by segment for the 9 months period. Sales in the Construction, Mining & Utility Equipment business decreased by 2.2% year-on-year to JPY 2.688 trillion. Segment profit decreased by 14.7% to JPY 362.6 billion. The segment profit ratio declined by 2 percentage points to 13.5%. In Retail Finance, revenues increased by 1.1% year-on-year to JPY 93.1 billion. Segment profit increased by 19.1% to JPY 26 billion. Sales in the Industrial Machinery & Others business increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% to JPY 27.3 billion. I will explain the factors behind these changes later. Slide 9 shows sales by region for the Construction, Mining & Utility Equipment business for the 9 months period. Sales in this segment decreased by 2.2% year-on-year to JPY 2.6805 trillion. Although sales decreased in Asia, North America and Japan, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales decreased by 0.6% year-on-year. Slide 10 details the factors affecting sales and segment profit in the Construction, Mining & Utility Equipment business for the 9 months period. Regarding sales, the positive impact of improved selling prices was outweighed by the negative impacts of the yen's appreciation and reduced volume, resulting in a decrease of JPY 60.4 billion year-on-year. As for segment profit, despite the positive impact of improved selling prices, it was outweighed by the negative impact of the yen's appreciation and reduced volume and increased costs, resulting in a decrease of JPY 62.3 billion year-on-year. Slide 11 shows the result of Retail Finance for the 9 months period. Assets increased compared to the previous fiscal year-end, driven by increase in new contracts and the depreciation of the yen at the end of the period. New contracts increased year-on-year, mainly due to increased finance penetration. Revenues increased by JPY 1 billion year-on-year, primarily due to the increase in outstanding receivables. Segment profit increased by JPY 4.2 billion year-on-year, mainly due to lower funding costs. Slide 12 shows sales and segment profit for the Industrial Machinery & Others segment for the 9 months period. Sales increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% year-on-year to JPY 27.3 billion. The segment profit ratio rose by 6.5 points to 16.8%. Sales and profits increased due to higher sales of larger press for the automotive industry and increased maintenance sales for high-margin excimer lasers for the semiconductor industry. Slide 13 shows the consolidated balance sheet. Total assets stood at JPY 6.3079 trillion, an increase of JPY 534.4 billion from the previous fiscal year-end, mainly due to the yen's depreciation at the end of the period. Inventories were JPY 1.6896 trillion, an increase of JPY 282.9 billion from the previous fiscal year-end due to the impact of the yen's depreciation as well as U.S. tariffs. The shareholders' equity ratio decreased by 1.7 points from the previous fiscal year-end to 53.3%. The net debt-to-equity ratio was 0.30. Regarding the share buyback result, at the Board of Directors meeting on April 28, 2025, we completed the acquisition of the maximum amount of JPY 100 billion by November 28, 2025. We canceled all of the 20,612,500 shares acquired this time on December 29, 2025. This corresponds to 2.2% of the total outstanding shares before cancellation. Free cash flow for the 9 months period of FY 2025 was a positive JPY 115.7 billion. This concludes my presentation. Next, the projection for fiscal '25 will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, GM of the Business Coordination Department. From here, I'll explain the projection for fiscal '25 business results and the conditions in the major markets. Page 15 shows an overview of the projection for fiscal '25 business results. The full year outlook remains unchanged from the October projection. From Page 16, I'll explain the demand trends and projection for the 7 major products. Demand for the 7 major products includes mining equipment. The figures for the fiscal '25 Q3 are preliminary estimates by the company. Demand in fiscal '25 Q3 appears to have increased by 3% year-on-year. The full year demand outlook for fiscal '25 is set at 0% to minus 5% year-on-year, which is unchanged from the October projection. Page 17 shows the demand trends and outlook for the North American market. Demand in the fiscal -- demand in fiscal '25 appears to have increased by 1% year-on-year. Demand for infrastructure and energy remained steady. The demand projection for fiscal 2025 is 0% to minus 5% year-on-year, which is unchanged from the October projection. As in the first half, there was no downward pressure on demand from tariffs during the third quarter apparently. However, as cost increase due to tariffs gradually progress, we will closely monitor its impact on demand. Page 18 shows the demand trends and projections for the European market. Demand in fiscal '25 Q3 appears to have increased