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Operator: Welcome to the analyst and investor presentation for HSBC Holdings plc First Quarter 2026 Earnings. This webinar is being recorded. I will now hand over to Pam Kaur, Group Chief Financial Officer. Manveen Kaur: Welcome, everyone. Thank you for joining. We have had another quarter of positive performance, which reflects further progress towards creating a simple, more agile, growing HSBC. Annualized return on tangible equity, excluding notable items, was 18.7%. We are confident in achieving the targets we set out to you at the full year. We are updating 2 pieces of guidance today, banking NII to around $46 billion and our expected ECL charge to around 45 basis points. I'll talk to the drivers of both shortly. In the quarter, we continued to make disciplined progress in simplifying the group to unlock HSBC's growth potential. We actioned a further $0.2 billion of simplification saves and remain well on course to deliver the $1.5 billion target. We completed the privatization of Hang Seng Bank, the sale of U.K. Life Insurance, Sri Lanka Retail Banking and South Africa. And as you will have seen, we have agreed the sale of our retail banking business in Indonesia. We expect to realize an up to $0.4 billion gain on completion anticipated in the first half of 2027. Our CIB business in Indonesia is unaffected. On outlook, the economic landscape remains complex and uncertainty will persist. Our thoughts are with all those affected by current events in the Middle East. We are fully engaged in supporting our colleagues, customers and partners across the region. We are well positioned to work with our customers and manage the uncertainties in the global environment from a position of financial strength. Let's turn first to the income statement, where I will focus on year-on-year comparisons unless I indicate otherwise. Profit before tax, excluding notable items, was $10.1 billion. Notable items this quarter include a loss of $0.3 billion on moving Malta to held for sale, a loss of $0.2 billion on the sale of U.K. Life Insurance and $0.1 billion of restructuring costs related to our simplification program. Revenue, excluding notable items, grew 4% year-on-year to $19.1 billion. This was driven by banking NII and strong growth in wealth fee and other income. Annualized RoTE was 18.7%, 0.3% higher than last year. It benefited from the removal of Hang Seng Bank minorities. Looking at capital and distributions. Our CET1 capital ratio is 14%, down 90 basis points on the quarter as expected following the privatization of Hang Seng Bank. Reflecting our strong organic capital generation, we are already back to our operating range of 14% to 14.5%. The dividend for the quarter is $0.10. We continue to target a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts. Let's now turn to our business segment performance. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items. This broad-based performance shows our strategy is working. I would just mention the $0.2 billion gain from a one-off property asset disposal in the Corporate Center, which is not a notable item. Moving now to banking NII. Banking NII increased $0.3 billion year-on-year to $11.3 billion. It fell by $0.5 billion quarter-on-quarter. $0.3 billion of this quarterly decline is day count. We also noted at the fourth quarter, $0.1 billion in gains that we did not expect to repeat. In addition, this quarter, HIBOR was lower in March, and we also recognized a $0.1 billion adverse one-off. We are now upgrading our full year banking NII guidance to around $46 billion. This reflects an improved interest rate outlook. I would highlight that interest rate curves have been volatile and can, of course, change further in either direction. Turning now to wholesale transaction banking. Recent economic, market and tariff situations have validated the strength of our franchise, both over the last 12 months and in this quarter. We grew fee and other income 2% year-on-year. Customers continue to turn to us to help them navigate volatility and uncertainty. Our balance sheet and franchise strength are particularly valuable in times like this. In the quarter, Securities Services grew fee and other income 11%, reflecting new mandates and higher transaction volumes. Trade grew 8%, driven by continued growth in volumes. Payments grew 3%, driven by growth in volumes across most regions. Foreign exchange fell by 1% compared to a strong first quarter last year. We continue to see growth in volumes and strong client engagement. Turning now to wealth. We grew fee and other income by 15% to $2.7 billion. I remind you that the first quarter of last year was a high base. Growth was driven by all 4 income lines, and we added 287,000 new-to-bank customers in Hong Kong. It is worth remembering there is typically favorable seasonality to the first quarter when compared with the fourth quarter. Having said that, we are pleased that the investments we are making in our wealth products, distribution channels and customer experience are translating into real results. Private Banking grew 8% and Asset Management, 3%. Investment distribution performed very well, up 21%, reflecting particularly strength in our customer franchise in Hong Kong. Insurance growth of 19% from a strong base was also pleasing, again, with Hong Kong, the standout. Our insurance CSM balance was $15.2 billion, up 19% versus the prior year. First quarter wealth balances were $1.6 trillion, up 12% or $170 billion year-on-year. Net new money in the first quarter was a strong $39 billion, of which $34 billion came from Asia. This is a broad-based and robust franchise. Our investments and focus are paying off. I will note that we saw a slowdown in flows in the early days of the conflict, but activity recovered in April across our wealth franchise in Asia. Turning now to credit. Our first quarter ECL charge was $1.3 billion, equivalent to an annualized charge of 52 basis points as a percentage of loans and advances. Given the ongoing uncertainty in the outlook, we are updating our full year 2026 credit guidance to around 45 basis points. This quarter includes a $0.3 billion charge related to the Middle East conflict. This is precautionary and related to the impact of the conflict everywhere, not just in the Middle East. We also include $0.4 billion for fraud-related secondary securitization exposure with a financial sponsor in the U.K. I will emphasize that we regard the Stage 3 charge this quarter as idiosyncratic and not representative of the risks in the wider portfolio. We have completed a full review of the highest risk areas in our portfolio and have not identified any comparable fraud concerns. We have updated our risk appetite and are incorporating lessons in our due diligence processes. This remains an area in which we are comfortable, but it is not a significant growth driver in our plan. In Hong Kong commercial real estate, we had some small recoveries in the quarter. And overall, it remains broadly stable. You will see our usual detailed breakdown on Slide 21. On Slides 15 and 16, we have also set out our private market exposure. We have made these expansive definitions to give you a full picture of our full-service business in private markets. Let's now turn to costs. We continue to take a disciplined approach to cost management. We are on track to achieve our target of 1% cost growth in 2026 compared to 2025 on a target basis. Cost growth this quarter is 3% year-on-year. This included 1% driven by higher variable pay accrual based on business performance. If you exclude the variable pay accrual, target basis cost growth was around 2% year-on-year. We manage costs on a full year basis. So looking at a quarter in isolation is not meaningful. We remind you that our simplification actions provide a cumulative year-on-year benefit through 2026. For the avoidance of doubt, our 2025 target cost baseline is $34 billion when updated for FX. Now let's turn to customer deposits and loans. Our deposit momentum continues with $99 billion of deposit growth, including held-for-sale balances over the last 12 months. CIB deposits increased $10 billion quarter-on-quarter in what is usually a soft quarter. Hong Kong was a particular driver. This corporate inflow offset a slower retail flow in our Hong Kong pillar. You will see deposit seasonality on Slide 20. Excluding the movement of Malta to held for sale, IWPB deposit growth was $4 billion. You will see on Slides 18 and 19 that we have set out additional deposit disclosure. This shows you the deposit base split between fixed term and instant access accounts. The 70% instant access proportion should help you see the strength and breadth of our deposit base across our businesses. Turning to loans. Growth picked up in the quarter. CIB mainly reflects continued momentum in GTS, higher term lending in Hong Kong and drawdowns on committed lines by high-quality borrowers in the Middle East. We are pleased to be there for our customers when they need us most. Hong Kong returned to volume growth this quarter after a period of decline. We are pleased to see borrowing appetite return as the economy grows and as residential property prices recover. Our $13.7 billion investment in Hang Seng Bank is a signal of our confidence in the opportunity in Hong Kong. We are investing across both iconic banks, and we see significant growth runway for both ahead. In the U.K., we delivered another quarter of good growth. This was both mortgages and our commercial lending book. We see good momentum in our domestic portfolio. Low levels of household and corporate debt in the U.K. provide a platform for the continued growth of our franchise. Now turning to capital. Our CET1 capital ratio was 14%, down 90 basis points in the quarter. This follows the 110 basis point impact of the Hang Seng Bank privatization and Malta disposal loss. We also saw a 12 basis points impact from the fair value through other comprehensive income bond portfolio, as government yields rose following events in the Middle East. These were offset by ongoing strong organic capital generation. We are pleased to have remained within our CET1 operating range since the announcement of the Hang Seng Bank privatization. A decision on future share buybacks will be taken quarterly, subject to our normal buyback considerations. Let's turn to targets and guidance. First, targets. We reiterate the targets we set out to you at the full year. Revenue rising to 5% year-on-year growth by 2028, excluding notable items. Return on tangible equity of 17% or better, excluding notable items each year. Dividends, 50% of earnings per share, excluding material notable items and related impacts. Finally, to guidance. Today, we are updating our banking NII to around $46 billion, given the higher rate outlook and our ECL charge to 45 basis points given macroeconomic and market uncertainty. In addition, to inform management planning, we have assessed a range of top-down stress scenarios. We have set these out for you on Slide 17. I'm happy to discuss these further in Q&A. All other guidance set out on this slide remains unchanged. To conclude, the intent with which we are executing our strategy is reflected in the growth and momentum in our first quarter. It shows discipline, performance and delivery. Discipline in the way we are applying strong cost control and investing to deliver focused sustainable growth. We are on track to achieve our target of around 1% cost growth in 2026 compared to 2025 on a target basis. And we are reallocating costs from nonstrategic or low-returning businesses towards growth opportunities, while upgrading our operating model. This includes investing in artificial intelligence to empower our colleagues, simplify how we operate and enhance the customer experience by personalizing service at scale. Performance in our earnings. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items and delivery. Our first quarter results show we are creating a simple, more agile, growing HSBC built on the strong foundations of a robust balance sheet and hallmark financial strength. This is why during periods of greater uncertainties, our customers turn to us as a source of financial strength, and we remain confident in delivering against our targets. With that, I'm happy to take your questions. Operator: [Operator Instructions] Our first question today comes from Guy Stebbings at BNP Paribas. Guy Stebbings: The first one was on wealth. Clearly, another very good performance, particularly on investment distribution, insurance. Can you talk about what you're seeing in terms of flows in the competitive landscape in Hong Kong right now? I'm sort of mindful it's been a very good story and the benchmark comparisons is getting tougher in terms of growth rates. But equally, there's sort of no evidence of let up in momentum and can see another really good performance for new business CSM, which is well above what you're actually booking through the P&L right now. And then the second question was on private markets. Thanks for Slide 15 and 16. Interested in any changes you're making in your approach to this segment. You've called out the $400 million hit in Q1, and you've not identified anything comparable in the book. One of your peers has signaled sort of partially stepping away from some exposures in this segment, as they've assessed sort of levels of financial controls. I know you said this wasn't a big growth driver of the plan, but are you changing how you're thinking about this segment in any way? Manveen Kaur: Thank you, Guy. If I take your questions in turn. On the first question on wealth, we are really pleased with the growing CSM balance and as well as on investment distribution. First quarter is always a very strong quarter for us, but I'm pleased to say that even after some slowdown in the month of March, we again see momentum coming through in April. We have a very vast range of products that we offer to our customers. So we've seen some shift in the products. So people moving from bonds and mutual funds into structured products and equities and all that obviously contributes very well to our fee income in wealth. We have an iconic brand in Hong Kong. And yes, competition is fierce. But as you can see, we are also growing new customers despite putting the fee in January, and these new customers over time also become customers from a wealth perspective, but more in the near term for the insurance business. So those are all very positive signs for us. From a private credit perspective, our overall exposure on private credit has stayed the same, as I called out at the year-end of $6 billion on the chart. And then this is both drawn and undrawn and the private credit and related exposure stays within 2% of our balance sheet. So that, again, from our perspective, is a comfortable position in terms of the concentration. Following the, what I would call, experience that we've seen in the fraud perspective, I've always said that in this ecosystem, no one is immune to second order sort of exposures, which is where we have had from financial sponsors. Clearly, as a learning, what we are working on is looking at very specifically some of the additional due diligence processes we may carry even where we are relying on the due diligence of financial sponsors. In terms of concentrations, we are also looking at any specific concentrations on individual counterparties in this space, but remain comfortable overall. And as I've said, we will not have this and it has never been a significant driver of private credit. So same as before, continue to be even more diligent where we are relying on financial sponsors related secondary exposures and their due diligence. Operator: Our next question today comes from Amit Goel at Mediobanca. Amit Goel: So 2 other questions from me. So one was just on the cost growth. So it seemed like the cost growth was a bit higher this quarter, even ex the VP than the overall target for the year. So just in terms of why you think the costs will be a bit more contained or at least the cost growth will be a bit more contained and the drivers there? And then also the second question is just on the Middle East scenario. So I appreciate the extra slide. Just curious on those stress scenarios. So what would we need to see or what would we have to see -- to be seeing some of that scenario play through and to have further impact on your ECL guidance? Manveen Kaur: Thank you, Amit. So I'll take the cost question first. So as we have said, our simplification actions will be completed by the middle of the year. And those simplification actions will give us cumulatively more savings in the second half of the year. And if we factor those in and phase out in line with our forecast and financial resource planning, we are very comfortable that we will be within our cost guidance of around 1% growth on a target basis. It is a timing of when you have the gross increase, which we said last year would be 3% and then the timing of when the 2% savings come so that you come to the net 1% cost growth. Now from a Middle East scenario, firstly, to be clear that our ECL guidance and indeed, when we reaffirm our targets, we look at all plausible downside scenarios, and we are, by nature, quite conservative in how we approach these matters. We have, in the fullness of an integrated top-down stress scenario called out a bookend stress scenario, which requires all 5 things to happen. So just to give you some perspective, in this kind of a scenario, you would expect stock markets to be down 35%. So it's pretty severe. You would also expect oil price at 145 basis points and market disruption as well as significant GDP slowdown across markets globally. So that is the context of this scenario. But as I said earlier, in terms of the right weightage of probability from an ECL perspective, that has already been factored in the 45 basis points guidance. And this scenario gets driven by not just an ECL number, but also an impact on the revenue line, and it assumes that the wealth business, which has continued to do really well even through the month of April will have a significant impact in this kind of a scenario as well as deposits, which typically in a stress position always become an inflow for large deposits. But because of the extreme market disruption, very high inflation that the deposits will come down because customers will need to get money in order to survive through a very stressful economic scenario. Operator: The next question today comes from Aman Rakkar at Barclays. Aman Rakkar: I just wanted to ask one quick follow-up on the Middle East scenario. Is there any chance -- I think just back of the envelope, it's a kind of $2 billion to $3 billion hit to PBT in terms of the mid- to high single-digit percentage on '26. Is there any chance you could just kind of round out the disclosure on that in terms of what the breakdown in that scenario is between revenues and impairments? I'm assuming it's literally revenues and ECLs and if you could just quantify that for us, that would be really helpful. The second question was just on banking NII, please. So first of all, I think you're calling out $100 million negative impact in the quarter. Just kind of adding that back in, I guess, to the underlying run rate, it looks like your Q1 banking NII is annualizing a shade above the $46 billion that you are guiding for your full year. So I'm interested in the sequential drivers of net interest income, please, from here, as you see them presumably rates not that much of a headwind and you've got some balance sheet momentum. So trying to work out what the negative is from here to offset that, please? Manveen Kaur: Thank you, Aman, for your 2 questions. So taking the first one. Firstly, to say, yes, the impact absolutely is equal between sort of revenues and ECLs broadly in this scenario and your numbers were right. I also want to say this is what I would call an unmitigated impact. In other words, it's prior to management actions. We are very comfortable that even in stress scenarios, we have a range of management actions we would be taking. And therefore, we are very confident in reiterating our RoTE targets for '26, '27 and '28. Now on banking NII guidance, as always, as you would expect, we tend to be quite conservative. We consider in the guidance all possible downside scenarios as well, at least the plausible ones. So in terms of the mathematical calculation, as you've done ex the one-off and looking at the day count, et cetera, it, of course, takes you above the $46 billion. Our guidance is around $46 billion, not just $46 billion. So that's the first point to call out. And the things that we have considered in terms of a possible plausible headwind would be, of course, there's an uncertainty on the interest rates. Also, we have seen the experience. There were a few weeks of impact of a lower HIBOR in the month of March, but I'm very pleased to note that the HIBOR has again come to the range that we are most pleased with, which is around 2.5% and obviously, there is the continuing tailwind of our structural hedge reinvestment. We've given you disclosures on that. And the deposit flow overall continues to be very strong, but we are happy to say around $46 billion with our usual conservatism. Operator: Our next question today comes from Andrew Coombs at Citi. Andrew Coombs: A couple of follow-ups from me, please. Just firstly, coming back on the private credit exposures on Slide 16. I think the exposure on which you booked the charge today falls within the $3 billion securitization financing bucket that you list on that slide. Can you just give us an idea, please, of how much of the exposure that you've taken a charge on today accounts for of that $3 billion total, please? And then secondly, coming back to wealth, it's difficult to quibble on 15% year-on-year growth, but that revenue growth does look slightly weaker than your peers. So can you just give us an idea of where you think the differences are? Is it business mix, which means you have lower transaction income benefit year-on-year? Anything you can comment on relative performance? Manveen Kaur: Thank you. So just in terms of the exposure, we have substantially provided for that exposure. And that exposure, when you can see mathematically, is not an insignificant part of the $3 billion that you've called it quite rightly, it really comes from that particular bucket. Coming back to your point on our revenue. So in terms of the revenue, I'll just bring to attention that the CSM balances have been growing, but the way they actually hit the P&L, it is really over a period of time. And therefore, what you capture in the P&L is 1/10 and that then flows through over the following years. So that is how I would look at it in terms of the fee income growth. If you ex that or adjust for that, we are very much in line or indeed ahead of peers in certain pockets. Operator: The next question today comes from Katherine Lei at JPMorgan. Katherine Lei: Pam, I would like to ask about the fraud cases. Like can we have more color about the fraud cases such as like what is our total exposure? Because the key concern is that is this $0.4 billion one-off or we were going to see more like step-up in impairment charges because of this particular case? I think this is the number one question. Number two question is like I look at the risk weighting, right? It seems like a downside scenario, now we aside, 45% versus like before the war, like, say, 4Q '25 is roughly about 15%. Can we get more color of like, say, in this scenario, would that be -- let's put it this way, under what situations do you think we will continue to see continue rise in this 45% of downside scenario? Manveen Kaur: Thank you, Katherine. So firstly, this fraud is an idiosyncratic fraud. We have gone back and reviewed all our highest risk exposures across our portfolio and specifically looked at the private credit exposures as called out on the slide, and we see no comparable fraud risks in this matter. And of course, we continue to review our risk appetite, tightened due diligence and so on. So therefore, we feel quite comfortable that this is a one-off fraud indeed, and it comes to us through a secondary exposure that we have through a financial sponsor and where there was reliance on the financial sponsor due diligence. So that's the first case. And second one, in terms of the downside scenarios, the 45% downside scenario is built also from a 30% Middle East-related specific scenario that we created, which was a fifth scenario. So we do not expect that 45% downside scenario to shift much. And I can just give you as a comparison as we went through periods of COVID, Russia, Ukraine, that's sort of a leaning on the downside scenario. It's pretty much at the top end of the downside scenarios. And then once the situation gets more normalized, we bring the scenarios back to what our normalized scenarios that you have called out. I also want to stress to you that the IFRS 9 downside scenarios factor in, what we think at this point of time, the full extent of the forward-looking guidance, as we would obviously calculate based upon what we're seeing on the ground as well as assumptions as well as the probabilities given to all the scenarios. And this is quite distinct and different from the bookend Middle East conflict stress scenario on Slide 18, which has a much holistic view and a range of things happening, including, as I called out, from very severe stock market disruptions as well as oil price distinction. So I just want to make a clear distinction between what you account for, what you have in your outlook versus what you keep as part of a planning exercise in terms of the range of scenarios that you should always be aware of as a good management practice. Operator: Our next question today comes from Chris Hallam at Goldman Sachs. Chris Hallam: Two for me. So the first, again, on wealth. So $5 billion of that $39 billion of net new money was deposits. So it feels as though sort of 90% of the flows were invested, whereas if I think about the stock of your wealth balances, it's closer to 60%. So how should we think about that? Is that a structural trend you're seeing? Are clients becoming more invested? And if so, what does that mean for fee margins and for returns going forward? And maybe just within the $39 billion, without the conflict in Iran, would that number have been higher or lower? And then second, on capital, like you said, well managed through the guidance range throughout the HSB privatization process. Obviously, this quarter, a couple of one-offs within the quarter, but the underlying business performance appears to be encouraging. So given all of that, can you comment on when you expect to restart share buybacks? Manveen Kaur: Thank you, Chris. So firstly, in terms of invested assets, we are very pleased with the growth in invested assets. But I just want to remind you, typically, Q1 is strong for investments. So there is some seasonality of money moving from deposits into investment assets into -- in Q1. We've also been very strong in terms of the new mandates we've got from private banking. So overall, wealth is a very robust story to call out, and it's very broad-based, not just dependent on one lever. In terms of the conflict, there was a bit of risk-off wait and watch in the second half of March. However, as April has come through, we continue to see high volume of transactional activity. And as I said earlier, our customers, they continue to readjust their portfolios and our strength lies in the broad range of products we have on offer. And we have really invested in this business. So going forward, from a fee income perspective, I do believe there is a huge tailwind for us in terms of how we build on this year-on-year. So coming back to capital now. Firstly, I'm really pleased that even with this very large core investment we have done in Hong Kong, which is a critical market for us where we are hugely confident about the future growth prospects, we have still remained throughout the entire period within our CET1 operating range, and that truly reflects the very strong capital generation capabilities of our business across all 4 businesses. So that is indeed very encouraging. Now in terms of share buybacks, you're right that even with all the one-offs we've had in the first quarter, we are in a good position, and I expect Q2 to be equally highly capital generative for us. But of course, a share buyback decision is done on a quarterly basis. Starting point is always capital generation, which looks strong. We have to also look at loan growth, then we have to look at our 50% dividend payout ratio, which is an important target for us and the residual is always in terms of share buybacks and distributions, notwithstanding any inorganic opportunities for which we have an extremely high hurdle rate. So we will look at it again starting from Q2. Operator: The next question today comes from Kunpeng Ma at China Securities. Kunpeng Ma: I got 2 questions for you. And the first one is about Hang Seng. I'm glad to hear the momentum in deposit and wealth management in the first quarter and the pickup in the momentum from April. But how -- what proportion of such momentum could be attributed to the synergies out of the Hang Seng deal? And also some color on future synergies, future synergy effects of the Hang Seng deal would be much more helpful for us. Yes. The second question is on HSBC's global footprint. Yes, this is out of the proposed disposal of the Indonesian retail business. I think the Indonesian market is quite important. It's not the kind of some marginal or less important market. So I want to know the HSBC's views on your global franchise. I mean, which markets are important to you or which markets and which business are less important? Yes. Manveen Kaur: Thank you, Kunpeng. So firstly, we have made a very good start on the Hang Seng privatization, but the synergies at the moment have been very little, if any, because it's just the start of the process. We have already started investing in Hong Kong, both in the red brand and the green brand in terms of technology, in terms of simplifying customer journeys and training and skilling of our colleagues. So we do expect progressively the growth from the synergies to come through starting from the second half of this year, but mainly through 2027, '28. So that's a very strong tailwind, again, to support our targets as we progress. And so far, everything is very much on plan and with a lot of engagement with colleagues on the ground, which is, I think, really important, both in terms of maintaining the momentum, the sentiment as well as reinforcing our strong optimism in Hong Kong, as you've already seen in the results as well as in the stabilization of the Hong Kong commercial real estate market. Now coming to our global footprint from an Indonesia perspective, we think Indonesia is a critical market for us from a CIB perspective. It is an important network market and the economy is significant from an Asian perspective. However, our retail business of the size and the scale it was and the scope it had was not within the strategy of our wealth business. It was a valuable business, remains a valuable business, as you've seen from the financials for the transaction that has been announced. But from our perspective, from a wealth perspective, it did not meet the high hurdle rate criteria we had. We have other markets where we are investing in a far more focused manner. Operator: Our next question today will come from Alastair Warr at Autonomous. Alastair Warr: Just a couple of follow-ups on the credit costs and on the insurance that we touched on just a moment ago. If you've got 52 basis points booked in for the first quarter on credit costs, it looks like, therefore, to get to your 45 over the rest of the year, you'd be looking at a little bit above 40 for the remaining quarters of the year? You were at 40 for the full year before. So is that just implicitly building in maybe a little bit more drag from the Middle East? Or is there anything else going on anywhere else for us to be thinking about? And just a second point, you touched on the CSM there and how it can make a difference to how you're booking your speed of growth of income at the wealth line. HSBC has been really strong on some big ticket quite short payment period and products that some of your big name peers in Hong Kong are not necessarily so keen on. So can I just confirm, you talked about 10 there -- that your release rate in years is about 10 years and that this shorter payment period thing doesn't turn up in a shorter release rate as well. Manveen Kaur: Thank you, Alastair. So firstly, on the credit costs. You're right, this quarter's credit cost of 52 basis points has 2 significant numbers in it. One is obviously the idiosyncratic one-off fraud-related. If you take that off, we are pretty much in line with where we would be in Q1 of 2025. Our books overall ex these 2 items have performed really well. The second being obviously the Middle East reserve. So if you take the Middle East reserve build of $300 million and the fraud number, then the actual credit cost would be lower than what it was in Q1 2025 at around $600 million. What we are looking -- $600 million, sorry. As we look at going forward into the next few quarters, we are always a bit conservative, and we do have a little bit of scope built in, both in terms of what happens on Stage 3s of the fraud-related item, obviously, that's a one-off, but the ex-fraud-related Stage 3 buildup increases because of a prolonged conflict in the Middle East. Also Q1 has been very benign on Hong Kong commercial real estate. We are very pleased that we are seeing the beginning of a stabilization, but we are not calling it the end of the cycle. So therefore, we keep that sort of a buffer for the rest of the year. So in terms of the CSM balances very specifically, there is no change in the accounting policy. Obviously, it's based upon IFRS 17 principles, hence, the drip feed over the 9- to 10-year period that we will see. And the key thing there is as long as with the new customers that we are onboarding, with the growth in the CSM balance, the growth in the CSM balance exceeds the P&L flow from the CSM balance because the trajectory is very positive in the growth of that business in Hong Kong. It is an iconic brand for us. So therefore, the demand for the product from a distribution perspective remains extremely strong. Operator: Thank you, Pam. We will take our last question today from Joseph Dickerson at Jefferies. Joseph Dickerson: I just wanted to ask in terms of the numbers you've given the guidance upgrade on the banking NII, is that taking into account the -- effectively marking the market for the current yield curve in the U.K. I note some footnotes around you were using rates, as I think mid-April. Does that take account of the yield curve in the U.K.? And then presumably, there's some outer year tailwind into that. And given you've got some outer year revenue growth assumptions, I'd be keen to know how that -- how any maturities at higher rates might influence the outer year revenue growth rate. Manveen Kaur: Thank you, Joe. So from a banking NII perspective, yes, we looked at the yield curves as -- at the middle of April across the currencies. So that's correct. In terms of the revenue growth projections that we gave for the outer years, they were based upon the yield curves as when we set our targets. So if the yield curves continue to be higher or grow, then everything else being equal, that will be a tailwind for revenue in future years. The banking NII guidance, as you know, we always only give for the current year. Operator: Thank you very much. That ends today's Q&A. So I'll now hand back to you, Pam, for any closing remarks. Manveen Kaur: So thank you all for your questions. As you've seen from our results, we are very pleased with our return on tangible equity of 18.7%. We have never printed a number of this size for nearly 20 years now. And that gives us a very good start in terms of where our targets are and how firmly we stand behind them for the next 3 years. Of course, there are macro uncertainties in the current environment, and we have given disclosures, which are very fulsome, both on private credit as well on extreme downside stress scenarios, bookends. So hopefully, in that context, I have answered all your questions. And obviously, if you have any more detailed questions, please reach out to the IR team. Thank you very much again for your patience and interaction. Operator: Thank you, everyone, for joining today. You may now disconnect.
Operator: Good afternoon, and welcome to PennyMac Mortgage Investment Trust's First Quarter 2026 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call as well as an Excel file with supplemental information are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. Starting on Slide 3. PMT's first quarter net income was $14 million or $0.16 per diluted common share, representing a 4% annualized return on common equity. These results were impacted by a lower contribution from our interest rate sensitive strategies primarily due to a decrease in servicing fees as a result of seasonality and a larger-than-expected MSR runoff related to higher note rate loans. These impacts were partially offset by improved results in our aggregation and securitization segment. PMT paid a quarterly dividend of $0.40 per share and book value per share on March 31 was $14.98, down 2% from the end of the prior quarter. Turning to Slide 5. I would like to note we have renamed what was previously the Correspondent Production segment to the aggregation and securitization segment. We believe this name more accurately captures the breadth of PMT's participation in the mortgage ecosystem, specifically our focus on aggregating high-quality loans for execution in the secondary market to drive organic asset creation. In total, during the first quarter, PMT purchased $4.3 billion in UPB of loans from PFSI. $2.8 billion in UPB was through its correspondent purchase agreement with PFSI, for which PMT pays fulfillment fees. The remaining $1.5 billion represented loan sales from PFSI to PMT outside of their loan purchase agreement where PMT's private label securitization platform provided optimal secondary market execution for PFSI. Slide 6 highlights the continued success of our organic investment creation engine. Similar to last quarter, we completed 8 private label securitizations totaling $2.8 billion in UPB. This activity resulted in the retention of $190 million of new subordinate bond investments in the credit-sensitive strategies and $12 million of new senior bond investments in the interest rate-sensitive strategies. We also generated $40 million of new MSR investments. Our momentum has continued after quarter end, with 2 additional securitizations completed and another 1 priced totaling $1.1 billion in UPB, and we remain on pace to complete approximately 30 securitizations in 2026, which we expect will build a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On Slide 7, we provided a snapshot of the high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of subordinate bonds within our credit-sensitive strategies totaled $744 million. 66% of this portfolio is comprised of bonds from nonowner-occupied loan securitizations. 20% is comprised of bonds from general loan securitization with the remainder primarily from agency eligible owner-occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics. including a weighted average FICO origination of 774, a weighted average LTV and origination of 72 and negligible delinquencies. Within our interest rate-sensitive strategies, as of quarter end, we held $94 million in fair value of senior and mezzanine bonds. These investments are diversified across our jumbo non-owner occupied and agency eligible owner-occupied loan securitizations. And similar to our credit-sensitive bonds, these investments are backed by high-quality collateral with weighted average original FICO scores in the 770 range and original loan-to-value ratios in the low 70s. This consistent credit quality across these organically created assets underscores our ability to produce attractive, high-yielding investments on Slide 8, approximately 60% of PMT's shareholders' equity remains deployed to long-standing investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for nearly half of shareholders' equity, providing stable cash flows from the portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments represent 12% of shareholders' equity and consists of seasoned loans with a weighted average current LTV of 46%. Turning to Slide 9, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes have been below our dividend level for the past several quarters. As you can see, we are showing an average run rate return of $0.31 per quarter for the next year. And focusing on the interest rate-sensitive strategies, increased amortization on higher coupon loans as well as reduced expectations for declines in short-term interest rates, which drive financing costs have lowered expected returns on MSRs in the near term. As is our long-standing practice, we continue to actively evaluate our overall equity allocation and investment opportunities to refine and optimize our returns on a go-forward basis. We are working diligently to reposition PMT to capture the opportunities more aligned to our long-term return hurdles. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market. By leveraging our unique ability to create credit-sensitive, high-quality assets, and drive our overall returns higher through disciplined capital allocation, I remain confident in our strategy to support our dividend and create long-term value for our shareholders. Now I'll turn it over to Dan to review the first quarter financial performance. Daniel Perotti: Thank you, David. Net income to common shareholders was $14 million or $0.16 per diluted common share in the first quarter or a 4% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $16 million to pretax income, generating an annualized return on equity of 17%. Gains from organically created CRT investments were $10 million, which included $7 million of realized gains and carry and $3 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $6 million, $2 million of which were market-driven value gains. Interest rate-sensitive strategies contributed pretax income of $8 million for an annualized ROE of 3%. Income excluding market-driven value changes for the segment was $11 million, down from $21 million in the prior quarter, impacted by increased prepayment speeds during the quarter, particularly on higher note rate MSRs, which drove higher runoff of our MSR assets, as well as lower servicing fees from seasonality and lower placement fees on custodial balances as a result of lower short-term interest rates. Regarding market-driven value changes, our hedging activities during the quarter yielded a small net decline as the $40 million MSR fair value increase was more than offset by $46 million of net declines in fair value of MBS and interest rate hedges, including the related tax expense. Additionally, during the quarter, we sold $477 million of agency fixed rate MBS to capitalize on intra-quarter spread tightening, resulting from the GSE MBS purchase announcement, and we redeployed the capital into retained investments from our private label securitizations. The aggregation and securitization segment reported pretax income of $16 million compared to a pretax loss of $1 million in the prior quarter. The prior quarter amount was primarily driven by spread widening on jumbo loans during the aggregation period and lower overall margins. In total, PMT reported $28 million of net income across strategies, excluding market-driven value changes, up from $21 million in the prior quarter, primarily due to an increased contribution from the aggregation and securitization segment. I want to address our dividend in the context of our current results and the updated run rate return potential. While projections for income, excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend of $0.40 per share, which is supported by our taxable income and which we expect to be sufficient to fully cover the dividend at its current level. Turning to Slide 13. We highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we redeemed $345 million of exchangeable senior notes originally due in March 2026 using capacity from existing financing lines. And finally, on Slide 14, we continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage and that ratio declined to 5.6x at quarter end from 6x at the prior quarter end within our expected range. PMT's total debt to equity increased to approximately 11:1 from 10:1 at December 31 as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization mitigating any additional exposure to PMT. We expect the divergence between these 2 metrics to continue increasing as our securitization program grows. We'll now open it up for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: Question related to your comments on Slide 9 about actively evaluating the asset allocation of the company and some new investment opportunities. Can you elaborate on what you guys are looking at in terms of kind of new investments if that includes things like non-QM or home equity. And also was curious if sales of maybe some lower returning assets are part of the valuation that's ongoing? David Spector: Well, I think it's all of the above would be my response. I think first of all, if you look at Slide 9, when you look at the annualized return on equity, you can see that the -- in terms of achieving that minimum required return of, call it, 13%, 14%. Means that the sector that's really under delivering and has been the net interest rate sensitive strategies and, in particular, MSRs. And so as we look across our MSR portfolio, I mean, clearly, there's parts of that, that have real value and there's demand in the marketplace for it. And there's others that have real value that perhaps there isn't as much demand in the marketplace. So we're strategically evaluating the MSR portfolio to help accelerate perhaps the weighted average equity allocation down in that operating strategy and moving more to the credit-sensitive strategies. The point you raised in the credit-sensitive strategies, of course, there's more opportunity to do additional securitizations in nonowner-occupied loans and agency-eligible loans even jumbo loans. But given what we're seeing in the non-QM originations, both in correspondent and over a PFSI in their broker division, the ability to aggregate for securitization is very apparent to me. So I wouldn't be surprised to see us do a non-QM securitization over the next year. And to your point, there's other assets that we see in the marketplace that you can create investments that achieve our return target. And so as we've done in the past, we're going in and we're evaluating how to -- where can we recycle out of lower returning assets in the higher returning assets. Operator: And your next question comes from Bose George with KBW. Bose George: So first, just the change in the ROE expectation that you gave for the $0.31 down from $0.40, it looks like it's mainly on the Agency MBS, but can you just walk through the drivers of that change. Daniel Perotti: So the -- so really, the bigger driver of those is on the MSRs, which -- where the return came down a few percentage points in the allocation, weighted average equity allocated there is a larger proportion. The Agency MBS also did decline. That was really related to -- if you look at the expectations for short-term rates going back from last quarter versus this quarter, there was obviously a sharper decline and thus a greater expected carry from the agency MBS in that -- in the prior run rate scenario. But the bigger impact is related to really the prepayment speeds and expectations that we see in the short to medium term on the MSRs. Bose George: Okay. That makes sense. And -- the -- and in terms of the bridge now from the $0.16 you guys did this quarter up to the normalized. Can you sort of walk through just the bridge there? Daniel Perotti: Well, certainly, obviously, rates have increased a bit, and so we are expecting slower prepayments on the MSRs. But still below -- still elevated from what we saw earlier in prior quarters or in earlier quarters in 2025. And then as David has mentioned, there we mentioned some allocation out of MSRs and into -- if you look at the allocation here, for example, some ability to ramp up other investments as we move through the next few quarters. Operator: And your next question comes from Jason Weaver with Jones Trading. Jason Weaver: In your prepared remarks, you mentioned the sale of roughly $0.5 billion of MBS on tightening to redeploy towards retained securitization, which looks like a material rotation in the interest rate-sensitive book. All else equal, is this a sort of glide path we should think about for the remainder of 2026? Or was this more of a tactical rotation? Daniel Perotti: I think that was really more opportunistic or tactical. We wouldn't necessarily expect to continue to wind down that portfolio, especially, although we will adjust as we're looking at rotating out of certain portions of the portfolio. But given the returns that we expect from the Agency MBS portfolio and what we have here overall, we wouldn't expect to drawdown necessarily further on the MBS portfolio, but it's something that we'll continuously evaluate based on where spreads are in the market. Jason Weaver: Got it. And I think you redeemed about $350 million of exchangeable senior notes from the existing financing book. What is the unsecured corporate debt stack look for the next 24 months, if you can just guess. And are you targeting any sort of opportunistic refinancing or extension given current spreads? Daniel Perotti: So we issued about $150 million of additional convertible debt towards the end of Q4 last year. We additionally in 2025 issued a few unsecured baby bonds. That was effectively a pre-refinancing of the convertible debt that was retired in Q1 of this year. So we don't have a need to necessarily raise additional unsecured debt. It is something that we will continue to look at and see if there are opportunities. but no immediate plans necessarily, but it's something that we will be opportunistic with to the extent that we see opportunities. Operator: [Operator Instructions] Your next question comes from the line of Doug Harter with BTIG. Douglas Harter: As you think about the opportunity in the non-agency securitization, do you view it as more opportunity limited today or more capital constrained and as you think about the ability to scale -- continue to scale that business? David Spector: I think it's really capital more than opportunity. I think the great story about PMT is obviously, the synergistic relationship it has with PFSI and the ability to source the underlying assets, the ability to underwrite and process the loans on the front end and where we have the ability to actively select the loans that we want in our investments is a really important feature that we have in PMT. And so the -- whether it's investor or non-owner securitizations where we create subordinate bonds or general loan securitizations and even the agency eligible loans where we're not securitizing just for best execution purposes, we're securitizing to create investments for PMT. And so I think that it's really more of a capital issue for us. And I think that's why we're focused on opportunistically getting out of lower returning assets and most likely reinvesting the capital into our credit-sensitive strategies sector, which, by the way, from the very beginning of PMT is what the -- is what the investment thesis was for PMT looks to be a credit-sensitive strategy vehicle. And so that's really the guiding -- the kind of the guiding force here. We're -- I think we've done a great job in being the preeminent securitizer of these non-agency loans and creating the investments behind them. And you look at the performance of these, and they're really remarkable. And I think that we've done a nice job when CRT was discontinued to be able to move to figure out, okay, how do we create a like investment without the CRT opportunity, and that's how we ended up where we are today. But I think you're going to continue to see us grow the equity allocation in the credit sensitive strategies over time. Douglas Harter: And David, as you mentioned, you're seeing increased non-QM volume, how much crossover is there in your traditional agency originator that's a correspondent partner versus non-QM or some of these other products that you haven't necessarily gotten as large in yet? David Spector: I'm really -- I've been really pleasantly surprised and I think it's a function of the size of the market that we're seeing a good amount of our correspondent getting into non-QM lending. And so I think that they are -- they're recognizing that they need to expand their product base. And so this is where being the leading correspondent aggregator with over 700 plus [ clients ] is really an advantage to us and being really good, meaningful deliveries of non-QM correspondent. And I expect that to meaningfully grow. I think the important part of non-QM, like all non-Agency products, you have to keep an eye on the fact that you don't want to get caught in a market disruption or with spreads widening. And so we're being really diligent at least initially in selling and forward selling the non-QM product to really lock in the margin until such time as we want and we decide to do a securitization. And that's where again, the synergistic relationship with PFSI to be really valuable because similar to the correspondent side on the PFSI side, we're seeing really good receptivity to non-QM with our broker partners. And so I think when we decide that we want to do a securitization and really deploy capital there, we'll be able to do so. But by and large, I think there's part of the non-QM market that we're participating in is getting more readily accepted in the broker and correspondent communities has more akin to their credit profile and their risk management framework than when it was originally -- when a vision was born some 10 years ago and people thought of it as maybe a little less than prime. But I've been pleasantly surprised by this. Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks. David Spector: Well, I'd like to thank everyone for joining us on our call today. If you have any questions, please don't hesitate to reach out to me or our IR team, Dan and I look forward to speaking to all of you in the near future. Thank you. Operator: The concluded today's call. You may now disconnect.