by 7% year-on-year. The projection for fiscal 2025 is at the same level as the previous year, unchanged from the October projections. In Europe, an improvement in the business climate has been observed, including upward revisions to GDP growth rates. And with infrastructure investment plans in various countries, demand has remained firm. However, we will continue to closely watch market future conditions. Page 19 shows the demand trends and outlook for the Southeast Asian market. Demand in fiscal '25 Q3 appears to have decreased by 6% year-on-year. As the decline in demand through the third quarter was smaller than expected as of October, the demand projection for fiscal 2025 has been revised to 0% to minus 5%. In Indonesia, demand for mining equipment declined significantly from the second quarter onward due to falling coal prices. In addition, reductions in public works budgets have continued and demand for construction equipment remains sluggish. Uncertainty remains high. And while distributor inventory adjustments are underway, a recovery in demand is not yet in sight. Page 20 shows the demand trends and outlook for the Japanese market. Demand in fiscal ' 25 Q3 appears to have decreased by 14% year-on-year. The projection for demand in fiscal '25 is minus 10% to minus 15%, unchanged from the October projections. Low utilization of rental equipment, labor shortages and rising material prices continue and no signs of demand recovery are being observed. Page 21 shows trends and projections for major mineral prices related to demand for mining equipment. We expect prices for low-grade coal in Indonesia to remain depressed, while prices for other minerals are remaining high or moving steadily. Page 22 shows demand trends for mining equipment. Demand in fiscal '25 Q3 appears to have decreased by 21% year-on-year. Coal prices declined in Indonesia, leading to a significant decrease in demand for equipment. The demand projection for fiscal 2025 is minus 10% to minus 15%, unchanged from the October projections. Coal prices in Indonesia have not recovered and demand has not rebounded. However, demand for equipment in other regions and for other minerals is expected to remain generally at high levels towards the fiscal year-end. Page 23 shows sales of mining equipment. Sales in fiscal '25 Q3 increased by 4.9% year-on-year to JPY 475.1 billion. Excluding FX impact, sales increased by 2%. Although sales declined in Asia, mainly Indonesia and in North America, increases in Latin America and Africa resulted in overall year-on-year growth. Page 24 shows the projected sales of equipment, parts and services and related items in the Construction, Mining & Utility Equipment segment. Parts sales in Q3 of fiscal '25 increased by 6.1% year-on-year to JPY 265.5 billion. Including services and others, the aftermarket accounted for 54%. And excluding FX impact, total aftermarket sales increased by 3.8% year-on-year. This concludes my explanation. Thank you. Unknown Executive: We would now like to receive questions from you. [Operator Instructions] The first question, please. UBS Securities, Sasaki-san. Tsubasa Sasaki: So this is Sasaki from UBS Securities. I have 2 questions. First question relates to the Q3 results. So I'd like you to do a recap on the Q3. So it has been progressing well vis-a-vis plan, especially in terms of sales and operating income, in terms of volume and also the selling price and FX inclusive. So what has been positive? And what were not as expected vis-a-vis plan? If you can give us a recap, that would be helpful. Takeshi Horikoshi: So this is Horikoshi. In terms of sales, JPY 145 was the expectation, but in actual JPY 153. So about JPY 71 billion or so of an excess that we have seen because of FX. In terms of volume, it's about JPY 5 billion short vis-a-vis plan. Also for the price differential, it's about JPY 3 billion short of our plan. So about JPY 63 billion in comparison to October PA, we have exceeded the initial expectation in comparison to October. So we mentioned in terms of volume that was short by JPY 5 billion. So in the construction, that was short by JPY 7 billion. And in terms of mining, JPY 2 billion of excess. So that is the breakdown. So in terms of construction, the breakdown for what was short. So in North America, JPY 5 billion is the shortage in North America. This relates to repair. So because of the constraints of the customers' budget, it has been pushed out. So that is why the number is short in North America. Also, the competitors have been quite aggressive, especially in the month of December. So this was prior to the price increase. So they have been quite aggressive. So that is why we had seen a negative impact. Also in terms of Indonesia and Asia, so actually, it was better than our initial plan. So where we have seen shortage, that was Japan. So in comparison to October announcement, it was worse. So if you were to net out all these factors, it's JPY 7 billion of short in terms of the construction equipment. Moving on to mining business. North America, we have seen a similar number in North America that was short vis-a-vis plan. This is specifically related to oil sand in Canada because of the constraints in budget, therefore, the service provision was pushed out. So that was one of the factors. Where was it positive, favorable, was Indonesia. It was better than our initial anticipation. The reasons why Indonesia was performing better than expected. First of all, in Sumatra, the island, there has been a huge -- the torrential rain, and there were some demand related to restoration. And because of that, there was a demand for construction equipment. Also, the coal prices, and that is the thermal, the coal, that is, the pricing wasn't as bad as initially expected. Therefore, Indonesia, it was actually excess in comparison to our plan. Oceania and also South Africa has been quite solid. So on a net basis, the mining business was in excess about JPY 2 billion or so. Now moving on to the PL. In terms of profit, so in terms of FX, the profit was a push up by JPY 20 billion. Also in terms of the volume, so vis-a-vis sales of JPY 5 billion in terms of profit was short by JPY 2 billion. Also, in terms of the selling price, that was a negative factor. And also for fixed cost, we have some excess in the fixed costs and others. So all in all, so we mentioned about FX differential was JPY 20 billion, and that amount in entirety, we were able to see an excess. So we were able to offset that. Did I answer your question? Tsubasa Sasaki: Thank you very much. So in terms of fixed cost, that was a positive of JPY 5 billion. So FX was JPY 20 billion then. Is my understanding correct? So of course, the production cost was a negative. Why do you see an excess in the fixed cost? Takeshi Horikoshi: So the budget execution was pushed out to Q4. Tsubasa Sasaki: Understood. So based on that, my second question, you mentioned about the situation in Indonesia. So I was able to understand why it was better than expected. When it relates to construction equipment and mining equipment, what is the expectation? And what is the current state of Indonesia? If you can also share with us your outlook for Indonesia. Kiyoshi Hishinuma: So this is Hishinuma. From the perspective of demand, the situation has not dramatically changed. However, after Q2 is over, in comparison to the demand outlook, it was somewhat better than our forecast at the end of Q2. And the reason is just as we have explained. So at the end of Q2, mining was expected to be not so favorable because the coal prices weren't faring. But Q2, it was about $42 to $43 or so. And in Q3, it was back to $45 or $46. So we have seen a push up because of that. And that is why Q4, we expect this positive trend to continue. And for construction equipment, for the public spending, the budget constraints hasn't changed. And therefore, the situation had not really changed from before. Now the expectations from Q4, it may actually deteriorate from the previous year. That was our initial forecast. But in terms of the holidays, it was end of March last year. But this year, it's about a week or 10 days more holidays in comparison to last year. So we have incorporated the maximum risk. But overall, we do not expect the situation to change so much. Tsubasa Sasaki: I was able to fully understand. Sorry, this is an additional question. I fully understand the situation in Indonesia. So already, the situation is not so favorable, but it appears as if it is stabilizing. Are there any risks that Indonesia may deteriorate further? So it was pretty, I know, not-so-good situation, but what are the risks that actually further deteriorate? Unknown Executive: That relates to next fiscal term then. So we are trying to revisit these plans. But as for next fiscal term, construction equipment shouldn't be so bad because in the recent months, it is somewhat getting stronger. So Indonesia is the area that we may see some decline. Given the current coke price, chances are we may see a decline in Indonesia for next fiscal term as well. Tsubasa Sasaki: So this fiscal term, it is pretty bad then. So the deterioration in Indonesia, could we expect the impact will be smaller from Indonesia? Apologies for going on. Unknown Executive: I don't know. We don't know. Unknown Executive: Let's move on to the next question. Maekawa-san from Nomura Securities, please. Kentaro Maekawa: This is Maekawa from Nomura Securities. I also have 2 questions. I have a question about overall mining. Regarding our demand outlook, we haven't really changed the overall picture. But for parts and services, have you been seeing demand pick up? And for equipment demand, there may be a chance that it's going to pick up due to investment plans. So based off the current market, can you share with us how you view mining equipment demand going forward? And I think this