Hiroshi Hosotani: I am Hiroshi Hosotani, CFO. I will now provide an overview of the business results for the fiscal year 2025. Page 4 shows the highlights of business results for fiscal '25. Foreign exchange rates were JPY 150.5 to the U.S. dollar, JPY 173.8 to the euro and JPY 99.2 to the Australian dollar. Compared to the previous fiscal year, the Japanese yen appreciated against the U.S. dollar and Australian dollar, but depreciated against the euro. Net sales increased by 0.7% to JPY 4,132.8 billion. Operating income decreased by 13.7% to JPY 567.3 billion. The operating income ratio was 13.7%, down 2.3 points. Net income attributable to Komatsu decreased by 14.4% to JPY 376.4 billion. Net sales reached a record high for the fifth consecutive year. ROE was 11.3%, down 2.9 points from the previous year. We plan to pay an annual cash dividend of JPY 190 per share, the same as the previous year, resulting in a consolidated payout ratio of 45.9%. Page 5 shows segment sales and profits for fiscal '25. Net sales in the Construction, Mining & Utility Equipment segment increased by 0.2% to JPY 3,806 billion. Sales exceeded the projection announced in October, as demand was higher than expected. Segment profit decreased by 18% to JPY 491.1 billion. The segment profit ratio was 12.9%, down 2.9 points. Retail finance sales increased by 2.4% to JPY 126.1 billion. Segment profit increased by 24.4% to JPY 36.6 billion. Industrial Machinery and Others sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. I will explain the factors behind the changes in each segment later. Page 6 shows the sales by region for the Construction, Mining & Utility Equipment segment for fiscal '25. Sales to outside customers for the segment increased by 0.2% to JPY 3,796.1 billion. Details of regional changes will be explained by Mining and Construction Equipment, respectively, on the following pages. Page 7 shows the sales by region for mining equipment within the segment for fiscal '25. Mining equipment sales decreased by 0.6% to JPY 1,904.4 billion. In Asia, sales decreased due to a decline in demand following low coal prices in Indonesia and demand decline. However, sales increased in Africa and Latin America, where demand for copper mines remained strong, keeping overall sales flat. Page 8 shows the sales by region for Construction Equipment within the segment for fiscal '25. Construction Equipment sales increased by 1.1% to JPY 1,891.7 billion. In real terms, excluding FX impact, sales increased by 0.2%. In Asia, sales decreased as it took time to adjust distributor inventories in Indonesia. Sales increased in North America, driven by demand for infrastructure, rental and energy and in Europe, where infrastructure investment is on a recovery trend. Page 9 shows the causes of difference in sales and segment profit for the Construction, Mining and Utility Equipment segment for fiscal '25. Sales increased by JPY 7.8 billion as price improvement effects outweighed the negative impact of decreased volume. Although we focused on improving selling prices, segment profit decreased. The negative effects of decreased volume, product mix and higher costs due to U.S. tariffs and production costs outweighed the price improvements, resulting in a JPY 107.8 billion decrease in profits. The segment profit ratio was 12.9%, down 2.9 points from the previous year. The impact of tariffs in fiscal '25 amounted to JPY 64.2 billion. Page 10 shows the performance of the Retail Finance segment for fiscal '25. Assets increased by JPY 238.3 billion from the previous fiscal year-end due to an increase in new contracts and the depreciation of the yen. New contracts increased by JPY 75.8 billion, mainly due to higher finance penetration in North America and Europe. Revenues increased by JPY 2.9 billion, mainly due to an increase in outstanding receivables. Segment profit increased by JPY 7.2 billion, mainly due to lower funding costs. Page 11 shows the sales and segment profit for the Industrial Machinery & Others segment for fiscal '25. Sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. The segment profit ratio was 15.9%, up 3.6 points. For the automotive industry, sales of large presses increased. For the semiconductor industry, sales and profits increased due to higher maintenance sales of excimer lasers with high profit margins. Page 12 shows the consolidated balance sheet and free cash flow. Total assets reached JPY 6,423.9 billion, an increase of JPY 650.4 billion, primarily due to the impact of the yen's depreciation. Inventories increased by JPY 195.2 billion to JPY 1,601.9 billion, affected by both the weak yen and U.S. tariffs. The shareholders' equity ratio was 54.7%, down 0.3 points and the net D/E ratio was 0.26x. Free cash flow for fiscal '25 was an inflow of JPY 249.7 billion, a decrease of JPY 56.8 billion from the previous year. From Page 13, I will explain the progress of the strategic growth plan. The current strategic growth plan, driving value with ambition, which started in fiscal ' 25, set 3 pillars of growth strategy, create customer value through innovation, drive growth and profitability and transform our business foundation. Under create customer value through innovation, we began operating a power agnostics truck at a copper mine in Sweden as part of our efforts to address various power sources. We also conducted a POC test of a hydrogen fuel cell powered hydraulic excavator at a highway construction site in Japan. As part of our efforts for advanced automation and remote control, we are advancing the development of SPVs for next-generation mining equipment in collaboration with applied intuition. We are also promoting the practical use of autonomous driving technology for Construction Equipment through collaboration with Tier 4. Next, under drive growth and profitability, we received the first major mining equipment order in the Middle East for the Reko Diq Copper Gold Project in Pakistan. We began deploying AHS in the U.S. and delivered the 1,000th unit globally. We will also strengthen our remanufacturing business through the acquisition of SRC of Lexington in the U.S. We have initiated the establishment of a training center in Côte d'Ivoire, and we'll work to strengthen our marketing and service capabilities in the Africa region. Lastly, regarding transformer business foundation, in addition to embedding risk management through ERM and strengthening our supply chain through cross-sourcing and multi-sourcing, we accelerated human resource development for innovation and business transformation through the utilization of AI and digital transformation. We succeeded in improving scores in our employee engagement survey. Also, our global brand campaign led to high recognition at international creative awards. Page 14 shows achievement of management targets in the strategic growth plan. Net sales for fiscal '25 increased by 0.7% year-on-year as improvement in selling prices offset the decline in sales volume. On the other hand, profit decreased year-on-year as the negative impacts of volume reduction and cost increases outweighed the effects of price improvements. Regarding management targets, in terms of profitability, the operating income ratio for fiscal '25 was 13.7%, a 2.3 point decrease from the previous year. Despite efforts to improve selling prices, the results were significantly impacted by volume decline, inflation-related cost increases and higher costs due to U.S. tariffs. In terms of efficiency, ROE was 11.3%, achieving our target of 10% or higher. For the retail finance business, we achieved our targets for both ROA as well as the net D/E ratio. Regarding shareholder returns, we expect to maintain a consolidated payout ratio of 40% or higher. Also, we executed the repurchase of JPY 100 billion of our own shares. Regarding the resolution of social issues, we have set 30 KPIs, and progress in fiscal '25 has been broadly in line. Among these, for the reduction of environmental impact, we achieved our target for CO2 reduction from production ahead of schedule. Reduction of CO2 emissions during product operation and the renewable energy usage ratio are also progressing largely as planned. That concludes my presentation. Operator: With that, fiscal year 2026 forecast of the business, and that will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, the GM from Business Coordination Department. I'd like to walk you through our forecast for fiscal year '26 in our primary markets. Page 16 summarizes the impact of the situation in the Middle East and the U.S. tariffs as well as the underlying assumptions that have been factored into the fiscal year 2026 earnings forecast. And then the fiscal 2026 forecast incorporates items for which estimates can be made based on information available at this time. Regarding the situation in the Middle East, assuming the turmoil in the Middle Eastern countries and soaring oil prices and supply chain disruptions will continue throughout the year. We have factored in a decrease in sales of JPY 90.1 billion and an increase in cost of JPY 18.8 billion. However, regarding the impact on production due to shortages of crude-oil-derived materials, while there is a risk, the situation is unclear at this time. Therefore, it has not been factored into the fiscal 2026 outlook. Now on to U.S. tariffs. Based on assumptions of Section 122, additional tariffs will apply throughout the year and the revised steel and aluminum tariffs will apply from April 6 throughout the year. We have factored in additional costs of JPY 67.8 billion. However, we have also factored in JPY 30 billion in refunds, resulting in a net cost increase of JPY 37.8 billion. Page 17 provides an overview of the outlook for fiscal year 2026. We anticipate exchange rates of JPY 150 to the U.S. dollar, JPY 170 to the euro and JPY 106 to the Australian dollar. We project net sales of the JPY 4,118 billion, a 0.4% year-on-year decrease and operating income of the JPY 508 billion, a 10.5% year-on-year decrease. Net income is projected to be JPY 318 billion, a decrease of 15.5% year-on-year. Furthermore, at the Board of Directors meeting held today, a resolution was passed to repurchase treasury stock up to a maximum of JPY 100 billion or 25 million shares and to cancel all repurchase shares during fiscal year 2026. ROE for fiscal '26 is projected to be 9.1%. The dividend per share is planned to be JPY 190, the same as previous year, and consolidated dividend payout ratio is projected to be 53.8%. In addition, when the JPY 100 billion share buyback announced today is included, the total payout ratio is projected to be 85.4%. Page 18 presents the revenue and profit forecast for each segment. Revenue for the Construction Machinery and Mining Equipment and Utilities segment is expected to decrease by 0.4% year-on-year to JPY 3.79 trillion, while segment profit is expected to decrease by 10.4% to JPY 440 billion. Revenue for Retail Finance is expected to increase by 1.1% year-on-year to JPY 127.5 billion, while segment profit is expected to decrease by 1.6% to JPY 36 billion. Revenue for Industrial Machinery and Others is expected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% to JPY 37 billion. We'll explain the factors behind the change in each segment later. Page 19 presents the regional sales forecast for the Construction Equipment and Utilities sector for fiscal '26. Sales of this segment are projected to decline by 0.5% year-on-year to JPY 3,778.2 billion. Details of the year changes by region are provided on the following pages, broken down by Mining Machinery and General Construction Machinery. Page 20 presents the regional sales forecast for Mining Machinery within the Construction Equipment and Utilities segment for fiscal '26. Sales of mining equipment are expected to decline by 2.4% year-on-year to JPY 1,858.5 billion. Sales are expected to decline in Asia and Middle East due to sluggish demand for coal and impact of situation in the Middle East. In North America and Oceania, demand is expected to decrease as mining companies complete their equipment renewal cycles, leading to a decline in sales. Page 21 shows regional sales forecast for general Construction Equipment within the Construction Equipment and Mining Equipment Utilities segment for fiscal '26. Sales of general Construction Equipment are forecast to increase by 1.5% year-on-year to JPY 1,919.7 billion, while sales expected to decline in Middle East and Asia due to regional situation. Overall sales of general Construction Equipment are projected to increase year-over-year, driven by growth in North America, where demand for infrastructure energy project remains strong and in Latin America, where public investment is robust. This page outlines the factors contributing to the projected changes in sales and segment profit for this segment. Although we are striving to improve selling prices, sales are expected to decrease by JPY 16 billion year-on-year due to negative impact of lower sales volume caused by situation in the Middle East. Segment profit is expected to decrease by JPY 51.1 billion year-on-year, although we will strive to improve selling prices. This is due to the negative impact of lower sales volume, the expanding impact of tariffs and rising procurement cost. The segment profit margin is expected to decline by 1.3 percentage points year-on-year to 11.6%. Page 23 presents the outlook for retail finance. Assets are expected to increase by JPY 23.6 billion compared to the end of the previous fiscal year as new lending exceeds collections. New lending volume is expected to increase by JPY 5 billion year-on-year as we anticipate a high utilization rate continuing from the previous year. Revenue is expected to increase by JPY 1.4 billion year-on-year, primarily due to an expansion in outstanding loan balance. Segment profit is expected to decrease by JPY 0.6 billion year-on-year, primarily due to higher costs. ROA is expected to decline by 0.1 percentage points year-on-year to 2.3%. Page 24 presents the sales and segment profit outlook for Industrial Machinery and Others. Sales are projected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% year-on-year to JPY 37 billion. In the Semiconductor Industry segment, sales are expected to increase due to customers ramping up production amid the market recovery. However, for the automotive industry application, revenue is expected to rise, while segment profit is expected to decline due to factors, such as decreased sales of large presses and automotive battery manufacturing equipment as well as rising procurement costs resulting from the situation in the Middle East. The segment profit margin is expected to decline by 0.4 percentage points year-on-year to 15.5%. Starting on Page 25, we will explain the demand trends and outlook for the 7 major Construction Equipment categories. The demand figures for the 7 major Construction Equipment categories include the mining equipment. The figures for the fiscal year '25 are preliminary estimates based on our projections. Demand for fiscal '25 appears to have increased by 5% year-on-year. For fiscal year '26, we anticipate a year-on-year decline in demand ranging from 0% to negative 5%. In addition to decline in demand in Indonesia, we expect a decrease in demand in Middle East and neighboring countries due to the deteriorating situation in the region. Page 26 outlines the demand trends and forecast for the North American markets. Demand for the 2025 fiscal year appears to have increased by 3% year-over-year. Demand remains strong in sectors, such as data centers and other infrastructure, rentals and energy. The demand forecast for '26 fiscal year is expected to remain on par with the previous year. We anticipate the infrastructure and energy sectors will continue to drive demand as we go forward. Page 27 shows the demand outlook and demand for European markets. The demand units for 2025 fiscal year is expected -- was expected to increase by 4% previous year. And the demand outlook for '26 is expected to be 0% to positive plus percent -- positive 5%. And Germany and the U.K. public investment demand is expected to lead overall demand, and we are expecting to see the robust demand. Page 28 covers demand trends and outlook for the Asia market. Demand for '25 fiscal year appears to have increased by 5% year-on-year. In Indonesia, although the demand for mining machinery declined due to sluggish coal prices, overall demand increased due to rising demand for general construction machinery, such as food estate projects. In India as well, demand increased driven by aggressive infrastructure investment. The demand outlook for fiscal '26 is projected to be a decrease of 5% to 10%. While demand in India is expected to remain robust, demand in Indonesia is forecast to decline significantly due to the government's policy to reduce coal production and the impact of the introduction of the B50, which is biodiesel fuel regulations. Page 29 outlines the trends and outlook for demand in the Japanese market. It appears that demand for the 2025 fiscal year declined by 13% compared to the previous year. We expect demand for '26 to remain at the same level as the previous year. Although nominal construction investment is increasing due to inflation, real-time growth -- real-term growth is stagnant due to soaring material and labor costs, and there are currently no signs of recovery in demand. Page 30 presents trends and outlooks for the prices of key minerals related to demand for mining machinery. We expect copper and gold prices to remain at high levels going forward. While both low grade and high-grade thermal coal are currently trending upward, we will continue to monitor future developments closely. Page 31 shows the trend in demand for mining machinery. It appears that the number of units in demand for fiscal '25 decreased by 10% year-on-year. Overall demand declined due to a significant drop in demand for coal-related machinery in Indonesia. The demand forecast for fiscal '26 is expected to be a 10% to 15% decline. Although demand for copper and gold mining equipment is expected to remain at a high level, overall demand is projected to decline due to weak coal-related demand and the completion of the replacement cycle in North America and Oceania and the impact of the situation in the Middle East. Page 32 presents the sales outlook for the construction machinery, mining equipment and Utilities segment, including equipment, parts and services. In fiscal '25, parts sales increased by 0.4% year-on-year to JPY 1,055.2 billion. The aftermarket segment as a whole, including services accounted for 52% of total sales. Excluding the impact of ForEx, total aftermarket sales increased by 1% year-on-year. For fiscal '26, parts sales are projected to increase by 2.2% year-on-year to JPY 1,078.5 billion. The aftermarket overall sales ratio, including services, is projected to be 53% and aftermarket sales, excluding ForEx effects are projected to increase by 3.1% year-on-year. The Page 33 presents outlook for capital expenditures and other investments for fiscal year '26. Excluding investments in rental assets on the left, capital expenditures are expected to increase year-on-year due to investments in production and sales facilities as well as the reconstruction of the head office. Research and development centers shown in the center are expected to increase year-over-year due to focused investment in adapting diverse power sources and automation. Fixed costs shown on the right incorporate the effects of the structural reforms. However, they are expected to increase year-over-year due to wage increases and higher R&D expenses. Next, I'll explain the main topics. Page 51 now. Komatsu has acquired a remanufacturing business for construction and mining machinery components and parts from SRC of Lexington through its wholly owned subsidiary, Komatsu North America, Komatsu America Corp. In 2009, Komatsu transferred its North American remanufacturing business to SRC Lexington, and since then, has continued to do business with the company as one of its most important suppliers for Komatsu's North American remanufacturing operations. With this acquisition of SRC of Lexington's remanufacturing business, Komatsu will further expand this operation by establishing a new dedicated manufacturing facility in North America, one of the largest markets for construction and mining equipment. Page 52. In December 2025, Obayashi Corporation, Iwatani Corporation and Komatsu conducted demonstration test of hydrogen fuel cell power hydraulic excavator during rockfall prevention work on the Joshin-Etsu Expressway. The test confirmed several benefits, including operational performance equivalent to that of conventional diesel-powered models and reduced operator fatigue due to the absence of vibration. At the same time, we reaffirm the challenges facing practical implementation, such as the need for higher capacity and the faster hydrogen supply and refueling systems. The three companies will continue to conduct the studies and verification tests aimed at practical implementation. Page 53. Komatsu exhibited at CONEXPO International Construction Machinery Trade Show held in Las Vegas, U.S.A. from March 3 to 7. The company showcased a new generation of vehicles, including bulldozers and hydraulic excavators equipped with the latest features, such as intelligent machine control as well as articulated dump trucks designed to further improve operational efficiency. Komatsu highlighted its initiatives to leverage data from vehicles and digital solutions to enhance customer productivity and safety while reducing total cost of ownership. Page 54. Komatsu has acquired Malwa Forest, a forestry machinery manufacturer through its wholly owned subsidiary, Komatsu Forest. By acquiring technological capabilities and product lineup for lightweight compact cut-to-length forestry machinery, specifically designed for thinning operations, a segment in which Komatsu previously had no presence, the company will contribute to value creation across the entire circular forestry process. Page 55. We have reached a cumulative total of the 1,000 units for our ultra-large autonomous dumb truck equipped with autonomous haul system, AHS, for mining operations. Since introducing AHS for the first time in the world in 2008, the cumulative total haulage volume has exceeded 11.5 billion tons. That concludes my presentation. Operator: Now we would like to move on to the Q&A session. So first, we would like to take any questions from the people here. Maekawa-san from Nomura, please. Kentaro Maekawa: This is Maekawa from Nomura. I have 2 questions. First, regarding tariff impact and price increases. Hosotani-san, you mentioned this in your presentation, but last fiscal year, JPY 64.2 billion was the cost impact. I think originally, you were expecting JPY 55 billion and about JPY 120 billion, which is 4 quarters -- a quarter multiplied by 4, what's going to be your expectation for fiscal '26? So what kind of changes did you experience in reaching your results for fiscal '25? Can you confirm that first? And what have you accounted for, for this fiscal year? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding U.S. tariffs, there are no major changes on a dollar basis. While we were converting it at JPY 140 before, but now it's at JPY 150 against the dollar or to be more exact, JPY 150.5 against the dollar. Therefore, on a U.S. dollar basis, it's not different. It hasn't changed. It's just because of the FX impact. For fiscal '26, the impact will materialize on a full year basis. So it was about around JPY 600 million before, but it should reach around JPY 900 million. Other than that, we have accounted for refunds as well, which is equivalent to the reciprocal tariffs that are likely to be refunded. So that's what we have accounted for. Kentaro Maekawa: So if it's $900 million, it's about JPY 135 billion. For steel and aluminum, how much of an increase? How much of a decrease are you expecting from reciprocal? And the JPY 30 billion refunds are also included in the JPY 135 billion. So when you look out at March '28, is it going to become JPY 165 billion? So can you break down the JPY 135 billion? What has been going up, what has been coming down? Or can you talk about how it's going to rise from the JPY 64.2 billion? Kiyoshi Hishinuma: Well, regarding the period, before, it was from the middle of the year. So at the beginning of the year, we did have inventory from the previous year. So we started paying the tariffs at a later timing from a payment point of view. From a P&L impact, we had year-end inventories. So it was relatively low. But in fiscal '26, from the beginning of the fiscal year, we are making payments. So there is a period difference. And regarding the details, reciprocal tariffs may be gone. But for steel and aluminum, we used to calculate the content in order to reduce the level of tariffs paid. But now it's at 25%. So the impact is greater. So that is one reason why it's greater than before. From that point of view, for the refunds, that's about last fiscal year's portion. So for fiscal '27, we won't have deferrals from the previous fiscal year. Therefore, we will see full impact. So if nothing changes, it's likely to be JPY 165 billion. Next year, of course, that 10% or Article 122, when that's going to end is a question mark. But well, if we're working off the assumption that the same thing is going to materialize for the next year, that's what we're accounting for, but we are not sure. In that case, it's JPY 135 billion, for next year, the following year, if sales and production is not going to change, it should be about JPY 130 billion for fiscal '27 as well. And this year, it's JPY 30 billion less, or excuse me, for the results for fiscal '25, we already said that it was JPY 64.2 billion. And for fiscal '26, originally, we were guiding JPY 130.7 billion or JPY 130.8 billion. But because of the refunds that we were explaining, which is worth USD 200 million, which we view as JPY 30 billion in terms. So when you account for that, it should be a little bit over JPY 100 billion of an impact on our P&L. Kentaro Maekawa: Got it. For price increases, and on Page 22, when you look at the projections for selling prices, it's plus JPY 68.9 billion. So hypothetically, even if you don't get the refunds at JPY 130 billion, you should be able to make up for it through price increases. Are you making progress? And have you gained visibility already? Can you also speak to that? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding pricing, we did a bottom-up approach looking at the business plans of our subsidiaries, but price increases are also accounted for, for the U.S. But Caterpillar is not raising prices, and those are the circumstances. So there may be a risk. However, for the tariff increases in the U.S., we won't be able to absorb it completely just with the U.S. So global price increases need to happen. So that's what we're accounting for. Kentaro Maekawa: Understood. My second question is for this fiscal year and your view on volume. Also going back to Page 16, in light of the Middle Eastern conflict, you have reduced sales by JPY 90.1 billion. And last year, when there were some tentative assumptions for GDP as much as you can see, what can you see, what can you not see? So what are the assumptions that led you to JPY 90.1 billion? Because in mining, when energy prices are high, I think that may also serve as a positive. So I was wondering how you view this situation. Kiyoshi Hishinuma: This is Hishinuma. First, regarding demand for the Middle East, a 60% decline is expected. So that has been accounted for, 6-0 percent. And also due to the impact from the Strait of Hormuz, we believe that costs are likely to increase and especially negative impact on countries in Asia. So we are expecting sales to decline. But when it comes to higher coal prices, there is a chance that they may stimulate demand. But when you look at countries like Indonesia, it's true that what originally used to be $40, $50 a ton are now reaching $60 a ton. But even so, we are seeing a higher idle standby rate of equipment, and we're not sure if this is going to continue or not in the future. So demand has not really picked up. So currently, people are still on the sidelines waiting and seeing. There may be an opportunity, but so far, we have not accounted for that in our expectations. Takuya Imayoshi: Just to add a comment to that. Last year, U.S. tariffs just started. So it was hard to account for it in our guidance. But based off IMF predictions and so forth, we have viewed how much GDP is likely to decline and what's going to happen to demand. And that is why we accounted for JPY 50 billion decline in sales. But the global economies have not yet fallen, but we try to account for risk as much as possible to the extent that we can calculate. And also the Middle Eastern crisis, we don't really know its impact clearly yet, but our way of thinking is the impact from the Strait of Hormuz is likely to continue. That's the assumption we have. But then because we are dependent on crude oil as well as LPG, like -- in regions like Africa as well as Asia are likely to be affected. So like Hishinuma-san explained, we are expecting a demand decline in Asia as well as in the Middle East, leading to a sales decline in turn. And also accounting for our gut feeling that we have experienced from the past, we have accounted for a JPY 90 billion impact. And also due to higher crude oil prices, we are already seeing material prices increase that are crude-oil-derived, and that impact is JPY 18.8 billion. So this is purely looked at as a cost increase. So JPY 90 billion of volume decline and JPY 18.8 billion of a cost increase SVM-wise is what we've assumed due to what I've just explained. On the other hand, of course, the impact may be greater than our assumptions or the crude-oil-derived goods may fall to a shortage, which may affect our production, but that is still not known. So we have not accounted for that negative impact. Operator: I would like to move on to the next one, Sasaki-san from UBS. Tsubasa Sasaki: This is Sasaki from UBS Securities. I've got several ones, but the first question is the figures I always ask you. Page 22, this waterfall chart and volume product mix and also the cost variance. Looking at the Page 9 and Page 22, the plan and actual performance, and there have been some figures related to tariffs, but could you please give us the details around those factors? And this volume mix has been negatively contributed to your performance. So the negative JPY 32.2 billion, that's in your plan, but what gets you to that number? Hiroshi Hosotani: This is Hosotani speaking. First, Page 9. Page 24 and Page 25 variance. First in segment profit, JPY 72.6 billion of the volume mix and product mix difference, just hold on a moment. I'm sorry on this one. First, JPY 25.8 billion for the volume difference, and that was a negative. And also product mix, JPY 25.1 billion, that's included. Now factors for this, is that as we explained, electric dump truck, as we explained those up until the last fiscal year, and it's not that they were able to enjoy the higher profitability, but the mix increased for this electrical dump truck. And also Chile contract business margin declined slightly. And also regional mix had negatives here. And among the region, the highest profitability comes from Indonesia. And sales volume significantly decreased in Indonesia market. And that's why regional mix has seen the impact from that and JPY 19.6 billion approximately. Now moving on to the right and production cost, JPY 81.6 billion negative. Let me give you the breakdown for that, which includes the U.S. tariff cost increase, JPY 64.2 billion. This is only applicable to the Construction Equipment of the JPY 64.2 billion and other ones, like the variance coming from industry others, Industrial Machinery and Others. And also cost variance, let me give you the breakdown for that. From third party, we purchased components, the major components, and those costs started to inflate. So that's why there is the major variance of cost of goods. And fixed cost variance, fiscal '24 to '25, the labor cost significantly increased. Apology, you talked about the volume variance, apology, hold on a moment. For fixed cost, JPY 20 billion comes from the labor cost and the SGP projects were underway. And also the variance in comparison between '25 and '26, JPY 31.8 billion of the volume that's been included here, and of which the volume mix amounts to JPY 40 billion. JPY 40 billion, the big chunk comes from Indonesia. Hold on a moment. Other than volume mix, the regional mix and product mix are written here. Fiscal '25, the losses we have to make were all gone for '26. So JPY 31.8 billion included volume mix and that amount to JPY 40 billion. That's all from me. Tsubasa Sasaki: What about the variance of cost of goods? Because I guess the cost increases comes from the conflict in the Middle East. Hiroshi Hosotani: Yes. Fiscal '25 and '26, JPY 49.6 billion for production. The U.S. tariff's impact is included here in this number. About JPY 67 billion is included here, but at the same time, the JPY 30 billion of the refund is included. So the net it all out, the JPY 37 billion of cost increase is included here. And also other cost of goods variance, JPY 10 billion-some is also included. Tsubasa Sasaki: My second question, let me take this opportunity to ask this question of Hosotani-san. You took office as CFO. Give us your commitment as a CFO as we look ahead. For example, as a Komatsu, the capital efficiency improvement and the better margin, I mean, there could be a number of the lists that you want to attain, but you're succeeding Horikoshi-san and took office as CFO. And as one of the members of the top management team, what are the things would you like to achieve? I mean this is your first time to be here in a financial briefing. Do you have any commitment would you like to make? That's my second question. Hiroshi Hosotani: Well, you set the high bar for me actually, but let me try to answer. My predecessor, Horikoshi-san, mentioned this too. But basically, we always have to be mindful of the shareholders in running the business. And I would like to be contributing to the way we run the business. So shareholder returns and balance sheet and ROE, those indicators are the things I always look. For example, in comparison '25 to '26, the net income -- I mean, volume declined because of the conflicts in the Middle East. So net income declined. Business size and the revenue size need to expand from our perspective. And to that end, we are engaged in various activities. As we expand the business size, I would like to be of a support for the better decision on the management level so that we are able to have a better top line. I'd like to engage in those activities as CFO. Tsubasa Sasaki: Is it more like a better top line? Is it one of the things, which you like to commit? That's what I get from your message. What made you think that way? Hiroshi Hosotani: Well, for example, as we look at the current status, the conflicts in the Middle East and there are impacts from that. It takes time until the situation will go back to where it has been. So in the longer term, this is the one-off factor. But the U.S. tariff is concerned, some say this is a one-off factor, but at the end of the day, this is about the balance of the export-import of the United States and other countries and try to correct this imbalance. So these costs are permanently are subjected to occur. So that's why we need to continue to contribute to the cost, but net profit size need to be secured to an extent, which means that we are able to -- we need to have a better top line. Operator: Let's take the next question from SMBC Nikko, Taninaka-san. Satoshi Taninaka: This is Taninaka from SMBC Nikko. Regarding mining equipment, mainly, I have 2 questions. For metal prices, including coal prices, they are rising lately. And in the new fiscal year, when you add up the after services, you're only accounting for about 3% growth year-over-year. I think you're being conservative when you think about the underlying trends. And when you look at the underground mining equipment manufacturers' results, their growth rates look stronger. So can you talk about the backdrop to how you derive these assumptions? Kiyoshi Hishinuma: This is Hishinuma speaking. For mining equipment, as you rightly said, prices have been going up for, obviously, copper and gold and so forth. But on the other hand, for equipment and the way we look at demand, the replacement cycle is pretty long. So there's ups and downs. And also when you look at it by region, there are regions where we're expecting higher demand and other regions where we're expecting lower demand. That's for equipment. And the growth we're expecting for the aftermarket business may look small. However, we did see drop-offs that were quite significant in Indonesia and also in the Middle East, including reman, we have been growing the business, but all in all, the numbers may not look as dynamic as you were expecting. Satoshi Taninaka: My second question is with respect to the replacement cycle and you talked that it has run its course. From 2011 through 2013, demand for mining equipment grew quite substantially. And then you have a replacement cycle. And are you trying to say that the message was that the replacement cycle is over? Or are you saying that over the short term, there are ups and downs and replacements are at a standstill at this moment? So for March '28, are you trying to imply that demand is going to go down even more? Kiyoshi Hishinuma: Well, the cycle we're referring to is not about the 2011 cycle. It's more about whether we have big deals or not in recent years. For example, in North America, in '24, '25, in North America, there were some big deals. And we have been explaining that some big deals have been absent in 2025 because there were more in 2024. So they were less in 2025. And in 2026, we are expecting at this moment less of large deals. But regarding the share volume of general deals, we are actually seeing an increase. So it's just a matter of whether or not we are carrying large deals or not. For example, in the case of Australia, in fiscal '26, we're not expecting that much of big deals, so to say. That's what we were referring to. But for super large dump trucks that we manufacture in North America, when you look at our production plans and compare '25 with '26, production volume is not going to change that substantially. Even if the sales may not be recognized in 2026, there is a possibility that it's going to go into 2027 sales. And rope shovels are being produced at 100% capacity. And we are also working on fiscal '27 already. And because copper is doing well, we're not really expecting that much a decline. However, we need to monitor closely the trends in Indonesia. Operator: I would like to take a question from Adachi-san from Goldman Sachs. Takeru Adachi: This is Adachi from Goldman Sachs. I have 2 questions, too. The first one, the mining equipment. As Hishinuma-san shared, Asian market, usually coal prices are on the rise, which is positive, but diesel prices and operating costs have been boosted, which is negative and negative outweighed the positive and the dormant that populated the vehicles is increasing. And what are the changes that you have seen for dormant and idle vehicles? And I think up until Q1 last fiscal year, there was a last minute demand was very strong and that sub demand in Q2. But as you look ahead, Q1, you see the sales can drop from the fiscal year, but do you think that, that will be flattish after Q2? Or do you think that Q2 and beyond, do you think the moderate decline continues, especially for the Indonesia mining equipment market? Kiyoshi Hishinuma: For Indonesia, as you raised a number of the points, the idle vehicles ratio and what are the historical trends? For example, 2024, the end, 5%, they used to be 5%. Then fiscal '25 in June, 8.5%. And then that was up to 9.6% in January and 10% afterwards and 17% in January. So the coal prices goes up and even the workload increases, and they are able to handle the increase in volume with the coal prices with the current volume. So B40 and now start in July, it starts B50 and production volume, 800 million tonnes, 600 tonnes -- 600 million tonnes. And there are some talks of increasing the volume. Throughout the year, we are not 100% confident that there are bound to increase. So fiscal '26, I believe that we are seeing this as a cautious note. Takeru Adachi: As Tanigawa-san and yourself discussed a bit, Indonesian coal and precious metal have been pretty strong in prices and the production plan is at full, as you said. In order to accelerate it, would you like to accelerate further on that point? Kiyoshi Hishinuma: In North America production capacity ramp-up, rope shovel might be at full. The electric dump truck production plan for fiscal '26 and '25 will be equivalent, I said. But versus what it has been in the past, there are some time where we produce more. So at the full capacity, if we produce them, and there could be some more availability. So in North American market, we are not -- we haven't gone to the point where we are dealing CapEx. Takeru Adachi: Okay. Next one is cash flow and the buyback is announced. And the previous year and two years ago, like those 2 years, you have announced JPY 100 billion. What are the decision-making process like? And behind that, free cash flow assumption were -- would have been calculated. How much free cash flow you're expecting, JPY 160 billion is expecting, I guess. So how much of the operating cash flow and the working capital level? And what are the production assumption to the working capital? Maybe you can have a breakdown approximately. Do you have any up and down of your planning for production? Hiroshi Hosotani: This is Hosotani speaking. For free cash flow, fiscal '24, free cash flow, JPY 300 billion-or-some. That's fiscal '24. And it's been a few years, the JPY 250 billion to JPY 300 billion of the free cash flow. That's our track record of the free cash flow. Now with this amount, dividend and buyback of the JPY 100 billion, we have enough excess capacity to do that with this amount because it amounts to JPY 300 billion. Now for fiscal '26, free cash flow or as planned of the JPY 250 billion plus and deposits and others, I mean, sales were not growing and profits declined, but the working capital is expected to improve. So as a result, so we are able to generate equivalent level. JPY 300 billion plus of the free cash flow are our commitment. So that will continue for 3 years. And M&A portion excluded, then JPY 1 trillion. And that's a commitment and goal we set ourselves. Operator: There are people raising their hands on Zoom. So we would like to take that question from [ Otake-san ], please. Unknown Analyst: Can you hear me? This is Otake speaking. Operator: Yes, we can. Unknown Analyst: Just wanted to confirm again. First question is regarding the impact from U.S. tariffs, please let me sort it out. For the year ended in March 2026, the impact was JPY 64.2 billion on your P&L. Is that correct? Hiroshi Hosotani: That is correct. JPY 64.2 billion for Construction Equipment. That's for Construction Equipment. But for Industrial Machinery, there are -- there is a bit of tariff's impact as well that has been incurred. Unknown Analyst: Up until the previous results, according to the materials, you were saying JPY 55 billion of impact from tariffs. So does this include Industrial Machinery as well on top of Construction Equipment? Kiyoshi Hishinuma: It's only several hundreds of millions of yen attributed to Industrial Machinery. So the level doesn't really change. There was about JPY 400 million of an impact from Industrial Machineries and Others. Unknown Analyst: Got it. And for -- from the assumption of JPY 55 billion, the reason why it increased to JPY 64.2 billion is due to FX impact, right? Kiyoshi Hishinuma: Yes, exactly. Unknown Analyst: No differences on the U.S. dollar basis, broadly speaking. It's just due to the differences in conversion FX rates. So for this fiscal year, for the year ending March '27, excluding refunds, you're expecting JPY 130.8 billion. Is that correct? Hiroshi Hosotani: That is correct. Unknown Analyst: Got it. And the impact amount, the reason why it's higher, you were saying that the content calculation has been abolished and that has had an impact. Can you walk me through what that means and entails? Kiyoshi Hishinuma: Regarding content, for steel and aluminum content, you calculate how much is included for -- as part of your product prices or cost. And that is subject to steel and aluminum tariffs and the rest to reciprocal tariffs. So by calculating the content, we have been able to reduce its cost. And even for derivatives, it is 25% now. So when we were calculating the content, it was less than 25% basically. Unknown Analyst: Or by doing a precise calculation of content, you have been explaining from before that you are able to reduce the cost. But I guess that is not possible anymore. Then in order to reduce tariff impact going forward, such as reviewing our supply chain or logistics, I think that will be key, but with respect to these measures, in order to reduce the negative impact, what are you focusing on? Or what would you like to focus on going forward? Takuya Imayoshi: Well, last year, in April, we shared with you various types of countermeasures we were planning for. For the products that used to go through North America that went to ultimately Canada or Latin America, by shifting to direct shipments instead and shipping out to Canada directly, we will be able to alleviate the impact, and that is fully contributing already. And there are some parts that are going through the U.S. as well. But by directly shipping and also creating warehouses in Panama, we are trying as much as possible to reduce the impact. And for countermeasures, for steel and aluminum tariffs, not by simply just paying for it, but by calculating the content, we had been trying to minimize the tariff impact. However, now it's going to be 25% across the board. So that countermeasure is no longer viable. However, reciprocal tariffs are now gone. So on a net-net basis, the actual amount of payments are slightly up. You referred to the P&L, but the impact on '25 and the impact on '26 because of more inventory impact, it's going to become a greater impact. And the difference in tariff rates have also been impact -- are expected to impact us as well. Unknown Analyst: I see. So you are working on various initiatives. But in order to mitigate tariff impact even more, one kinds of feels that it may be challenging. But what would you like to do additionally? Or do you feel that you will be able to reduce its impact? Takuya Imayoshi: Of course, increasing production in the U.S. is something we are considering. But from a cost point of view, it is also challenging, which is preventing us from doing so. So I think it's more of a buildup of various improvements. And hopefully, we could raise prices to make up for it globally or reduce costs globally as well so that we can ensure that we are profitable. And sorry for going on, but for price increases, you were talking about Caterpillar and that they are not raising prices recently, but currently, in the U.S. as well as in other regions. Unknown Analyst: When you look across the competitive landscape, how are the price increase trends from your point of view? How do you view the market? Takuya Imayoshi: Well, we have been communicating this from before. But from several years ago, in accordance with higher steel prices, we have been increasing prices, but our competitors have been more bullish in raising prices. So we were a little bit behind. But in order to catch up, we have continued to steadily raise prices. But now steel prices have calmed down and price increases just limited to higher tariffs is not really happening, and that is why we are seeing difficulty here. Unknown Analyst: My final question is about the Middle East and its impact. JPY 18.8 billion of a cost increase is what you're expecting. Can you break it down? How would it look like? Can you share it with us as much as possible the breakdown? Kiyoshi Hishinuma: It's -- costs are rising and parts are rising due to oil-derived products and also logistics, transportation costs because of higher fuel costs, that has been accounted for as well. The majority is because of higher parts prices and cost increases. Takuya Imayoshi: Meaning fuel, oils, paint, gas that are oil-derived, material prices have already been going up quite a lot. So that has been accounted for as a cost increase. Unknown Analyst: I see. So procurement cost increases is about maybe 80% of the cost increase and maybe 20% to 30% associated with seaborne transportation. Takuya Imayoshi: Maybe it's like a 70-30 split. Operator: I would like to take questions from anyone joining us online. BofA, Hotta-san. Kenjin Hotta: This is Hotta from Bank of America. I have 2 questions, too. First, with the conflicts of the Middle East and that has impacts on volume and other mix. On the production front, you have uncertainties, so you haven't incorporated them into the guidance, as you said. But if possible, on production front, how much impact do you think that there is? You said there is nothing for now, but given the current situation, how much potential impacts you might have to suffer from? Or are you saying that you have enough inventory, so you are able to have the muted impacts from that on the production front? Give us the details around production areas, if there's anything you can share with us. Kiyoshi Hishinuma: Well, first on production area or production front. First, we try to sustain production work, and we try to work with suppliers. We try to secure enough works and components. And how far we are able to secure them? It's not to say that we are able to secure them for 6 months and 1 year ahead. So we always have to cement where we are, and we try to secure production. To the worst-case scenario, naphtha and other materials could have issues in the future. And if and when, if we can secure some of the materials from plants for any of the one single supplier and the production itself could be impacted. But when would that happen? We're still not sure. That's why we haven't incorporated the potential factors into the guidance this time. Kenjin Hotta: Okay. My second question is the mining equipment. You said replacement cycle. And you said that there is a completed replacement cycle now, but fuel is on the rise. So a little bit outdated equipments. Needs to have -- needs to be a newer ones so that, that uses less oil or less fuel. Is that kind of the replacement demand that you're seeing? Kiyoshi Hishinuma: Well, it's not going to be a replacement cycle you're going to see in the passenger cars. Kenjin Hotta: Okay. But to stay on the same topic of the fuel prices, if you look at the Australian market, diesel shortages is very dire and SMEs mining companies started decide the shortage of diesel and they need to compromise the utilization ratio recently. And BHP has no issue whatsoever because they are big enough. But Australian market is primarily a market where the utilization ratio for the machine is declining. Is that something you're saying? Or isn't there any impact on your operation whatsoever in terms of the diesel shortage? Takuya Imayoshi: Well, we haven't witnessed any of the specifics, be it suspension of the operation itself, but there are risks, yes. Operator: There's another question from online, McDonald-san from Citigroup Securities. Graeme McDonald: Can you hear me? Operator: Yes, we can. Graeme McDonald: This is McDonald speaking. I have a question about Page 26 in North America. Looking at the right-hand side for Q4, for the 7PLs, it was plus 7%. And going back, I think for the first time in several occasions, it was a good number, maybe several years, where you're seeing an uptrend even so for this fiscal year. For volume, you're expecting flattish demand compared to fiscal '25. The non-housing space, when you look at the segments like mining, energy, road construction and data centers and so forth, for this fiscal year, I kind of think that you're conservative in your projections for North America this year. Of course, I'm sure you have a lot of concerns in your heads. But why are you guiding flattish demand? Shouldn't you be guiding having an assumption that is more positive? That's my first question. Kiyoshi Hishinuma: Thank you for the question. For North America, as you said, what we show in the material for Page 26, at the bottom right, we show the breakdown of demand by segment, divided into rental, energy, infrastructure that are performing positively across the board. It was only housing as well as government-related that was negatively contributing. So all in all, the trends are positive. And after completing fiscal '25, we saw plus 3% growth in demand. So when you listen to what customers are saying even, they have about order backlog of 6 months to 2.5 years. Therefore, we do believe the market is quite strong. So our assumptions are flattish, but we're not really anticipating any major negatives. Therefore, yes, you can say that we are being conservative. Graeme McDonald: Well, from a regional point of view, Indonesia apparently had the highest profitability in the past, but if you're so bearish about Indonesia, the highest profitability as a market, I guess, is coming from North America in the non-housing segments. Do you think that's true that it has the highest margins? Kiyoshi Hishinuma: If you just look at SVM, excluding fixed costs, the procurement cost inclusive of tariffs is quite big. So no, the margins are not the highest in North America. Graeme McDonald: Okay. So it will continue to be challenging. So I just wanted to confirm another thing about Page 9, I think. In your comments, Hosotani-san, for last fiscal year and the negatives from product mix was EDTs. Is this one-off? Or for electric dump trucks and its profitability, is it relatively low? I just wanted to confirm that point you made. Hiroshi Hosotani: This is Hosotani speaking. Our dump trucks is because of our dump truck mix. Globally, we sell -- the regions where dump truck margins were high was Indonesia. For Indonesia, we have been selling rigid dump trucks mainly. And for electric dump trucks are being made in the U.S. on the other hand, compared to rigid dump trucks, the costs are greater due to its structure. And sales in Indonesia, especially for mining has been dropping off. So product mix-wise, rigid went down, whilst EDT composition has increased. So from a product mix point of view, because of more electric dump trucks, average margins have come down slightly. Graeme McDonald: I see. So we shouldn't be that concerned, I guess. Hiroshi Hosotani: Correct. Graeme McDonald: Finally, I have a quick question on topics on Page 50, you talked about AHSs and reaching 1,000 units in volume. I think that's great. Going forward, do you have any numerical targets as to how to grow the business even more? That's my final question. Kiyoshi Hishinuma: Well, in the strategic growth plan and our targets, it was 1,000 units in fiscal '27. That was our original target, but we have been able to reach it beforehand. So we have been -- we are thinking about raising the target up to 1,200 units instead. So compared to the pace we saw back in fiscal '25, it looks like it's going to decelerate. However, new customer implementation is likely to increase. And in that case, the rate of increases is going to look like it's decelerating, but we will continue to work on its implementation. Graeme McDonald: How about margins? Compared to rigid dump trucks, is it lower? Kiyoshi Hishinuma: Well, we talked about electric dump trucks earlier. So that in itself is not that high, but this is an AHS system, and we receive income from subscriptions as well. So that is a positive. Operator: We are counting down some time. Anyone who has questions here? Okay. I'd like to take a final question from the floor. Issei Narita: Narita from Mizuho Securities. Sorry, I'm repeating myself, but Page 28, here in Indonesia, mining equipment demand doesn't look like it's declining so much. And yes, I do understand that there is a declining market, but the Chinese manufacturers try to make inroads into mining equipment more and more. And against the hard work in Latin America, the Indonesia and those smaller kinds of smaller dumps were utilized in those Indonesia. So other than the market, there have been anything that you can share other than the competitive landscape? And also, you said Indonesia, it has the highest margin, whereas coal prices will give you the headwind. And that might be changing in the future, but with your self-effort, do you see any capacity to increase further overall performance in Indonesia? Takuya Imayoshi: Well, as you see the bottom right, Page 28, you see the demand trend, and that might be misleading, but you see by sector here. So in terms of the size, the smaller equipment for mining are included here. And then fiscal year '25, we are shipping a lot of those smaller ones and 100 tons demand is on a decline. So that sounds like that doesn't add up. But the demand for 100 tons, the customer try to hold back the purchase. That's why we are struggling. And fiscal year '26, the coal production volume is going to be struggling, but we work with the distributors to secure enough volume here. Operator: So finally, Tai-san from Daiwa Securities, we would like to take your question remotely. Hirosuke Tai: Yes, I'll keep my question brief. I have a question for Imayoshi-san. With respect to the Middle East and tariffs, that was the main topic for today's call. Even if you add back those numbers into your guidance, profitability is expected to be about the same as last year or a little bit down, whether it be on a company-wide basis or for the C&ME segment. And I think it all comes down to inflation, maybe. But how about striving to raise profitability by making up for it? Do you have that intention? Or are you fine with this kind of margin? And would you like to instead raise top line? Because you have just started a new fiscal year. So Imayoshi-san, of course, can you talk about some themes that you're considering as a company? Of course, countermeasures for the Middle Eastern conflict may be one, but I was hoping that you could share 1 or 2 things on your mind. Takuya Imayoshi: Well, as stated in the strategic growth plan, we want to have profitability and growth rates that exceed industry levels. So it's not just about growing top line, but also profitability as well. Overall, demand-wise, we are at a juncture where it's broadly flat. It's not just tariffs impact, but Indonesia's drop-off is also a negative when it comes to profitability, but we will steadily implement the measures that we're stating in the strategic growth plan. We will work on product development as well as we'll think about ways to grow the aftermarket business. So we would like to ensure that we're able to generate results so that we can also enhance profitability. Operator: Thank you very much. This concludes the Q&A session.