will cover next fiscal year as well, presumably. Unknown Executive: Well, regarding that question, actually, we are right in the middle of formulating our business plan for next fiscal year. So that -- it may be subject to change, but just to give you a feel of what we are thinking about right now. First of all, regarding minerals or commodities, for nickel and thermal coal, it is in a situation of excess supply. Due to a decline of demand in China, the prices are weak. And also for nickel, the greatest producer is Indonesia and production has been in excess. For mining equipment, since 2021, it has been expanding, but it has been reaching peak this year. And for next fiscal year, demand is expected to be flat. And we believe it's going to be shifting from greenfield to brownfield when it comes to investments. Our customer financials are sound, but due to inflation, costs have been increasing and mineral grade has been going down as well as the way to mine has become more complicated. Therefore, I think we have to be cautious in investments. So we believe the demand for rebuilds will become higher in aftermarket. For Africa, Middle East, Central Asia and emerging mining regions, we do believe mining developments will proceed. And like we announced Reko Diq in Pakistan have been new opportunities that have been presented to us. And for Indonesia, I talked about it earlier. Kentaro Maekawa: How about coal -- copper? I think the demand is high in Latin America. So how should we expect future activity? Unknown Executive: Next fiscal year, as of now, our thinking is demand is expected to decline in Australia this year. It was a peak year for replacement demand. That's what we thought. So demand is likely to decline next year. And we also expect Indonesia to go down as well, but we believe it will be brisk conditions in other regions. Kentaro Maekawa: Another question I have for you is regarding tariffs and increases in selling prices as well as its impact and if there are any changes there. Just wanted to check with you. The 9-month basis, Q3 results, JPY 25.1 billion was the tariff impact. I think that was in line with plan. And for this fiscal year, you haven't changed your outlook, but you're expecting JPY 55 billion. And for next fiscal year, 30 times 4 is JPY 120 billion. Has that expectation changed? And regarding selling prices, I think you're already working on it. But are you thinking about additional price increases? And are you expecting any impact on demand? Or have you been seeing any impact on demand? So those are the 3 things I would like to know. Takeshi Horikoshi: This is Horikoshi again. Regarding tariff-related costs, including mitigation measures, we said JPY 55 billion as of October, but we do believe our projections were quite accurate. So far, things have been developing in line with our expectations, and we follow the numbers on a monthly basis as to how it's hitting our P&L. For next fiscal year, we said as of October that it's going to be Q4 times 4x. That should be the expectation, which is around JPY 120 billion. For selling price increases, in August, we did a selling price increase or starting from August orders, that is. And we also have been increasing prices from January orders as well. For our U.S. peers, starting from January, we have been hearing that they also have been raising prices. So the environment for raising prices is now becoming quite established, and we do believe we will be able to do further increases next fiscal year. Kentaro Maekawa: So because of that, are you expecting any last-minute demand? Do you think there's going to be some prebuys or any risk that it's going to drop off after you raise your prices? Takeshi Horikoshi: In the case of our company, we did a campaign in October and in November, it went down, but it went up again in December. So no, we are not feeling such trends. Unknown Executive: We would now like to move on to the next question from Goldman Sachs Securities. Adachi-san, please. Takeru Adachi: This is Adachi from Goldman Sachs. So I also have 2 questions. First question, which is somewhat related to the previous ones relates to mining and the exposure to the metals and the precious metals. So I think Latin America and Africa, I believe it was better than expected. So the exposure to the copper and gold is quite high in those regions. So you had the backlog and it was realized as planned. Was that the case? Or were there more of a short-term aftermarket rebuild demand has increased. So what is the current state in terms of Africa and Latin America? So how has the demand changed in terms of exposure to gold and others? Unknown Executive: Within the analysis, we talked about the comparison with the October announcement. Africa was favorable. Last year, Anglo had conducted the business restructuring. So they have restrained from the investment. So it could be a reactionary the response to that. So South Africa was positive from the previous year and also in comparison to the October announcement. Also another point, the gold prices continues to rise. So we have large projects such as in Ghana. So we hear that a number of new projects are underway. Takeru Adachi: So in terms of the Q3 order intake, perhaps you haven't disclosed much, but how was the situation of order intake? Unknown Executive: It has been quite positive, very brisk. Takeru Adachi: My second question relates to cost. So the cost was higher than initially expected, but tariffs was in line. So I would imagine that the non-tariff-related cost was higher than initially expected. So if you can give us more details on the production cost, please. Unknown Executive: In terms of the steel prices in comparison to last year, it has come down. So we have seen some gains from that. But in terms of the production guarantee basis, there was some one-off cost. Also tires and power lines. So nonferrous metals. So these are non-steel, the parts, actually, the prices have risen from the previous year. So we have actually incurred some loss related to those nonferrous metals. Takeru Adachi: So excluding those one-off factors then, is inflation pretty much in line with your expectation? Or even excluding those, was the price increase not in line with your expectation? Unknown Executive: If you were to exclude the one-off, we have seen the gains as expected. Unknown Executive: Let's move on to the next one. From Nikkei, Mr. Otake -- Ms. Otake, excuse me. Unknown Analyst: This is Otake from Nikkei. Earlier, there was a question asked and my question may overlap somewhat. But the first question is about the circumstances in North America. Can you talk about now and your projection related to construction equipment and mining equipment? Can you talk about each, respectively? Kiyoshi Hishinuma: This is Hishinuma speaking. So first, regarding North America, relatively brisk conditions are continuing. When we were setting forth this fiscal year's projection, we were saying minus 5% to minus 10%. But since Q2 onwards, we've revised it up to 0% to minus 5%. And it was plus 1% for Q3. And therefore, we do believe that it has been quite steady. And we are aligning with the local people to capture the numbers, but we are not seeing any factors that will make our numbers change dramatically. So that's for construction equipment. For mining equipment, last year was quite good. So this year, we're guiding negatively, but it's not because the economy is bad, so we are not that worried. Unknown Analyst: You talked about Canada earlier. For mining, in next fiscal year, are you expecting further decline? Or are you not feeling such risks? Kiyoshi Hishinuma: Correct. We are not expecting such risks. Unknown Analyst: And secondly, my question is about price increases. You said that competition has been raising prices from January and the market is accepting higher prices. According to -- regarding that point, for selling price increases that are going to probably be ongoing, how much do you believe that will boost your profits? Can you give us some direction or a feel of how much that's going to look like? Kiyoshi Hishinuma: Well, at our October results briefing, I mentioned this in an interview, but the magnitude that we are experiencing now is what we are striving for next fiscal year as well. Unknown Analyst: That means around JPY 83 billion is the positive impact on profits, no? Kiyoshi Hishinuma: Well, JPY 3 billion might be a little extra, but we are striving for similar levels at this fiscal year, which means around JPY 80 billion. I am not definitively saying JPY 80 billion, but I have been saying that about the same level as this fiscal year. Unknown Analyst: My third question is, as you mentioned in the beginning, for Q3 compared to your plan, it has been exceeding and trending positively, and there has been some areas where you've been beating your profit expectations. When you look at the FX rates for the second half of the year, we are seeing the yen weaken. So I think there is sufficient opportunity for you to exceed your expectations for the full year. But what are the chances of that happening? What is your feel? Kiyoshi Hishinuma: For Q3, we talked about JPY 20 billion of positive impact coming from FX. And for -- when you net it out, it's 0. But I was saying we can exceed JPY 20 billion. But for Q4, due to fixed costs, there have been some pushouts or that's what we're expecting at least. Therefore, on a full year basis, we expect we're going to be under our expectation by JPY 10 billion. JPY 10 billion, meaning excluding FX impact. But FX-wise, we expect similar numbers to come through in Q4 as well. Unknown Executive: I'd like to move on to the next question from Citigroup Securities, McDonald-san, please. Graeme McDonald: Slide 13, please. About free cash flow. There wasn't much comment on free cash flow today. So we've seen the yen depreciated and also