Operator: Welcome to the 2026 First Quarter Results Announcement Conference Call for Budweiser Brewing Company APAC Limited. Hosting the call today from Budweiser APAC is Mr. YJ Cheng, Chief Executive Officer and Co-Chair of the Board; and Mr. Bernardo Novick, Chief Financial Officer. The results for the 3 months ended 31st of March 2026, can be found in the press release published earlier today and available on the Hong Kong Stock Exchanges and Budweiser APAC websites. Before proceeding, let me remind you that some of the information provided during this result call, including our answers to your questions on this call, may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It is possible that Budweiser APAC actual results and financial condition may differ possibly materially from the anticipated results and the financial condition indicated in these forward-looking statements. Budweiser APAC is under no obligation to and expressly disclaims any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For a discussion of some of the risks and important factors that could affect Budweiser APAC's future results, the risk factors in the company's prospectus dated 18th September 2019, the 2025 annual report published and any other documents that Budweiser APAC has made public. I would also like to remind everyone that the financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed during today's call are both organic and normalized in nature and unless otherwise stated, percentage changes refer to comparisons with the 2025 full year. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Budweiser APAC's normal activities. As normalized figures are non-GAAP measures, the company disclosed the consolidated profit EPS, EBIT and EBITDA on a fully reported basis in the press release published earlier today. Further details of the 2026 first quarter results can also be found in the press release. It is now my pleasure to pass the time to YJ. Sir, you may begin. Yanjun Cheng: Thank you, Ari, and good morning, everyone. Thank you for joining today's call. We entered 2026 with a clear focus on recovering volume through disciplined execution across our market. For Bud APAC total volume returned to a positive growth, supported by continued strong momentum in India. In China, our increased investment shows a sign of progress. With the quarter-over-quarter volume decline tightening further as we remain committed to our strategy of enhancing our in-home route to market enriching our portfolio and innovating behind our mega brand to rebuild momentum. In South Korea, we gained market share in both on-premise and in-home channels. Before we go over our financial results, I wanted to take a moment to introduce Bernardo Novick, our new Chief Financial Officer, effective from April 1 this year. Novick joined ABI Group in 2009 through the global MB program and has worked across various functions in multiple markets. He brings deep finance and global resource allocation expertise, having led projects, delivering savings and meaningful value creation. I'm pleased to welcome him to the Bud APAC team. Let me now hand over to Novick for a brief introduction. Bernardo Novick Rettich: Good morning, everyone. I am delighted to join the Bud APAC team. I would like to thank you, YJ for your trust and invitation to join the team. I joined AB InBev 16 years ago and spent 5 years in finance roles, 5 years in commercial roles and 5 years in innovation roles where I led the corporate venture capital arm in New York. Most recently, I was responsible for our global capital allocation division reporting to the global CFO. I hope I can bring this experience to grow Bud APAC's business in a profitable way. I have already had the pleasure of meeting some of you joining the call today, and I look forward to meeting many more in the next weeks and months ahead. Let me share our financial results for the first quarter of 2026 in more detail. In the first quarter, APAC volume returned to growth, even if it's just 0.1% after many quarters, driven by strong growth in India, and a sequential improvement in the industry and our volumes in China, with volume decline narrowing quarter-over-quarter. This progress was driven by both enhanced execution as well as increased investments across channels and our portfolio, which added temporary pressure to our bottom line. We also maintained strong brand momentum in South Korea, despite a soft industry and a challenging comparable last year. In India, we continue to advance premiumization, delivering strong double-digit volume and revenue growth. In summary, for Bud APAC, total volumes increased by 0.1%. Revenue and revenue per hectoliter decreased by 0.7% and 0.8%, respectively. Normalized EBITDA decreased by 8.1%, while our normalized EBITDA margin contracted by 246 basis points. Now let me cover some of the highlights from each of our major markets. In China, volumes decreased by 1.5%, improving sequentially with a quarter-over-quarter decline continuing to narrow since the second half of 2025. Revenue and revenue per hectoliter decreased by 4% and 2.5%, respectively, impacted by increased investment to support our wholesalers and activate our brands in the in-home and emerging channel. Normalized EBITDA decreased by 10.9%, impacted by our top line performance and increased investments. We continue to make progress in expanding our distribution in the in-home channel, while increasing the distribution of our premium brands. This premiumization is more clear in the online to off-line or O2O channel, which grew strong double digits in the quarter. Now let me share with you some of the investments we are making on our brands through our marketing campaigns as well as liquid and package innovations to better connect with our consumers across more occasions and increased sales momentum particularly in the in-home channel. On Budweiser, we accelerated the national expansion of Budweiser Magnum, building on its strong consumer traction and sustained sales growth. In March, Budweiser Magnum, launched an integrated nationwide campaign, anchored by a strategic partnership with global football icon Erling Haaland, and the FIFA World Cup mega platform to drive geographic and channel expansion. Regarding our Harbin family, we introduced Harbin 1900, celebrating its brewing heritage as the birthplace of Chinese beer. Position in the Core++ segment, which is the RMB 8 to RMB 10 price range. This new innovation is 100% pure malt classic lager, pairing distinctive vintage packaging with a rich authentic taste. The launch reinforces Harbin's role in driving innovation and placing new bets in this growing and important Core++ segment. In South Korea, volumes decreased by low teens and revenue decreased by mid-single digits, mainly due to a challenging comparable in the first quarter of last year, driven by shipment phasing ahead of a price increase that if you recall, was in April 2025. Revenue per hectoliter on the other hand, increased by low single digits, also comparing with the first quarter last year before the price increase. This led to a normalized EBITDA decreasing by low teens. Having said that, we maintain a good commercial momentum in both in-home and on-premise channels, and we foresee a recovery in the second quarter. Finally, India continues to grow and will play a bigger role in our footprint. Industry momentum continued in the first quarter, and we gained total market share. We delivered strong double-digit volume and revenue growth led by a strong growth in our premium and super premium portfolio. We also continue to see momentum in the moderation agenda with states like Maharashtra and Karnataka introducing changes that decreased the current relative tax advantage of hard liquor versus beer. We see this as a step in the right direction and a sign that some states understand the importance of evolving towards an alcohol tax policies that are consistent with global policy standards where high alcohol products are taxed higher than low alcohol products like beer. And with that, YJ and I are here to answer any questions that you might have. Operator: [Operator Instructions] Our first question is coming from Xiaopo Wei from Citi. Xiaopo Wei: Can you hear me now? Operator: Yes, we can hear you very well. Xiaopo Wei: I'm sorry. That -- I have two questions on China. I'll ask one by one. The first one, in the past 2 years, we have seen a few senior management leadership changes in the company. So far is any achievement or breakthrough that the company would like to share with us with the new leadership? [Foreign Language] Yanjun Cheng: I'm YJ. Let me take these questions. So let me start in English, then let me turn to Chinese, if needed. So the changes we have, mainly happened first half year last year. And the reason for the change is kind of retention between either global other between the region in China. So and also between Headquarter in China versus operation in the field in each sales region. And the reason for that is to share some best practice and to further strengthen their strengths in each area or each function and also learn each other best practice sharing. So that's kind of a normal retention changes. And to be able to share the more the answer to your question about the changes of the people. As I mentioned earlier, we keep a consistency of our strategy which is focused on portfolio, brand portfolio, which is meaning Harbin and Budweiser and also focus on in-home and market. And third one is focus on execution. So those are the 3 strategies we set up early last year and we have no changes. And also, you see the progress we have been made as Novick just mentioned, quarter-over-quarter on decline narrow quarter-by-quarter and see very good trends. And also, we see the execution in each area make a huge improvement, and we put a lot of effort to invest in our brand and also further focus on the in-home channel that the channel changes reached which and that's our further opportunity in our operation. So we see starting from second quarter last year and the fourth quarter last year, and first quarter this year, the things getting improved quarter-by-quarter. So I think that's I tried to answer your question. Xiaopo Wei: Shall I start a second question? Yanjun Cheng: Yes, go ahead. Xiaopo Wei: Okay. The second question is about the channel inventory. As far as I can recall, the company in China start destocking the channel in 4Q '24. It has been a few quarters of destocking and I remember in the last quarterly earnings call, you mentioned that actually, our China inventory actually was young and lower versus historic level. But we know that China is a very dynamic market and the changing areas on a daily basis. So were you foreseeing the future that the China channel inventory will be below historic level as a new norm? Or is any factor you expect to see before you become more exciting and try to restock the channel looking forward. [Foreign Language] Yanjun Cheng: Thank you for your question. You're right. We have been proactively taking steps to adjust our inventory given the current business environment. [Foreign Language] Operator: Our next question is coming from Ye Liu from Goldman Sachs. Ye Liu: Thanks. Can you hear me? Yanjun Cheng: Yes. Ye Liu: This is Liu from Goldman Sachs. Thanks for the opportunity and welcome Novick for your first earnings call with Bud APAC. I have 2 questions. The first one is on China. So basically, our ground check shows that there has been some volume recovery in the super premium segment, including Corona, Blue Girl in the first quarter. So how to look at the sustainability of this trend? How to comment on the on-trade consumption recovery so far, including any color on 2Q to date on the on-trade performance in China? I will translate to Mandarin by myself. [Foreign Language] Yanjun Cheng: Let me take this question. I will start the summary of the answer first, then I'm going to talk a little bit detail in sort of answer in Chinese. Indeed we grow Super Premium volume by double digit in the first quarter 2026 as we focus on premiumization in the in-home channel and O2O. In terms of on-trade recovery nightlife channel contribution was stable, and we grew volume in the nightlife the first quarter 2026. However, Chinese restaurant channel remains under pressure. [Foreign Language] Ye Liu: The second question is to our new CFO, Novick. So I would like to know what's the 3 key focus for you this year, would you please share with the investors on the call. Thank you so much. Bernardo Novick Rettich: Thank you, Liu. Nice to hear from you, and thanks for the question. So let me share the 3 priorities that me and my team will focus this year. The #1 priority is growth. And the main objective here is to stabilize the volumes in China. The second priority is to improve execution. And the third priority is value creation. So on the #1, the #1 is consistent to the business strategy that YJ was describing. And the main objective of the business is to grow volumes here, right? And in order to do that, we really need to stabilize volumes in China. And the finance role to do that is increasing investments and making the investments more effective. I think it's important here, when we manage to stabilize volumes in China, given our footprint in India and in Southeast Asia, will be able to reignite growth for the whole Budweiser APAC. Number two priority is execution. I think here, finance has an important role, collaborating with our commercial team in China to enable and upgrade our route-to-market model to help on this transition to more volume in the in-home channel. That's another important priority for us. And the third one is value creation. Here, we are reviewing internal investment decisions, improving efficiencies, cost controls. One example here, for example, we are reviewing the unit economics of different packs to make decisions that can help us be more efficient with resource allocation. But ultimately, Liu we are here for growth, and that's our main priority for this year. Thank you very much for the question. Operator: Our next question is coming from Elsie Sheng from CLSA. Yiran Sheng: Thank you management for taking my questions. Thank you, YJ, and also welcome Novick. I have 2 questions. My first question is on China in-home development. Do you have any update or progress to share on the development of off-trade channel in China. I will translate myself. [Foreign Language] I will ask my second question later. [Foreign Language] Yanjun Cheng: Thank you, Elsie. This is YJ. Let me take this question. As a channel shift to in-home channel, we are taking actions to expand in the in-home channel to adapt. As we have a relative low exposure in in-home channel, which means we have a massive growth potential. We are investing to catch up. [Foreign Language] Yiran Sheng: My second question is on China commercial investment. So previously, management mentioned that you will increase marketing this year. Is that plan still on track? And what's the marketing plan for the coming peak season and sport events like World Cup? [Foreign Language] Yanjun Cheng: Yes. So as Novick mentioned, as I mentioned earlier, in 2026, our top priority in China is a stabilized volume. To achieve this, we have given room to the team, to the commercial team to increase commercial investment. So that's the direction we set up for the commercial team. [Foreign Language] Operator: Our next question is coming from Mavis Hui from DBS. Mavis Hui: My first question is on China. Could we have some more updates on the growth of your emerging channels such as O2O instant retail and e-commerce in China. More importantly, how do margins and pricing dynamics across these channels compared with traditional off-trade and how are we managing potential channel conflict with our distributors? But let me translate first. [Foreign Language] Yanjun Cheng: Thank you for your question. I will take this question as well. O2O is one of faster emerging channel in China. We have started to make a fair significant effort to increase our presence with it. And we see this as a great opportunity for us in 2026 and beyond. We partnered with a major O2O platform to further expand our participation. [Foreign Language] Mavis Hui: And my second question is on Korea. Excluding shipment phasing effects, are we still seeing underlying share gains in South Korea? What are the key challenges to sustaining outperformance in the market? [Foreign Language] Yanjun Cheng: Thank you. Let me take this question again. Total industry in Korea have remained soft in the first quarter 2026. With a soft consumer environment continued to impact overall alcohol consumption. However, our underlying momentum in Korea continued and we outperformed the industry in both the on-premise and in-home channel. [Foreign Language] Operator: Our next question is coming from Anne Ling from Jefferies. Kin Shun Ling: I have 2 questions here. First is on the cost of goods sold in general. We saw some raw materials price volatility, and this has been coming up recently for example, like aluminum. So what will be our view on the raw material costs for year 2027? [Foreign Language] Yanjun Cheng: In 2026 of first quarter our cost per hectoliter has decreased by 0.8%, mainly driven by efficiency improvement, partially offset by commodity headwind. [Foreign Language] Kin Shun Ling: [Foreign Language]. So my second question is on the India side. So could you share with us now on the Indian market update? How do we see the market competition and our strategy over there? I understand that we are focusing on more market share. So may I know when the company will start focusing on the profitability of the market? Is it still a little bit too early? And that competition is still very keen? Should -- I mean should Carlsberg be listed? What is your view on the competitive environment afterwards? [Foreign Language] Yanjun Cheng: Thank you. In India, we are focused on sustainable and meaningful top line growth that can translate to EBITDA and cash flow growth accordingly. [Foreign Language] Operator: Our next question is coming from Lillian Lou from Morgan Stanley. Lillian Lou: And thank you, YJ and Bernardo for the detailed answer previously. Congrats to Bernardo for your new role. I have two questions. The first one is on China pricing because YJ just mentioned that the raw materials are fully hedged and were relatively stable. But on the pricing side, any price action and mix shift that you observed that could improve the overall pricing in the market in general? [Foreign Language] Bernardo Novick Rettich: I can take this question YJ. Yanjun Cheng: Go ahead. Bernardo Novick Rettich: Lilian, nice to hear from you. Thank you for the question. I think all the answers should start with the same reminder that our main priority, right, is growth and particularly to stabilize the volumes in China. It's true that in the first quarter, our net revenue per hectoliter was below last year and this was impacted by investments, mainly in 3 objectives for the investments to support our wholesalers, to activate our brands and also to accelerate the growth in O2O. But on the other hand, we had positive mix effects coming from our brands, mainly driven by our Premium and Super Premium brands. I think it's important to mention to you and the press that we expect to continue to invest in 2026. Regarding price, we will continue to monitor always the prices in the market, and we are open to adjustments if something changes. But at this moment, we don't have any news regarding price increase for China. Lillian Lou: My second question is on Korea -- South Korea market. We all know that last year, April, you had a price increase, which still benefited the first Q this year on the pricing side. But what will drive the South Korea revenue and also pricing and the EBITDA growth for the rest of the year, in particular, the industry remain a little bit soft and the competition is still there. So this is the question on Korea. [Foreign Language] Bernardo Novick Rettich: I can take this one too. Very good question, Lillian, thanks. When we think about like a medium-term margin growth for APAC East and Korea, I think there are mainly 3 things that can drive this. One is, of course, pricing. The second one, operational efficiencies. And the third one, I think it's important to mention is mix and innovations. Maybe let me talk about each one of them. On prices, of course, we always consider our pricing decisions looking at what's happening in the beer market, but also the macroeconomic situation in the country. We'll continue to monitor similar to China. We don't have anything to announce at this point. On the second part, operational efficiencies. Here, we continue to implement cost management initiatives. This is one of our main strengths at Budweiser APAC, as YJ was talking about our efficiency and excellence programs that we have so this is something that we still see opportunities. And number three, I think mix and premiumization and innovations are very important for us in the future. Maybe I can share a couple of examples one of them is the growth of Stella Artois in the on-trade. I think that's a prudent healthy growth. The other one is the nonalcoholic beer, like example like Cass 0.0. I think both of them are good examples of innovations that can both drive volume growth, but also margin expansion. So overall, I think that we see opportunities to keep recovering margins in Korea in the future. Thank you for the question. Operator: In interest of time, our final question will come from Linda Huang from Macquarie. Linda Huang: My first one is regarding for the dividend. And given that Bernardo has really taken up the CFO role. So I just want to know that whether from the group perspective, whether you will change the capital allocation approach. Especially the last 2 years, right, we -- they paid out USD 0.0566 per share dividend to the shareholders. So whether this is the dividend per share policy under review. So this is my first question. [Foreign Language] Bernardo Novick Rettich: Thank you, Linda. Nice to hear from you. Thanks for the question. So I think it's important to remind everybody, right, we are working to deliver sustainable long-term results for our shareholders, right? And the other message is that our capital allocation strategy remains the same. Our first priority continues to be to invest in our business like we are doing this year to drive organic growth. followed by M&A when we see opportunities for acquisitions. That's the second one. And then the third one to return to our shareholders, for example, via dividend, but it's also what we have been doing, right? So I think we are very proud of our dividend track record since the beginning, recently with the announcement of the $750 million dividend that we announced for 2025, which by the way, was consistent to the dividend for the previous 2024. So I think if I have to summarize, we are working towards improving our business performance this year to be able to keep this consistency in the future. Thanks for the question. Linda Huang: My second question is regarding for our products, and I think this may be YJ can help. So when we compare China to the other Western countries. I think there's always plenty of alcohol product innovation. So I just want to know that, again, whether the management can elaborate more about our product innovation plans? And then what kind of the innovation strategy will fit well for our China market. [Foreign Language] Yanjun Cheng: [Foreign Language] Operator: Thank you. That concludes our Q&A session today. I would like to turn the conference back over to YJ for the closing remarks. Yanjun Cheng: Thank you. As I mentioned on our 2025 annual results call early this year, our priority is to stabilize volume and rebuild our market share momentum in China by investing in our in-home route to market and a leading permium portfolio. The progress we have been seeing in the first quarter and have been encouraging. On this positive note, thank you all for joining us today, and I'm looking forward to speaking to you soon. Operator: Thank you. And this concludes today's results call. Please disconnect your lines. Thank you.
Operator: Ladies and gentlemen, welcome to the Novonesis Q1 2026 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tobias Cornelius Bjorklund. Please go ahead. Tobias Björklund: Thank you very much, operator, and welcome, everyone, to Novonesis' conference call for the first quarter of 2026. As mentioned, my name is Tobias Bjorklund, and I'm heading up Investor Relations here at Novonesis. In this call, our CEO, Ester Baiget; and our CFO, Rainer Lehmann, will review our performance as well as the outlook for 2026. Also attending today's call, we have Tina Fano, EVP of Planetary Health Biosolutions. We have Henrik Joerck Nielsen, EVP of Human Health Biosolutions; Andrew Taylor, EVP of Food & Beverages Biosolutions; and Claus Crone Fuglsang, Chief Scientific Officer. The conference call will take about 50 minutes, including Q&A. Let's change to the next slide. As usual, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs, and they involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements. With that, I will now hand you over to our CEO, Ester Baiget. Ester, please. Ester Baiget: Thank you. Thank you, Tobias, and welcome, everyone. Thank you for joining us this morning. The year started strong with 7% organic sales growth against a high comparable, including around 1.5 percentage point effect from exiting certain countries and a good 1 percentage point from inventory buildup in animal. We delivered growth across all sales areas in both developed and emerging markets while achieving an adjusted EBITDA margin of 37.8%. Developed markets grew 8% with solid performance in both Europe and North America. Emerging markets grew 4%. We continue to drive growth through innovation and a stronger market presence with tailored solutions. We launched 5 new biosolutions in the first quarter, and we are well on track for our full year expectation. These launches are responding to an increasing consumer and societal needs from higher yields in food to replacing fertilizers in agriculture. Ten months into the Feed Enzyme Alliance acquisition, we're delivering in line with our initial expectations. And more importantly, we are continuously seeing increased traction with our customers through a broader and integrated offering of enzymes and probiotics. As a complement to our global footprint, we acquired an attractive production facility in Thailand in early April, and it's expected to be operational in 2027. The facility holds optionality to produce different biosolutions, including the scaling of HMO production, which would require additional investments. Such investments are already included in our communicated CapEx plans towards 2030. We are operating in a world with increasing global uncertainty, with rising pressure on economies in many different ways. Countries are seeking for homegrown solutions to strengthen energy and food security supply. Biosolutions are increasingly becoming central answers to resilience and productivity agendas, reducing exposure to global disruptions while enabling the creation of local jobs. In our dialogues with customers and policymakers, particularly in the energy area in Southeast Asia and in India, we see this momentum accelerating and Novonesis is uniquely positioned to support this shift. With a strong start to the year, we feel very confident about our full year outlook. Growth is expected to be mainly volume-driven, supported also by pricing. The outlook includes a close to 1 percentage point effect from exiting certain countries. For the adjusted EBITDA margin, we maintain the outlook at 37% to 38% with an expected margin expansion compared to 2025, more than absorbing currency headwinds and increasing raw material costs. With that, let us now look at the divisional performance in more detail, starting with Food & Health Biosolutions. Please turn to Slide #4. Thank you. Food & Health Biosolutions delivered a strong organic sales growth of 9% in the first quarter. The adjusted EBITDA margin was 35.7%, 130 basis points lower compared to last year, mainly driven by the ramp-up in commercial resources we did over the course of 2025, product mix effects from stronger growth in HMO and strong currency headwinds. These were partially offset by cost synergies and economies of scale. During the quarter, we launched 3 new products in Food & Health, including a new yogurt culture solution that improves taste and texture while also delivering higher yields and productivity benefits. For 2026, we expect the division to deliver organic sales growth in line with the group, primarily driven by Food and Beverages and supported by growth in Human Health. Food & Beverages deliver -- please turn to the Slide #5. Thank you. Food & Beverages delivered a strong organic sales growth of 11% in the quarter. Growth was mainly volume-driven, with pricing contributing a good 1 percentage point. Synergies contributed to growth and in line with expectations, supported by cross-selling and increased commercial scale. Growth was well anchored across geographies and industries. Performance was driven by increased market penetration, a strong adoption of innovation and positive market development. Despite muted consumer sentiment, we continue to see high demand for higher protein for clean label products and healthier solutions, supporting an increasing demand for biosolutions. Momentum in dairy continued to be strong and was led by North America and emerging markets. In fresh dairy, demand for efficiency, higher yields and high protein continues to drive strong demand, including bioprotection and probiotics. In cheese, customer conversion to high-yield solutions remains a key growth driver. Growth across the remaining industries was driven by innovation and increased penetration, led by plant-based solutions and beverages with solid performance from recent launches. Solid growth in baking and meat also contributed to growth. For 2026, growth in Food & Beverages is expected to be broad-based, supported by both synergies and pricing. Human Health delivered organic sales growth of 5% in the first quarter. Growth was primarily volume driven, while pricing and synergies contributed positively. Performance was driven by strong growth in Advanced Health & Nutrition, supported by both early life nutrition and advanced protein solutions. Early life nutrition was led by HMO with growth across regions, including cross-border trade into China. Advanced protein solutions grew alongside the anchor customer. Dietary supplements was impacted by a softening North American market, where our sales to women's health category continued to be strong. For 2026, growth in Human Health is expected to be supported by dietary supplements as well as Advanced Health & Nutrition led by HMO. Pricing is expected to contribute positively and deferred revenue is expected to add around 1 percentage point to growth. Please turn to Slide #6. Thank you. Planetary Health Biosolutions delivered organic sales growth of 5% in the first quarter against a high comparable. The anticipated inventory buildup at a key customer in Animal contributed a good 2 percentage points to growth. The adjusted EBITDA margin was 39.5%, up 10 basis points year-on-year, driven by the Feed Enzyme Alliance acquisition and cost synergies, including the ramp-up in commercial resources we did over the course of 2025 as well as currency headwinds. We launched 2 new products in Planetary Health in the first quarter. In Animal, we introduced the Bovacillus probiotic for cattle, benefiting from a faster route to market following the formation of Novonesis. These solutions enhances digestion and strengthens cattle immune system, resulting in an increase of up to 1 kilo of milk per cow per day, while also improving the feed efficiency. In plant, we launched the first product based on our new enzyme platform, ActiPhy, that enhances nutrition uptake in soil, improving the yield from agri of corn by around 3%. The solution initially targets corn in North America and is supported by several years of strong field trial data. For 2026, we expect the division to deliver organic sales growth in line with the group with relative stronger contribution from agricultural, energy and tech. Please turn to Slide #7. Thank you. Household Care delivered organic sales growth of 4% against a high comparable. Growth was mainly volume-driven, supported by positive pricing. Performance was driven by increased market penetration and adoption of new innovations across laundry, dish and other cleaning categories in both developed and emerging markets with particularly strong traction among local and regional customers. For 2026, we expect solid performance in Household Care in a market that carries some uncertainty related to weaker consumer sentiment. Growth will be driven by continued innovation, increased penetration in both developed and emerging markets and continued support from pricing. Agriculture, Energy & Tech delivered organic sales growth of 5% in the first quarter, driven by energy and agriculture, while tech declined due to order timing in biopharma, processing aids and high comparable. Strong growth in energy was driven by Latin America and Asia Pacific, particularly India, reflecting continued growth in corn ethanol production. North America also supported growth through increased adoption of innovation and higher ethanol production volumes, supported by growing exports. Additionally, increased penetration of biodiesel solutions and the ramp-up of second-generation ethanol production contributed to the strong growth. Following the increasing need for energy security and supply as countries are seeking further diversification from fossil fuels, we see an increasing strategic global interest for higher biofuel blending. Strong growth in agriculture was mainly driven by inventory buildup at a key customer in animal, contributing by around 4% to the organic sales growth for Agriculture, Energy & Tech. As mentioned, integration of the Feed Enzyme acquisition continues to progress in line with expectations with synergy milestones materializing as planned. Our plant business declined during the quarter due to timing and high comparable. For 2026, growth in Agriculture, Energy & Tech is expected across all industries, led by energy and supported by synergies and pricing. And now let me hand over to Rainer for a review of the financials and the outlook for 2026. Rainer, please? Rainer Lehmann: Thank you, Ester, and also good morning, everyone, and welcome to today's call from my side. Let's turn to Slide #8. In the first quarter, sales grew a strong 7% organically and 4% in reported euro, including around 1.5 percentage points effect from exiting certain countries. Sales synergies across both divisions and pricing each contributed around 1 percentage point, while the inventory buildup in Animal contributed a good 1 percentage point. Currencies provided 6 percentage point headwind, while M&A contributed positively with 3%, reflecting the Feed Enzyme Alliance acquisition. The adjusted gross margin improved by 120 basis points to 60.1% versus Q1 of last year. Pricing and productivity improvements as well as the Feed Enzyme Alliance acquisition supported the development, while currency and product mix had a negative impact. Total operating expenses adjusted for PPA-related depreciation and amortization were 29.1% of sales compared to 27.3% in Q1 last year. This development mainly reflects the planned increase in commercial resources over the course of 2025, driven by both organic expansion and the Feed Enzyme Alliance acquisition. The adjusted EBITDA margin for the quarter was 37.8% compared to 38.3% in Q1 2025. The margin benefited from the higher gross margin, cost synergies and around 50 basis points from the Feed Enzyme Alliance acquisition, in line with our expectations. This was offset by higher operating expenses and currency headwinds. Let's keep in mind that -- let's keep in mind also that last year's operating expenses were quite low in the first quarter. Adjusted earnings per share, excluding PPA amortization, were EUR 0.57, corresponding to an 8% increase compared to last year. Operating cash flow amounted to EUR 167.1 million in the first quarter, an increase of EUR 60.7 million year-on-year. It was mainly driven by improved net profit and a more favorable working capital development compared to Q1 last year. CapEx in the quarter amounted to EUR 93.1 million, equal to 8.3% of sales. Despite higher investment levels, free cash flow before acquisitions increased by 9% to EUR 74 million. On March 12, we successfully issued EUR 1.7 billion of senior unsecured notes to refinance the existing bridge loan related to the Feed Enzyme Alliance acquisition. Relating to this, I'm also very happy that S&P Global Ratings issued an A- stable outlook rating for Novonesis. With this, let us now turn to Slide #9 to talk about the outlook. Please note that the outlook presented today is based on the current level of global trade tariffs and the prevailing foreign exchange environment. As Ester mentioned earlier, we are very confident in the full year outlook and confirm our guidance for both organic sales growth and profitability on the back of a strong start to the year. The outlook for organic sales growth is maintained at 5% to 7% and includes close to 1 percentage point effect from exiting certain countries. Growth is expected to be mainly volume-driven, supported by around 1 percentage point from sales synergies and a good percentage point contribution from pricing across both divisions. The outlook also reflects some uncertainty related to consumer sentiment for the year. The recent situation in the Middle East and its broader implications to global market dynamics is difficult to fully assess and leads to increased uncertainty. However, based on our diversified end market exposure and flexible regional production footprint, including our pricing capabilities, we currently do not expect a material impact on our adjusted EBITDA margin. We continue to monitor the development closely. We expect a smaller positive timing impact also in the second quarter from the Animal business related to inventory buildup at a key customer. I want to reiterate, though, that for the full year, this effect is expected to be neutral. We continue to expect the adjusted EBITDA margin to be in the range of 37% to 38%, reflecting continued margin expansion compared to 2025. This improvement is expected to be driven by a stronger gross margin, the Feed Enzyme Alliance acquisition and synergies, partly offset by currency headwinds of around 0.5 percentage point and including somewhat higher input costs. As previously communicated, we'll see a temporary step-up in CapEx as part of our strategy to enable growth through 2030 and beyond. This includes continued expansion of our resilient global enzyme production footprint, completion of the doubling of our U.S. dairy culture capacities here in 2026 and investments related to the recently acquired facility in Thailand. In addition, we continue to invest in the implementation of our new ERP system, which will impact CapEx by around 1 percentage point annually over the next few years. As a result, CapEx is expected to be 12% to 14% of sales for 2026. Finally, Net debt-to-EBITDA is expected to be around 1.7x at year-end, supported by strong cash generation and continued deleveraging despite the increased CapEx level. We had a strong start to the year and remain very confident in the 2026 outlook. With that, I will hand back to Ester. Ester Baiget: Thank you very much, Rainer. Could you please turn to Slide #10? Thank you. In the current macroeconomic environment, demand for our biosolutions continues to be strong across all fronts, from customer needs for higher yield and efficiency, consumers' increasing demands for healthy nutrition and to growing needs to decouple from fossil fuels as countries seek greater energy diversification and security of supply. Quarter after quarter, we demonstrate the strength and the resilience of our business model, supported by strong innovation, a resilient global footprint and diverse end market reach. As the world continues to evolve, the relevance and the need for biosolution only continues to increase. And even with increasing global uncertainty, we are confident in our 2026 outlook as well as the 2030 targets, including the 6% to 9% organic sales growth CAGR. And with that, we're now ready to open the call for Q&A. Operator, please? Operator: [Operator Instructions] The first question comes from the line of Thomas Wrigglesworth from Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Could you just elaborate a little deeper as to how you see the Middle Eastern conflict playing out both within your business and within your customers? I guess there's -- the message that we hear is that Southeast Asia will be more impacted by cost inflation. And clearly, that then leads to a question about your emerging market exposure. So anything that you can share in terms of recent order pattern changes or freight rate constraints that are limiting or enabling your business would be very useful? Secondly, just in light of that, just on the bioenergy side, you've touched on seeing an uptick in interest in obviously, bioenergy solutions. Is that to say that this is going to be something that will happen in a couple of years? Or is there going to be a more immediate impact through 2026 as you see it? Ester Baiget: Excellent question, Thomas. And let me start answering to them and then also let Tina build up on each of them. So first, regarding Middle East conflict, important to mention that our direct exposure to Middle East and the sales in Middle East, they are small. So the impact effect of that, it's marginal to none on our overall revenue. Then building on your comments on what we see these changing dynamics in our -- in the world that we live in. We see from one side increased level of cost from raw materials that we have very good conversations with our customers, also including pricing, and we're confident that it will lead to a marginal neutral non-impact into the EBITDA. And then we see increasing continued interest from our customers around the globe. That was there. But now with this crisis in Middle East, if anything, we see it as a catalyzer of further momentum. We see a catalyzer of further momentum for diversification. And that's true across all segments. We see it on Food, the eagerness for healthier and cleaner and replacing stabilizers and texturizers and seeking for solutions that will continue to fulfill the consumer dynamics. We see it in Household Care. We see it in Energy. We see an increasing need, particularly in Energy. And then maybe tipping in your second question, particularly in countries that they had already in the past, taken decisions towards biofuels. We see Brazil, North America, Malaysia, Indonesia, the countries that they had already included biofuels into their diversification, benefiting from those decisions of the past. And then seeing a broader resilience and being able to absorb the constraints on supply and also access to competitive raw materials. And we see that momentum doubling up across the whole globe, but particularly with a strong pull here in Southeast Asia. These efforts are there. They are reflected -- maybe it's not so much on the sales year-to-date. We see in U.S. an increasing level of exports. But the big impact, it's for the long term, as you mentioned. Do we see the growing direction of increasing pull from mandates that will lead to continuous investment. And in any case, it gives us stronger comfort on the drivers of growth. So long answer, indicating that what we're doing with our customers, what we're doing on price. But then at the same time, the catalyzer of this crisis of momentum that was there for solutions leading to higher yields and high efficiencies and also decoupling from energy. Tina Fanø: Yes. And only adding a bit because I think Ester covered most of it. Short term, I would say, yes, you'll see it as a pickup in exports from the U.S. mostly. However, you will also see it elsewhere longer term. I am just coming back from Southeast Asia, in fact, here over the weekend. And there is a significant interest in, for example, biodiesel expansion. We talked about Indonesia going from B30 B40 to even B50. So I would say that diversification journey we have been on with feedstock diversification, with end market diversification and geographical diversification is serving us well here. But most impact, you should expect in the longer term, given the mandates are ramping up. So it's a good underlying growth driver for the energy segment. Shorter term, it is mostly from exports, but not only from exports. And in the quarter, you hardly see anything. Exports has been growing over the last year. So that is part of our numbers as well. Operator: The next question comes from the line of Thomas Lind Petersen from Nordea. Thomas Lind Petersen: Two questions also from my side. Both regarding the guidance for this year. So Ester, back in February, you said that you expect a sort of deterioration in the consumer sentiment. And I think perhaps you were alluding to North America. So I was just wondering if you could give us a bit of color on that. Is that still what you expect for the year? Or are you beginning to see a deterioration in the consumer sentiment? And perhaps also if you could comment a bit on the pricing and your ability to raise prices given the higher raw materials. So one question here regarding the revenue for this year. And then the second one is about the adjusted EBITDA margin. You end up here at 37.8% in the first quarter. And just wondering if how we can extrapolate from -- for the rest of the year. Also given I believe that your FX headwind, at least the large part of the FX headwind that you've seen has sort of been cycled now. So is there anything that speaks for a lower adjusted EBITDA margin going forward? Or how should we think about this? Ester Baiget: Excellent. Thank you, Thomas, for your questions. I'll answer the first one, and then I'll pass it to Rainer on EBITDA. Regarding the comments we made at the beginning of the year, as you so nicely indicated, we included in our guidance some softness on consumer behavior. We could foresee that coming, and that was included in our guidance, and it's already happening. We continue to include it in our guidance for the -- and it's included in our guidance for the full year. It's true that the strong start of the year gives us comfort, and it reduces the risk from the volatility and uncertainty of the market that we're living in. We continue to see, as I mentioned before, a strong underlying demand from our solutions, but we see some cases of that softening demand. Maybe particularly not reflected in Q1, but in the Q1 figures, but particularly in Human Health, this is a segment where we see consumers and in North America when they are sitting and choosing the -- where they're allocating their pocket money, decreasing the demand of probiotics. And we see some indications there of softer consumer demand in North America in probiotics, which, as I mentioned, included in our guidance and also coupled with a strong start of the year gives us full comfort of deliver of the full year guidance. And then I'll pass it to Rainer on EBITDA. Rainer Lehmann: Yes. Thomas, you're absolutely right. Of course, the biggest, let's say, spread between the FX side was in Q1, where we actually had last year, even tied to USD 1.06 and now we're running at USD 1.17, USD 1.18. Nevertheless, let's keep in mind that it's a gradual impact. So for the year, we still see the around 0.5 percentage point impact on the EBITDA margin. And then the -- of course, the strong margin in Q1, please look at the sales, right? There's quite some sales leverage in there. That was the highest sales quarter ever. That, of course, will come down a little bit. But therefore, we feel comfortable that this margin is going to be between 37% and 38%. Ester Baiget: Thank you, Rainer. And building on also on your comment on pricing, we have really good conversations with our customers, and we feel comfortable on the momentum there on bringing in the prices and then leaving, as Rainer mentioned, of no impact to the EBITDA margin for the year. Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: I was just curious on your announcement to buy this facility in Thailand. You are spending a lot of your own CapEx and then on top, you're buying this facility. I'm just curious from a timing perspective, why now? Because there is so much CapEx going on. Is this an indication of you thinking about yourself more capacity constrained? Or is this more a unique opportunity? Because I think this is much more an HMO type facility. So maybe it can speed up your go-to-market on HMO side? And the second question and maybe this is just a reminder because you are growing very, very strongly in dairy, but I was at DSM-Firmenich Capital Markets Day earlier this year, and they were actually indicating that they are at #1 in dairy enzymes from what I remember. And I was just curious how are you growing in dairy across both your cultures and enzymes? And is there a limitation from the Chr. Hansen merger that you had in place because of regulatory consideration that is probably limiting to some extent, your growth? Or can that be even better at some point once that limitation is taken away? Ester Baiget: Thank you, Chetan. I will let Andrew answer the question on dairy and enlight you on why now we are stronger and even more equipped to be the partner of growth for our customers with a bolder portfolio. But then bringing -- building on your first question on Thailand, we have investment -- we have announced announcement of increased CapEx of 12% to 14% to support growth, aiming also for the high end of our guidance. And this facility in Thailand is a good add to that path. It is bringing optionality for growth, including further investments that they are already included into the 12% to 14% and also comes with some capacity already today to produce HMO that supports the growth trajectory of this business. But then opportunistic acquisition that puts us in a good place in a region that we're growing, well embedded in our overall CapEx, included in our strategy and then with further investments to capture the potential of this optionality embedded already in the 12% to 14%. Andrew Taylor: Yes. And maybe taking on the second part of the question around dairy. So I'd begin with -- we have very strong customer relationships across the world in dairy, and we're seeing good growth in both cheese and fresh dairy and all its related subcategories. And when you think about cultures and enzymes, we're very strong in both of those and actively innovating. I think the thing that's probably most interesting for us right now is the combination of those pieces. So post the combination of the 2 companies, we're now able to do things in the combination of cultures and enzymes that help both the production of the cheese as an example, as well as the aging, oftentimes in one bag. And so a lot of what we're trying to do is expand those solutions that are both driving productivity for our customers, which is an ongoing demand, but then also new value, how can you create better tasting cheeses, how can you taste -- quicker ripening cheeses. So we're very comfortable in our position and the growth that we're seeing around the world supports that. Operator: The next question comes from the line of Lars Topholm from DNB Carnegie. Lars Topholm: I also have 2 questions. One is actually related. So let me start with that. So in Thailand, there's a lot of focus on production of ethanol from cassava, which requires enzymes. So I just wonder, maybe, Tina, if you can put some words to the significance of this for you guys? And are these enzymes some you can produce on your new Thai assets? And then my second question goes to Ag, Energy and Tech, which grows 5% organically. There's a 4% contribution from inventory buildup in Animal Health. And I assume bioenergy grows double digits. So it seems to me something is going terribly wrong with plant and with tech. I just wonder if you can put some words and maybe some growth rates on the 4 different components of this division and maybe also the reasons behind, what should we say, the less flamboyant growth in parts of that business. Ester Baiget: Thank you, Lars, and I'll pass it to Tina, who will also guide you on the optionality of the plant on Thailand with further investments. And remind us that we now look in our business on a quarterly level here for the long run, and we are confident on the full year guidance. Lars Topholm: I know, Ester, but you said the same after Q4. And now we have 2 soft quarters in a row. So the long term starts with a weak quarter. That's how it is. Ester Baiget: Every quarter is a quarter. And then I repeat myself, we were confident on the full year guidance, but I'll pass it to Tina, Lars. Tina Fanø: Yes, Lars. So let's start with Thailand. And yes, Thailand is one of the places in Southeast Asia where we operate in our bioenergy space as well. The plant which we have there gives us optionality also for producing the enzymes there. So this is good. In terms of Agriculture, Energy & Tech, and you're right, we saw a strong growth in bioenergy and the math then brings that tech and plant is in decline. I don't -- you said terribly wrong. I don't at all agree to that point. I would say I think sales is progressing according to plan. Yes, it's a declining quarter. And yes, it is a double-digit decline. But we remain confident for the full year. Agriculture, Energy & Tech is going to grow stronger than Household Care and all of Planetary Health is going to grow in line with group. So I feel quite good about where we are, including in plant and tech. Tech is, as you know, quite lumpy, especially given biopharma processing. And you could say we knew that we wouldn't get any orders here beginning of the year. We expect that to ramp up, and we see that ramping up for the full year. And that's why also tech is going to contribute to the growth of AT. Plant is super small. So -- and you know there is timing on when it's exactly planting. And then you have to remember also the tough comp, which there are in both plant and tech from 2025. Lars Topholm: Tina, I would just mention it didn't grow in Q1 '24. So the tough comp from '25 was a very easy comp, I guess, in '24. Ester Baiget: But what about '23 then? Lars, let's hold that question for end of the year. Then when we see the growth coming in, then we remind ourselves about the volatility of 2 small segments that they are by intrinsic nature, volatile, and they contribute consistently to growth for the company. Operator: The next question comes from the line of Alex Sloane from Barclays. Alexander Sloane: Two from me, please. First one, just on household. Obviously, with oil prices much higher and petrochemical-based surfactants under renewed cost pressure, are you seeing any acceleration in demand from your customers for enzyme substitution? And if so, when would you expect that to translate into your volumes? And the second one was just a follow-up on the food biosolutions. Obviously, the growth rate there, excluding the Russia exit, really strong, I think, close to 15%. Dairy, obviously, the standout. Could you maybe help us just disentangle what is you see as kind of structural growth within that from penetration and new customer capacity opening versus maybe any temporary customer behavior, if there was any maybe pull forward of orders, customer restocking, et cetera. I guess should we be expecting that food growth to slow and normalize in the second half, please? Ester Baiget: Excellent. Thank you, Alex. Tina will answer your question regarding the underlying drivers of the growing demand in Household Care and then Andrew, on Food & Beverages. Tina Fanø: Yes. So on Household Care, you could say, increased oil prices is increasing the discussions on substitution of surfactants. However, this is not something you do overnight. So this is something which we are going to see as time progresses. So this is an underlying good driver for our Household Care business. But I would more think of it in a more longer-term perspective, Alex. So we have, over many years, invested in emerging markets because there is a significant growth opportunity for us there. And this is a market where we have low single-digit growth when you look at both emerging as well as developed market when you combine it. So it's not a high-growth area. But we have been able to outgrow that given the investment, given our strong footprint in emerging markets. And as we also have talked about many times, the inclusion of enzymes in emerging market is less. So there is a significant opportunity for us to go for. Short term, you could say there's increased interest for surfactant replacement, but not only surfactants. It's also other oil-derived components. However, there is also the risk of taking out, for example, enzymes short term given the cost pressure they are under. This is not something we are seeing. We remain, you could say, confident in the full year outlook of solid growth in Household Care. Andrew Taylor: Yes. And then following up on the question with regards to food and dairy. So first off, the base most structural momentum continues to be very positive. We've talked the last couple of quarters about things such as the drive for productivity, the drive for high-protein yogurts for new texture experiences. So if you look across the world, those underlying structural drivers remain and actually are strengthening in some parts of the world. We do have some benefits from the annualization of some of the larger projects that have been queuing up in dairy, which we've noted before in the past. So the opportunity pipeline looks solid, but we wouldn't expect that to continue at the same rate. The thing that's also important is we're seeing good growth in food as well, so not just dairy. So if you think about the balanced portfolio, we are continuing to see acceleration. We talked a little bit last quarter, but we continue to see beverages as an example, back in the growth mode through some of the investments we've made. So we think it's very balanced across the 2 pieces. Operator: The next question comes from the line of Matthew Yates from Bank of America. Matthew Yates: A couple of follow-ups really from what we've discussed already. The first one for Rainer, just around the operating expenses. It looks like it was up about 13% on a reported basis, I guess, probably closer to 10% at constant scope. You mentioned, I guess, some annualization effect given spending ramped up through the course of last year. Just wondering when you think about the full year guidance for 2026, is the expectation that OpEx grows in line with sales or slightly faster? And then the second question, sorry to just circle back on Tina. I think it was Lars was asking about the animal performance. I mean it looks to me over the last 3 years, the animal business hasn't grown. I apologize if that's wrong, you're welcome to correct me. So it has been quite some time now. So can we just talk a little bit more about how that business is doing and where the confidence would come from just thinking that growth may pick up over the coming quarters? Ester Baiget: Thank you, Matthew. I will let Rainer answer your first question and then Tina build -- and your question was on animal or on plant then? Matthew Yates: On animal. Ester Baiget: Okay, perfect. Rainer Lehmann: So let me answer first on the OpEx side, absolutely right, we saw a step-up in Q1, exactly what you said, the rolling effect of annualization. But even on top of that, there's always a little bit of timing. So I do not expect actually to increase OpEx for the next quarters relatively to the Q1 number. We are here really going to see more flattish development. Tina Fanø: Yes. And on the Animal business, we feel quite comfortable with where we are on the animal side. We have seen growth over the last years. And it is a business where we see in the customer discussions, increased focus on the full biosolutions, which we are offering. Matthew Yates: But you can't share anything more specific about market conditions or product launches? Tina Fanø: Yes. So one of the things we're also calling it out this quarter is the launch of Bovacillus. Also, we have earlier years launched a number of new enzymes. Hiphorious is, for example, a new launch, which is coming. So it is, as you know, in the animal space, and you need to do trials in order to prove the benefits of it. And we feel, I would say, quite good at where we are. It is -- when we look at what we have, the combo solutions is something which there is quite some interest in both from enzymes as well as probiotics. We see, you can say, good pickup on our silent solutions. So overall, I would say we are, in fact, in a good place in the animal space. It is a bit more difficult on the numbers given the acquisition. So you'll have to look at both organic and the acquired and so forth. But overall, we believe we are in a good place there. But let's go into details on the discussion later on, if needed. Operator: The next question comes from the line of Soren Samsoe from SEB. Soren Samsoe: So I have 2 questions. One is more in dairy in China. Just if you could update us on growth in yogurt and also cheese. I understand, cheese is growing quite well, although from a low level still. And then my second question is on the human health weakness. I understand, of course, driven a bit by the weak consumer in North America. But are there any other dynamics we should be aware of here or changes to the dynamics? And how is the growth looking in Europe and Asia? Ester Baiget: Thank you, Soren. I love it when the question comes implied with the answer on -- particularly in human health on the isolation on North America on the softness, but I'll let Henrik build on that. And first, Andrew, shine you up with the efforts we're doing in China and that we continue to grow in the segment on any degree. Andrew Taylor: Yes, very good question. So as we all know, the fundamental dairy market in China has been challenged for a few years. What's exciting is we're continuing to see growth. So we saw growth last year. We're seeing growth again this year. That is both in fresh dairy as well as in cheese. On the drivers of that growth are different. So on the fresh dairy side, a lot of it ends up being around innovation and new products and new solutions that we're driving to help reinvigorate the category. And on cheese, that's where we're helping build that market over a long period of time. So we've been investing in the cheese team in China as a way to actually be the reference point as that market develops. So the drivers are different, but both positive. Henrik Nielsen: Thank you for the question, Soren. So yes, in human health, one theme is for sure, the U.S. market. Long-term underlying drivers are still healthy. Short term, we are seeing some signs of a weakening U.S. consumer. There is, of course, the consumer sentiment out. We see fewer searches on online platforms for probiotics. And we have yet to see that potentially become an effect, but this is something we are definitely keen on watching out for. Then you asked about Europe and Asia. Overall, the quarter was in line with our expectations. Europe also, it's a growth market, but at a more moderate pace as well as in APAC, where maybe I highlight the -- we're seeing some very nice growth in dietary supplements in China. That's still coming for Novonesis from a small base, but an area where we have high expectations. Operator: The next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: I have 2, please. One is on the Plant Health segment. So I'm trying to work out if the absence of growth here is a deliberate decision on Novonesis part or a result of market share loss that is not wanted. And I look at the Planetary Health segment margin, and I think to myself that maybe there is some removal of lower-margin products here that have either commoditized or were not quite what Novonesis was looking for. What intentions, what program has Novonesis been implementing in this segment? And what is the end goal? My second question is on the bioenergy segment. If you were to rank in order of importance, increase in ethanol production, change in market share and growth in 2G, what would have been the biggest drivers of the growth in Q1? Ester Baiget: Thank you, Sebastian. Regarding the question about Bioenergy, I mean growth in Q1 for 2G... Tina Fanø: Okay. So on plant health, yes, we talked about -- we had some restructuring of part of our planned activities last -- end of last year. And that was simply because we have a number of launches we want to get out. So you could say more securing that we get benefit from the things which we have developed. We are happy with the launch we have done just this quarter on ActiPhy. So you could say an example of what it is we want to get out and do some work for us. Overall, I would say, in plant, remember, plant is a very small part of Agriculture, Energy & Tech. It's 5-ish percent. So it's quite small. So it's not influencing in any significant way the margin. But it is -- Planetary Health is a good -- you could say it's big industries efficient with a nice profitability. In terms of Bioenergy, I would say, well, when you look at the ranking where you say increased production, change of market share and whether it's 2G growing, well, 2G is still very, very small. It is less than 5% of the energy segment. So although the growth rate is nice, it is still a small part of the growth. So if I were to rank them, the biggest one, which is driving our growth is the increased -- I wouldn't say penetration, but the increased production of ethanol. That is the main driver for our growth. Operator: The next question comes from the line of Nicola Tang from BNP Paribas. Ming Tang: Coming back on Household Care or actually coming back on the comments around cautious consumer behavior that you had flagged earlier in the year. I think today, you're referring to the probiotics business, but I think you've historically mentioned Household Care, particularly risks or the potential risk in North America. I was wondering if you've seen any deterioration at all in Household Care, specific to North America or generally? And conversely, I was wondering if perhaps there could have been any prebuying by some of your -- or safety stock build by some of your customers, either in Household Care or elsewhere, just in light of the kind of Middle East uncertainty. And then the second question, I was wondering if you could give a little bit more detail on your outlook for inputs. Is it fair to assume that the main potential impact from the Middle East conflict might be more around energy cost, where I know you have hedging. Could you talk a little bit about what you're seeing in terms of raw materials? Because as I understand, it's mainly naturals, where there's less inflation than on the synthetic side. So could you talk about the magnitude of input inflation that you expect for this year? And any commentary around specific inputs or availability of inputs? Ester Baiget: Thank you, Nicola. I'll comment on both questions, and then I'll pass it to both Tina and Rainer. The first one, important to mention that the 7% growth, it's underlying growth across all segments, robust growth, volume growth mainly, also a little bit of growth from pricing. And it is driven by continuous increasing demand of our solutions. We don't see changes on the consumers' buying behavior. This is underlying driving demand growth, where biosolutions continue to be the answer of our customers. We don't see the softness in North America on Household Care. Tina is going to further comment on that. And we see continued penetration of the -- collecting the fruits of the investment we've made in the past. Last year, we put 400 more people boots on the ground, sellers in the regions. And we see the benefits there. We see the closeness of the customers, the proximity where the growth is and then translating it on what it is the top line growth that also with the strong start of the year gives us full confidence for the year-end guidance. And then regarding the costs, Rainer will talk about this. But as I mentioned, we bring in pricing and conversations with our customers, and we're aiming and forecasting nonimpact to the EBITDA for the year. Tina Fanø: Yes. So as Ester said, I mean, when you look at, a, the Michigan Institute on consumer sentiment in the U.S. That is something which for sure we are watching. Also, if you watch the Nielsen data, then you will see, you could say, flattish/declining volumes in the U.S. in detergent volumes after a good 2025. So this is something we are watching, you could say, in the market. But when we look at our data, we don't see any impact. And in fact, I also want to highlight that given our broad base with different players in different segments, if people move between, you could say, private label and branded goods -- for example, in Europe, we have a broad exposure. If they move down in tier to less enzyme containing enzymes, then we are not immune to that. But that outlook of our sentiment and how we look at the world is included in our outlook for the full year. And as we have said, we expect solid growth in Household Care. Rainer Lehmann: And Nicola, regarding the input cost of the Middle East, as Ester basically said, this is mainly impacting us on the supply chain side. So meaning our basically transportation and packaging cost is affected by that, which we're basically recovering on the pricing side. So that is really the driver for it, not the other components on the COGS side. Ester Baiget: One more question, operator, please, last question. Operator: The next question comes from the line of Charles Eden from UBS. Charles Eden: I'll limit myself to 2 quick ones, if that's okay. Firstly, probably for Tina, can we just come back on the plant and tech? Obviously, you mentioned double-digit decline in tech in the quarter, but I think you obviously mentioned order timing. So is the expectation that reverses in Q2 or at least in the balance of '26? And if possible, could you quantify the magnitude of that order timing headwind in Q1? And then secondly, just to come back on Food & Beverage. Obviously, a lot of time focused on Ag, Energy & Tech, but Food & Beverage, in particular, sort of 11% organic, but 15% underlying, if you exclude the Russia exit, quite an incredible performance. Can you just sort of help us understand maybe that's well ahead of the end market growth. What is driving that? What's the success in your offering, which is allowing you to grow probably 4, 5x the underlying market? Ester Baiget: Thank you, Charles. I love that question. What is the driver of -- that we continue to outgrow the markets that we're present. And it's consistently across all areas, a single pattern, customer proximity and bringing answers that lead to value generation for our customers. And that's true for food. That's true for dairy. That's true for Household Care. That's true for Bioenergy. And in the environment that we live in today, we see that pool continue to grow. I'm going to tip toe on your first question and then pass it to Andrew. We saw a decline, double-digit decline in Ag and in plant and in tech this quarter mainly from timing. Both are going to contribute to growth through the year. That means implicitly that there's going to be growth on the remaining of the year to overcome the decline that we saw on a segment in AAT that contributed to growth with a strong growth from Bioenergy and also growth in Animal that we see good momentum and conversations with our customers. And with that, Andrew, I'm passing it to you. Andrew Taylor: Yes. Thank you. And so if you take a step back and think about what's driving Food & Beverage, I think there's a few things. One, we all see the same data on the underlying market growth. I would say that there are pockets of the underlying market that we are differentially exposed to. We always talk about the high protein trends around the world. That's clearly a piece. But the biggest piece is the increasing use of our biosolutions. It's actually driving penetration around substituting, in particular, for synthetics. And what's exciting is that is a continuing trend in many of the things that we see, for example, Maha, and other things actually are helping with that. So as an example, a culture can substitute for multiple things in the yogurt that are potentially at risk. So we do see that across Food and Food & Beverage. The third piece is really around how you share that value. So if we're helping our customers create productivity, if we're helping them get better end consumer and customer demand, we also work to share that value through the pricing. So we are excited about the progress. It's a very choppy market around the world, but we keep investing in that part of the business. And in particular, the capital investments we're making are very important because it signals to our customers, we're willing to grow with them for the long term. Ester Baiget: Thank you very much. And with that, we're closing the session of the day. Looking forward to continuing the conversations with all of you during the forthcoming days. Thank you so much. Bye.
Operator: Thank you for standing by, and welcome to the Cytokinetics, Incorporated Q1 2026 earnings conference call. This call is being recorded, and all participants are in a listen-only mode. There will be no question and answer session after the company's prepared remarks. I would now like to turn the call over to Diane Weiser, Cytokinetics, Incorporated’s Senior Vice President of Corporate Affairs. Please go ahead. Diane Weiser: Good afternoon, and thanks for joining us on the call today. Robert I. Blum, President and Chief Executive Officer, will begin with an overview of the quarter and recent developments. Andrew M. Callos, EVP and Chief Commercial Officer, will discuss the commercial launch of MYCorzo in the United States and readiness in Europe. Fady Ibraham Malik, EVP of R&D, will address the results from Acacia HCM. Stuart Kupfer, SVP and Chief Medical Officer, will provide updates related to our ongoing clinical development programs. Sung H. Lee, EVP and Chief Financial Officer, will provide a financial overview for the quarter. And finally, Robert I. Blum will make closing remarks and review key milestones for the year ahead. As you can see on this slide, today’s discussion will include forward-looking statements that are subject to risks and uncertainties. Please refer to our SEC filings for a discussion of these factors. I will now turn the call over to Robert I. Blum. Robert I. Blum: 2026 has been a remarkable period for Cytokinetics, Incorporated and one that I believe reflects the emerging promise of what we have been building here for over 25 years. Most notably, we launched MYCorzo, our first approved medicine for the treatment of adults with symptomatic oHCM in the United States. This is a milestone many years in the making and reflects our unwavering dedication to translating our science into impact for patients. As Andrew M. Callos will discuss, our initial commercial launch, while representing only a partial quarter, is exceeding our internal expectations with net product revenue of $4.8 million in the first quarter. The level of engagement from prescribers, the pace of REMS certifications, and the early demand all reinforce our conviction in the significant opportunity ahead for MYCorzo. And based on its clear differentiation, we believe this initial momentum builds a strong foundation for longer-term commercial success. Beyond the United States, during the quarter, the European Commission approved MYCorzo for patients with oHCM, and we are now moving quickly towards our first European commercial launch in Germany in the second quarter. The global market for MYCorzo is significant, and we are prudently building the right infrastructure to realize its potential. And then, of course, there is Acacia HCM. This morning, we reported positive top-line results from this pivotal Phase 3 clinical trial of aficamtin in nonobstructive HCM. We were very pleased to see that aficamtin improved both symptoms and exercise capacity with no new safety signals observed. Fady Ibraham Malik will speak more to the results that we reported, but we are excited by what these results represent for patients living with nHCM who have no currently approved therapies and for aficamtin, which, depending on the results of regulatory review, may now have the opportunity to be the first product approved to treat the full spectrum of HCM. With a statistically significant and clinically meaningful effect on both endpoints, we believe we have a very clear picture of the treatment effect that aficamtin has in nHCM. Given the trial results, we plan to meet with regulatory authorities, including the FDA, to discuss our plans for promptly submitting a supplemental NDA. During the quarter, there were several meaningful regulatory updates for aficamtin beyond that. In the United States, our sNDA for MAPLE HCM was accepted for filing by the FDA, and we were assigned a PDUFA date of 11/14/2026. We believe the results of MAPLE HCM will enable us to accelerate expansion of the prescriber base, especially with cardiologists in the community setting. Outside of the United States, we submitted an MAA for aficamtin in oHCM in Switzerland, and as a reminder, we also have a marketing application already under review in Canada. Plus, our partner Sanofi is continuing to progress potential approvals in Hong Kong and Taiwan. Taken together, the progress we made in this first quarter is a testament to what we have built in service of our vision of becoming the leading muscle-focused specialty biopharma company intent on meaningfully improving the lives of patients through global access to our innovative medicines. As we look ahead, we enter the remainder of 2026 with strong commercial momentum, conviction in our pipeline, and a deep sense of purpose. Our priorities remain the continued growth of MYCorzo in the United States, advancing our planned launches in oHCM in Europe, pursuing expansion into nHCM, and advancing our muscle biology pipeline, all with disciplined execution and careful attention to capital allocation. I will now turn the call over to Andrew M. Callos. Andrew M. Callos: Thanks, Robert I. Blum. I am thrilled to be reporting on our first quarter of commercial performance for MYCorzo. MYCorzo became available to patients on January 27, and we saw HCP prescribing within days. We have had a strong start that exceeded our expectations. Our launch is grounded in the foundation of clinical evidence and differentiation. The results from SEQUOIA-HCM demonstrate that MYCorzo provides rapid and sustained reduction in obstruction with improvement in symptoms, outcomes that resonate with HCPs. MYCorzo also offers an adaptable monitoring schedule with echocardiograms permitted within a flexible two- to eight-week window and a REMS that does not require DDI counseling. Over 80% of treating HCPs report awareness that they have seen the prescribing information for MYCorzo on an as-needed basis. We are pleased to see continued growth in perceptions of clinical differentiation favoring MYCorzo. In our most recent ACT survey, we see a higher majority of HCPs favoring the clinical profile of MYCorzo, especially among the high-volume HCM prescribers surveyed. In addition, HCPs surveyed view MYCorzo favorably across metrics such as dosing flexibility, safety and tolerability profile, and REMS program requirements. Beyond the clinical profile, treating physicians are also responding favorably to the practical elements of prescribing MYCorzo. Across key metrics of ease of prescribing, echocardiogram monitoring flexibility, and the absence of DDI restrictions within REMS, HCPs appear to view MYCorzo as differentiated. Following FDA approval in December, our team of 100-plus cardiovascular account specialists began engaging HCPs in early January, a few weeks ahead of when product became available in late January. Since then, they have reached HCPs at all levels of HCM prescribing. Our initial launch prioritized focusing our promotional and sales force activity on deepening prescribing among the high-volume HCM prescribers that have historically generated 80% of HCM prescriptions. While our call points span over 10,000 HCPs, we are currently putting greater emphasis in call allocation on the high-volume HCM prescribers. In Q1, our sales teams detailed over 90% of these HCPs. We plan to continue this emphasis on high-volume prescribers until we achieve over 50% new-to-brand prescription share among these HCPs, which we anticipate will occur by year-end. Once we see strong share performance in the high-volume HCM prescribers, we will put greater emphasis on increasing the breadth of prescribing, while still maintaining leadership and growth in the high-volume HCM prescribers. We are already seeing uptake outside the high-volume prescribers. In Q1, more than 40% of MYCorzo prescriptions are from the combination of low-volume HCM prescribers and first-time HCM prescriber segments. In Q1, our field force reached an estimated 40% of these HCPs. Beyond personal and non-personal promotion, our surround-sound approach to reaching HCPs has also delivered strong interest with robust participation in our peer-to-peer physician speaker programs and engagement with our digital advertising. By the end of Q1, over 2,100 people were already enrolled in the MYCorzo patient community. In addition to our clinical profile, we are taking the time to educate HCPs on our REMS program and patient services, as they are different from what HCPs have become accustomed to. Since launch, we have moved quickly to release enhancements to these systems that are consistent with HCPs’ feedback and clinical practice. To measure launch performance overall, we have committed to sharing three launch metrics: the depth and breadth of prescribing, and volume of patients. Breadth of HCP prescribing is measured by the number of HCPs who have written prescriptions. Depth of HCP prescribing is measured by the number of patients each HCP prescribed MYCorzo. Volume of patients is measured by the number of unique patients prescribed MYCorzo. In Q1, we saw strong demand, with more than 275 unique HCPs prescribing MYCorzo, with over 50% from the high-volume HCM prescriber segment. Through April, we have seen continued prescriber growth, with more than 425 HCPs prescribing MYCorzo. Overall, these HCPs have written an average of 2.4 prescriptions per HCP, while the high-volume prescribers have prescribed MYCorzo to approximately 2.6 patients per HCP. While it is difficult to be precise about our new-to-brand Q1 exit share due to some limitations in data availability, our internal analysis leveraging projected syndicated data suggests that the MYCorzo new-to-brand Q1 exit share was greater than 30%. These are very encouraging numbers at such an early stage of our launch. We also see positive momentum in the 1,400-plus HCPs who became REMS certified during the quarter, a potential leading indicator of HCPs who plan to prescribe MYCorzo. The differentiated profile of MYCorzo and our targeted HCP engagement since the beginning of the year has resulted in approximately 680 patients prescribed MYCorzo by the end of Q1 2026, and through April the number of patients has increased to 1,100. Importantly, in Q1, over 70% of dispensed patients are on a paid prescription. On average, patients convert to a paid prescription in less than two weeks. Most of these metrics exceed our launch expectations. This is particularly due to our limited distribution model with dedicated focus on MYCorzo patients, which has helped us achieve a high percentage of patients on a paid prescription very early in the launch phase. As we continue to accelerate our launch, we are also focused on expanding and reducing barriers to prescribe. As we have shared, we have been engaging with payers for quite some time regarding the clinical evidence from our clinical trial program and the clinical and economic burden of oHCM. We currently have comparable access for nearly 90% of Medicare lives and expect to have parity in Medicare within Q2. We are also building commercial access and expect to reach 50% of commercial lives by early Q3 and remain on target to achieve commercial access at parity by the end of Q4. Simultaneously, we are continuing to expand our commercial readiness and planning in key geographies around the world. We secured approval for MYCorzo in the EU in February and continue to move quickly towards our first European commercial launch in Germany, planned in the second quarter. In support of that milestone, we finished hiring and onboarding our full German team inclusive of sales, marketing, medical, and leadership teams. Across the EU, we have also now submitted six HTA dossiers, with five more expected to be submitted this quarter, on the path to broaden European patient access. We also submitted an MAA to Swissmedic, and beyond Europe we continue to look forward to receiving a decision in Canada in the second half of this year. Cytokinetics, Incorporated is now firmly a commercial-stage company, and while it is early in our U.S. launch, we are very encouraged by the initial performance. Both in the U.S. and in Europe, our commercial teams are dedicated to delivering excellence in this new chapter of our company’s history. I will now turn the call over to Fady Ibraham Malik. Fady Ibraham Malik: Thanks, Andrew M. Callos. This morning, we were thrilled to report the top-line results from Acacia HCM. The trial met both of its dual primary endpoints, demonstrating statistically significant improvements from baseline to week 36 in both KCCQ Clinical Summary Score and peak VO2 compared to placebo. In patients treated with aficamtin, KCCQ increased by 11.4 points compared to 8.4 points for patients on placebo, resulting in a least squares mean difference of 3 points with a p-value of 0.021. Similarly, peak VO2 increased by 0.64 mL/kg/min in patients on aficamtin, while it decreased by 0.03 mL/kg/min for patients on placebo, resulting in a least squares mean difference of 0.67 mL/kg/min and a p-value of 0.003. Statistically significant improvements were also observed in key secondary endpoints, including the proportion of patients with improvements in NYHA functional class, the composite Z score of ventilatory efficiency and peak VO2, and NT-proBNP. Importantly, there were no new safety signals identified. The percentage of patients who completed treatment in Acacia HCM was similar between those receiving aficamtin or placebo. Incidence of LVEF less than 50% was 10% in patients taking aficamtin, of which two patients experienced a serious adverse event of heart failure. LVEF less than 50% occurred in 1% of patients taking placebo. Treatment interruptions due to LVEF less than 40% occurred in 3% of the patients taking aficamtin. The improvement in KCCQ was robust and consistent throughout the treatment period in patients on aficamtin. Following washout, KCCQ decreased for patients on aficamtin to match the placebo group. At week 36, peak VO2 increased for patients on aficamtin, while it remained unchanged for patients on placebo, consistent with prior trials of aficamtin. What makes the data particularly compelling is the consistency across what the primary, secondary, and other exploratory endpoints capture. The KCCQ is the patient-reported measure that reflects how they feel and function, their symptoms, their quality of life, while peak VO2 reflects an objective functional measure of exercise capacity. NYHA functional class, the first key secondary endpoint, is also a measure of symptom and functional burden, but is physician assessed. To have improved both symptoms and functional capacity in a meaningful way reflects the depth of the potential impact of aficamtin in this patient population. This is a historic moment for the HCM community. nHCM is a serious condition for which no therapies have ever been approved. These results suggest that aficamtin has the potential to change that and to become a treatment to support the full spectrum of the disease. We could not be more enthusiastic about what we have seen in these top-line results. I want to take this moment to express my gratitude to our team for their relentless conduct of this trial to ensure the quality and robustness of the findings. Additionally, we are deeply grateful to the patients who participated in Acacia HCM, to their families, and to the investigators and site staff across the globe who conducted this trial with such dedication and rigor. Our thanks go to all for everything they have contributed to this program, and, in turn, to the entire HCM community. Next, we plan to submit Acacia HCM for presentation at an upcoming medical meeting and look forward to presenting the results in a more fulsome fashion at that time. Until then, we will not be able to share any additional detail on top of what was reported in today’s press release. As Robert I. Blum mentioned, we will be discussing these results with the U.S. FDA and other regulatory authorities. It has been an extremely exciting start to the year, to say the least. I will now hand it over to Stuart Kupfer to speak more about our ongoing clinical trials in both HCM and heart failure. Stuart Kupfer: Thanks, Fady Ibraham Malik. First, I will touch on our ongoing global clinical programs for aficamtin in HCM. During the quarter, we continued to advance three trials that together are building a comprehensive clinical foundation across indications, geographies, and patient populations. In obstructive HCM, our partner Bayer advanced conduct of CAMELLIA-HCM, a Phase 3 clinical trial evaluating aficamtin in Japanese patients. In pediatric patients with obstructive HCM, we continued enrolling CEDAR-HCM, our global clinical trial evaluating aficamtin in adolescents and younger children. We expect to complete enrollment in the adolescent cohort by the end of 2026. In nonobstructive HCM, we continued enrollment of the Japanese cohort of Acacia HCM. Japan represents an important market where aficamtin is not yet approved for either obstructive or nonobstructive HCM. Both CAMELLIA-HCM and the Japanese cohort of Acacia HCM are designed to support potential marketing authorization for both indications in that country. To that end, I am also pleased to note that aficamtin received orphan drug designation from the Japan Ministry of Health, Labour and Welfare for the treatment of nonobstructive HCM in adults and for obstructive HCM in pediatric patients, reflecting the unmet need that remains in these populations. Now I will move on to our clinical development programs in heart failure. COMET-HS, the confirmatory Phase 3 clinical trial of omecamtiv mecarbil in patients with symptomatic heart failure with severely reduced ejection fraction less than 30%, is progressing well. All sites in the U.S. and Europe are now activated, and we are working to bring on additional trial sites in China. We are pleased with the progress we have made so far this year and plan to continue enrollment through 2026. We also continued AMBER-HFpEF, the Phase 2 clinical trial of ulicamten in patients with symptomatic heart failure with preserved ejection fraction of at least 60%. During the quarter, we expanded enrollment in cohort one following a recommendation from the dose level review committee to collect more data at the current doses, and we expect to complete patient enrollment in cohort one in the second half of this year. Across these programs, we remain focused on rigorous execution and are encouraged by the progress we continue to make in building what we believe will be a leading specialty cardiology franchise. With that, I will pass it to Sung H. Lee. Sung H. Lee: Thanks, Stuart Kupfer. Beginning with revenue, total revenues for the first quarter were $0.4 million compared to $1.6 million for the same period in 2025. In the first quarter, we recorded $4.8 million in net product revenues for MYCorzo, which reflects approximately nine weeks of commercial sales following the U.S. launch near the end of January. As Andrew M. Callos stated earlier, we saw strong demand for MYCorzo, and the net product revenue is reflective of over 70% of dispensed patients on a paid prescription, with the balance receiving drug through either our 30-day free trial bridge or patient assistance programs. We expect the majority of patients receiving MYCorzo through free trial and bridge programs to transition to paid prescriptions on a timely basis, and this dynamic is expected to repeat in future quarters. Other components that contributed to total revenues in the first quarter include $2.6 million in collaboration revenue compared to $1.6 million for the same period in 2025, and $11.9 million from the achievement of a milestone under the Bayer license agreement tied to the first commercial sale of MYCorzo in the U.S. Turning to expenses, R&D expenses for the first quarter were $95.5 million compared to $98.3 million for the same period in 2025. The decrease was primarily due to higher clinical trial activity in 2025, partially offset by higher personnel-related costs in 2026. SG&A expenses for the first quarter were $104.9 million compared to $57.4 million for the same period in 2025. The increase was primarily due to external costs associated with the commercial launch of MYCorzo, the U.S. sales force, and higher non-sales personnel-related costs, including stock-based compensation. Cost of goods sold for the first quarter of 2026 was $0.2 million. Collaboration cost of revenues for 2026 was $2.4 million compared to $1.6 million for the same period in 2025. Collaboration cost of revenues includes cost reimbursements as well as costs incurred in connection with manufacturing drug supplies for collaboration partners. Net loss for 2026 was $[inaudible] or $1.67 per share compared to a net loss of $161.4 million or $1.36 per share for the same period in 2025. Turning to the balance sheet, we ended the first quarter with approximately $1.1 billion in cash and investments compared to $1.2 billion at the end of 2025. Cash and investments declined by approximately $144 million during 2026. Moving on to our financial guidance, we are maintaining our full-year 2026 financial guidance, with GAAP combined R&D and SG&A expense expected to be between $830 million and $870 million. Stock-based compensation included in the GAAP combined R&D and SG&A expense is expected to be between $120 million and $130 million. Excluding stock-based compensation from the GAAP combined R&D and SG&A expense results in a range of $700 million and $750 million. As we have just announced positive top-line results from Acacia HCM, we will update you accordingly in the future on the potential impact of this development on our financial guidance. Looking ahead, we remain focused on disciplined capital allocation and prioritizing our investments on the launches of MYCorzo in the U.S. and Europe, advancing our development pipeline, and investing in our muscle biology platform and research pipeline. With that, I will hand it back to Robert I. Blum. Robert I. Blum: Thank you, Sung H. Lee. This was a first quarter we will long remember at Cytokinetics, Incorporated. Our first medicine reached the hands of patients in the United States. We recorded our first product sales revenues. We progressed readiness for future global launches. And more recently, this morning, we reported positive top-line results from Acacia HCM, results that we believe may open a new chapter for patients living with nHCM. I am incredibly proud of what we have accomplished so far in 2026, and I am even more energized by what lies ahead. The opportunity in HCM has never looked brighter; we have never been better positioned to deliver. We look forward to keeping you updated as we progress through the year. I will now recap our 2026 milestones. For aficamtin, we expect to meet with regulatory authorities, including the U.S. FDA, to discuss the results of Acacia HCM and our potential plans for submitting a supplemental NDA. We expect to launch MYCorzo in Germany in the second quarter of 2026. We expect to potentially receive FDA approval of the supplemental NDA for MAPLE HCM in Q4 2026. We expect to complete enrollment in the adolescent cohort of CEDAR-HCM in the fourth quarter this year, and we expect to potentially receive approval from Health Canada in the second half of this year. For omecamtiv mecarbil, we expect to continue patient enrollment in the conduct of COMET-HS through 2026. For ulicamten, we expect to complete patient enrollment in cohort one of AMBER-HFpEF in 2H 2026. And for CK-089, we expect to begin conduct of a second Phase 1 study. Finally, for our preclinical development and our ongoing research, we expect to continue those activities directed to additional muscle biology–focused programs through the year. As a reminder, there will not be a question and answer session following these prepared remarks on today’s call. We want to thank all the participants on this call today for your continued support and your interest in Cytokinetics, Incorporated. Operator, with that, we can now please conclude the call. Operator: This concludes today’s call. Thank you for attending. You may now disconnect.