the pushout in terms of mining. You've talked about those factors and also their impact from the tariffs. So working capital appears to be somewhat deteriorating. So JPY 240 billion, the cash flow, that has been revised downwards in Q2, but it may be difficult to achieve on a full year basis. So what are your thoughts right now? Unknown Executive: Last year, we had -- so about JPY 306 billion or so for last year. So cumulative last year was about JPY 150 billion cumulative up until Q3 for last year. So Q4 in 3 months, we had JPY 150 billion of free cash flow, leading to JPY 300 billion and JPY 157 billion for this year up until Q3. So if you see the similar -- the free cash flows within Q4, we could possibly reach that JPY 240 billion. Chances are we may actually reach that number. So I think it's the FX. Graeme McDonald: If yen continues to be so weak, it may be challenging to achieve this number, isn't it? Unknown Executive: It doesn't necessarily relate. Graeme McDonald: Oh, it doesn't relate? Unknown Executive: No. Graeme McDonald: So right now then, it was in the course of 3 years, the SGP on the cumulative basis, JPY 1 trillion, you should be able to achieve this? Unknown Executive: We don't know yet. We don't know yet. Of course, we'll make the effort. But what we can say at this moment, if you look at the free cash flow numbers, so back in 2023, there's been a lot of fluctuation on the free cash flow. So I think 2023 was about JPY 240 billion or maybe I might be wrong, but that was the number. Last year was JPY 300 billion, and this year is JPY 240 billion for this year. So in comparison to the previous period, it has become more stable in terms of generation of free cash flows. So we still have 2 years to go until the end of the SGP. So we'd like to work hard to achieve that number. So of course, shareholders' return. So you have JPY 100 billion of share buybacks has been completed and you have retired the other shares. Of course, I fully understand nothing is decided for next fiscal year, but institutional investors see that there's a lot of cash piling up. And perhaps there is not much need of CapEx, for instance, construction of new plants. We do appreciate there is a demand in investment related to replacement of renewal. But unless there is a large-scale M&A, can we expect to see similar amount of shareholders' return? Graeme McDonald: That's a comment? Unknown Executive: Yes, that is a comment. Graeme McDonald: Horikoshi-san, I'm pretty sure it is hard for you to say that. Yes, we heard your comment. Also to a different note. So you mentioned the profit was slightly better than the plan. So my impressions are -- so industrial machinery and retail finance was positive. That was my impression. But there's a discussion related to best owner. But aside from that, in terms of industrial machinery, that is Gigaphoton continues to be in good shape. And the profitability as well as the top line is improving. So chances are this situation may continue for some time. What are your thoughts, Horikoshi-san? Takeshi Horikoshi: As you know, the semiconductor demand continues to be on the rise, and that is expected. Also, the Komatsu, the NTC, Komatsu Industries continues to be quite solid. So fortunately, on a total basis, the profitability is higher than the construction equipment. And Gigaphoton, we expect growth next year onwards. So we do expect that to happen for next year. So the sales on a cumulative basis, about JPY 50 billion or so. Graeme McDonald: So there are some comments related to maintenance. So how much does that actually account for within the sales right now? Takeshi Horikoshi: We don't have the number at hand. But as far as this fiscal term is concerned, about half relates to maintenance and the half is related to the equipment. Graeme McDonald: So just to confirm then, Gigaphoton's profitability is far superior to average. So I have this image that it's over 20%. Is that correct? Takeshi Horikoshi: Yes, your impressions are correct. Unknown Executive: Moving on to the next question. Taninaka-san from SMBC Nikko. Satoshi Taninaka: This is Taninaka from SMBC Nikko. I have 2 questions. The first one is about increasing selling prices, passing on the cost. The ones you have announced regarding the ones that are effective from January, inclusive of that, you didn't say JPY 80 billion definitively, but there was some conversation around increasing prices by the same magnitude next fiscal year. I think the cost increase expected for next year is about JPY 65 billion. But how much of the profit decline are you expecting to offset next fiscal year? Can you give us some food for thought? Unknown Executive: Regarding tariff impact, it's actually the difference between JPY 120 billion and JPY 55 billion. So yes, you are correct. But selling price increases, like mentioned earlier, is what we are striving to do. So you will be able to come up with the percentage if you do