Hannah Jeffrey: [ Audio Gap ] projections, expectations, predictions are forward-looking statements, whether because of new information, future events or developments or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 5, 2026. And with that, I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer. Waleed Hassanein: Thank you so much, Hannah. Good afternoon, everyone, and welcome to TransMedics First Quarter 2026 Earnings Call. As always, joining me today is Gerardo Hernandez, our Chief Financial Officer. Our vision has been bold -- our vision has always been bold and growth-oriented. Since inception, TransMedics has been relentless in our pursuit to transform organ transplant therapy by increasing utilization of donor organs and improving the clinical outcomes of transplant patients throughout -- through technology and service innovation and by disrupting the status quo. To accomplish this, we've been deliberate yet aggressive in our strategic investment in growth initiatives. We believe that 2026 is a critical and transformational year that stands to cement TransMedics' near, mid- and long-term growth trajectories and global market position. In the U.S., we're actively engaged in growing our heart and lung franchises by advancing our enhanced heart and DENOVO lung programs to expand our clinical evidence to support broader adoption. In parallel, we are also completing the development of the OCS Kidney platform using our Gen 3.0 platform. Our OCS Kidney platform will enable us to access the largest segment of the global transplant market, which is kidney transplantation. This will happen for the first time in the history of TransMedics. We strongly believe that once regulatory approvals are in hand, OCS Kidney will drive significant growth for our abdominal franchise. And we're not stopping here. We're also actively engaged in upgrading our heart, lung and liver devices to Gen 3.0 platform, which will enable us to gain significant future operating leverage and increase clinical adoption of the OCS platform in these critical organ transplant segments. Our growth initiatives also now go beyond warm perfusion. We recently unveiled the TransMedics Controlled Hypothermic Organ Preservation System, or CHOPS. CHOPS is designed to expand our product offering to cover new segments of the transplant market best served with cold static storage. And finally, our growth initiatives now extend beyond the U.S. to important international markets. In Europe, we are undertaking a bold initiative to replicate the NOP clinical service and transplant logistics model to catalyze European OCS adoption and potentially expand our total addressable market. I will provide details on each of these exciting initiatives on today's call. As you can see from our ongoing growth initiatives, our focus remains on long-term value creation with continued investment across each pillar of our growth strategy. Specifically, I want to highlight that this is a strategic and proactive decision, and we fully expect that our financial performance over the next several quarters will reflect these necessary investments in people, infrastructure and technology development as we capitalize on the opportunities in front of us. Based on everything we know today, we are highly encouraged and inspired by what's ahead for TransMedics. We are committed to executing our plan to drive significant growth for TransMedics and for the global transplant markets broadly. As I've stated repeatedly, I truly believe that TransMedics remain in the early innings of our long-term growth opportunity. I'm excited to report that our first quarter performance that reflects a strong start for 2026. Despite the broader volatility and the transient negative impact of the U.S. Transplant Modernization Act on OPO performance and the overall donor numbers in the U.S., we managed to deliver a solid quarter to start the year. Here are the key operational highlights for 1Q 2026. Total revenue for 1Q '26 was $174 million, representing approximately 21% growth year-over-year and approximately 8% sequential growth from 4Q 2025. U.S. transplant product revenue grew by 22% year-over-year and approximately 7% sequentially to $102 million, while OUS transplant revenue grew approximately 39% year-over-year and approximately 17% sequentially to $6 million. We delivered an adjusted operating profit of approximately $18.1 million in Q1, representing approximately 10.4% of total revenue in 1Q while continuing to make significant investment to fuel our growth. Importantly, we ended 1Q with $462 million of cash and cash equivalents, while making substantial investments in the growth initiatives above. TransMedics transplant logistics services revenue for 1Q 2026 was approximately $32 million, up from $26.1 million in 1Q 2025, representing approximately 22% year-over-year growth and up from $28.6 million in 4Q 2025, representing approximately 12% sequential growth. In Q1, we maintained coverage of approximately 82% of our NOP mission requiring air transport. We expect to maintain 22 operational aircraft in the U.S. fleet throughout 2026. As we discussed, we are now focused on maximizing the utilization of our U.S. fleet and improving efficiency and capacity by double shifting a portion of the fleet to meet the growing clinical demand. We will detail key findings from this initiative at year-end. Overall, we are pleased by our strong performance that was fueled by growing OCS case volume, increased clinical adoption. Importantly, we're also encouraged that we achieved these results without any contribution of ENHANCE and DENOVO clinical programs due to the enrollment timing of these important programs. Speaking of ENHANCE and DENOVO, let me shift to provide a detailed update on our strategic initiative to unlock these 2 important clinical programs to help us grow our cardiothoracic franchise in the U.S. At the recent ISHLT conference in April, we unveiled our TransMedics Controlled Hypothermic Organ Preservation System, or CHOPS. CHOPS is a true active cooling device designed to provide a variety of temperature conditions ranging from 4 to 12 degrees Celsius to meet the users' need. This represents a unique -- unique and optimized approach that we believe is superior to the Styrofoam boxes that are used for cold static storage of organs today. These boxes use face-changing material or cold packs that are extremely variable and are nearly impossible to control or adjust preservation temperatures with. CHOPS will be an FDA-registered and regulated organ preservation device made by TransMedics and will serve as the control arm of the ENHANCE and DENOVO programs once the IDE supplement is approved. This would be a huge strategic win for TransMedics as it stands to help avoid any reliance on competitive products as we conduct our important clinical programs for heart and lungs. We plan to file the IDE supplement within the next few weeks, and we expect this to be approved and implemented in early Q3 2026. Importantly, in parallel to these clinical programs, we fully intend to file a 510(k) application to clear this device for commercial use in the U.S. Once cleared by FDA, CHOPS would expand TransMedics' platform of organ preservation technologies and enable us to address shorter preservation times for organs that may be best suited for cold storage. As we highlighted on our last call, the panic and confusion caused by the competitive reaction to our clinical programs somewhat delayed our ENHANCE Part B and DENOVO enrollment. We not only addressed this challenge by introducing CHOPS, but we are now going after the niche market with superior, more validated cooling technology and our best-in-class NOP infrastructure. Said differently, beyond facilitating our trial enrollment, we are expanding our product portfolio to ensure that TransMedics is well positioned to provide transplant programs around the world with the widest range of products to meet their clinical needs across the full spectrum of organ transplantation. We plan to accomplish this goal based on best-in-class technologies, best-in-class clinical services and with the most cost-efficient and reliable logistical network in the market. Now let me move to share the -- share update on our strategic initiatives that we see as an important catalyst for our business. First is the National Transplant Modernization Act. In March 2026, TransMedics submitted our detailed comments on CMS proposed rule-making language for the new U.S. transplant system to advance U.S. transplant modernization initiatives. Our public comments focused on several key topics. First, on the system-wide benefits of allowing new entities with proper national infrastructure that are not current OPOs to participate in the new transplant ecosystem by becoming either a multiregional or even national OPOs. This is to help maximize U.S. donor organ utilization for transplants. Importantly, it will provide a mechanism for fair competition and maximize transparency while driving cost efficiency to the U.S. transplant ecosystem. Second, on the benefit of using FDA-approved portable perfusion technologies to maximize donor organ utilization in the U.S. while limiting the use of unproven, fairly expensive and potentially detrimental techniques that were organically introduced into the market over the last several years. Third, on the benefits of enabling for-profit entities to participate so long as they are strictly adhering to all performance metrics proposed by CMS and complying with all the financial disclosure requirements. Fourth, on the benefits of allowing new entities to bid to replace as many of the decommissioned OPO regions as they can support. And finally, we highlighted the potential benefits of requiring these new participating entities to provide technology and clinical support services to existing OPOs. Again, our proposal was to -- it was intended to maximize the benefits to the U.S. transplant ecosystem in general and not just to one entity. If CMS agrees with this direction, TransMedics fully intend to submit bids for donor service areas or DSAs associated with decommissioned OPOs later this year or early next. Again, our goal is to drive efficiency, transparency, maximize patient access and organ utilization for transplant in the U.S. The second growth initiative is NOP Europe. As we've discussed, we are actively building infrastructure and staffing in Italy across 4 hubs to cover Northern and Southern Italy. Meanwhile, we're actively engaged and applying for Italian organ transplant air and ground logistics tenders for a few Italian regions as we speak. We are also actively engaged with Benelux region stakeholders to establish NOP in the Netherlands and Belgium to create NOP hubs that are staffed by a dedicated clinical TransMedic staff to manage OCS cases in these countries. Another important element to our European NOP strategy is to create the first ever dedicated and integrated transplant logistics network to cover the broad European transplant logistics demand. On that front, we announced last week that we've entered into a definitive agreement with a major European charter flight operator, PAD Aviation, or PAD to partner on creating this European air logistics network. PAD is located in Paderborn, Germany, which is within 1- to 2-hour distance from all the major transplant hubs across Europe. Importantly, they are operating a fleet of same model aircraft that we use in our U.S. fleet, Embraer Phenom 300Es. Simply stated, we're planning to replicate the success of the U.S. NOP in Europe to potentially expand or nearly double our total addressable market, increase OCS clinical adoption and provide efficient and dedicated transplant logistics service across Europe using our dedicated logistics network. The third growth initiative is OCS kidney program. As we discussed on the last call, this represents our next frontier with kidney expected to be the first organ to launch on our OCS Gen 3.0 technology platform. Gen 3.0 technology platform will comprise a completely redesigned form factor, hardware, software and perfusion system that is smaller, lighter with lower part count, purposely designed for automated assembly and high reliability. Currently, the development program is running at full speed, and we hope to introduce the final design device and potentially working device at the American Transplant Congress in Boston in late June. Looking ahead, we are still targeting early 2027 for our U.S. IDE submission for our kidney program. We are extremely excited about this program as it stands to unlock a substantial incremental market opportunity measured in tens of thousands of kidney transplant procedures globally. The fourth growth initiative is OCS Technology Gen 3.0 upgrade for both liver, heart and lung systems. This program is running in parallel to the kidney program to bring significant technology upgrade to our current liver, heart and lung systems and help catalyze our clinical adoption in these transplant segments. Again, we are intentionally developing our Gen 3 platform to gain supply chain and operating leverage with lower part counts and less reliance on critical third-party suppliers. As you can see, our growth strategy is multifaceted with catalysts lined up across the short, mid and long terms. We're excited and laser-focused on investing to ensure the successful execution of these initiatives throughout 2026 and beyond. Now let me conclude by stating that based on all the dynamics we see today, both in the U.S. transplant ecosystem and at the macro level, we are reiterating our revenue guidance for the full year 2026 between $727 million to $757 million, representing a 20% to 25% growth over full year 2025. We may revisit the guidance later in the year as we gain more visibility on the pace of ENHANCE and DENOVO enrollment and other dynamics in the U.S. transplant ecosystem. With that, let me turn the call to Gerardo to cover the detailed financial results for the quarter. Gerardo Hernandez: Thank you, Waleed. Good afternoon, everybody. I am pleased to share TransMedics first quarter 2026 results. Please note that a supplemental slide presentation with additional details is available in the Investors section of our website. As Waleed highlighted, we started 2026 with solid execution and continued momentum across our platform. Importantly, consistent with the priorities we highlighted on our previous earnings call and throughout 2025, Q1 also marked the beginning of an accelerated phase of investment and execution for TransMedics. We are advancing multiple initiatives designed to support future growth, strengthen our operating capabilities and position us to capture the opportunities ahead. These include continuous progress across our different programs, international expansion efforts, shops and as announced last week, our agreement to invest in PAD Aviation to support the development of a dedicated organ transplant logistics network in Europe that Waleed mentioned before. Together, these initiatives and these actions demonstrate our ability to move quickly and boldly in allocating capital to execute on strategic opportunities that we believe can further fuel long-term profitable growth. And as Waleed says, let me repeat, these actions are designed to further fuel long-term profitable growth. Beginning Q1, we are introducing certain non-GAAP financial measures, including adjusted R&D expense, adjusted SG&A expense, adjusted operating expenses, adjusted income from operations, adjusted net income, adjusted diluted earnings per share and adjusted operating margin. We use these non-GAAP financial measures to support financial and operational decision-making and to evaluate period-to-period performance. We believe these measures are useful to both management and investors because they provide meaningful supplemental information regarding our core operating performance, particularly as we begin to incur certain discrete expenses and because they offer greater transparency into the key metrics management uses in running the business. Examples of these discrete expenses include costs related to strategic initiatives, corporate development activities, headquarter relocation and the implementation of our new ERP. A reconciliation between GAAP and non-GAAP results is included in the supplemental materials available in our website. Now turning to our Q1 financial performance. Total revenue for the quarter was approximately $174 million, representing 21% growth year-over-year and 8% growth sequentially. Growth was led by strong liver performance, continued progress in heart and increasing contribution from our integrated logistics platform. U.S. transplant revenue was approximately $167 million, up 20% year-over-year and 8% sequentially. By organ, liver contributed with approximately $139 million, heart with approximately $26 million and lung with approximately $2 million. International revenue was approximately $5.6 million, up 39% year-over-year and 17% sequentially. International revenue growth was primarily driven by heart with smaller contribution from lung. We are encouraged by the progress we are seeing internationally as we continue to build our presence and advance our expansion plans. At the same time, the business remains at an early stage and quarterly variability is expected due to reimbursement and market dynamics. Total product revenue for the quarter was approximately $108 million, up 22% year-over-year and 8% sequentially, reflecting continued strong liver performance and modest growth in heart. Service revenue for the first quarter was approximately $66 million, up 19% year-over-year and 9% sequentially. Growth was driven primarily by logistics revenue, supported by increased utilization of the TransMedics aviation fleet. Together, these results reflect continued demand for the OCS platform and the value of our integrated NOP model. Total gross margin for the first quarter was approximately 58%, broadly consistent with recent quarters and down approximately 331 basis points year-over-year. The year-over-year decline was driven primarily by increased internal supply chain activity to replenish inventory across our hubs and position inventory in support of the DENOVO and ENHANCE programs as well as continued investment in NOP network, which together with certain onetime items impacted the margin, and we will expect this to normalize in the coming quarters. Sequentially, as mentioned before, gross margin remained broadly stable at approximately 58%. Underlying performance in the quarter was encouraging with operational improvement largely offset by ongoing internal supply chain costs to support the DENOVO and ENHANCE programs continued investments in NOP capabilities and certain onetime items that we will expect to normalize in the coming quarters, as mentioned before. Adjusted operating expenses for the first quarter were approximately $83 million, up approximately 42% year-over-year and 17% sequentially. Adjusted R&D increased approximately 45% versus the first quarter of 2025, primarily driven by the continued development of our OCS kidney program and our next-generation OCS platform. The increase also reflects ongoing product development activities in Mirandola, Italy and headcount growth as we continue to strengthen our development capability across U.S. and the Mirandola site. Sequentially, the increase in adjusted R&D was primarily driven by continued investment in OCS Kidney and our next-generation OCS platform with a smaller contribution from increased product development activity in Mirandola. Adjusted SG&A increased approximately 41%, primarily reflecting the continued investment to strengthen NOP network and IT capabilities, the initial impact of our new headquarter in Sommerville and consulting and market research in support of international expansion plans. Some of these factors also drove the sequential increase, particularly continued investment in NOP network and international expansion initiatives. Adjusted income from operations for the quarter was approximately $18 million, representing an adjusted operating margin of approximately 10%. The year-over-year decrease in operating margin primarily reflects the timing and scale of our planned investment in 2026 as well as the gross margin dynamics discussed earlier. Adjusted net income was approximately $11 million or $0.30 per diluted share. As Waleed mentioned before, we ended the quarter with approximately $462 million in cash. Cash generation from operations remained solid during the quarter, and our balance sheet remains strong and continues to provide us with the flexibility to invest in the business, support our clinical and international expansion plans and evaluate strategic opportunities that we can -- that can strengthen our platform. Now turning to our 2026 financial outlook. We are reiterating our full year 2026 revenue guidance of $727 million to $757 million, representing a 20% to 25% growth over full year of 2025. We continue to expect growth to be driven primarily by increased transplant volume supported by OCS and NOP platforms, expansion of service revenue and progress across our clinical and international initiatives. In terms of gross margin, we continue to expect our long-term gross margin profile to remain around the 60%. As I shared before, as we continue to invest ahead of growth and expand geographically, we do expect some near-term pressure. We feel confident in our long-term profitability goals. As we continue to scale the business, we expect to capture additional operating leverage while also benefiting from initiatives that are planned to be margin accretive over time, including our kidney program, our next-generation OCS -- and our next-generation OCS. Taken together, these factors reinforce our confidence in the long-term profitability of the business. And again, as Waleed said, let me repeat, taken together, these factors reinforce our confidence in the long-term profitability potential of the business. In terms of capital allocation, our focus remains on driving long-term value. We are concentrating our investment in 3 key areas: first, fueling growth through continued R&D investment, strengthening our NOP network and targeting expansion into selected international markets. Second, building a stronger foundation through enhanced systems, processes, talent and organizational capabilities to improve efficiency, scalability and execution. And third, enhance our infrastructure and strategic optionality, including our new global headquarters, manufacturing and product development upgrades and selected strategic opportunities that can further strengthen our platform. Overall, our first quarter performance reflects continued execution, disciplined investment and progress across several strategic initiatives. Several strategic initiatives that aim to expand our TAM and materially strengthen TransMedics' long-term position. We are moving with conviction and investing strategically in capabilities required to support future growth, improve scalability and drive long-term value creation. And with that, I'll turn the call over to Waleed for closing remarks. Waleed Hassanein: Thank you, Gerardo. Overall, we're proud of our success to date, but we're not stopping here. 2026 represents another critical period for TransMedics as we invest to deliver on several transformational growth catalysts. The strong financial position we've built over recent years have enabled us to pursue this multipronged approach, and we are more excited than ever for what lies ahead. In conclusion, we're humbled and proud of the significant life-saving impact of our OCS technology, NOP services and dedicated team and remain committed to our mission of expanding cases and improving clinical outcomes to patients in need for organ transplant worldwide. With that, I will now turn the call to the operator for Q&A. Operator? Operator: [Operator Instructions] Your first question comes from the line of Bill Plovanic of Canaccord Genuity. William Plovanic: I'm going to focus on CHOPS, if I could. And just could you please help us understand the strategy behind CHOPS, the thought on cannibalizing your existing uses? And then are you still planning on hitting that 10,000 organ target? Does that include CHOPS? Or is that incremental? And then also just any thoughts on CHOPS for liver and kidney? Waleed Hassanein: Thank you, Bill. I want to clarify one thing right off the gate. CHOPS is not cannibalizing anything. CHOPS is tackling a segment of the market, specifically DBD hearts that are like 2 hours of preservation that we're not being used at today. So that CHOPS is not cannibalizing. It's additive to our market share, and it's specifically focused on these short transport runs that are currently going on static cold storage. So that's number one. Number two, the strategy behind it was to find a better way to develop the control arm with better technique than the standard Styrofoam boxes that are currently being sold for static cold storage, but also presented an opportunity for us to provide a broader product portfolio to meet those centers that are -- their volume is primarily shorter distance and they don't invest in DCD or longer distance organ procurement. Finally, our goal right now is on heart and lungs in that order. We do not see -- obviously, it will be approved for organ preservation, cold static storage for organ preservation, but we have not made a decision yet, is it going to be rolled out for liver and kidney as well. We think the kidney cold static preservation is really a disaster, and we are trying to transform all this to machine perfusion. CHOPS is specifically designed for the cardiothoracic platform. Operator: Your next question comes from the line of Joshua Jennings of TD Cowen. Joshua Jennings: Hoping to just build on discussion on ISHLT will lead and just with the ENHANCE Part A and Part B programs, optimal scenario being kind of a win-win-win potentially driving day-only surgeries for high-risk DCD Hearts showing superiority in DBD short transports and then also opening up this advanced cold storage CHOPS opportunity. And maybe just help me better understand the dynamics there, if you would, and how ENHANCE Part A, Part B can help drive stronger liver heart penetration, OCS heart penetration. Waleed Hassanein: Thank you, Josh. As we've stated before, ENHANCE was designed exactly to accomplish the goals you outlined. We wanted to give the market a safe, reproducible and effective way to do morning hour heart transplants. We wanted to give the market a better way to preserve DCD Hearts and better way to preserve long distance and long preservation time, extended criteria hearts, minimizing edema and resulting in better function and enhancing function on OCS. That was primarily the design of ENHANCE. In addition, we wanted to penetrate that segment of the market that I called earlier, DBD Hearts that are, call it, sub-4 hours of preservation, which currently the vast majority of those are being transported using Styrofoam boxes with cold packs. That's Part B of ENHANCE. So yes, the vision, the strategy of ENHANCE is still intact. Unfortunately, the competitive dynamic caused a little bit of a confusion and resulted in a little bit of a delay to launching these 2 parts, specifically Part B. And we found a solution for it and that completely make ENHANCE fully independent from any competitive dynamic. So we are as excited as always and as we've ever been on ENHANCE, and we just can't wait to get the IDE supplement approved and getting the program rolling. So again, from where we sit here, we see this as a huge opportunity for us to catalyze adoption in heart across all market segments in heart and still have an optionality for centers that are not for whatever reason, are not focused on any of the sort of expanding portion of the heart market of DCD or long-distance procurement and just are happy with the cold storage to offer a product that is, we believe, will be -- will provide them -- meet their expectation and provide them potentially better solution, but on our platform, which is CHOPS. So as you said, Josh, we look at this as a win-win-win from TransMedics perspective. We just have to be patient. We have to execute on the strategy. We have to finish the program. From where we sit, Part A is going slightly ahead of schedule. We're excited about what we're seeing. The market is giving us early feedback on how the hearts are behaving -- coming off OCS, which is exactly as we predicted it would be. But again, we need to finish the program, and then we expect good things. Operator: Your next question comes from Allen Gong of JPMorgan. K. Gong: I had a quick one on what you're seeing in the market. I know intra-quarter, you had talked to some disruption that you were seeing at OPOs, especially as they're grappling with some of the potential changes proposed in the OPTN modernization. But I'm curious to hear what you're seeing so far in the second quarter. Are you seeing the same level of challenges? Are you seeing it get better? Are you seeing it worsen? And how should we think about your growth in the second quarter in light of that? Waleed Hassanein: Thank you, Allen. The specific things that we're seeing is what everybody is seeing, which is that the overall disease donor numbers have been below expectation and below last year. And we saw that throughout the first quarter and April continued. We hope that will reverse. We usually don't pay too much attention to inter-quarter variability, but we are paying attention this year because of the dynamic with the Modernization Act. And if you remember, we predicted that we will see some volatility in diseased donor numbers, which is the mechanism that OPOs kind of register their this pleasure with the transformation. And we've seen it reverse, and we have all the confidence that it will reverse. When it will reverse, we don't know, but we're not -- we don't expect this to be a chronic thing. And we expect actually when it reverses, it will bounce -- not just bounce back to baseline, but we expect some acceleration. That's what we've seen over the history over the last 20 years. When this happens, that dynamic kind of plays out as I outlined. K. Gong: Got it. And sorry if I missed this in the prepared remarks when bouncing around. I understand that the new strategy that you are approaching for your clinical trials. Do you have an expectation for when you think you can get those IDE approvals and then how quickly you can get those trials started afterwards? Waleed Hassanein: Yes. Thank you, Allen. As I stated in the prepared remarks that we plan to file the IDE supplement within the next couple of weeks, and we hope to be in approval stage and implementation stage by early Q3. Operator: Your next question comes from the line of Ryan Daniels of William Blair. Matthew Mardula: This is Matthew Mardula on for Ryan. And I might have missed this, so I apologize, but what is the guidance for operating margins this year? And is just the operating margin growth more weighted in the second half and investments more front loaded given what we've seen in Q1? Any more color into margins and its trajectory for the second half would be greatly appreciated. Gerardo Hernandez: Yes. What I mentioned in the last call is that we're expecting up to around 250 basis points below -- operating margin below last year, which now will be really adjusted operating margin below the number that we had in 2025. I would not like to go into more details in terms of phasing because we have an investment plan that it needs to materialize for it to result in what we are seeing. So I'd rather not go into those level of details now. Operator: Your next question comes from the line of Chris Pasquale of Nephron Research. Christopher Pasquale: Waleed, I also wanted to ask about the ENHANCE, DENOVO trials. And the CHOPS program seems like a great addition to the portfolio. But previously, you were comparing OCS to established hypothermic organ storage approaches in those studies. Now by including CHOPS in the trials, you effectively have 2 investigational arms being compared against each other. So I guess kind of a 2-part question is, one, does that complicate the interpretation of the results? Do you worry at all about not having a clean outcome here in terms of physicians being able to interpret what the data says. And then two, you're theoretically introducing a harder control arm here if you really believe that you're going to do a better job controlling the temperature of those organs. And so does that make you at all concerned about the margin of improvement you're going to be able to show in the studies? Waleed Hassanein: Chris, excellent question, and thank you for asking it. So let me address it in several sections. The first segment is there's no such thing as well-established cold storage other than ice. What we've seen over the years is there's these hypotheses and claims that are being thrown out there in the marketplace by a handful of newcomers to the space that haven't been really substantiated. In fact, even the variation in temperature we've seen at the last ISHLT that did not show any significant difference than 4 degrees to 8 degrees versus 10 degrees. -- none of these hypotheses have really materialized. So for us, we don't -- we're not concerned at all that we are lowering the standard. The opposite is true. We're actually elevating the game and saying, listen, if you, as a center, wants your organ to be stored between 4 and 8, we have a device that we can validate that it's between 4 and 8. If you want it at 10, we have a device that validates it at 10. So that's number one. Number two, we've discussed the second part, which is comparing to investigational arm. The CHOPS will not be investigational by the time we interpret the trial results. That's the plan that we discussed with FDA, and I would leave it at that. Three, do -- am I worried about raising the bar in the control arm? No. I think the OCS will prove its value because, again, these programs are designed to show several value points. And again, we know that even if we deliver superiority results, there will be a segment of the market that's still focused on cold static storage just because of cost, just because of limited volume or what have you. And in this case, TransMedics would gain market share in that segment that today, we don't have a product to sell to these needs. So net-net, we are extremely focused on getting these programs executed. We are -- we believe we found the best solution out. In fact, I would -- at risk of quoting the FDA, the FDA called it a creative and elegant solution. So we will go and execute the trials, and we are confident that our strategy is going to pan out on many fronts. We just can't wait to get these programs fully activated and we get out of this confusion that was created by the panic that was thrown into the mix by our competitors. Operator: Your next question comes from the line of Suraj Kalia of Oppenheimer. Suraj Kalia: Waleed, can you hear me all right? Waleed Hassanein: Can hear you perfect, Suraj. Suraj Kalia: So Waleed, I wanted to follow up on Chris' question just with a slightly different flavor. So one of the pushbacks we got after the CHOPS announcement was, hey, how do you know this -- the CHOPS is optimally designed, i.e., it isn't really designed as an inferior product. I'd love for you to push back on that notion. This is a new product. How do you know this is optimally designed as is? Hence, you can -- I think, so Chris was looking at one side of the spectrum in terms of good outcomes of the control arm. What I'm saying is at least what the pushback we got was, what -- if it is suboptimally designed and you get bad outcomes in the control arm, hence, you automatically look good. I'd love for you to push back on that notion of thought. Waleed Hassanein: Great. Suraj, thank you for asking this important question. The opposite is true, Suraj. The thing is, again, this question implies that the market is actually working with highly scientific, highly validated technologies. The opposite is true. There are transplant -- major transplant programs are going to Home Depot and buying either YETI coolers or RYOBI coolers and they're operating with them day in and day out. And guess what, none of these coolers have been validated or designed or even FDA approved for that intended purposes. We are elevating the game. We are a company that pride itself of developing and delivering Level 1 evidence to the highest clinical standards and to the FDA standards. That's number one. Number two, as I said in my prepared remarks, and I will reiterate it again here, CHOPS is designed to be a fully registered and regulated FDA medical technology, which means, by definition, Suraj, as you know, that we have to go through an exorbitant amount and exhaustive testing to validate that the design meets the intended purpose. None of the technologies I'm talking about have been -- have gone through that. So that's a hyperbole assumption. We -- the opposite is true. We are actually -- I am with -- Chris' spectrum is the one that's more realistic that we are elevating the game on the control arm. But even then, we are not concerned because we see significant value and also we provide solutions across the spectrum of values achieved -- that would be achieved in ENHANCE DENOVO. Operator: Your next question comes from the line of Matthew O'Brien of Piper Sandler. Samantha Munoz: This is Samantha on for Matt. Also wanted to talk about the clinical trials in CHOPS. I guess, first, kind of a 2-parter. Can you first just quantify and put into numbers for us how much of the market CHOPS is expected to address? And then I'm also trying to square the design of these trials. You mentioned the superiority. So these trials are essentially trying to say that OCS is a better technology versus now cold storage and CHOPS, but then also the decision to launch CHOPS, presumably this inferior technology. Waleed Hassanein: Sure. Sam, that's an excellent question. So let me address the latter piece first. Again, as I stated earlier, we all know you, everybody on this call and the listeners know and they've spoken to clinicians and surgeons in the field of organ transplantation. You ask 10 transplant surgeons, one question, you will get 12 different answers. So we know for a fact that, even when we prove superiority, there will be a handful of centers or a segment of the market that will still prefer cold storage technique in certain cases. Why not provide them that solution and go through the effort of providing a fully FDA-approved regulated device that gives them that flexibility. So that's number one. Number two, I'm sorry, Sam, can you repeat the first part of the question again? I lost my train of thought. Samantha Munoz: No, that's okay. Waleed Hassanein: Quantification. I'll give you one example. I'll give you one example. 2025 U.S. heart transplant total volume was 4,646 hearts, okay? You need to know that 46% of that total market which is 2,131 were DBD hearts preserved less than 4 hours. Our portion of that market is measured in single digits. So that is a market that is today all going to cold storage techniques. The Styrofoam cooler, the RYOBI cooler, the YETI coolers, why not provide an answer to that? Yes, we should gain a greater portion of that by demonstrating superiority or demonstrating better outcomes. But there will be a segment of that market still out there that the surgeon or the clinicians would need access to cold storage technique. Let's provide them the solution and provide them the clinical service of NOP and the logistics associated with it. Operator: Your next question comes from the line of Daniel Markowitz of Evercore. Daniel Markowitz: Thanks for taking my question. I wanted to talk about energy prices. It sounds like you're able to pass this along to customers via surcharges. Can you just talk through the dynamic a little bit? What's the exposure here? Are you able to pass it all along? And how does this flow through the P&L? And what's, I guess, contemplated in the guidance on that front, both on the revenue and on the COGS side? Waleed Hassanein: Daniel, thank you for asking this important question, which, as we understand, has been creating this black cloud overhang over TransMedics. People forgot who TransMedics is and which market segment we deal with. We're not United Airlines or Delta. We are an organ transplant company. So you need -- everybody needs to remember that we are operating in a highly competitive environment where there are other charter operators and companies that service the same market that we are servicing from a logistics standpoint. Historically, for the last 4 or 5 decades, transplantation have survived and grown when oil prices was high, when oil prices was low. How? Because the market has a mechanism to recover the cost of these -- when the prices go up. In fact, so because of that competitive dynamic, I cannot share with you on an open mic the detail of how TransMedics is doing it. All I can share with you is I can assure you and I assure all the listeners on this call that TransMedics is doing the absolutely right thing by our customers, and we are having the ability to control our logistics and our fleet and the network effect that was created here gives us maximum operating leverage on dealing with fuel prices. I'll give you one example. We are monitoring fuel prices by hub, and we have the maximum flexibility of moving hubs and floating our fleet to make sure that we are not incurring unnecessarily higher fuel charges, so we don't pass these unnecessarily high fuel charges to the transplant program. But again, the results speaks for themselves. If fuel charges are truly that unsurmountable challenge, we would not be able to print the results we printed here. And to put everybody's mind at ease, fuel charges is a small component of our operating flight hour cost. So it is covered and our network is the most cost-efficient way to deal with this problem until it's resolved. Operator: Your next question comes from the line of David Rescott of Baird. David Rescott: I want to follow up on some of the margin commentary, gross and operating. First on the gross margin side. I think historically, Q1 is typically or has been over the past 2 or 3 years, the high watermark for gross margin. So curious, one, if that is the way that we should be thinking about the cadence for the year, if there's any maybe transient impacts there? And then I appreciate some of the comments already on the operating margin side. But just trying to get a sense maybe for some of the puts and takes that you saw in Q1 versus what you're expecting to maybe normalize or work its way out as you get into the back half of the year. Maybe CHOPS is a piece of that. Just be curious on any more color on the gross and operating margin numbers in the quarter and then for the year. Right. Gerardo Hernandez: Right. Thank you, David, for the question. In terms of gross margin, we -- as I shared in the call, we're looking and we're expecting convinced that we can -- that the right margin for the business is the 60% -- around 60%. We are investing ahead of that. And because of that, we are seeing some pressure in the margin in the short term. I saw, let's say, significant positive impact -- operational impact in the quarter in Q1 that was mostly offset by some -- a good portion of that was transient expenses. So my view is that for the rest of the year, we should see a recovery towards our long-term goal. I'm not sure we're going to get all the way to the long-term goal this year or even next year. That's why it's long term. But I see -- and I believe that this is the quarter where it should be more the floor rather than the ceiling. Operator: Your next question comes from Young Li of Jefferies. Young Li: I think you mentioned the ENHANCE Part A trial is enrolling slightly ahead of schedule. I guess I'm wondering how does that sort of inform or change your expectations for Part B enrollment timing once that restarts in 3Q, is 12 to 18 months still the right time frame for ENHANCE Part B and DENOVO enrollment? Or can you enroll faster than that? Waleed Hassanein: Xuyang, thank you for the question. I'll answer the second part first. We still are holding the 12 to 18 months time frame. That hasn't changed. I think I caution to compare Part A to Part B. There are 2 different components. But it's -- remember, it's the same centers that will be enrolling in Part A or Part B. So again, it's all about value. If the center sees the value and sees the clinical outcomes in their hand, we expect the trial enrollment to pick up. For me, right now, I'm focusing on getting the IDE supplement approved, getting the TOPs into the control arm and removing all the confusion by competitors so we can get Part B enrolled. DENOVO is actively enrolling, and we enrolled a handful of patients already despite some of the confusion, thanks to the transplant program stepping up and moving forward. But I think it will accelerate even further once CHOPS is introduced as the control arm or an option for the control arm. Operator: Your next question comes from Mike Matson of Needham & Company. Michael Matson: So just on the CHOPS devices that are going to be used in the trials, will you be getting paid for those? And then just generally, can you talk about the kind of -- what kind of pricing we should expect on that, both in the trials and then when you're selling it just kind of the customers in the open market? Waleed Hassanein: Mike, I appreciate very much the question. Unfortunately, I cannot discuss the commercial structure of CHOPS yet, the priority is to get it through the IDE process. And all I can say is this is going to be a part of our NOP service offering, and I'll leave it at that. Operator: Your next question comes from Tom Stephan of Stifel. Thomas Stephan: Apologies if this has been asked, jumping between calls. But Gerardo, maybe for you, for the 20% to 25% guidance on revenue in the core business for '26, when I look at growth over the last, call it, year or so, 40% plus growth in 1H, 30% plus in 2H and then 1Q was a bit over 20%. So like with that trend in mind, what gives you confidence that the growth rate rest of year will remain stable in the core business or even accelerate a bit moving forward in order to kind of hit that full year 20% to 25%. Gerardo Hernandez: Thank you for the question. Well, basically, when we look at the phasing and the history of the transplant volume in the U.S., we can see how the remaining of the year, it continues to strengthen. So we're not expecting any change to the global volume, except for the one that Waleed mentioned before in terms of any potential disruption due to the Modernization Act. Now we believe that we can -- that we will deliver within the 20% to 25% growth with that. And I think that's really what makes us confident. We're seeing the results. We're seeing the adoption and that together with the last year's performance, it really shows how the market trend is going. So there is nothing really that would prevent us to get to that range, at least as I see it today. Waleed Hassanein: And Tom, let me add also, again, we don't comment on penetration and market share midyear or throughout the year. As you know, we comment on it at year-end because of the choppiness of it. But we're watching our market share in Q1 despite the overall transplant numbers and donor numbers being a little bit on the low end and below last year, we're maintaining and growing our market share, which tells me that we're taking some market share in Q1. That's what gives us the confidence that just organically, without even talking about ENHANCE and DENOVO that we should be able to meet that target range that we set for ourselves. Operator: There are no further questions at this time. I will now turn the call over to Waleed Hassanein, President and Chief Executive Officer, for closing remarks. Waleed Hassanein: Thank you all very much for spending your afternoon with us. We're looking forward to one-on-one calls. I appreciate it. Have a great evening, everyone. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2026 Earnings Call. [Operator Instructions] Mr. Eliason, you may begin your conference. Nic Eliason: Thank you, and welcome to our first quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our first quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez. Javier Rodriguez: Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. DaVita's foundation is clinical excellence, driven by operating rigor that produces durable results. We have consistently delivered exceptional clinical outcomes and strong financial performance, and this quarter is no exception. To ensure we sustain and build upon this foundation, we're actively investing in our future capabilities. In a rapidly evolving landscape, we're taking a pragmatic approach to expanding our IT systems and digital infrastructure. These targeted technology investments are designed to empower our clinical teams and serve as a backbone for our next chapter of clinical and operational excellence. Today, I'll walk through our first quarter performance, share how technology is enhancing our operations, provide an update on ACA Plans and finish with our outlook for the remainder of the year. But first, I'll start as we always do with a clinical highlight. This quarter, we're highlighting the continued momentum of Integrated Kidney Care, or IKC, our value-based care business. In the latest results from CMS' Comprehensive Kidney Care Contracting program, or CKCC, we delivered year-over-year improvements across all 3 key measurements, which are gross savings rates, total quality score and high-performing status. Clinically, this means our IKC care model, together with our physician partners is improving the health and well-being of our patients. Economically, we generated the highest total aggregate savings of any participant driven by our 4.5% improvement in gross saving rate since the beginning of the program. This is a clear example of how IKC clinical rigor paired with data-driven insights is delivering better outcomes for our patients and a more sustainable model for the future of Kidney Care. Turning to the first quarter. We delivered strong financial results ahead of our expectations with outperformance from each element of our U.S. dialysis trilogy; treatment volume, revenue per treatment and cost per treatment. This balanced outperformance reflects the strength of our team and our focus on consistent execution. I'll touch on a couple of key metrics that contributed to the quarter and will help shape the remainder of the year. Starting with volume. In the first quarter, our treatment volume was slightly ahead of forecast. Quarter-end census was ahead of plan as a result of better-than-forecasted mortality, partially offset by lower-than-forecasted admits. Census also benefited from patient transfers in related to ongoing clinic closures by Fresenius. Although negligible in the first quarter volume, we anticipate that these transfers will contribute to positive treatment growth over the remainder of the year. As a result, we're raising our volume growth expectations for the full year from flat to a range of 25 to 50 basis point increase. Approximately half of the increase is from better underlying performance and half is related to transfer in from Fresenius. Switching to labor. Q1 was ahead of plan, primarily from better productivity, which we expect to sustain over the balance of the year. Let me turn to our technology strategy and the investments we're making to strengthen our operations and ultimately, our clinical outcomes. We're taking a disciplined approach to AI that we've been building towards for years, and we're seeing that groundwork translate into real impact. Our strategy has 2 parts. First, we've modernized our data infrastructure. This means standardizing and integrating high-quality data across the enterprise through systems like our proprietary EMR platform. That work gives us a differentiated foundation to power AI applications at scale. Second, we're actively deploying AI solutions across clinical, operational and business use cases with a focus on supporting our caregivers, improving how we operate and drive measurable impact. One example is [ ScheduleHub ], a new tool that dynamically processes changes in each center's patient census, capacity and teammate availability to recommend optimal patient and staffing schedules in real time. Given the complexity of the center scheduling, we expect this will reduce administrative burden for our facility administrators and enhance teammate experience while supporting patient care. This is one of many examples where our sustained IT investments translate into tangible scale benefits across the enterprise. We're still early in our AI journey, but given the strength of our data foundation, and the pace of our deployment, we are well positioned to outperform both clinically and operationally as technology evolves. Next, on ACA Plan enrollment. Based on what we know today, ACA open enrollment is trending towards a slightly favorable outcome relative to our prior expectations of an approximately $40 million headwind in 2026. This favorability will be partially offset by more patients selecting lower-level bronze plans, which translates to higher out-of-pocket costs and a modest RPT headwind. We will gain greater clarity on the enrollment outcome and mix impact as we get deeper into the year. I will conclude my remarks with our financial outlook for the remainder of the year. With our first quarter results, we're off to a strong start for the year. As a result, we're raising and narrowing our guidance for adjusted operating income to a range of $2.15 billion to $2.25 billion. Similarly, we're raising our adjusted EPS guidance to a range of $14.10 to $15.20 per share. The increased guidance is primarily the result of our higher volume forecast for the year and lower patient care costs. I will now turn the call over to Joel to discuss our financial performance in more detail. Joel Ackerman: Thank you, Javier. Today, I'll provide details on our first quarter results, then give you some more context on the update to 2026 guidance that Javier shared. First quarter adjusted operating income was $482 million, adjusted earnings per share from continuing operations was $2.87 and free cash flow was $140 million. Adjusted operating income came in about $50 million ahead of our forecast. Approximately half was the result of performance ahead of plan and the other half, the result of timing. Starting with detail on the U.S. dialysis segment. Treatments declined about 20 basis points versus the first quarter of 2025 and treatments per normalized day increased 40 basis points versus Q1 of 2025, approximately 20 basis points ahead of our expectations. As Javier mentioned, we are increasing our full year volume forecast to 25 to 50 basis points. As a reminder, this represents our forecast for treatment growth. This translates to 50 to 75 basis points of growth in treatments per normalized day because of the year-over-year treatment per normalized day headwind in 2026 compared to 2025. Revenue per treatment declined approximately $5 sequentially, primarily as a result of the typical first quarter headwind from patient-pay responsibility. Year-over-year RPT growth was approximately 4% in the quarter. We still expect full year RPT growth in the range of 1% to 2%. Patient care cost per treatment were about flat to the fourth quarter. This was primarily the result of a seasonal decline from high health benefit costs in the fourth quarter, offset by typical increases in wages and other cost growth. Patient care costs were lower than expected, largely as a result of better-than-expected productivity improvements. U.S. dialysis G&A costs declined $16 million from the seasonally high fourth quarter, although growth versus the first quarter of 2025 was about $37 million or 13%. This growth is the result of continued investment in technology. Turning to our other segments. In the first quarter, international adjusted operating income was $30 million, and IKC had an adjusted operating loss of $19 million, both in line with our expectations. Regarding capital allocation, we repurchased 3 million shares during the first quarter, and we repurchased an additional 2 million shares since the end of the quarter, which includes the shares bought from Berkshire Hathaway pursuant to our repurchase agreement. At the end of the first quarter, our leverage ratio was 3.34x consolidated EBITDA, well within our target leverage range of 3 to 3.5x. Below the operating income line, other income was $4 million, a sequential increase, primarily as the result of no longer recognizing losses from our investment in Mozarc. Debt expense in the first quarter was $145 million. As an update to our guidance, we now expect quarterly debt expense for the remainder of the year to be similar to Q1 due to higher share repurchases and higher interest rate expectations resulting in full year debt expense about flat to last year. For 2026 guidance, as Javier described, we are raising our adjusted operating income guidance range by $40 million at the midpoint. The largest driver of the increase is our expectations for higher treatment volume. The second factor is an expectation for continued labor efficiencies within patient care costs. Regarding the phasing of our guidance through the balance of the year, we currently expect adjusted operating income to be about evenly split across each of the 3 remaining quarters, which assumes Q4 weighted IKC operating income. Our expectations are that the seasonal pattern we saw in 2025 are not typical, and we expect to see phasing more in line with 2024. Moving to EPS. We are also increasing our adjusted EPS guidance consistent with our updated guidance range for adjusted operating income. That concludes my prepared remarks for today. Operator, please open the call for Q&A. Operator: [Operator Instructions] Our first caller is Kevin Fischbeck with Bank of America. Kevin Fischbeck: I wanted to dig in a little bit to the volume commentary. I guess, is there any way that you can kind of break out whether weather had an impact, how much that was? And then the improved mortality? Is there a way to kind of break that into what was maybe just a light flu season year-over-year versus underlying trends you're trying to think about how durable the better mortality for the rest of this year? Joel Ackerman: Yes. Thanks for the question, Kevin. On weather, weather came in exactly as we expected. As you would imagine, we build weather into our forecast. It can range from year-to-year. It was, as I said, in line with forecast. I'd call it, about 10 bps better than last year. In terms of flu overall, again, came in line with our forecast. What we had said at the beginning of the year was we were building in a flu season that looked like 2 years ago. And while the pattern was a little different quarter-over-quarter, the impact for us was about what we expected. As we think about flu, we focus on cumulative hospitalizations, which you can find on the CDC website as the main driver of volume impact for us, and this year is in line with what we saw 2 years ago. In terms of splitting out the mortality coming in a little better than expected, it was probably not about the flu because flu came in as expected. It was more around the underlying mortality. Kevin Fischbeck: Okay. Great. And then can you just give a little more color on the rate update? Why was the rate so strong in Q1 relative to your guidance for the year? Joel Ackerman: Yes. So rate -- RPT was up a little more than 4%, so call it $17.50. I would say 2/3 of that was normal stuff in terms of rate increases and mix shifts, about, call it, $6, I would attribute to timing. Part of that was negative timing in Q1 of '25 and part of it was positive timing this year. We see timing -- we call it out frequently around RPT. And for the year, we're sticking with our 1% to 2% guide. Kevin Fischbeck: Okay. So nothing unusual there around like drugs or binders or anything like that kind of skewed the number? Joel Ackerman: No, nothing unusual. Kevin Fischbeck: Okay. And then maybe just the last question. Can you talk a little bit more about the ACA impact and how you're thinking about it? It sounds like you're saying it was coming in better, but it sounds like the guidance hasn't changed yet for the year to get that right. And then how are you thinking about the timing? Is it that Q1 came in better? Now you're assuming it's going to ramp? Or did you always assume Q1 was going to be a little bit lighter relative to the year, thoughts there? Javier Rodriguez: Yes, Kevin, it's a great question. And the reality is that it is very early. So just to repeat, Q1 was pretty flattish to Q4. So it has performed better than we expected. That said, the reality is that we haven't seen the effectuation rate and the affordability play out, and so it's too early. We have to see payments and we have to see enrollment over time. And that's why we're thinking it's a little premature to change our numbers. But the reality is that we will need -- the real data point that we want to see is the mix of our future incidents. And that is, of course, too early to tell. So we're holding to that $40 million number. Although right now, we would be trending -- $40 million number, we're trending a little better than that. Operator: Our next caller is Andrew Mok with Barclays. Andrew Mok: Hoping you could provide more color on what you're doing to position yourself to capture market share and the visibility you have into those share gains at this point to raise guidance, specifically to the clinic closures? Javier Rodriguez: Look, at the end of the day, we, of course, are in a very competitive market. The centers that are being closed, you can assume are small centers, and you can also assume that Fresenius and anyone that closes a center would work hard to try to keep those patients in their own network and with their same physicians, et cetera. And so we are, of course, making sure that the market is aware of our share availability and our physician access and all the things that one would do. And then, of course, the patients and the physicians will make their choice. Andrew Mok: Great. And then I just wanted to follow up on the mortality comment. I appreciate that flu wasn't necessarily the driver. But any color on the underlying mortality performance would be helpful considering that's an important metric for building consensus on volumes for the balance of the year? Joel Ackerman: Yes. It is an important metric. You're absolutely right about that, Andrew. I would say the changes are rather small, and we're not ready to call out any significant underlying trend. That said, we did up the volume guidance, and it's captured in there. Andrew Mok: I guess how are you able to isolate that it was mortality versus some of the other dynamics in the market with flu and clinic closures? Joel Ackerman: Clinic closures are a separate issue because they are about admissions, and we've got a lot of visibility on patients coming in and patients leaving. In terms of mortality, as we've said before, it can be a hard variable to know in real time, but we feel pretty good about what we saw from Q1 now that we're sitting here in May. Javier Rodriguez: Andrew, I think let me try and be helpful with this because you're asking the right question. And there are several inputs that go into treatment. As you can imagine, you've got seasonality, you've got mortality, you've got admissions, you've got missed treatments, you've got transfers, but they're all pretty small. And so what we're trying to do is instead of going into a world of small numbers, give you a range that handicaps all of those variables. Operator: Our next caller is Pito Chickering with Deutsche Bank. Pito Chickering: Just a follow-up on the treatment commentary. Can you just talk about the new starts to dialysis in first quarter? And as you think about Fresenius scaling in from their closures, is this an immediate ramp in sort of 1Q, 2Q and then normalize in the back half of the year? Just want to make sure that as you're increasing your treatment growth guidance here that we're also modeling where you guys go from 2Q and then where you guys finished the year in fourth quarter? Joel Ackerman: Yes. So on the admit side, I don't think we've got a lot of color to go in. We're talking about basis points of change and then to go to the next level and bifurcate that among all the inputs that Javier mentioned, I think, gets us to a point of false precision. In terms of timing on the new starts, we saw what I would guess is about half the new starts from Fresenius that we would see by the end of the first quarter, we would guess the other half will come in Q2. So if you're thinking about how to model them, I would say we'll get probably 2/3 of a year worth of those new starts. Pito Chickering: So does -- when we pull together with the new starts, in the mortality and the Fresenius, kind of where should we be ending the fourth quarter from a treatment -- organic treatment growth perspective? Joel Ackerman: Yes. I think the way we're thinking about it is treatments per normalized day, which we think takes out the quarter-to-quarter and year-to-year noise associated with the different number of days in a quarter and the different mix of Monday, Wednesday, Friday, Tuesday, Thursday, Saturday. So what we would expect is the normalized treatment per day count to grow over the course of the year. It's sitting today at about 40 bps positive, and we would expect that to grow over the course of the year. Just to make sure everyone's following how we're thinking about this, our new guide for treatment volume is plus 25 to 50 bps. Because there's a 25-day headwind in the year on normalized treatment days, our guide for the year would be plus 50 bps to 75 bps of normalized treatments per day. So that's 40 bps now getting to that average of 50 bps to 75 bps for the year ending somewhere higher than that. Pito Chickering: Okay. Great. And then a follow-up here on the revenue per treatment. If you pull out the $6 you're talking about from a timing perspective, gets us to $4.11 to $4.12, typically, 2Q ramps, $4 or $5 as you burn through the deductibles and then we see continued ramp in the third quarter and then obviously, fourth quarter, we get the update with the new Medicare rates. I guess, I'm trying to figure out how we're still getting to 1% to 2% revenue per treatment guidance growth, even pulling out at $6 in the fourth quarter -- from the first quarter because of normal seasonality you guys see in the interim treatment? Joel Ackerman: Yes. So I think there are 2 dynamics. One is normal variability. So the quarter was a little higher, and you take that out. The second dynamic is around mix and the enhanced premium tax credits. What we would expect is commercial mix to decline over the course of the year, and that will put pressure on RPT, which would help you bridge from a higher number in Q1 to the 1% to 2% for the year. Pito Chickering: Okay. But at this point, through April, you haven't seen that negative hits that you're guiding to, you're just sort of just assuming it comes until later on in the year? Joel Ackerman: That's correct. Pito Chickering: Great. And then last question. Your G&A per treatment, you talked about was up 13% due to tech investments. Where does it end the year? And kind of -- should we think about this declining linear throughout the year as those investments were made or just any color around how we should be modeling G&A treatments for -- G&A cost per treatment throughout the year as the tech investments begin to decline? Javier Rodriguez: Yes. I appreciate the question on G&A. And I want to reassure you that we are looking at this incredibly diligently. And if one looks at G&A independently, that line is growing at a faster rate than revenue. And so I think it's worthwhile to let you know our philosophy on it, which is we look at G&A as a piece of the total cost. In other words, we're not trying to optimize G&A, but rather not worry about the geography of the expense as long as the sum of the parts add up to a good number. So if you look at the last 5 years CAGR on our total cost, which includes patient care costs, depreciation and amortization and G&A, that CAGR is 2.6%. And so we spend a lot of time trying to make sure that we optimize the cost, and we worry less about the geography on the P&L. So I think that our guide will stand on our cost, which is that 1.25% to 2.25% we gave at the beginning of the year. Pito Chickering: Great quarter, guys. Appreciate it. Operator: [Operator Instructions] Our next caller is Justin Lake with Wolfe Research. Dillon Nissan: This is Dillon on for Justin. Just a couple of quick questions. What did commercial mix do in the quarter? And then also curious on the Medicare Advantage side, can you speak a little bit about what the growth in share was as well? Joel Ackerman: Yes. Thanks, Dillon, for the question. The answer is pretty much the same on both. They were pretty flat relative to last quarter. Operator: Next question is from A.J. Rice from UBS. Albert Rice: Maybe just to ask on a couple of items that are mentioned in the press release, whether there's anything significant to call out. You talk about a decrease year-to-year in health benefit expense, pharmaceutical cost, and then on the G&A line, professional fees, was the -- was that sort of as expected? Or was there anything unusually positive that happened there? Just asking. Joel Ackerman: Yes, A.J., it was as expected. We'll often see the decline sequentially from Q4 to Q1, especially in health benefits. So nothing unusual there. Albert Rice: Okay. And then I appreciate the comments about the technology investments and some of the use cases you're looking at. Is there any way realizing even if you get savings, you may choose to reinvest it in other ways. But is there any way to sort of size some of the opportunities you see? And are those being reflected now in operating results? Or what is your thought about how long it may take for the sum of this to impact operating performance? Javier Rodriguez: Yes. I appreciate the question. I think the way we look at it is the long-term view that we, again, are trying to ensure that we are putting our clinicians in the best position and that we're making the trade-off on efficiency for the long term to make sure that we sustain 3% to 7% OI growth over time. And so as you know, right now, technology is moving at a very quick pace. And some of these will be a lot of user experience, i.e., we're just enhancing the experience. And some of these will be helpful toward the bottom line. And it's a little early, and I don't think we want to get into the timing of it, but rather the sustainability and the outperformance of it. Operator: Our next caller is Ryan Langston with TD Cowen. Ryan Langston: Nice to see the operating income guide up, EPS guide up as well. I noticed the free cash flow guide did not change. I think this was a similar dynamic last year. Just wanted to confirm that's normal course and nothing specific to read into? Joel Ackerman: Yes. Ryan, you're thinking about it the right way. There's just more variability in a wider range with free cash flow, so we didn't move the number despite the increase in OI. Ryan Langston: Okay. And then this administration is really focused on fraud, waste and abuse. It seems to me dialysis might be a little better insulated versus other types of providers. Just any general thoughts on this administration's focus on that FWA and what this could mean potentially for DaVita or maybe not mean for DaVita or even just more broadly for dialysis in general? Javier Rodriguez: Yes. Thanks for the question. It's tough for us to comment on the broader environment. But what I can say is we take compliance incredibly seriously. And number two, what we do have a little help in is that dialysis is not a controversial diagnosis. So there's not like, "Oh, should I go get this treatment or not" controversy, so that makes it easier. And then the fact that it is a bundle in a single DRG, in essence, simplifies some of the compliance issues. But again, we are internally focused on making sure we do right by the government. Operator: At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments. Javier Rodriguez: Okay. Thank you, Michelle, and thank you all for joining the call today. I would wrap up with 3 takeaways. First, our most recent clinical initiatives are beginning to gain traction, and we're seeing early signs of the benefits for our patients. Second, our business is performing well as we continue to achieve our clinical goals. This drives our strong financial results. And finally, we maintain a long-term view on our business, and we'll continue to invest in our future. Thank you all for joining this quarter. Be well, and we look forward to seeing you next time. Happy Cinco de Mayo, everyone. Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Operator: Morning. My name is Jason, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade Company's First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Chris Forrey, Senior Vice President of Finance and Investor Relations. Mr. Forrey, you may begin your conference. Chris Forrey: Thank you, Jason, and good morning, everyone. I would like to welcome you to Boise Cascade Company's First Quarter 2026 Earnings Call and Business Update. Joining me on today's call are Jeff Strom, our CEO; Kelly E. Hibbs, our CFO; Joanna Barney, leader of our Building Materials Distribution operations; and Troy Little, leader of our Wood Products operations. Turning to Slide two. This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC regarding the risks associated with these forward-looking statements. Also, please note that the appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA, and segment income or loss to segment EBITDA. I will now turn the call over to Jeff. Jeff Strom: Thanks, Chris. Good morning, everyone, and thank you for joining us for the earnings call. I am on Slide three. As I step into the role of CEO, I want to express my deep confidence in our company, our talented people, and our established direction. We have a strong foundation and a proven strategy that has positioned us well in the marketplace, and I am committed to building on that momentum. My thanks to our outstanding team whose dedication, expertise, and commitment to our customer and supplier partners are what drive our continued success. I am excited to lead us forward, focused on delivering sustained value for all of our stakeholders. Let me turn to our first quarter results. Total U.S. housing starts increased 1% compared to the prior-year quarter. However, single-family housing starts were off 5% for the same comparative period. Our consolidated first quarter sales of $1.5 billion were down 2% from 2025. Our net income was $17.8 million, or $0.50 per share, compared to net income of $40.3 million, or $1.06 per share, in the year-ago quarter. Our businesses delivered solid results for the quarter despite continued demand uncertainty resulting from geopolitical events, volatile mortgage rates, and severe weather. The challenges of consumer sentiment and home affordability remain the most significant headwinds for residential construction activity. In this environment, we are continuing to leverage our integrated model, which consistently demonstrates its value and resilience, particularly in challenging market conditions like these. As a follow-up to our previously disclosed legal matter that was resolved last week, this was a legacy issue involving certain hardwood plywood purchases made at a single distribution facility in Pompano, Florida between 2017 and 2021. We bought the wood from a former U.S.-based supplier that improperly imported the products. We were not involved in creating or operating the supplier scheme, but we did not follow some of our own internal processes that would have prevented us from making these purchases. We have taken responsibility for that and have strengthened our processes to prevent this from happening again. Kelly will now walk through our segment financial results, capital allocation priorities, and second quarter guidance, after which I will provide insights on our business outlook and make closing comments before we open the call for questions. Kelly E. Hibbs: Thank you, Jeff, and good morning, everyone. BMD sales in the quarter were $1.4 billion, down from the first quarter of 2025. BMD reported segment EBITDA of $48.2 million in the first quarter, compared to segment EBITDA of $62.8 million in the prior year. Selling and distribution expenses were up $8.2 million from the first quarter of 2025. In addition, gross margin dollars decreased $6.5 million compared to the prior-year quarter, reflecting lower gross margins on all product lines, particularly EWP. In Wood Products, our sales in the first quarter, including sales to our distribution segment, were $398.2 million, down 4% compared to the first quarter of 2025. Wood Products segment EBITDA was $32 million compared to EBITDA of $40.2 million reported in the year-ago quarter. The decrease in segment EBITDA was due primarily to lower EWP sales prices as well as higher per-unit EWP conversion costs. These decreases were offset partially by lower per-unit OSB costs, as well as higher plywood sales volumes and price. Moving to Slides five and six, BMD's year-over-year first quarter sales decline of 1% was driven by net sales price decreases of 3% offset partially by net sales volume increases of 2%. By product line, general line product sales increased 4%, commodity sales decreased 5%, and sales of EWP decreased 7%. Sequentially, BMD sales were up 2% from the fourth quarter of 2025. Weather had a significant impact on first quarter sales activity at our Southeast and Northeast distribution centers, as the affected locations were closed for a combined 35 days in January and February. The impacts were evident in BMD's daily sales pace during the quarter, with daily sales of approximately $21 million in both January and February before rebounding nicely in March to $24 million. Our first quarter gross margin was 14.4%, down 30 basis points year over year. The decline was driven by EWP competitive pricing pressures, as well as lower margins on general line. BMD's EBITDA margin was 3.5% for the quarter, down from both the 4.5% reported in the year-ago quarter and the 4.1% reported in the fourth quarter. Lower gross margins, coupled with the effects on our operating expense leverage from branch closures in the first quarter, negatively impacted our EBITDA margin result. Turning to Slide seven, on a year-over-year basis, first quarter I-joist and LVL volumes were down 51%, respectively. Sequential I-joist and LVL volumes were up 168%, respectively, driven by seasonal demand improvements and channel restocking ahead of the spring building season. As it relates to pricing, first quarter EWP sales prices declined about 7% year over year and remained flat sequentially. Turning to Slide eight, our first quarter plywood sales volume was 373 million feet compared to 363 million feet in the first quarter of 2025. The year-over-year increase in plywood volumes was due primarily to the restart of operations at our Oakdale mill in the fourth quarter of 2025. Sequentially, our plywood sales volumes were up 5% from the fourth quarter of 2025 as anticipated due to seasonal demand improvement. The average plywood net sales price was $343 per thousand in the first quarter, representing a 1% increase year over year and 4% sequentially. We attribute the recent improvement in plywood pricing primarily to weather-related supply constraints in the South combined with reduced imports. Notably, Brazilian imports declined by more than 60% year over year in 2026. However, following the late February Supreme Court decision that validated the use of IEPA to impose tariffs, higher import volumes are anticipated, which are expected to influence market dynamics in the coming months. I am now on Slide nine. We had capital expenditures of $40 million in the first quarter, $23 million of spending in BMD and $17 million of spending in Wood Products. The capital spending range for 2026 remains at $150 million to $170 million. Roughly a third of BMD's 2026 spending relates to growth projects across our system, with the balance of our spending in both segments attributable to business improvement and efficiency projects, replacement projects, and ongoing environmental compliance. Speaking to shareholder returns, we paid $10 million in dividends during the quarter. Our Board of Directors also recently approved a $0.22 per share quarterly dividend on our common stock that will be paid in mid-June. Through the first four months of 2026, we repurchased approximately $91 million of our common stock, including approximately $66 million in the first quarter. Since the beginning of 2024, we have repurchased approximately 12% of our outstanding shares. As of today, approximately $148 million of our outstanding common stock is available for repurchase under our existing share repurchase program. As expected, we utilized cash in the first quarter, primarily driven by seasonal working capital needs along with our planned capital investments and shareholder returns. However, the ongoing strength of our balance sheet remains in place, which positions us well to continue the pursuit of our strategic objectives. I am now on Slide 10, where we have outlined a range of potential EBITDA outcomes for the second quarter, along with the key assumptions underlying these projections. As we look ahead, end market demand remains uncertain, and certain cost inputs are volatile. For BMD, we currently estimate second quarter EBITDA to be between $65 million and $80 million. BMD's current daily sales pace is approximately 15% above the first quarter sales pace of $22 million per day. Gross margins are expected to be between 14.25% and 15%. Importantly, as our guide suggests, if our current sales pace is sustained, we expect BMD to show a healthy sequential improvement in EBITDA margin. For Wood Products, we estimate second quarter EBITDA to be between $32 million and $47 million. Our EWP order files are showing seasonal strength, and we expect sales volumes to increase mid-single digits sequentially. EWP pricing is expected to range from flat to low single-digit declines sequentially. In plywood, we expect sequential volume increases in the mid-single digits. On plywood pricing, quarter-to-date realizations were 8% above our first quarter average, with the balance of the quarter market dependent. We expect our per-unit manufacturing costs will be comparable to the first quarter, as higher volumes and early results from focused site improvement plans across our manufacturing system are expected to offset recent energy-related cost increases. I will turn it over to Jeff to share our business outlook and closing remarks. Jeff Strom: Thank you, Kelly. I am on Slide 11. Given the current environment, visibility into end market demand for 2026 is limited. For much of the first quarter, mortgage rates declined to the lowest level in over three years. However, recent geopolitical turmoil has led to volatility in Treasury and mortgage rates alike, introducing greater uncertainty on the remainder of the spring selling season. Homebuilders are responding to the cautious demand environment with thoughtful approaches to starts, home sizes, location, and inventory. As a result, maintaining our focus and staying agile remains central to Boise Cascade Company's strategy for delivering outstanding service across a broad selection of in-stock, industry-leading building materials in any operating environment. The alignment of our two business segments is evident every day and is a driving force in our world-class operations. Enhanced channel visibility supports the alignment of our production rates and inventory strategies with end market demand. Cross-divisional coordination and our strong financial position provide the security and flexibility for our teams to execute our strategy and deliver long-term value creation. We are committed to continuously seeking new opportunities to leverage our integrated model by driving greater efficiency, responsiveness, and innovation across our organization. As we consider the future of homebuilding, we remain confident in the structural drivers of U.S. housing demand, which include the persistent undersupply of housing driven by generational tailwinds, near-record levels of homeowner equity, a decade of underbuilding, and an aging U.S. housing stock with the average home being more than 40 years old. The strong fundamentals for both new residential construction, repair, and remodeling reinforce the industry's favorable outlook. Boise Cascade Company's investments throughout the business cycle give us confidence that we can outpace industry growth as these market tailwinds materialize. Thank you for joining us today and for your continued support and interest. We welcome any questions at this time. Jason, please open the phone lines. Operator: Thank you. We will now begin the question and answer session. Our first question comes from Michael Roxland from Truist Securities. Please go ahead. Michael Roxland: Yes. Thank you, Jeff, Kelly, and Chris for taking my questions. First question I had, Kelly, just in response to one of your comments regarding Brazilian import and lower tariffs. You mentioned expecting to see them in coming months. Have you started to see any increased plywood or wood flows from Brazil at this juncture? And it also seems like my second question, just EWP prices in the first quarter sort of stabilized quarter over quarter. One of your peers was showing mid-single-digit decline in pricing. Can you provide any more color around what is driving the price stability in your business maybe versus some of your peers? Kelly E. Hibbs: Yes. So my understanding, Mike, is that the true answer is yes. We are expecting to see more and more of that show up at the ports, maybe a little bit delayed because there was a phenol disruption at a manufacturing site in Brazil. But we know the wood is coming and we are seeing quotes show up in the coming months. Jeff, do you have some more color on that? Jeff Strom: I would add that there has been some that has showed up, but not significant enough that would cause any major impact. Troy Little: Yes. I mean, we were able to hold prices relatively flat since the third quarter of last year, but that is definitely not a function of less pressure in the market. It has come back. There has been more chatter. There is regional pricing pressure from our competitors still. We have the conversations with homebuilders and still a strong concern for home affordability. So right now, it is just a matter of being very strategic. It is regional conversations, making sure that we are competitive, but we are not leading with price, leading into our model and our service proposition. Fortunately, so far, we have been able to hold prices, and right now, quite honestly, our order file is strong, which allows us to be selective in how we address our pricing. Operator: The next question comes from Ketan Mamtora from BMO Capital Markets. Please go ahead. Ketan Mamtora: Good morning, and thanks for taking my question. Perhaps to start with, can you talk about freight and transportation inflation that you are seeing across both Wood Products and Distribution? If you can quantify that headwind and how you all are mitigating that? And then, when I think about the second quarter EBITDA guidance, appreciate that it is a dynamic environment. As I think about your top end versus the bottom end of the guidance range, can you at a high level talk about what that contemplates? Should I think about your current daily pace getting you to the midpoint of the guidance range in Distribution? Is that the way to think about it? Troy Little: Ketan, this is Troy. In terms of diesel prices, we are seeing that in various aspects of our business. The biggest one for us is probably in our resin costs. That is the input cost that is affected related to the increase in prices. We did have a price increase probably in the 10% range around our resin. Then we have some direct cost, if you think about fuel for rolling stock and things like that, which is not a huge spend for us, but that will be an impact. Moving veneer around the system, we see that in our wood costs. Then there is the indirect, every piece and part that comes into our system has some type of inflationary pressure around freight. We are working on our cost control on the opposite side of that to help mitigate some of that. It is hard to quantify all that, but I think we are still comfortable that we should have comparable manufacturing costs, as Kelly mentioned. Joanna Barney: And then I will jump in on the Distribution business. Diesel rose significantly during the quarter. We were paying almost double at the end of the quarter what we were paying at the beginning of it. Most of it we are able to pass on through our daily transactions with our customer base. There are some fuel surcharges, and our people have done a tremendous job of passing those along, but there has been some short-term impact to our margin on program business where freight was included as part of the original program. At times, there are delays in what we are able to go out and recoup as far as those costs. I would also add that there has been a lack of trucks and drivers due to tight immigration policies. That has impacted freight rates and the availability of trucks as well. Jeff Strom: The thing I would add on the BMD side is that every load that goes out of our warehouse every single day, we make sure that we optimize. We are sending out a full truck to spread that freight as efficiently as possible, and we have been working really hard on doing that. Kelly E. Hibbs: So, Ketan, let me take a shot at the guidance piece. I will start with BMD first and then give you a little color on Wood Products also. You kind of hit it in your question, which is we still have two months to go in the quarter. End market demand is pretty uncertain, and how much of the demand we have seen so far is replenishing the channel versus end market demand is a little hard to tell. There are unknowns and volatility around the cost inputs. That is why we draw a pretty wide range around our EBITDA forecast for both businesses. Specific to BMD, if you assume that the sales pace we spoke to so far this quarter is sustained, and our margins are at the midpoint of the range that we put out, that would get us into the midpoint of the range, into the low $70 millions. That would get us back to a really good spot in terms of a healthy improvement in EBITDA margin, into the mid-4% range. In Wood Products, it is a similar theme in terms of the challenges with forecasting. Troy spoke to good order files in EWP and pretty good order files in plywood, but we know, particularly in plywood, how quickly things can flip. Again, that is why we purposely put a pretty wide range around those results. Operator: The next question comes from Susan Marie Maklari from Goldman Sachs. Please go ahead. Susan Marie Maklari: Good morning, everyone. Thanks for taking the questions. My first question is around thinking of the environment that we are in and the increase in macro uncertainty that we saw at the end of the first quarter. Has that had any impact on the mix you are seeing between sales coming out of the warehouse versus direct? What is the overall read of your customers, and how is that influencing the guide and how we should think about the flow through to results? And within general line, can you talk about what you are seeing from your suppliers in terms of competitive dynamics and pricing over the next couple of quarters? Jeff Strom: I will take a stab at the first part. What we did see in the first quarter, when commodities started to move and prices were down to begin with, was people stepping in and buying more directs than we have seen in the past few quarters. There was absolutely a shift to that. But as we move forward, with the uncertainty that is out there, that most often creates more reliance on distribution, and we are absolutely seeing that. Our warehouse business continues to be very strong and continues to be what people want to use. Joanna Barney: On suppliers and pricing, we saw late in the first quarter somewhere in the neighborhood of 25 to 30 price increases. Some of those were surcharge-driven, based on gas and freight, but most of them were product price increases. We are seeing broader product offerings and suppliers starting to understand that there has been some strength in the market that they are pushing into, and they are starting to move their prices accordingly. Operator: The next question comes from Kurt Yinger from D.A. Davidson. Please go ahead. Kurt Yinger: Great. Thanks, and good morning, everyone. I just wanted to go back to BMD. Looking at the volume performance there, even if we strip out an assumption on hold-in, it looks pretty flat, which I would say is good in this market. Can you talk about whether it is product category or customer initiatives that seem to be bearing fruit there? And then on the gross margin line, as we move into the back half, is the competitive environment so challenging that it would be tough to get back to that 15% plus gross margin level, or is that still an attainable goal? Joanna Barney: I would say it is both product and customer initiatives. As a backdrop, we had some margin return-on-sale impacts that were either a onetime event or not expected to be permanent. To Kelly's point in his prepared remarks, we had 38 days of closures with weather. Some of that business we recaptured, some of it we lost, but our costs remained fixed, so there was an impact there. We had fuel surcharges that we passed through, but there is timing that goes on there, so there is a margin shift. Within general line, we are focused on growth of our home center special order business, which we grew by double digits, and we continue to build out our door segments, gaining market share there. We are driving top-line revenue. Tied to our door initiative, we have pushed into the manufactured housing sector and saw double-digit growth in the first quarter, with a lot of upside opportunity there. We are making strides with our digital strategy. Our e-commerce business was up 57%. On commodities, you will continue to see us outperform the market because we have built out commodity technical systems that give us early indicators and real-time views into trends, inventory levels, and market segments, so that we can move quickly across our system. Our commodity volume and footage was flat to up in the first quarter, and we actually saw margin expansion, in spite of lower pricing. We feel confident that we are expanding our market share in commodities based on the systems we have built and the educated risks we take in putting inventory on the ground, built on years of experience and the expertise of our people. That has helped us in deflationary pricing environments to hold on to our volume and expand our margins. On gross margins versus 15% plus, I think it is an attainable goal. The current demand environment is uneven and rate-sensitive. There are still a lot of opportunities, but they vary by geography, product category, and builder type. When interest rates dipped below 6%, we saw strength return pretty quickly. If rates pull back and geopolitical tensions ease, BMD could see some improvement from seasonality as commodity prices improve. We are still seeing pricing pressure on EWP, although it is abating. We have had margin impacts across a wide breadth of general line products, and we saw year-over-year commodity price deflation, but we have offset that with margin expansion. If nothing changes in rates or tensions, we would have a more measured outlook: some seasonal improvement, but not a broad-based acceleration. Operator: The next question comes from George Staphos from Bank of America. Please go ahead. George Staphos: Hi, everyone. Good morning. Thanks for taking my questions. First, is there a way that you can give us a ballpark figure for the inflation you have seen in your cost of goods on an annualized basis that you have yet to recover in pricing actions already? Second, on plywood, you said there is some wood already showing up from Brazil and South America, but it has not had a big effect. Why do you expect it might have a bigger effect? What would some of the factors be, given your experience? Kelly E. Hibbs: I will start on the first one and speak specifically to Wood Products. In BMD, we are seeing some freight increases that we will largely be able to pass through over time. In Wood Products, the big items subject to inflationary increases that we are experiencing now and did not really see much of in the first quarter are glue, natural gas, and purchased electricity. Generally speaking, that is roughly 10% of Wood Products cost of sales. To the extent we see, and we have seen, about 10% increases in some of those key inputs, that gives you a sense of the cost impact, assuming volumes remain the same. On the second question around plywood imports, Jeff? Jeff Strom: We have not seen a huge impact because there has not been a whole lot that has come in so far. Why do we expect there will be an impact? It is supply and demand. It depends on where it comes in—what port, whether it is a big plywood market or not—and how much comes in. If there is a lot and a big price advantage, imports will grab some share. We have seen that before. But with what is happening there, there has been a delay with transportation and freight coming over. It will be wait and see when it gets here. George Staphos: As a quick follow-up, what are the spreads between current market pricing and what the quotes are coming in on imports? Can you give us a sense of the arbitrage? Jeff Strom: When it first got here, if I remember right, it was about a 10% difference between the two—what the pricing spread was when it first arrived or what they are quoting. Operator: The next question comes from Jeffrey Stevenson from Loop Capital. Please go ahead. Jeffrey Stevenson: Hi, thanks for taking my questions today. How much did restocking ahead of the spring selling season contribute to the improved sequential EWP volumes during the quarter? And could you provide an update on current EWP channel inventories at this point of the year compared with both last year, when they were elevated, and historical levels? Also, could you provide an update on the new Thorsby line and how we should think about the ramp and production at the facility as we move through the first half of the year? Troy Little: Undoubtedly, the better part of the first quarter was probably a restocking story. Maybe late in the quarter there was some follow-through, so it was a combination of both. Our order file grew to a solid two-week order file, and we have carried that through April and into May. On channel inventories, there is still a reliance on two-step distribution. Talking to our channel partners, they have increased inventory, but they are not back up to the high end of their targets for this time. On Thorsby, it is largely as planned. Right now, we are testing out and getting our products certified in the various depths and series. That is expected to go through the second quarter. In terms of sellable product, we would not have sellable product until probably the beginning of the third quarter. To a degree, that is capacity we have, but demand will dictate. To the degree demand is there, we will start producing out of Thorsby; to the degree it is not, we will use that as throttle. Going into the third quarter, I would not anticipate that being a huge volume contributor right now. Operator: Our next question comes from Reuben Garner from Benchmark. Please go ahead. Reuben Garner: Thank you. Good morning, everyone. Maybe just a follow-up on EWP price-cost dynamics. I think you referenced an expectation of low single-digit sequential pricing declines. What is driving that? You mentioned a strong order file and inflationary pressures. Is it still just so competitive, or supply-related? Is there a lag from competitiveness several months ago that is flowing through now? Why would we see sequential declines when we have a strong order file and inflationary pressures? And then on the BMD side, I think, Kelly, you mentioned margin pressure in general line products. Is there something unique going on there in any specific categories driving that? And where do inventories stand today in general line, and how are you thinking about them for this year? Troy Little: It is flat to down. There is enough chatter out there that we could see continued erosion from the competitive environment—primarily on retaining business. On delivered cost, if freight increases are not fully passed through the channel, there is some impact to net sales price on the freight side. That combination may lead to a little erosion, but we are not anticipating a lot. That is why we have the flat to low single-digit range. Joanna Barney: From a margin compression standpoint, the biggest pressure we have seen has been across engineered wood, but that is abating. The rest of general line shows small margin impacts across a wide breadth of products, mostly market-based at the distribution level—nothing out of the ordinary. On channel inventories, the business starts we have seen are starting to normalize a bit. The channel is lean but relatively stable. Customer purchases have been more consistent than the start-stop we saw last year. We have started seeing price increases from multiple suppliers on the general line side as well. Jeff Strom: I would just add that single-family is such a driver for us, and single-family demand is very much muted. When it gets like that, everybody is fighting for what is out there. It is hyper-competitive right now across pretty much everything. Operator: And the next question is a follow-up from Kurt Yinger from D.A. Davidson. Please go ahead. Kurt Yinger: Great. Thanks. Troy, have you seen any derivative impact in terms of the EWP price conversations you have had, maybe specifically on floor systems, given what we have seen in dimensional lumber inflation? And then, looking at the outlook, it sounds like the order book is pretty strong. I know the first quarter benefited from some restocking, but it does not seem like much of a sequential seasonal lift in EWP volumes in the second quarter versus the first. Is that related to the restock dynamic or more of an assumption around some softening in single family as we progress into summer? Troy Little: Nothing that I am aware of on floor systems. Typically, once you get builders to convert to EWP floor systems, you do not see them convert back. On open-web truss, that is a competitive product to I-joist, and the cost inputs for those products have been quite volatile in recent quarters. But I-joists are maintaining share. We were happy to see the good sequential volume increase we saw in I-joist. Kelly E. Hibbs: On the outlook, it is a little hard to sort out exactly how much of the first quarter was end market versus channel restocking; it was some of both. As we move into the second quarter, if you read the transcripts from the national homebuilders, they are very focused on sales pace and moving spec inventory, moderating their starts pace to their sales pace. Some are talking about increasing starts, but more seem to be talking about decreasing starts and transitioning a bit more to build-to-order, given improved cycle times. That all plays into the narrative. We are doing our best to pick up the demand signal from the homebuilder channel, which suggests we are not going to see a big seasonal increase into the second quarter. Operator: This concludes our question and answer session. I would like to turn the conference back over to Jeff Strom for any closing remarks. Jeff Strom: Thank you for your continued interest in Boise Cascade Company. Please be safe and be well, and we look forward to talking to you next quarter. Thank you all. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Shamali, and I am your event operator today. I would like to welcome everyone to today's conference, Public Service Enterprise Group Incorporated's first quarter 2026 earnings conference call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session for the members of the financial community. At that time, if you have a question, you will need to press star and the number one on your telephone keypad. To withdraw your question, please press star and the number two. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded today, 05/05/2026, and will be available for replay as an audio webcast on Public Service Enterprise Group Incorporated's Investor Relations website at investors.pseg.com. Please go ahead. Carlotta Chan: Good morning, and welcome to Public Service Enterprise Group Incorporated's first quarter 2026 earnings presentation. On today's call are Ralph A. LaRossa, Chair, President and CEO, and Daniel J. Cregg, Executive Vice President and CFO. The press release, attachments, and slides for today's discussion are posted on our IR website at investors.pseg.com, and our 10-Q will be filed later today. Public Service Enterprise Group Incorporated's earnings release and other matters discussed during today's call contain forward-looking statements and estimates that are subject to various risks and uncertainties. We will also discuss non-GAAP operating earnings, which differs from net income as reported in accordance with Generally Accepted Accounting Principles, or GAAP, in the United States. We include reconciliations of our non-GAAP financial measures and a disclaimer regarding forward-looking statements on our IR website and in today's materials. Following our prepared remarks, we will conduct a 30-minute question-and-answer session. I will now turn the call over to Ralph A. LaRossa. Ralph A. LaRossa: Thank you, Carlotta, and thank you for joining us to review Public Service Enterprise Group Incorporated's first quarter 2026 results. Starting with our financial results, Public Service Enterprise Group Incorporated reported net income of $1.48 per share and non-GAAP operating earnings of $1.55 per share. Our first quarter results reflect continued investment in utility infrastructure, focused on reliability and cost-saving energy efficiency programs at PSE and G. At PSEG Power, higher gas volume and capacity revenues have more than offset the absence of the zero emission certificate program that concluded last May. With this solid start to 2026, we are maintaining our full-year non-GAAP operating earnings guidance in the range of $4.28 to $4.40 per share. On the operations front, I am very pleased to report that our utility and nuclear operations delivered excellent reliability during one of the harshest winters in decades. In preparation for these extreme weather events that included high snow accumulation, ice, and arctic air temperatures, PSE and G initiated its winter weather readiness procedures and ensured adequate staffing for timely storm response. Starting in January with Winter Storm Fern through Winter Storm Hernando in late February that dropped 30 inches of snow on parts of Northern New Jersey, PSE and G systems held up well during intense conditions. For the relatively small group of customers that were affected by the weather, PSE and G was able to restore service to virtually all customers within 24 hours. I cannot say enough about our employees who carry out PSE and G's storm response work, who brave the elements to keep the lights on and homes warm for our customers. The utility experienced peak winter gas send-out on February 7 following over a week of subfreezing temperatures. These conditions underscore the need for continued investment in gas infrastructure modernization to address the impact that extreme temperatures have on our aging cast iron gas system. Despite this year's winter weather, PSE and G is on track with its 2026 capital spending plan of approximately $4.2 billion, investing in critical energy infrastructure, cost-saving energy efficiency, and system modernization for reliability and to meet new demands. During the same time, we have worked with the Governor's office and the New Jersey Board of Public Utilities to keep electric rates flat in 2026, in keeping with Executive Orders 1 and 2 that are addressing utility costs and generation supply. PSE and G's electric customers will also benefit from the update reflecting the latest Basic Generation Service auction results, which will go into effect on June 1. On February 1, we also kept residential natural gas rates flat for the remainder of the 2025–2026 winter heating season, delivering to our customers the lowest gas bills in New Jersey and in the region. And there is more good news for PSE and G electric customers. In early March, FERC issued an order supporting PSE and G and the State of New Jersey's objection to PJM transmission cost allocations. FERC's ruling reallocating these costs is expected to result in significant refunds of over $100 million, based on our estimates, to PSE and G customers after PJM's implementation. While this matter is still being litigated at FERC, it is another example of how Public Service Enterprise Group Incorporated works in partnership with the state at the regional and federal levels to keep our customer bills as low as possible. I would also like to mention that we are ramping up PSE and G's technology-driven conservation efforts. PSE and G recently launched two new ways to reduce energy use during peak times to save customers money and help reduce strain on the grid. The first is our demand response program with over 32 thousand residential and small business customers already enrolled to receive an upfront payment for reducing air conditioner use and other activities like EV charging during selected peak hours throughout the year. The second program is our new residential time-of-use rate that can save customers money by shifting some of their usage to off-peak time. This new rate option leverages the more detailed electric usage made available by our AMI investment in smart meters. Combined with our energy efficiency programs, PSE and G offers customers a variety of ways to reduce energy usage, manage their bills, and starting this summer, participate in creating a more flexible energy grid through our virtual power plant pilot. The BPU has started the process of implementing this directive in the first executive order. We expect that the BPU consultant will release the study this summer and that a stakeholder process on the topic will continue throughout the remainder of the year. We intend to fully engage with the BPU throughout this process. Now turning to PSEG Power. First, I would like to congratulate the PSEG Nuclear team for completing a second consecutive breaker-to-breaker operating run at Salem Unit 2 to begin their refueling outage this April. That notable accomplishment contributed to a 95.5% capacity factor and supplied 8 terawatt hours of reliable, carbon-free baseload energy to New Jersey and the grid during the first quarter. Last week, FERC approved the extension of the PJM price collar through the 2029–2030 base residual auction. This extension is expected to stabilize the effect of upcoming auctions on New Jersey's BGS default prices, even as regional demand growth advances with a limited supply response. As part of an all-of-the-above long-term approach to increase New Jersey-based generation supply, Governor Cheryl recently signed legislation lifting a decades-long moratorium on new nuclear construction. The announcement made at our three-unit site in Salem County highlighted broad support from policymakers, legislators, and labor leaders. Public Service Enterprise Group Incorporated is engaging in efforts to advance new nuclear development at the PSEG site. We believe the site's unique strengths, including an early site permit, prime logistics, access to a skilled workforce, and opportunities to leverage our operating expertise through contractual arrangements, make it a leading candidate for new nuclear deployment. We have also been watching developments related to PJM's proposed reliability backstop procurement auction. It is intended to be a one-time procurement, or emergency auction, to accelerate new dispatchable generation that can be brought online by 2031 to serve data center–driven load growth. More details from PJM are expected over the next month, and we will continue our vigilance during the stakeholder process to advocate on behalf of PSE and G's customers. Wrapping up, Public Service Enterprise Group Incorporated had a strong operating and financial quarter to start the year by doing the right thing for our customers, our communities, and our shareholders, with an eye towards a sustainable future. Our corporate reputation for excellence beyond our well-known reliability and customer satisfaction awards was recognized again last week when Public Service Enterprise Group Incorporated was named to the Dow Jones Best-in-Class North America Index for the 18th year in a row. We are maintaining the broad set of financial projections that we shared late in February, starting with our five-year regulated capital investment plan of $22.5 billion to $25.5 billion at PSE and G, and $24 billion to $28 billion for PSEG both through 2030. This investment program supports the utility's 6% to 7.5% compound annual growth in rate base, also through 2030, and helps drive a 6% to 8% non-GAAP operating earnings CAGR at Public Service Enterprise Group Incorporated over that same period. I would highlight again that items including nuclear revenue opportunities above current market prices, winning additional competitive transmission solicitations, or making incremental system investments to connect several thousand megawatts of solar and battery storage resources to the grid to meet new demand would be incremental to our 6% to 8% non-GAAP operating earnings CAGR. I will now turn the call over to Dan, who will review this quarter's results, then rejoin the call for our Q&A session. Daniel J. Cregg: Great. Thank you, Ralph, and good morning, everyone. Public Service Enterprise Group Incorporated reported net income of $1.48 per share for the first quarter of 2026, compared to $1.18 per share in 2025, and non-GAAP operating earnings were $1.55 per share for the first quarter of 2026, compared to $1.43 per share in 2025. We provided you with information on slide 8 regarding the contribution to net income and non-GAAP operating earnings by business for the first quarter, and slide 9 contains a waterfall chart that takes you through the net changes quarter-over-quarter in non-GAAP operating earnings per share, also by major business. Starting with PSE and G, which reported first quarter net income and non-GAAP operating earnings of $577 million for 2026, which compares to $546 million in 2025, utility results reflect ongoing investment in energy efficiency, gas system modernization, and transmission, the seasonality of gas demand, and the continued gradual increase in the number of electric and gas customers. Starting with the waterfall on slide 9, compared to 2025, transmission margin increased $0.01 per share due to higher investment. The first quarter distribution margin increased by $0.07 per share compared to the year-ago period and largely reflects incremental gas margin from the third quarter 2025 GSMP II extension roll-in, an increase in the number of customers in the quarter, and higher gas demand outside of the decoupling mechanism. Higher investment in energy efficiency also contributed to distribution margin in the quarter. Distribution O&M expense was $0.01 per share higher compared to 2025, reflecting an increase in operating costs due to inflation and extreme weather in January and February. Depreciation and interest each rose by $0.00 per share compared to 2025 due to capital investments and higher long-term debt interest rates, and for utility taxes and other, lower flow-through taxes had a net favorable impact of $0.0 per share in the first quarter compared to the prior-year period. First quarter weather, as measured by heating degree days, was 5% colder than normal and 8% colder than 2025, but had a limited impact on utility margin. As you know, the Conservation Incentive Program, or CIP, mechanism decouples weather and other economic sales variances for a significant portion of our distribution margin, while helping PSE and G promote the widespread adoption of energy conservation, including energy efficiency and solar programs. Under the CIP, the number of electric and gas customers drives margin, and residential customer growth for both segments was about 1% over the past year. On our regulated capital spending program, PSE and G invested approximately $800 million during the first quarter, and we remain on track to execute our full-year 2026 plan of approximately $4.2 billion focused on continued investments in infrastructure modernization, energy efficiency, electrification initiatives, and load growth. We have also maintained our five-year regulated capital investment plan of $22.5 billion to $25.5 billion through 2030. PSE and G began the next phase of the GSMP III program in the first quarter, and we anticipate investing a total of $1.4 billion over the three-year period. The GSMP III program's total includes approximately $1 billion in accelerated recovery and $360 million in stipulated base. Also in the first quarter, the BPU certified the results of the annual New Jersey Basic Generation Service, or BGS, auction that was held to secure electricity for customers that have not selected a third-party supplier. These auction results will have the effect of lowering the cost of electricity supply by 1.8% on PSE and G residential electric bills for energy and capacity starting June 1. Moving to PSEG Power and Other, for 2026 we reported net income of $164 million compared to $43 million in 2025, while non-GAAP operating earnings were $201 million for the first quarter compared to $172 million for 2025. Referring again to the waterfall on slide 9, the first quarter 2026 net energy margin was flat compared to the year-earlier quarter, as higher gas operations and capacity prices were offset by the absence of zero emission certificates, lower generation volume, and the absence of fuel and energy management fees under the renewed LIPA contract, which commenced in January 2026. O&M costs declined in the quarter, providing a $0.06 per share benefit compared to the same period in 2025, primarily reflecting a net reduction in operational expenses and an adjustment to tax reserves. The impact of higher interest costs and lower depreciation expense netted to a drag of $0.01 per share in the first quarter, reflecting incremental debt at higher interest rates partly offset by lower depreciation expense, reflecting our expectation that the NRC will approve a 20-year license extension for the New Jersey nuclear units. Lastly, taxes and other items had a net favorable impact of $0.01 per share in the quarter compared to 2025. Touching on some recent financing activity, Public Service Enterprise Group Incorporated had ample liquidity totaling $3.9 billion at March. This includes approximately $400 million of cash on hand, primarily related to net PSE and G financing activity during the quarter. Public Service Enterprise Group Incorporated entered into a $500 million 364-day variable-rate term loan in February, further supporting our liquidity position. Also during the quarter, all of our revolving credit facilities totaling $3.75 billion were extended by two years through March 2031. On the financing front this past January, PSE and G issued $1 billion of secured medium-term notes, consisting of $500 million of 4.20% MTNs due 2031 and $500 million of 5.63% MTNs due 2056. A portion of these proceeds were used to repay $450 million of MTNs at just under a percent that matured in March 2026. Public Service Enterprise Group Incorporated also has limited exposure to variable-rate debt, which totaled approximately $915 million and consists of two 364-day term loans and commercial paper, and represented a low 4% of our total debt at March. Looking ahead, our solid balance sheet continues to support the execution of Public Service Enterprise Group Incorporated's five-year capital spending plan, directed mostly to regulated CapEx, without the need to issue new equity or sell assets, and provides for the opportunity for consistent and sustainable dividend growth, as demonstrated by the 2026 indicative annual rate of $2.68 per share established by our Board in February. This new dividend rate represents an annualized increase of approximately 6% for 2026 and marks our 15th consecutive annual increase. In closing, we delivered solid operating and financial performance to begin the year, and are maintaining Public Service Enterprise Group Incorporated's full-year 2026 non-GAAP operating earnings guidance of $4.28 to $4.40 per share. We are also reaffirming our 6% to 8% compounded annual growth rate for non-GAAP operating earnings through 2030 based on the continued execution of our strategic plan. That concludes our formal remarks, and we are ready to begin the question-and-answer session. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for members of the financial community. If you have a question, please press star and the number one on your telephone keypad. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing star and the number two. If you are on a speakerphone, please pick up your handset before entering your request. One moment, please, for the first question. The first question comes from the line of Shahriar Pourreza with Wells Fargo. Please proceed with your question. Analyst: Hi. Good morning, team. It is Constantine here for Shar. Thanks for taking the questions. That is why I paused a little bit there, Constantine. I was not sure if it was you or him. So I did not want to say hello to Shar first. How are you, Constantine? Oh, doing quite well. Thank you so much. Just maybe a quick one starting on the BPU and the legislative process on utility constructs. The different branches finding their footing in terms of priorities? Is there anything in the cost-of-service model getting attention? Or, I guess, do the changes in ROE move the needle on affordability, or is there just a general recognition that the pressure is coming from the supply-demand that is really outside the state? Ralph A. LaRossa: Look, I totally agree with what you just said. I think a lot of people are finding their footing, and there have been a lot of constructive conversations between the companies, the administration, legislators, and the BPU. I think everybody is trying to do exactly what you said: find their footing. Everybody does recognize the challenge has been generated from outside the state, but we also know that we have some responsibility to do what we can from an affordability standpoint for our customers. So everybody is trying to row in the same direction. I hope you hear my tone. I feel positive about the way that we are trying to approach it as a team approach rather than a finger-pointing approach at this point. Analyst: Great. Appreciate that. Maybe shifting to the PJM capacity and reserve auction process. Some of the neighbors have been vocal around it. What could we see in terms of your participation in the RBA from both the power side and as the EDC? Any concerns around capacity cost allocation for your zone? Ralph A. LaRossa: Yeah, Constantine, as you said, there are a lot of people being pretty vocal about it. I would say we should all be a little bit calm and watch what happens here. There are a lot of steps to go through, and I do not want to overreact to anything. Obviously, we need to protect the customers and the utilities, and make sure they are not being burdened with planning assumptions that are being driven outside of anybody's responsibility. We have some states that have IRPs with their own planning assumptions, PJM with its own planning assumptions, and then you have customers putting in requests. All of that needs to be balanced, and putting that on the back of the utilities just does not seem to make a ton of sense for anybody. We will see how that plays out over time. I feel like it is a chance for us to bring more generation in. We all know there is a resource adequacy problem. I do not know how much we are going to get done—“we” being the region—by 2031, but I think it is a good step that we are trying, and I hope it produces some results. I think the limiting factor of 2031 is going to make it really tough for this to be a game changer. Daniel J. Cregg: And, Constantine, inherent within your question, you did talk about cost allocation. Very consistent with our actions related to the FERC decision around cost allocation, we are going to continue to look out for our customers and, in this instance, like the one we referenced in the prepared remarks, we will continue to make sure that those allocations, to the best of our ability, are going to be fair for our customers. Analyst: Maybe just to clarify, do things like the capacity price cap extension provide any additional upsides on the power side versus the 6% to 8% plan? Ralph A. LaRossa: I think we had envisioned and spoken in the past about the fact that we thought things were going to stay about where they were, so I would leave the comment there. Analyst: Appreciate it. Thanks so much for the time today. Operator: Our next question comes from the line of Carly S. Davenport with Goldman Sachs. Please proceed with your question. Ralph A. LaRossa: Hey, Carly. Carly S. Davenport: Good morning. Thanks so much for taking the questions. Maybe just starting on New Jersey, we do have a stakeholder meeting being held by the BPU this week on Executive Order 1, focused on the utility business model. Anything that you are expecting out of that meeting in terms of focus areas or what you think is on the table to address as we think about the utility business model in New Jersey? Ralph A. LaRossa: Consistent with what we have said in the past, we expect performance to be one of the biggest issues that will be on the table, and we welcome that. In the areas that we have seen focus in other states, our performance has been exemplary, and I would expect that to continue. I would, in some ways, welcome the recognition of our utility for the work that has been accomplished from a reliability standpoint, from the ability to hook up customers, and from customer satisfaction. Those three areas are areas where we think we have a lot of strength, and where the performance conversation goes, we would be supportive of that. We will be participating and constructive in the conversations. Carly S. Davenport: Got it. Okay. Great. That is helpful. Sticking in New Jersey but on the nuclear side, you mentioned the lifting of the moratorium in your prepared remarks. Can you talk a bit about how you envision Public Service Enterprise Group Incorporated participating on the nuclear front in the state, and what some tangible updates could look like as we think about the opportunities around new nuclear? Ralph A. LaRossa: We have been leaning in. It is clear that the federal administration is supportive of additional generation, and it looks like nuclear is one of those areas where there is momentum. The signing of that legislation was a great event and a great signal from the administration of their support. We are going to continue to do what we have been doing, which is try to enable it and advocate really hard for the state. We think we have a great site down at Salem. The port construction was completed; it will make some construction activities easier. We have great labor in that area, and we have the technical capabilities and operational performance to deliver additional megawatt-hours out of that area. So we are going to be advocating hard and try to stay lockstep with the administration on that. Carly S. Davenport: Great. Thank you so much for the time. Ralph A. LaRossa: Thanks, Carly. Operator: Thank you. Our next question comes from the line of Jeremy Tonet with J.P. Morgan. Please proceed with your question. Ralph A. LaRossa: Hey, Jeremy. Jeremy Tonet: Hi. Good morning. Jeremy Tonet: I was just wondering if I could start with a large load increase here. Could you provide a bit more color on the current state of conversations and interest there? Where does the total count stand versus last quarter? I think it was 11.8 as of December. Daniel J. Cregg: Yeah, Jeremy, that is about right. It is interesting—last year, if you go through the year, we saw quite a significant increase as you stepped through time. You were seeing the knee of the curve as the interest more broadly was coming about in data centers. I would say directionally you have seen that level off within the state. That 11 thousand we always talked about as being somewhere—maybe 10%, 15%, 20% of that—may come to fruition if we look, based upon history, at what we have seen within different new business coming forward. It is hard to predict, which is a broad topic across the sector. We are still in that ballpark. The change that we saw across last year had us put that forward so people could get an understanding, and with the leveling off, there is a little bit less to talk about on that front. We still pursue the ability to try to serve some of that load, either here or in Pennsylvania, where we have the Peach Bottom units, and that activity continues. Jeremy Tonet: Got it. That is helpful. That leads to my next question. Could you provide some color bifurcating between the states as far as interest or type of activity and conversations? At the same time, how does demand response currently factor into any of these discussions, and has that changed over time? Daniel J. Cregg: I do not think the demand-response factor has changed the discussions over time, but the first part of your question provides more differentiation, literally by virtue of what type of data centers are interested in going where. Absent significant tax incentives in New Jersey, you have not seen sizable interest in New Jersey. That has been a consistent concept that we have talked about for a while. In other states—there are plenty—some of the larger hyperscalers have the ability to derive financial incentives, and they are following those incentives from everything we have seen. The opportunity set to serve them follows suit with that. Jeremy Tonet: Got it. Makes sense. I will leave it there. Thank you. Ralph A. LaRossa: Thanks, Jeremy. Operator: Our next question comes from the line of Nicholas Amicucci with Evercore ISI. Please proceed with your question. Ralph A. LaRossa: Hey, Nick. Nicholas Amicucci: Hey, guys. How are we? Just a couple quick ones from me, if I could. When we think about the cadence at Salem and the potential for the capacity upgrade, would we pretty much assume that you would be seeking the extension first and then any firm announcement on a potential upgrade? Ralph A. LaRossa: You are talking about the license extension first? Nicholas Amicucci: Yeah. Daniel J. Cregg: The Salem units have current licenses that run through 2036 and 2040. Anything we would do to extend that another 20 years would happen in advance of that. What we have talked about with respect to the uprate, by comparison, is either the outage in 2027 or the outage in 2029 is when we would anticipate those coming on. There will be activity on the license extension, but you will see the upgrade come through within those time frames I mentioned. Ralph A. LaRossa: Very specifically, we are not counting on that extension to be in before we do the upgrade. That is not a gating factor. Nicholas Amicucci: Got it. Perfect. And then, given the strong performance—obviously somewhat weather-driven—in the first quarter, the adjusted EPS is roughly 36% of the midpoint and pretty above seasonal. Understanding it is early, what would you need to see going forward to move to the upper half of the range or increase guidance altogether? Daniel J. Cregg: On a normal year, even when you are decoupled, just volumetrically you are going to see a lot more coming through in the winters and the summers. There is a piece of that you see coming through from this winter. If I were to give you a one-word answer, it would be “summer”—what the summer ends up looking like. We are decoupled, so we do not have as much of an impact from that perspective, but there are elements—whether it is weather driving demands a little bit higher on gas or snow removal and things of that nature—that have an impact on results. We have more of those types of events in the winter and in the summer. I would say get through the summer and see what we look like. Ralph A. LaRossa: The other piece to this—just to remind you—we mentioned gas ops and that there was some value generated from our gas operations group. That also goes to offset customer rates pretty dramatically. So another good news message for the customers in New Jersey that we were able to transact in that area. Nicholas Amicucci: Perfect. Thanks, Dan. Thanks, Ralph. We will see you guys in a couple of weeks. Operator: Thank you. Our next question comes from the line of Julien Patrick Dumoulin-Smith with Jefferies. Please proceed with your question. Julien Patrick Dumoulin-Smith: Hey. Good morning, Ralph and team. How are you guys doing? Ralph A. LaRossa: Good, Julien. How are you? Julien Patrick Dumoulin-Smith: Quite well. Thank you very much. Appreciate it. Ralph A. LaRossa: Looking forward to another video. Daniel J. Cregg: Really. Come on. Bring it on. Let us do it. Gotta keep it lively. Julien Patrick Dumoulin-Smith: Let me ask you about PJM here. How do you think about your participation—whether in a bilateral context or outright in some other permutation? We have heard comments this morning and elsewhere. How do you think about that coming together, and how would you set expectations around this process? You are keeping close tabs on this at the state level and at the PJM level. How would you set expectations about what ultimately happens in terms of backstop versus bilateral versus capacity not getting procured on a timely basis? Ralph A. LaRossa: Your question—participation—you mean in new generation? Julien Patrick Dumoulin-Smith: In any flavor. I am curious about the process and then separately your participation in any flavor. Ralph A. LaRossa: The number one thing that we have been on—this goes back a long time, before the words “resource adequacy” were popular—is reliability: the reliability of the grid. We have been on that since 2003, since the lights went out. We start from there—looking out for reliability—and then looking out from a customer cost standpoint. We need to make sure that we are protecting the customer, number one, and making sure that there is enough product to deliver to those customers, number two. I am not sure that the way it is currently drafted really does both of those things. There is a concern about putting that burden on the LDCs versus the LSEs and whatever other acronyms we want to throw in there. We will participate in the process and we are going to advocate strongly. We have a new CEO at PJM who has just stepped into the role. Before we pass any judgment on what is going on at PJM, let us give them a chance to get their feet under them, get the organization structured the way they want, and the rules and proposals the way they would like to see them. We will continue to look at this from the customer's perspective and advocate on that behalf. Part two is when you think about generation—where is this supply going to come from? We get the question all the time: will you participate? We have always said we will do utility-like generation. We think we have some sites that make sense. The question is the fuel supply, and whether that is a fuel supply that makes sense for the state that those sites sit in. We are open to it, but it has to be utility-like investments when we have those conversations. Julien Patrick Dumoulin-Smith: Got it. Okay. Fair enough. And when you talk about new nuclear—understood why—how do you think about next steps in the state? You have got to get the right risk construct. Tangibly, what would the next step look like to show progress if there is to be something to happen? Ralph A. LaRossa: It is going to be a combination of government supporting the effort. You will need to see strong support from the federal government. There are rumors around that in different ways, shapes, and forms from different departments in Washington. Number one, we would need federal support. Number two, you would have to have state support. I think you need states looking for offtake agreements, you need hyperscalers looking for offtake agreements, and you need companies supporting it. A combination of things would have to come together. It all, to me, starts with the government being aligned—and aligned for the long term. You need to ensure that not only do you have some financial support, but that you have permitting support and siting support. We have heard a lot of that from our Governor—that streamlining permitting is one of the things they want to do here in New Jersey. Again, aligned with building new generation. I do not see any state taking on new nuclear without the support of the federal government. Julien Patrick Dumoulin-Smith: To elaborate on the last one, is there timing on when you could follow through on contracted new generation, whether gas or more specific storage or solar? Ralph A. LaRossa: You have to see what all the rules are—that was my point. When you look at this reliability backstop, we will see what those rules are when they come out. If that is a pure market solution, that is not something we are interested in. We are not interested in participating in that; that is not our core business. But if we are looking for rate base—utility-like—we have done that in the past: 30-year PPAs, those types of things. I do not know what will come out of this RBA. Also, remember, it is only on the capacity side. You still have the whole energy side that you have to figure out how you get a contract for. Julien Patrick Dumoulin-Smith: I hear you. Alright, I will leave it there. More to go. Ralph A. LaRossa: Thanks, Julien. See you in a little bit in May. Operator: Thank you. Our next question comes from the line of Michael P. Sullivan with Wolfe Research. Please proceed with your question. Michael P. Sullivan: Hey, guys. Good morning. Ralph A. LaRossa: Hey, Michael. Michael P. Sullivan: Picking up on your last comment—the energy side of the equation—any color you can give on the sharp move in PJM pricing and how you are thinking about that on both sides of the house? Any color on longer-term hedges, and then how you are thinking about the bill impact from that on the utility side? Daniel J. Cregg: Michael, this is Dan. The most immediate impact on the bill is going to be the BGS that we procured in February. From a bill perspective, we know what things are going to look like, and for PSE and G customers, they are going to see their bill go down 1.8% by June 1 because of what happened on BGS. From a customer perspective, that will change again next June 1. There is a lot of stability inherent within the BGS construct that the state put together many years ago that still exists. More broadly, if you think about markets, one of the things markets are trying to figure out is where this RBA goes and what it brings in from a supply perspective. People are weighing their views as to how much load is going to come on the system and what generation is going to be there and needed. Ultimately, through the market construct, that is how prices are going to be set. Those are the bigger questions that people will continue to digest. Like in any other market, they will use the available data, but in this instance it is how much load is going to actually come online and when, and the same two questions around supply. In general, I think you are going to have a tighter market because the path to incremental demand is a little bit clearer from a volumetric perspective than the path to incremental supply. Michael P. Sullivan: Okay, that is helpful. Any color on how much you are hedging into this in the out years? Daniel J. Cregg: The thing that we have said is that for the prompt year we are pretty close to fully hedged, and then as you look through the couple of years, we cascade off a little bit. Analyst: Next, just the next couple months here into the summer resets at the legislature—anything you expect or are focused on getting done between now and then? Ralph A. LaRossa: I think affordability remains a hot topic here in the state. We are prepared for those conversations as they continue to take place, and we continue to be supportive. I think there is a possibility for people to be talking about resource adequacy solutions and something else that might be out there. We are monitoring, and once those issues—if there is any legislation introduced—come up, we will assess them and comment on them. Analyst: Okay. Great. Thank you very much. Operator: Thank you. Our next question comes from the line of Analyst with KeyBanc Capital Markets. Ralph A. LaRossa: Good morning, Sophie. Analyst: Good morning. Thank you for taking my questions. I am curious if you see any opportunities for yourselves in the upcoming PJM transmission open window. Daniel J. Cregg: We even hit a little bit of that in the prepared remarks. On an ongoing basis, we look at what comes through those open windows. We will do exactly the same thing this summer when the next window opens. I would call it a careful look at what makes the most sense for us. We have a pretty deep well of experience in building transmission, but that does not mean everything makes sense for us. We go through carefully, and to the extent that we think something does, we will put in a competitive bid. To remind you, the capital plan that is in place does not have anything that we have not already won through a competitive process. But I absolutely think we have the skill set to expand in that area, and we will increment the capital plan to the extent that we do win as we go forward. Analyst: Thank you. Then on data centers, I appreciate your comment that absent incentives they are not necessarily looking to locate in New Jersey. Is there an option for your New Jersey assets to have virtual PPAs, virtual offtake with a facility elsewhere, or is that not a major focus right now? Daniel J. Cregg: We are deliverable beyond New Jersey, and even today power flows on the grid in the region. There is absolutely the potential for us to do something with the New Jersey units or the Pennsylvania units beyond the node they are at and beyond the zone they are in. So yes, that is possible. Analyst: Okay. Thank you. Daniel J. Cregg: Thanks. Operator: Thank you. Our next question comes from the line of Analyst with Bank of America. Please proceed with your question. Analyst: Hi, guys. Thanks for taking the question. First on the BGS auction—you got the 1.8% reduction that is going into effect in June. How are you thinking about the repeatability of that, with capacity prices either staying at the same level or going lower and potentially power prices going up? Do you think you can keep up the same decreases year over year? Daniel J. Cregg: You understand the pieces as well as we do. The way that auction works is that it is for a three-year period for a third of the load. You are taking a look—at least by design, unless there are delays at PJM—at capacity auctions that have already transpired. So that is a known item. We do not know what they all are now, but we will know by the time the auction comes around. Then a forecast of what energy prices look like—that is probably your biggest variable as you go forward. The other thing I would say is that being an auction for a third of the total demand, any impact—if you were to see a $3 impact to the price of energy—you would see a $1 impact come through to the bill because of the gradual effect. You would see that $1 increase across three years. The gradualism of that mechanism provides gradualism in the impact on rates to customers. Beyond that, trying to estimate exactly where things are going to go is tough to do. Ralph A. LaRossa: To reinforce something Dan said, the last time we had sticker shock was due to a capacity market delay. Even if prices are incrementally up a little bit, you are not going to have that same sticker-shock situation that we experienced a year ago when the BGS price came in so high because the capacity prices had piled up for three years. Those increases sitting there caused the challenge that we had. It was not necessarily incremental, especially in what we believe is a very good mechanism in the BGS, where you have this third/third/third. Daniel J. Cregg: But for the delay in the capacity auction, you would not have seen the magnitude of the year-over-year increase that you saw. Analyst: That is very clear. It makes sense. And then on the RBA—we have talked a lot about it on this call—but I saw the proposal that you filed jointly with some other EDCs. How are you thinking about the ideal things that need to be solved and would be in your favor for that? I saw that the load-serving entity should be the cost responsibility, but anything else you would point out? Ralph A. LaRossa: The key is the planning process. You really have to make sure that the planning process is a solid one and there is consensus around it. Whoever is the planner winds up with the accountability—that is the key. To have the planning done by a town and the accountability sit at the county level does not make a ton of sense—I am just using a parallel there. We have to get all of that aligned. States have IRP requirements. In addition, PJM has been granted by the EDCs responsibility for transmission planning. You put those pieces together, and it is kind of odd for that to wind up back with the EDCs. Therefore, the LSEs—the entities that have been identified with the responsibility—are where we believe the burden should sit. Analyst: That all makes sense. Very clear. Thanks so much, guys. Operator: Thank you. And our last question comes from the line of Anthony Crowdell with Mizuho Securities. Please proceed with your question. Anthony Crowdell: Hey, Ralph, Dan. Thanks for squeezing me in on a busy morning. Just a follow-up to, I think, Nick's question earlier on the nuclear upgrades and maybe the timing of them. When do you file for approval for the uprates? Is that an additional CapEx opportunity, or is it further out in the five-year plan, or do you already have any included in your current plan? Daniel J. Cregg: We have the capital for the uprate included, and the timing is going to depend upon which outage it goes into, Anthony. As I said—2027 or 2029. We will have an outage for those units in 2027 and an outage in 2029. Depending upon how it moves forward, that is when we will end up seeing that uprate go through. You are asking about the uprate, not the license extension, right? Anthony Crowdell: No—more the license extension. I am sorry if I was not clear. Ralph A. LaRossa: For the license extension, we will get information back over the next X amount of years. I know NRC is trying to move that a little bit quicker than they have in the past. At that point, they will let us know whether or not we have to change the oil, change the tires—what needs to be done. We will be able to forecast the CapEx at that point. Anthony Crowdell: Is it within the five-year period, or could it also be outside the five-year period? Ralph A. LaRossa: We would certainly gain consensus with NRC on the work that needs to be done in the five-year timeline, and I think the work will be completed outside the five-year timeline. Anthony Crowdell: Great. That is all I had. Thanks so much. Ralph A. LaRossa: Thanks, Anthony. Operator: Thank you. There are no further questions at this time. I would like to turn the floor back to Mr. LaRossa for closing comments. Ralph A. LaRossa: Thank you all for your interest and dialing in today. I know it is a busy day for many of you on the call, so I appreciate you taking the time. I look forward to speaking to everybody at AGA. I will end with another thank you to our team here for the work completed through this past winter. The weather was not easy for us, and people continued to work above and beyond our expectations. Thank you to the team, and thank you all for calling in. Looking forward to seeing you all at AGA later this month. Take care. Operator: Ladies and gentlemen, this concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.
Operator: Good morning, and welcome to the Addus HomeCare's First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead. Darby Anderson: Thank you. Good morning, and welcome to the Addus HomeCare Corporation First Quarter 2026 Earnings Conference Call. Today's call is being recorded. To the extent any non-GAAP financial measure is discussed in today's call, you will find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2026 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its first quarter 2026 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir. R. Allison: Thank you, Drew. Good morning, and welcome to our 2026 First Quarter Earnings Call. With me today are Brian Pop, our Chief Financial Officer; and Heather Dickson, our President and Chief Operating Officer. As we do on each of our quarterly earnings calls, I will begin with a few overall comments, and then Brian will discuss the first quarter results in more detail. Following our comments, the 3 of us would be happy to respond to any questions. As we announced yesterday afternoon, our total revenue for the first quarter of 2026 was $363.6 million, an increase of 7.7% and as compared to $337.7 million for the first quarter of 2025. This revenue growth resulted in an adjusted earnings per share of $1.62 and as compared to adjusted earnings per share for the first quarter of '25 of $1.42, an increase of 14.1%. Our adjusted EBITDA was $44.5 million compared to $40.6 million for the first quarter of 2025, an increase of 9.7%. For the first quarter of 2026, cash flow from operation was $52.4 million as compared to $18.9 million for the same period in 2025. As of March 31, 2026, we had cash on hand of approximately $103 million. With our strong cash flow in the first quarter, we reduced our bank debt to $94.3 million, leaving us with the financial flexibility to consider larger acquisitions as we continue to pursue expansion of our market reach and creating geographic density. During the first quarter, we saw an impact on revenue due to the widespread weather event that occurred towards the end of January. Our team did a good job of rescheduling affected personal care visits where possible. However, we could not make up for every weather-impacted miss visit. While the amount of the revenue was immaterial to our company overall, we did see a loss of revenue of approximately $1.5 million as a result of these storms. However, February and March returned to our normalized revenue expectations. As we announced on May 1, we closed on the acquisition of the Personal Care operations of home court home care based in Fort Wayne, Indiana. This acquisition marks our entry into an attractive state, which is adjacent to our largest personal care market of Illinois. We have been interested in Indiana for some time as over the past 3 years, they increased rates and worked to eliminate client wait lists. I'm excited to welcome all of our new team members from home court home care. We have also entered into a definitive purchase agreement for an additional personal care operation in Indiana, which will complement HomeCourt home care. We anticipate that this additional Indiana acquisition should close in the coming months subject to customary regulatory approvals. These 2 acquisitions continue our strategy of entering new markets with scale and where we have the ability to expand our services. As we mentioned on our last earnings call, the State of Illinois increased our rates in personal care service effective on January 1, 2026, adding approximately $17.5 million in annualized revenues. This most recent rate increase continues to show the important support we are receiving from our state partners as we continue to provide these much-needed services to our elderly and disabled clients. We also understand the New Mexico legislature included increased funding of $10 million for home and community-based services in the budget for the upcoming fiscal year. We are waiting for communications from the New Mexico Medicaid department regarding how and to which programs the funding will be extended. As we have stated before, we continue to believe that the 80-20 provision of the CMS Medicaid access rule will be eliminated in the near future. While implementation is still several years away and has no current impact on our business or financial performance, we believe this outcome would be an encouraging development for both our industry and our company. All our recent communications indicate that this part of the Medicaid access rule is expected to be eliminated this year. During the first quarter of 2026 we continued to experience positive current trends in our Personal Care segment. Our number of hires for [indiscernible] in the first quarter of 2026 was 108, up sequentially from 103 hires per day in the fourth quarter of last year and consistent with the first quarter of 2021. We achieved this number in spite of the impact of the weather event I mentioned earlier. As we have mentioned in the last few quarters, our clinical hiring remains consistent and has been mostly stable outside of a few of our urban markets. However, even in those markets, we have been able to staff our operations appropriately. Now let me discuss our same-store revenue growth for the first quarter of 2026. For our Personal Care segment, our same-store revenue growth was 6.5% compared to the first quarter of 2025. During the first quarter of 2026, we saw personal care same-store hours increased by 2.2% compared to the same period in 2025 and while our percentage of authorized hours served in the first quarter remain consistent with what we experienced in the fourth quarter of 2025. On a sequential basis, Personal Care same-store census was down slightly, partially due to the weather we mentioned before. However, during the first quarter, we saw growth in clients served in Illinois, our largest market, which is something we had anticipated for a while. This is important as we look to achieve year-over-year census during 2026. Turning to our clinical operations. Our hospice same-store revenue increased 7.7% compared to the first quarter of 2025. Our average daily census increased to 3,804 for the first quarter up from 3,515 for the same period last year, an increase of 8.2%. For the first quarter of 2026, our hospice medium length of stay was 23 days as compared to 25 days for the fourth quarter of 2025 and 19 days for the first quarter of 2025. We are very pleased by the continued growth in our hospice segment over the past several quarters. While our home health same-store revenue decreased when compared to the same quarter of 2025, our home health operating income improved over last year's first quarter and sequentially versus the fourth quarter of 2025. It is also important to understand that over 25% of our hospice admissions in New Mexico and now in Tennessee are coming from our own Addus Home Health operations, which overlap in these 2 markets as we continue to focus on our bridge program. We are pleased to see more patients receiving the benefit of the full continuum of post-acute home-based care and anticipate seeing similar clinical teamwork developed in Illinois, where we also have both home health and hospice operations. We continue to believe that size and scale are important to health care services and have been the focus of our strategy for the past 10 years. We continue to evaluate opportunities, which will increase both density and geographic coverage as well as seek to further strengthen our relationships with states and managed care organizations. Recently, we have begun to see an increasing number of personal care opportunities. Due to our focus on maintaining a conservative balance sheet, we have the ability to actively pursue these transactions. Recently, there appears to be more optimism around home health care due to the final home health rule for 2026 being more favorable than was originally proposed. While there is still some uncertainty about the future rate increases, there does seem to be more potential activity in home health care. While we will be open to home health opportunities, we will continue to be diligent as we evaluate possible transactions to further our strategy. Before I turn the call over to Brian, it is important that I thank the Addus team for the care they are providing to our elderly and disabled consumers and patients. We all have come to understand that the majority of this population prefers to receive here at home, which not only remains one of the safest but also the most cost-effective places to receive this care. We believe the heightened awareness of the value of home-based care is favorable for our industry and will continue to be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on both our dedicated caregivers and other employees who work so incredibly hard providing outstanding care and support to our clients, patients and their families. With that, let me turn the call over to Brian. Brian Poff: Thank you, Dirk, and good morning, everyone. The first quarter of 2026 marked a solid start to a new year for Addus. The results for the quarter reflect our continued ability to execute our strategy and deliver consistent growth. Results were highlighted by a 7.7% increase in top line revenue to $363.6 million and a 9.7% increase in adjusted EBITDA to $44.5 million when compared with the first quarter of 2025. Our Personal Care Services segment, which accounted for 77.3% of our revenues, was a key driver of our business. Revenues for the segment grew to $281.1 million, an increase of 8.8% overall and an increase of 6.5% on a same-store basis compared to the same quarter last year. We are continuing to see contributions from our acquisition of Gentiva's Personal Care operations in late 2024 and the acquisitions of Helping Hands home care services and [indiscernible] Home Care, both of which were acquired in the back half of 2025. The revenues of Gentiva's Personal Care operations are included in our same-store numbers for the first time this quarter. In addition to higher volumes, we are continuing to benefit from rate support in some of our key state markets including our 2 largest in Illinois and Texas. Our first quarter results included the impact of the 3.9% rate increase in Illinois, which became effective on January 1, 2026, and as well as the 9.9% rate increase in Texas that became effective on September 1, 2025. Our hospice care business continued to perform well and accounted for 18.1% of revenues for the first quarter. Our hospice revenues were $65.8 million, with a same-store increase of 7.7% over the same period last year and year-over-year improvement in average daily census. For the period, Home Health Services, our smallest segment, accounted for 4.6% of first quarter revenue at $16.7 million. We continue to look for ways to support and expand our home health service line, including through acquisitions, as we believe important synergies can be realized by offering multiple levels of home-based care in the markets we serve. Yesterday, we announced 2 transactions in Indiana, HomeCourt Home Care based in Fort Wayne which closed on May 1, and the signing of a definitive agreement to acquire additional operations of a similar size in the state. Currently, HomeCourt serves approximately 240 clients with annual revenues of approximately $9.7 million. We anticipate our second acquisition in the state will close later this year. We believe our announced expansion into Indiana, a new market for Addus is aligned with our strategy of broadening our geographic coverage with density and scale. Our team looks forward to welcoming the clients and caregivers to the Addus family. We intend to provide additional details on the second acquisition when regulatory considerations permit. Strategic opportunities will continue to play a role in our long-term growth planning. Our primary focus will be on identifying opportunities where we can leverage geographic coverage and density providing us with a competitive advantage. We will also seek opportunities to add services to meet our ultimate objective of offering multiple levels of care in the markets we serve. With our size and expanding scale and the support of a strong balance sheet, we are well positioned to execute our strategy. As Dirk noted, total net service revenues for the first quarter were $363.6 million. The revenue breakdown is as follows: Personal Care revenues were $281.1 million or 77.3% of revenue, Hospice care revenues were $65.8 million or 18.1% of revenue and home health revenues were $16.7 million or 4.6% of revenue. Other financial results for the first quarter of 2026 include the following: our gross margin percentage was 31.9%, consistent with the first quarter of 2025. As usual, our gross margin was affected in the first quarter by our annual merit increases and the annual reset of payroll taxes. Looking forward, we anticipate our gross margin percentage will remain relatively stable and consistent with our historical annual pattern. G&A expense was 21.4% of revenue compared with 21.7% of revenue for the first quarter a year ago. Adjusted G&A expense for the first quarter was 19.6% and compared with 19.9% a year ago as we continue to generate leverage from our growing revenue base. The company's adjusted EBITDA for the first quarter of 2026 was $44.5 million compared with $4.6 million a year ago, an increase of 9.7%. Adjusted EBITDA margin was 12.2% compared with 12% for the first quarter of 2025. Consistent with 2025, we anticipate our adjusted EBITDA margin percentage for the full year will remain above 12%. Adjusted net income per diluted share was $1.62 compared with $1.42 for the first quarter of 2025. The adjusted per share results for the first quarter of 2026 exclude the following: acquisition expense of $0.06 and noncash stock-based compensation expense of $0.20, including the impact of accelerated vesting for the previously announced retirement of our former President and COO. The adjusted per share results for the first quarter of 2025 exclude the following: acquisition expenses of $0.13 and noncash stock-based compensation expense of $0.13. Our effective tax rate for the first quarter of 2026 was 22.7%, benefiting from the excess tax benefit related to our stock compensation. For the full year 2026, we expect our tax rate to be in the mid-20% range. DSOs were 63 days at the end of the first quarter of 2026 compared with 38.2 days at the end of the fourth quarter of 2025 with DSOs for the Illinois Department of Aging at 47.4 days compared with 54.7 days at the end of the fourth quarter of 2025. As expected, we saw a resolution in some of the normal timing differences in payment cycles we experienced around year-end. Our net cash flow from operations was $52.4 million for the first quarter of 2026, a strong start to the year. As of March 31, 2026, the company had cash of $103.1 million with capacity and availability under our revolving credit facility of $650 million and $547.8 million, respectively. Total bank debt was $94.3 million at the end of the quarter a reduction of $30 million from the end of the fourth quarter of 2025. We have continued to reduce our revolver balance in the second quarter of 2026, with $10 million paid to date. We have a capital structure that supports continued pursuit of our strategic initiatives. Looking ahead, we expect to maintain our disciplined capital allocation strategy and continue to diligently manage our net leverage ratio while also focusing on enhancing shareholder value. This concludes our prepared comments this morning, and thank you for being with us. I'll now ask the operator to please open the line for your questions. Operator: [Operator Instructions] And our first question comes from Brian Tanquilut from Jefferies. Brian Tanquilut: Maybe I'll start, Dirk, when we think about the caregiver app rollout, I know that's something that you're working on in Texas. How do we think about the progress there? And what it will take to get it to where you want it to be as quickly as possible? And then what are the expected benefits for that? I mean, how do we think about the P&L translation of this app rollout and why it's important. Heather Dixon: Brian, I'll start, and then Dirk can add to anything [indiscernible] that I say. So I'll start with just the progress that we're seeing. With that Caregiver app, we now have deployed it in all 3 of our 3 largest states, Illinois, as you know, has been deployed for a while, and we're continuing to see really good utilization and uptick of that utilization throughout the state. In New Mexico, we have deployed it for a portion of our branches. We have some special nuances associated with the state EVV system there. So we're going to roll it out in 2 tranches. But we have deployed it, and we expect to be deploying to the rest of the branches soon in the coming quarters. And then finally, in Texas, we rolled it out during Q1, and we're seeing some really positive momentum in the utilization of that and caregivers actually downloading that app. We saw even in the first few days to a week, we saw up over 10% of our caregivers had already adopted that app. So we're seeing really good momentum. And as we think about where we go from here, there are a couple of things. One, continue to roll it out to other locations, and that's really going to enable our caregivers and help us focus on increasing our service percentage. And then two, we can use that to really drive communication and really create a good engagement -- positive engagement with our caregivers. R. Allison: Yes, Brian, and I think what Heather just mentioned, there are the 2 aspects that we really focus on and why we invested in the caregiver app. You've seen positive momentum in Illinois for the percent of hours served that we believe a large part of that is directly attributed to the fact that there's the caregiver app at the allows to be particular career to see how many hours are left on the authorization and make sure that we're serving to an appropriate amount. Also, we think it can allow us to be a little more sticky, as Heather said, with our caregivers, make it easier for them to know what their paycheck is going to be to know their hours served and now also the ability for them if they want to pick up additional hours we have this app out there that allows them to be able to do that in an effective manner. So those are really the benefits that we're looking for from this app. Brian Tanquilut: That makes sense. And then maybe my follow-up, Heather, for you or maybe for Brian. As I think about the length of stay on the hospice side, you just gotten questions on cap risk and how you're thinking about that. So just anything you care with us just on the hospice cap concern. Brian Poff: Yes, Brian, right now, we don't really have any cap consideration. We actually are managing, I think, our referral mix and our patient base pretty well. Discharge length of stay was a lite here this quarter. But again, those are just a factor of the people that actually discharged during the quarter and probably not indicative of you would pick a cap. Our median length of stay, as Dirk mentioned, was 23 days, which actually is probably a little bit low for us. I think we've got a really good mix and no cap concerns for us at the moment. Operator: Our next question comes from Raj Kumar from Stephens. Raj Kumar: Maybe just a date on the kind of from each states. I'm curious kind of Indiana, more specifically. I know when you guys went into Texas with Gentiva, that was kind of on the front of the state passing or kind of in the process of passing a rate update. So curious on the kind of Indiana rate backdrop and any commentary there? Brian Poff: Yes. I think in India, specifically, I mean we talk about some other states as well, Raj. Indiana, as Dirk mentioned, we've seen some nice rate support from that over the past several years. I think if you went back about 5 years ago or so, I'm not sure it would have been probably quite as attractive for us, but we've seen nice support for them, a nice margin and that stay pretty consistent with where we are on a consolidated basis. I think the ability for us to do 2 acquisitions simultaneously or in close proximity gives us really good coverage. I think we've always wanted to have a pretty good footprint when we go into a new market. I think if we were to do one the other, it probably wouldn't have been quite as attractive, but I think doing both gives us a nice -- a nice place to start in Indiana and the ability to continue to add either additional services or more density there. So we're more placed on the map where we have opportunities. I think just thinking about it from a budgetary standpoint, Obviously, Texas is every other year. So they're not going to meet this year. So nothing to really report on that in our kind of reference New Mexico, we just finalized their budget. There are dollars allocated for home and community-based services. We're just trying to determine it gets the information on the logistics of how that will pass down to providers. Indiana -- I mean, I'm sorry, Illinois, is our largest market is still [indiscernible] has not been finalized our budget this year. Our understanding is there's conversations from the union as we would expect every year about our services and rates, but nothing to report. We would expect them to probably finalize their budget over the next few weeks. So we'll know more then. But those are probably the 3 largest obviously, that we keep our eye on. Raj Kumar: Got it. And then maybe