your math. Satoshi Taninaka: Secondly, for precious metals, prices are going up. And after service for the mining business, how has that been changing? Because copper prices are increasing, are there any situations where people are not able to develop new mines? Or is production stopping at any copper mines because of this backdrop? So is utilization -- I guess utilization is not really picking up. But due to higher precious metal prices, is that directly affecting your aftermarket business? Or is it because precious metal prices are going up due to a variety of factors, there's no direct relationship. Can you give us some perspective on this? Unknown Executive: Well, please look at Page 38 in the disclosed presentation. It breaks down the sales of equipment and parts and services. For FX, if you exclude FX impact, for the third quarter as well on a cumulative basis, too, for equipment compared to last year, the difference was quite negative and it went down. However, for parts and services, actually, we've been exceeding. So on a net-net basis, compared to last year, we have been seeing a decline in sales or that's what we're expecting projection-wise. So the aftermarket business compared to last year has been steadily rising, and the ratios are shown at the top. But for this fiscal year, we expect the aftermarket ratio for mining is going to reach around 65%. So yes, we perceive that the business is doing well. And even for precious metals, the same thing applies. Unknown Executive: The next question, please. From Nikkei, Kugai-san, please. Unknown Analyst: This is Kugai from Nikkei. I'd like to pose 2 questions. First relates to rare earth. So the export control by China is in place. So what are the impacts right now? And what are the expectations? So in terms of export control, what is the current state of inventory? And what is the procurement strategy going forward? If you can share with us your thoughts, that would be helpful. Kiyoshi Hishinuma: So this is Hishinuma. Internally, we are definitely investigating the details. So we're looking at the suppliers' inventory level. And if there is a shortage, we're trying to source from elsewhere. So those are definitely activities underway. So of course, if there is a complete suspension, the impact will be quite huge. So we are cautiously involved in the discussion and the investigation. Unknown Analyst: Also, I have another question. So weaker yen is prolonging. So that is posing some positive impact in terms of the performance. But of course, if this is prolonged, that may impact the investment overseas. So with the yen depreciation, how do you perceive the current state? Also, what is the optimal, the FX level for you? If you can share with us your thoughts on what is the optimal level, that would be helpful as well. Unknown Executive: So just to do a recap. It's been over 2 years, actually, we're trending about JPY 150 or so. So the yen depreciation started back in Q1 of 2022. And since then, there has been gradually rise or depreciated. And since 2 years back, it's been hovering around JPY 150 or so. So I think back in 2017 to 2021, it was JPY 120 to JPY 115 or so. That was the past trend. So for 2 years, we've had JPY 150. It is almost becoming a de facto as we consider the future investment. So if we -- so it is not possible for us to invest more, expecting that the yen would appreciate going forward. So basically, the basic stance is, wherever needed, we will make such investment. Unknown Executive: Thank you. We are running out of time. But there are no people who have raised their hands. So if there are no additional questions, we would like to conclude today's meeting. Any additional questions? McDonald-san, you have one more question? Graeme McDonald: Yes, it's a short one. Regarding your P&L analysis for the volume, product mix, et cetera, can you give me -- give us pure volume, product mix, area mix and so forth and the details of that? Unknown Executive: Are you talking about Page 10 on a 3-month basis, right? Out of volume, product mix, it's JPY 520.1 billion. The pure volume negative is JPY 27.6 billion. For product and area mix, it's JPY 21.2 billion in total, combining the two. And the third item is a one-off item, which is related to product guarantee, which was worth JPY 3.3 billion. For area and product mix, JPY 21.2 billion of a loss. For area mix, Indonesia compared to last year has been going down and therefore, has been deteriorating. And for Europe, it has been increasing. But year-over-year, it is contributing negatively. For product mix, due to mining, and this applies to construction equipment as well. Due to the mix between equipment and parts, it has led to a negative impact for this period. Unknown Executive: As we reached the time given, we would like to end Komatsu's fiscal '25 Q3 results briefing. Thank you very much, everyone, for joining today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]