looking at home health, I guess there was a shift in the payer mix trend higher Medicaid year-over-year. I guess maybe anything to call out on that front, I guess, more intentional or just kind of how it played out. And I guess, has it been paying better than MA if it is intentional. I'm just kind of curious on the payer mix trend for home health in the quarter. Brian Poff: Yes. I think [indiscernible] quarter probably a little bit of a mile, we had some rate updates, some positive rate updates in one of our programs that kind of falls into that other bucket that you saw in our press release yesterday. So we saw that in the quarter, we'll probably revert back to more historical norms next quarter. Nothing intentional. I think, obviously, we're focused on making sure we try to get the best rate possible in the business that we take in home health. I'm trying to make sure that it's profitable. Our guys on the payer side are having conversations consistently with folks on trying to get as many episodic rates as we can and looking at taking cases that makes sense for us from a profitability perspective. Operator: The next question comes from Matthew Gillmor from KeyBanc. Matthew Gillmor: Maybe following up on some of the census comments for Personal Care. I think I saw the census was down a little sequentially you mentioned Illinois was up, which is encouraging. I just wanted to confirm I heard that correctly. And then maybe more broadly, I know census for personal care, oftentimes is lower in the first quarter. And if Illinois was stronger, does that imply there was weakness elsewhere? Or would you just sort of categorize it as sort of normal seasonal trends. Just wanted to see if there's any other details to share on this topic. Heather Dixon: Sure. I'll take that. So as Dirk mentioned, we did have some weather impact of the quarter. and that impacted our sequential census growth. That's what you saw as a slight sequential decline. But you did hear correctly, we had census improvements throughout the quarter, and we saw gains as we exited the quarter. And I think, very importantly, March since this exceeded January and February census. So we're focused on those sequential gains. And going forward, that should lead to year-over-year gains as we move through the next couple of quarters. And then specifically in Illinois, we were very pleased to see that start the care exceeded discharges throughout the quarter, and that led to sequential monthly improvement there as well. And so as we exited the quarter for Illinois, we saw a nice trajectory, and frankly, overall with census, and then we saw that trajectory really continue as we moved into the second quarter as well. There is nothing to point to. It's not that Illinois is masking anything else. It's just as our largest state and one that we're very focused on. We wanted to be sure that we shared the positive improvement that we've seen there. Matthew Gillmor: That's great. Appreciate it. And then maybe following up on some regulatory topics. CMS has made some comments that have been skeptical of the self-directed care model within personal care and sort of home and community-based services. broadly, especially with some key states like New York, which I know you don't have exposure to I was curious if the skepticism on the self-directed care model created opportunities for Addus more broadly, given your focus on the agency directed model? R. Allison: Self-directed care does have an issue. You don't have anybody in between the patient and the caregiver and the patient to make sure that the surface is actually being performed. So it's -- the state has a little more responsibility on themselves to do that. So we saw in New York that it was a program that was probably in our mind, going to have issues and not really sustainable. That's why we left New York. There's also issues out in California. There is a large issue out there because it's self-directed care. We don't participate in medical out there, most of the business we have is VA and private pay. But as you look at it, we've been saying for years, Personal Care is a great service and much needed and saves the states a lot of money but it needs to be done in the right way. And one of the things that is an advantage to having the companies like Addus and others sit out there hiring the caregiver and matching them with the patient is that we have responsibilities to do a lot of extra things to make sure that service is being provided. Whether that's supervisory visits, actually in person calls on the telephone, we have EVV. We have to make sure that the client shows up. I mean the caregiver shows up and stays the amount of time when they leave so that we're billing a proper number of hours. So there's a lot of compliance issues that are placed on companies like Addus as opposed to the self-directed care where there's very little, if any, of those. So we think it's a real encouragement to our industry. From our standpoint, we agree with the fact that there needs to be a look and make sure that when you're paid for services, those services are being rendered. We think that will benefit a company like Addus. Operator: The next question comes from Sean Dodge from BMO Capital Markets. Christopher Charlton: It's Chris Charlton on for Sean here. Maybe back on Personal Care. You've again driven strong growth in same-store a billable hours even amid a declining census. Can you just share some more detail on some of the dynamics behind the strength here and continuing to fill a strong percentage of the authorized hours and kind of how you anticipate that evolving throughout the year as you expect to return to some census growth? Heather Dixon: Sure. Sure. I'll take that. Chris, I'll start with talking about billable hours and sort of what we're doing that really fuels that growth in billable hours. A couple of things specifically. One, we're working on refining our operational processes from the support center and then also from the branch perspective, and that's particularly with scheduling and utilization of our authorized hours. And then as we talked about just a couple of minutes ago, we've been focused on creating tools and deploying them that will help our providers, actually, the caregivers have access to those hours as well, and that's in the form of the app. What we have seen is improvement in that service percentage or fill rate. So the hours that we are posting are really a higher utilization of the authorized hours. We're seeing that in most of our states, and we're seeing that specifically where we have deployed the app and we've had some really good usage. And we would expect for that opportunity to improve the service percentage to improve as we move throughout the year, particularly as we deploy the app in Texas, one of our largest states. If you think about from Q4 to Q1, your question about even though census is down just a bit sequentially, billable hours are up. I think that's just a function of the weather that we saw earlier in the quarter and nothing else really to point to there. R. Allison: Let me jump in on census because I know everybody is focused on that number, and it is an important number. It's not one that we get paid on billable hours. So we really focus on making sure we get the proper amount of hours per census as opposed to just census per se because you got to get the right census. You got to get the right hours from that patient coming on board to make sure that it's something we can serve appropriately and profitably. That being said, we do understand that people are looking at that. And I think the important thing this quarter that's very exciting to us is Illinois made the turn. And Illinois is one we really worked on the last 4 quarters to get it back into a growth mode. It just so happens this month, Texas was a little soft coming out in January, really. And so we saw a little bit of effect in Texas for the census for the quarter. But by the end of the quarter, Texas was back. Illinois was continued to grow. So the important thing is we believe most of our states now are in the situation where starts of care are exceeding discharges. Sometimes you're going to have a little bit of issue in a state maybe during a quarter. But the general trend is we think we've seen that change. And now we think all 3 of our big states are in that particular situation where we should grow census. Christopher Charlton: Okay. That's helpful. And then on home health, obviously, there was some encouraging adjustments to the final rate from CMS there last year. As you kind of come up on their initial proposal for 2027 rates in the coming months. Maybe just qualitatively, can you just share some thoughts on the backdrop and kind of what you would like to see initially just kind of give everyone some clarity that the environment might be starting to stabilize and might be looking just to be a more favorable backdrop for some opportunities there? Brian Poff: Yes. I think I can take that one, and Dirk can add some color as well. I think in Dirk's comments, I think, obviously saw some positivity in the final rule last year. I think we're interested to see what the rule will look like this year. It feels like maybe there's more appreciation coming out of CMS for what the industry has gone through the last few years, I think, in kind of focusing on some of the areas where there might have been some issues that might have impacted the way that they've looked at reimbursement in the last few years. And the industry, I think, has been lobbying for some time for them to see that in the way that some of the things in the fraud, waste and abuse area potentially have been used in the calculation. And with those kind of maybe out of the mix and maybe identified, I think we're hopeful that, that means maybe there'll be more positivity in the rate that we'll see coming up this year. So a small segment for us. We think there's a lot of synergies of having multiple lines of care. So something that we'll watch closely, but things that we're still interested in looking at. Operator: The next question comes from Andrew Mok from Barclays. Unknown Analyst: This is Jeffrey on for Andrew. So I appreciate all the color around the Personal Care segment, but maybe I just wanted to better understand Addus' exposure to self-directed personal care and the impact that's had on recent Personal Care segment results. R. Allison: Yes. We don't really see an impact from self-directed care in most of our states. As we mentioned, there was some issues in New York. We left that state. California, we used to -- if you go back 10, 15 years ago, we did business in California, and California really decided to go self-directed care, and it wasn't something that we provided. So we focused on states that really understand the difference between sub-directed care and agency care. And that really goes back to what I said a few minutes ago, was what you get with agency care is a compliance program. You get companies like Addus that are making sure that, that care never who may or may not just because it's called family caregiver. It may not actually be a family caregiver or a family member. It may be somebody that knew the patient and is willing to serve in that market. So for that aspect, we still do all the things. We do all the training. We make sure that EVV is in place. We go through our complete compliance program to make sure that we are being paid appropriately and that we're providing the appropriate care that per the plan of care. So really from us, the self-directed care does not have a direct impact, but we are glad to see that they're looking at self-directed care to make sure that it is following the rules just like agency care. Unknown Analyst: Okay. And maybe on the hospice side, I think revenue per patient day growth was negative for the first time while could you help us better understand the dynamics there? -- including any trade-off with average length of stay? Brian Poff: Yes. I think there's 2 elements to that this quarter. I think primarily, we talked last year that we had some positive impact from the implicit price concession or revenue adjustment, whichever term you want to use. And I think we had indicated we expected that revert back to kind of historical norms. And I think that's where we were this quarter. So that definitely was part of the consideration between last year and even Q4 rated into Q1. I think there's a little bit of probably impact from just mix as well, but nothing really material there, but those are really the 2 factors. Operator: The next question comes from Constantine Davides from Citizens. Constantine Davides: Dirk, you highlighted your balance sheet strength and ongoing debt reduction both in the quarter and post the quarter and I guess can you just comment a little bit on the size of the opportunities in the M&A pipeline, whether that's starting to skew up a little bit more in recent months? R. Allison: Yes. What we're starting to see this year, and there's already 2 or 3 opportunities out there that are upside that we're looking at. I think it's really something that changed probably in the last 3 months or so where we're seeing processes begin on these larger opportunities. And that's one of the reasons, I think, constant team that we've worked very hard to keep our balance sheet clean. It's the reason we were able to do Gentiva very quickly and bring it on board. So we're looking at some of these bigger opportunities that because of our balance sheet, we could do and bring on fairly rapidly without having to stress our balance sheet. So again, they are out there. They're in a process, and we're more looking at them. Constantine Davides: And when you say of size something along the size of -- or scale of Gentiva. R. Allison: Yes, they're similar concise to Gentiva. That's correct. Constantine Davides: Great. And then a quick follow-up on India. You talked about that being -- that state being attractive and good rate momentum, I guess, in recent periods. Where do rates kind of compare to either other states you're in or your blended average? R. Allison: The rates are a little higher than some of the Midwestern states. I mean, obviously, Illinois is going to be our highest market. But Indiana, if you look around the other states around there, the rates now are very -- there are nice rates. There are rates that we can operate in very effectively. Also, there seems to be a little less competition in Indiana in the number of providers of our care. So it's a state that we've been looking at. And with -- I think it was in like 2023 time frame is when they really raise their rates to make them more competitive. Ever since then, we've been looking for opportunities to get into a state. And this [indiscernible] home court home care brought to us and the other acquisition that we announced allow us to that state and start looking for other opportunities to grow. Operator: The next question comes from Ryan Langston from TD Cal. Ryan Langston: Maybe just dovetailing off Indiana. Obviously, strategy to enter states the size and scale. Do you know if you combine the 2 assets where that would put you in terms of market share in the state. And I just caught your comments on decent rates and competition dynamics. But anything else in particular that made Indiana attractive? Brian Poff: Yes. I can start and Dirk could add some color on. I don't know that we have a detail of exactly where we stand. I think it's going to be a good footprint for us from just a coverage standpoint. All in, the other acquisition is going to be similar size. So we're going to be just under $20 million in revenue, which is a pretty good start for us in the state. I think one of the things that made it attractive for us in addition to what Dirk had kind of referenced is the managed Medicaid component. Obviously, a lot of the larger players there, I think United and those folks, we have good relationships with all of those guys, as everyone knows kind of nationally. So I think it is a good fit for us as it's always been something that's been part of the profile that we like as we get into states that have managed Medicaid where we can have those relationships in place. So I'm excited about that. Ryan Langston: Okay. And then I appreciate the commentary and response to Matt's question, but maybe just more broadly, obviously, this administration is really focused on fraud, waste and abuse and have made some statements to that quite a bit over the past several months to a year plus. Like I guess, just in general, what do you think any of that could mean for Addus? Is that potential benefit because you're so large and sophisticated maybe versus some of your smaller competitors in your markets? Just maybe more broadly, what do you think this administration sort of stands on FWA, how that could affect that? R. Allison: Yes. One of the things that Addus as did, we participated with the alliance in talking to the current administration about the fact that front abuse is out there, and it causes companies that are legitimate providers. It causes issues with various things you can talk about. And so from the standpoint of Addus, we're glad to see the administration focus on fraud and abuse. We spend a lot of money on compliance. We have for the last 10 years, we want to make sure that when we operate in a state that we're following the rules and we're doing what's proppant. And at times that you find that maybe something was built in properly, we pay it back very quickly to stay in compliance with the state. So the fact that we are large, we spend millions of dollars into the compliance aspect, we think -- bodes very well for what the administration is trying to do, and that is take out the players -- mostly smaller players, but take out the players that aren't doing the right thing. They're just billing and not following through with what they need to do to make sure the rules are being followed. And more importantly, the most important thing is that the care is being given to the patient. There's a reason that patient has a plan of care that has stayed approved, and that is they need that care. And so for us, calling out personal care, we'd rather than just call out home care and talk about the fact that there's a lot of fraud and abuse in home health. There seems to be an in hospice. From a personal care standpoint, we believe that we're a leader in the industry, and part of that being a leader is to lead the compliance effort. And so we're pleased with the fact that we're focused on that. And we believe long term, it will be a benefit to our company. Operator: The next question comes from Jared Hasse from William Blair. Jared Haase: Maybe just one for the model. I appreciate all the detail you guys have given as far as hiring and some of the initiatives you have going on like the caregiver application. That hours per se a month metric has been about 70% for a couple of quarters now. I guess, is there anything structurally that would cause that decline? I think the typical seasonality would have that sort of continue to grow sequentially over the rest of the year. But I just want to make sure that's sort of the right expectation to level set how we're thinking about things for the model, just given the moving parts as it relates to sort of census and volume trends. Brian Poff: Yes, Jared, I wouldn't expect to see that. There's nothing structurally that's going to cause that to decline. I think you're always going to have a little bit of ebb and flow in mix in the states. But with the efforts that we're using in the caregiver app and that rollout and thinking about our full rate, we would actually probably expect that longer term to actually continue to grow because we think there are hours that are available for clients under their care plan that we are currently not serving. So no, I wouldn't expect from [indiscernible] I would not expect to see that decline for any structural reason. Jared Haase: Okay. Got it. That's helpful. And then maybe just another one on Indiana as a market for you guys. I'm just curious do you get any sort of regional leverage in a market like Indiana, just given obviously the proximity to your largest market, Illinois. I don't know if there's any sort of infrastructure that you're able to leverage that would help you scale up and extract synergies a little bit more quickly than normal. Brian Poff: Yes. If you look at it from where we have markets around India, obviously, we're very large in Illinois. We're in Michigan, we're Ohio. So Indiana is kind of right in the middle of that geographically. So if you think about from just a regional or leadership perspective, there's not going to be a need for us to add any additional layers there. They should be able to just talk under kind of what exists for us on the infrastructure today. Obviously, you'll have people in those branch locations. But really that should be the limit of it. So from a -- just from a lift perspective on G&A, that definitely should slide right into the operations that we have that kind of surround the state. Operator: Next question comes from Clarke Murphy from Truist. Clarke Murphy: I had a follow-up on labor. I appreciate all the commentary that you guys have around the caregiver app and hiring trends. But I wanted to see if you guys are seeing perhaps any benefit on labor availability, even some of the macro concerns that seem to have amplified over the last couple of months and the impact that, that's had on kind of a broader consumer environment. Heather Dixon: I'll take that. The short answer is that we're seeing positive hiring trends and we are seeing some of the leading indicators in terms of wage inflation and availability of candidate full trend in the right direction. And frankly, with wage inflation, we're back to sort of that normal roughly 3% base, a little -- some are a little higher, some are a little lower. But in terms of candidates, we're seeing really good candidate flow across our markets. As Dirk mentioned, we're always going to have small kits where it's a little bit more difficult to staff, but that is really limited to mostly rural locations and frankly, just a couple of skilled categories in those rural locations, but we continue to [indiscernible] though those so that we can make sure we're hiring the right staff to drive growth and to serve our patients and clients. So really seeing some good trajectory there. Now whether it's attributable to the macro environmental issues, that's really hard to say, of course, but I can tell you that we are seeing positive trends. Jared Haase: Got it. And then just switching gears to capital deployment. The other question I had was just if I think about your current pace of debt paydown relative to your debt balance suggests absent M&A be kind of largely paid off by the end of the year. Just wanted to see absent any large-scale M&A, how that would potentially impact your capital deployment priorities going forward? R. Allison: We spent a lot of time talking about this at our Board meeting, as you would expect with the company in our position. I think the thing we see that maybe is not as apparent to outsiders is the number of deals that are now starting to come on board. We're starting to see some larger transactions as we mentioned. And remember, with those large transactions, there still are a number of smaller transactions that we just announced that are out there that we consider in most cases, backfilled. And in this case, it was entering into a new market. So we believe that before our data is paid off, we will put to work, a great deal of our capital in these opportunities that are out there. So it led us to decide that that's really what we understand we're going to use our cap for today. Now if that didn't [indiscernible] over the next year, you would see us maybe come up with a different decision on how we use our capital. But we believe right now that with the opportunities that are there for us, and we'll be able to use our debt and our cash and debt to grow the company. Operator: The next question comes from Ben Hendricks from RBC Capital. Michael Murray: This is Michael Murray on for Ben. You saw some pretty good leverage on adjusted SG&A even with the weather headwinds. Are there specific cost initiatives driving this improvement? Do you think the caregiver app is helping there? And how should we think about SG&A ratio as we move through the year? Brian Poff: Yes. I would say, first, the caregiver app probably isn't going to really have an impact on G&A. I think what we continue to see is kind of ongoing leverage, particularly on our corporate G&A as we grow our revenue base as we would expect. So we're not having to obviously add incremental cost there. On the labor side, as we kind of mentioned earlier, this year in this cycle, we're back to kind of a 3-ish percent kind of default rate there, so kind of back to norm. I think kind of going forward, we do give our merits on March 1. So we think sequentially into Q2, there's going to be a little bit of additional dollars in G&A in Q2 as those kind of flow through for the full quarter. But nothing else really from a seasonal perspective. So I think we would expect it to maintain a pretty stable percentage of revenue and continue to see additional leverage as we grow. Michael Murray: Okay. And then just shifting gears to home health. Organic revenue declined 6.6%. I think you previously indicated a return to growth in the second half of this year against some easier comps. So just wanted to get an update on admission trends, the impact of your new leadership and your confidence in achieving that time line. Heather Dixon: Sure. Michael, I'll take that one and talk about home health. Just start by reminding everybody, it's less than 5% of our business. But that said, we've made changes from a leadership perspective and then also from a sales perspective and how we go to market for that business recently. In Q1, we saw our margins really where we want them to be. And so our focus is now on volume. We did see some positive trends in Q1. In fact, in Q1 2026 new admissions, total volume and total visits, all improved sequentially versus Q4 2025. So that is the trend that we would like to see. That's part of what we're focused on seeing and we continue to think that certainly later this year and feel good about that statement. Just to just step back a little bit at a higher level picking up on something that Dirk said earlier, the real value in our home health business is the interconnecting care that we provide and the correlation that we see in markets where we have multiple lines of service there and different levels of care between those lines of service. So for example, I think it bears repeating in New Mexico and also Tennessee, where we have what we call the bridge program in place, and we really focus on creating referrals and admissions from home health into hospice for patients where that's appropriate, we've seen those rates exceed 25%. And we've also now begun that program in Illinois. Obviously, Illinois Home Health is a little bit earlier for us, but there is great opportunity there and opportunity to continue that pattern Operator: And our next question comes from A.J. Rice from UBS. Albert Rice: First, I think at one point, you were -- had said that you thought in the second quarter, you'd still see above average growth in personal care and hospice and then it would moderate in the second half. Just wanted to give you a chance if there's any update. Are you thinking about seasonality, what that might be or if there's any comments on thinking about the seasonal layout of the business for the rest of the year. Brian Poff: Yes, A.J., this is Brian. I think maybe not so much seasonal, but I think you started thinking about comps over prior year and some of the rate impact, particularly in Personal Care. I think our prior comments that we expect it to be probably toward the high of our kind of normal 3% to 5% range, if not above. So starting this year, obviously, at 6.5% same-store basis. We would still expect that to be the case for the remainder of this year. I think once we kind of get confirmation on New Mexico and that flowing through as well, that will obviously benefit the back half of the year. So I think we still feel pretty comfortable with that commentary thinking about kind of where we'll be on a same-store basis for each quarter going forward in [ BCS ]. Home health -- I mean, sorry, hospice has been double-digit plus in same-store. I think we had guided people to think that's probably not long-term sustainable. Our ultimate expectation is probably upper single digits, so we're just under 8% this quarter. I think we've seen some nice trajectory in ADC coming out of the quarter. We were a little bit softer coming off of the holiday. So I think that sets us up pretty well. I think going forward to be in really good shape to continue to meet that as well for the remainder of this year. Albert Rice: Okay. And then I guess your comments about M&A and the pipeline and so forth. Obviously, these deals are more in the personal care arena. You sound like you're feeling a little better about the home health backdrop. Would that be something you would now sort of lean into again on M&A? Or is it still too early to do that? R. Allison: I think we would look at home health deals today as opposed to maybe a year ago. As you can understand, we'd be very careful in what we did, make sure it's strategically met. For us, the overlap with our hospice and personal care so that our [indiscernible] bridge program can work. But yes, we would start looking at home health care opportunities today. Operator: The next question comes from Joanna Gajuk from Bank of America. Joanna Gajuk: Full of questions here. So on personal care same-store hours per business day, I think grew, call it, 2%, 2.2% -- so what was it excluding weather? I know you gave a revenue, I guess, impact from that? And what was it as you exited the quarter? So essentially what I'm trying to get at is kind of what was your growth in March? And do you expect sort of the acceleration and a little bit higher over the rest of the year on that metric? Brian Poff: Yes. I think, Joanna, I think our target has always been and we've been talking about it for some time now. We can keep that same-store hours per business day between 2% and 2.5%, we're probably going to be in a pretty good spot. We've been 2.4% each of Q3 and Q4 [indiscernible], but we were a little bit softer as we kind of mentioned in Heather -- with some of the weather we saw in January. So we're probably not going to go into kind of a month-by-month metric on that. I think we feel pretty comfortable coming out of the quarter with where we were from just a census perspective in hours in March and going into that 2% to 2.5% range still feels very, very solid for us going forward. Joanna Gajuk: It's great. 2.5%. And then the gross margins, so Q1 is seasonally low, right? But can you help us kind of call out anything as we think about Q2 from Q1? Brian Poff: Yes. I think yes, seasonally is usually always our low watermark of the year with the reset of payroll taxes and our merits. I think traditionally, what we see is -- usually you see a little bit of improvement with some of the payroll tax caps getting Q1 into Q2. So usually, there's a little bit of benefit into Q2. Q2, Q3, usually pretty flat. I think Q4 usually is the best quarter for us from a margin perspective, just with some additional benefit from payroll tax caps but also our hospice rate increase kicks in, in that quarter as well. I think if you look at the mix of our business, personal care was a little over 77% this quarter. As a comparison, you think about that versus hospice and home health, hospice and wealth have a higher gross margin. So if that mix gets back more to 75-25 on skilled and non-skilled that would benefit as well, but mix is going to potentially play in as well. So I think we feel really good coming out of the quarter on the track for [indiscernible] ADC. So if that were to be a bigger part of our mix going forward, that would benefit our gross margin percentage as well. Joanna Gajuk: And the last one on the quarter. The stock comp was higher sequentially from Q4. Is there -- was there something kind of onetime in nature? Is the $5 million a good run rate? Or is this something outside of [indiscernible]? Brian Poff: Yes. That's not a run rate. I mentioned in my comments. So with our former President and COO, retiring, there was some accelerated vesting as part of this retirement that impacted the quarter, but should be onetime and would not be continuing going forward. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Allison for any closing remarks. R. Allison: Thank you, operator. I want to thank each of you for taking the time to join us today on our call, and we hope that you have a great week. Thank you. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the Expro Q1 2026 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Dave Wilson, Vice President of Investor Relations. Please go ahead. Dave Wilson: Thank you, operator. Good morning, everyone, and welcome to Expro's First Quarter 2026 Earnings Call. I'm joined today by Mike Jardon, CEO; and Sergio Maiworm, CFO. Both Mike and Sergio will have some prepared remarks, after which we'll open the call for questions. In association with today's call, we have an accompanying presentation and supplemental financial information on our first quarter results. Both of these are posted on the Expro website, expro.com, under the Investors section. Before we begin today's call, I'll remind everyone that some of today's comments may refer to or contain forward-looking statements. Such statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These statements speak only as of today's date, and the company assumes no responsibility to update such forward-looking statements. The company has included in its SEC filings, cautionary language identifying important risk factors that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included in the company's SEC filings, which can be obtained on the SEC's website, sec.gov, or on our website, again, expro.com. Please note that any non-GAAP financial measures discussed during this call are defined and reconciled to the most directly comparable GAAP financial measures in our first quarter 2026 earnings release, which was issued this morning and can also be found on our website. With that said, I'll turn the call over to Mike. Michael Jardon: Thanks, Dave. Good morning, good afternoon, everyone, and welcome to Expro's first quarter 2026 earnings call. I'll begin by reviewing the first quarter of 2026 financial results from today's press release. I'll then comment on the overall macro environment, provide some insight into our Middle East and North Africa region, talk a bit about our exciting news today with our Enhanced Drilling acquisition announcement, then revisit our outlook for the year ahead. And finally, I will then conclude with some operational highlights for the quarter. Sergio will then provide some further details on our financial performance by geographic region and address the company's ongoing capital allocation framework. Let's begin on Slide 3. During the quarter, the company experienced the usual first quarter seasonality we have in our business. And as a reminder, this seasonality is a result of winter weather in the Northern Hemisphere, which slows offshore activity due to ongoing winter storms and rougher than normal season. Additionally, the seasonal dip is also a result of our customers' CapEx and operational spend cycle that tend to be lower at the start of their annual budget cycles. This is generally more typical with our NOC customers. Additionally, our first quarter results were only marginally impacted by the conflict in the Middle East. I'm pleased to report that local emergency response plans were implemented quickly and the efficiency in which these actions were taken, and that all of our employees still in the region remain safe. I will go into more detail regarding our MENA region in a moment. But from an overall perspective, the disruptions to our Middle East business late in the quarter only had a minor impact on our operational and financial results during the quarter. For the quarter, the company generated $368 million of revenue and $63 million of adjusted EBITDA, representing a 17% margin. Adjusted free cash flow for the quarter was $3 million and was affected by changes in working capital, which Sergio will comment more on later in the call. Now taking an assessment of the current environment, we, like others, see a global energy market that is increasingly influenced by the heightened geopolitical tensions, commodity price volatility and an expanding focus on long-term energy security. At some point, the uncertainties will subside with the expectations that oil prices will reset and begin to stabilize once these disruptions ease. However, there is still a significant amount of disruption that will continue to have global implications in terms of not only near-term supply and demand dynamics, but also over the medium- and longer-term as countries and companies around the world look to prioritize energy security and what will be needed to achieve that. There has been intensified interest in strengthening supply resilience and geographic diversification, trends that could develop and will likely shape industry behavior longer-term. It is our fundamental view that the new normal will look different than it did before the Middle East conflict. Many believe it will still take some time before the industry returns to a more normalized state of operations, and we believe that it will be the end of the second quarter before we have a sense of complete clarity. We remain optimistic that resolution of the situation could begin sooner than that, but we'll adapt our operations appropriately. One industry behavior that we are confident with that we do not believe will change is that of capital discipline. In this light, we see offshore and deepwater developments remaining attractive, not only by providing stable, lower-risk growth pathways, but also from an energy security standpoint as well. We expect such projects will continue to drive demand for Expro's well construction and well management businesses. Additionally, brownfield optimization continues to see a growing focus as operators look to enhance production from existing assets to reduce capital risk. We believe this industry trend also presents an opportunity for Expro's technologies and services as well. We still expect activity to strengthen in the second half of the year, and with Expro's strong offshore and international positioning, along with its production optimization capabilities, believe the company is well positioned to manage near-term uncertainty and benefit from increased activity in the coming quarters and years. To summarize, Expro maintains a constructive outlook for 2026 and beyond, allowing us to continue supporting customers throughout the full life cycle of their assets. Moving to Slide 4, which reflects our MENA region. Oftentimes, when the MENA region is discussed, the focus is heavily on the Middle East portion, which is certainly understandable, and we have received our fair share of questions related to our exposure to countries in that region. Having lived and worked in that part of the world earlier in my career, I think it's helpful to give our stakeholders some more clarity on how Expro is exposed in the region. I'll look to address that really in 3 fundamental ways. First, for Expro, there's more of a balance between our Middle East and North Africa operations in terms of financial contribution, and there has been no disruption to our operations in North Africa. Second, to the countries in the Middle East, while we do have some exposure to countries like Qatar, Kuwait and Iraq, they do not carry as large of a contribution to our revenue or EBITDA generation. The biggest contributor in those regards is Saudi Arabia and to a lesser extent, the Emirates. And while there were some interruptions in those countries' operations, we have continued to have more normal operational cadence. Third, given the timing of the commencement of the conflict in the Middle East, there was only 1 month affected during the first quarter, so that too lessen the overall impact. Now moving to Slide 5. We're very excited to announce Expro's acquisition of Enhanced Drilling. Enhanced Drilling is an industry and technological leader in managed pressure drilling, or MPD, really focused in the deepwater offshore operations. For Expro, this acquisition adds a critical technology solution that is proven and is increasingly gaining traction within the industry. As structured, this acquisition will be immediately accretive to cash flows and EBITDA margins, and it adds over $275 million of order backlog. We see a lot of growth opportunities in the service line going forward, especially as part of the Expro platform. Due to our size and breadth, we are able to bring services and technologies acquired into new markets around the world. We have a proven track record of doing this with our most recent example of Coretrax acquisition that we completed back in 2024. Currently, Enhanced Drilling is operating primarily in offshore Norway and in the Gulf of America. And we see opportunities in the Caribbean, West Africa, Brazil and Australia, where this technology could benefit customers tremendously. Turning to Slide 6. Here's a quick summary of the transaction from a financial perspective. The purchase price is NOK 2 billion, which is currently equating to roughly USD 215 million. We expect some final adjustments to the purchase price based upon customary and working capital adjustments as the transaction is finalized and closed. Expro will utilize a combination of cash on hand and borrowings under the revolving credit facility to fund the acquisition. Current projections are for Enhanced Drilling to add more than $50 million to our annual run rate adjusted EBITDA. Additionally, with adjusted EBITDA margins over 30%, this acquisition will contribute to further EBITDA margin expansion. Finally, we anticipate that the transaction will close in the third quarter and based upon our understanding at this point, will likely be some time in the early part of the quarter. The next few slides provide a little bit more detail on Enhanced Drilling and some of its services and offerings along its riser-based and riserless solutions. We have provided these slides for informational purposes. Now let's jump ahead to Slide #10. On Slide 10, we're providing our 2026 financial guidance based upon what we currently see in the global market. In essence, this means no change to our previously established annual guidance for 2026. With the continued global conflicts, uncertainty still exists, which adds to the complexity of providing forward guidance. That said, however, we believe that current industry optimism is tangible, particularly towards the back end of 2026 and especially as we go into 2027 and beyond. We remain constructive and confident in our second half of 2026, and the associated ramp in revenue and adjusted EBITDA, seeing sequential improvements in each subsequent quarter. With regards to the impact of the Middle East conflict on our future results, assuming a resolution to the Middle East conflict by the end of the second quarter, we would expect the impact on our second quarter results to be in the $10 million to $15 million revenue range. Including the first quarter and projected second quarter, impact of the Middle East conflict would equate to approximately 1% of total company revenues for the year. It is also worth noting for the second quarter, those revenue impacts carry elevated decrementals for EBITDA calculations. In other words, the impacts are disproportionate on the revenue versus the costs. Regarding our confidence and the ramp-up for the back half of the year, there are a few aspects I'd like to highlight. We see opportunities in our North and Latin America region with subsea well access and well flow management projects in the Gulf of America, tubular sales and well intervention and integrity work in Colombia, all of which should contribute a healthy amount to the projected increases. In our Middle East and North Africa region, besides assuming a resolution in the Middle East by the end of the second quarter and a return to more normalized activity, we still expect increasing contributions from our North Africa operations, particularly around a sizable production solutions project. For the back half of the year, in our Asia Pacific region, we see our well construction and well management businesses in Southeast Asia contributing incrementally more, along with some subsea equipment sales in China. Additionally, we expect incremental contributions from our Coretrax product line across our geographic regions. In Europe and Sub-Saharan Africa, while we do not expect much incremental growth in the back half of the year, we still expect operations there to be steady and be a sizable contributor to overall revenue and EBITDA. Finally, as we have mentioned before, we intend to expand our margins this year with the full year benefiting from our Drive 25 initiative and to improve our capital efficiency and wallet share with existing customers. Before moving on to our customer and technology highlights, I want to revisit a few attributes that we believe set Expro apart. These are included on Slide #11. Due to our breadth of services and technologies across the well lifecycle, we see opportunities to expand our wallet share with existing customers. Expro can leverage our installed base to provide additional services and technologies to customers, which adds value to their operations, while at the same time, helping to expand our underlying margins. Another thing that we see as distinct is our innovation and technology offerings. They are emblematic of how we see the industry evolving. Our technologies and our ability to address unique customer challenges place Expro as the vendor of choice for many of our customers and adds to the company's relevancy and longevity with those same customers. In addition to our service and technology breadth, we also have geographic breadth. Our global footprint enables us to leverage services and technologies, whether those are developed internally or acquired through M&A to be deployed in multi geographies where we operate. For example, as we've mentioned before, our acquisition of Coretrax in 2024. That business was operating in circa 15 countries at the time of the acquisition, but now we are deploying those technologies across over 31 countries. We plan to use a similar blueprint with the Enhanced Drilling acquisition, both in terms of integration, but also in terms of market expansion. Now moving on to our customer technology highlights for the quarter on Slide #12. During the first quarter, Expro continued to demonstrate its innovative technological capabilities with additional deployments and introduction of new technologies into the market. Similar to last quarter, we had several examples to choose from, but only a few to quickly highlight. In Norway, Expro successfully delivered a world-first fully remote completion joint makeup with a downhole control line and clamp without a single person in the red zone. The combination of these disruptive technologies enhances safety, increases execution and operational efficiency, and delivers consistent and repeatable outcomes. Another achievement during the quarter was Expro's iTONG offering, reaching a significant industry milestone. We have now successfully run and pulled over 1.2 million feet of casing and tubing in field operations since the technology was first deployed. This achievement underscores the iTONG growing momentum in the market with an increasing number of clients adopting the technology and experiencing its operational safety and performance advantages. Also during the first quarter, we launched Solus, a single shear-and-seal valve that replaces conventional 2-valve subsea well access systems. This technology reduces the complexity, operational risk, time and cost during subsea intervention and decommissioning operations. The last example I want to highlight is the successful deployment of our MultiTrace gas tracing technology for a customer that enabled accurate flow measurement on a large diameter flare system. This technology overcomes significant process challenges caused by the highly transient conditions surrounding the flow of gas and fluctuating gas consumption. MultiTrace allows accurate measurement of the flare gas in complex conditions, helping operators understand emissions and improve compliance without disrupting operations. At the heart of all these innovation examples and a common thread with all of them was the value creation for our customers. Before turning the call over to Sergio, I'd like to briefly revisit Expro's long-term strategic pillars, those we focus on to drive value for our shareholders. These are included on Slide #13. Expro's long-term strategy is to build a large diversified company that has increasing relevancy to our stakeholders, particularly our customers and our shareholders. Our relevancy to customers is built upon our service offering, including our innovative technologies, execution capabilities and market leadership positions. For shareholders, we continue to move forward, building a company that is able to generate healthy levels of free cash flow, which will be used to achieve our various capital allocation goals, all of which Sergio will expand on in his following comments. One of the pillars of the strategy that we have talked a lot about is our commitment to improve the company's financial profile. We have seen evidence of this over the last several years with EBITDA margin expansion and increasing free cash flow generation. These will remain in focus moving forward, and we expect to achieve further improvement through cost efficiencies and reducing our capital intensity. Another pillar and an important component of our strategy is our technology and innovation and how those are deployed into the market. We continue to develop and deploy new technologies into the market across our global footprint. Our expansive footprint also enables us to internationalize or globalize technologies, particularly those that we acquire through acquisitions that have limited geographic exposure, which leads to another component of our strategy, and that is to grow the company through scalable acquisitions like today's Enhanced Drilling announcement. The company has a strong track record of execution with acquisitions that we have made over the last several years. For these acquisitions and potential ones in the future, Expro looks to add to its services and technology offerings. In general, we seek opportunities with international and offshore exposure that have adjacent product offerings and are accretive to the company's financial position, again, very characteristic of today's announcement of Enhanced Drilling. Due to the slate of service offerings across the full well lifecycle, we have multiple avenues to pursue when looking at potential acquisitions. Our focus will continue to be on pursuing those that we believe will increase relevancy with our customers and shareholders. With that, I'll turn the call over to Sergio, to review our first quarter results in detail. Sergio Maiworm: Thank you, Mike, and good morning to everyone on the call. As we reiterated on our last call, Expro's quarterly results reflect the normal seasonality we experienced during the first quarter of the calendar year, caused primarily by -- as Mike mentioned -- the winter weather in the Northern Hemisphere and a slow start to customer spending. Again, this is normal seasonality and expected every year during the first quarter. With this backdrop, the company executed well on its operational and financial results. Both revenue and adjusted EBITDA reflected the relative midpoints of the ranges we previously provided. Specifically to Q1, our adjusted EBITDA was $63 million with a margin of 17.1%, which is a decline from the previous quarter, but again, reflects the seasonality of the first quarter, and we expect sequential improvement for the remaining quarters of the year. Slide 14 illustrates our annual margin growth for the past few years. Even with these results and noting the ongoing situation in the Middle East and the modest headwinds those have created for us, we remain focused on expanding our margins in 2026, and the drivers of margin expansion for us remain the same. In the near term, those are reflected on Slide 15, and they are the full year impact of our Drive 25 cost efficiency initiative, increasing customer wallet share at higher margins and to continue to internationalize services and technologies acquired in previous acquisitions, spreading those into new geographic areas. The Enhanced Drilling acquisition we announced today will further help expand our margins. Not only is the margin in that business already greater than 30%, but the internationalization of that technology will expand our margins even further. In the medium term, we expect to increase our top line revenue, continue to gain customer wallet share and more fully utilize services and technologies acquired across our geographic areas in order to achieve the next milestone goal of adjusted EBITDA margins greater than 25%. Also acknowledging that possible future M&A may play a factor as well, which we have executed on with today's announcement regarding the Enhanced Drilling acquisition. We're also keenly focused on cash flow generation. And in Q1, Expro reported quarterly free cash flow generation of $3 million on an adjusted basis. This was admittedly light based on our own expectations, but was really driven by working capital changes that worked against us this quarter. Those changes were roughly $20 million more than what we had expected and was primarily driven by the increase in our accounts receivable balance and prepaid amounts included in our other asset balances. This phenomenon is just timing-related. And in fact, subsequent to the quarter end, we have already seen most of Q1 related collections being received, and we already experienced a significant improvement in our working capital balances. I personally expect the second quarter to be a very good collections quarter. Considering the already seen improvements in our working capital, our operational outlook and anticipated CapEx for the year, we still believe we'll generate a good level of adjusted free cash flow this year, in line with our annual guidance. Now quickly turning to the liquidity position. We have included this on Slide 16. The company closed the quarter with $517 million in total liquidity. That includes $171 million in cash on the balance sheet. At quarter end, we had $79 million outstanding on our revolving credit facility, which was consistent from the previous quarter and put the company's net cash position at approximately $92 million. Now obviously, with the Enhanced Drilling acquisition, those numbers will change as we are funding the acquisition through a combination of cash on hand and borrowings under the credit facility. At the end of the day, we're still in a very strong financial position with substantially less than 1x net debt to adjusted EBITDA. Having and maintaining a strong balance sheet positions the company well to execute on its other capital allocation priorities. These are highlighted again on Slide 17. Our capital allocation framework is designed to maximize long-term value creation. As we have mentioned before, there are 4 equally important capital deployment priorities: invest in the business with CapEx, providing organic growth that enhances our core capabilities, improves efficiencies and/or supports technological innovation across our service offerings. As a reminder, the vast majority of our capital expenditures are geared towards specific projects with known return profiles that meet or exceed our standards. I would reiterate, these are not speculative investments. Another capital allocation priority is to deploy capital to inorganic growth. Just like today's announcement, through M&A, Expro can and has completed acquisitions that add to the company's complement of services across the well lifecycle. Our M&A strategy is focused on opportunities that offer clear industrial logic, scalable technologies and synergies and the potential to expand our presence in attractive markets. We maintain a highly selective approach when looking at M&A to ensure only the value-accretive opportunities are pursued and pursued at the right price. Another key aspect of our capital allocation framework is a commitment to return cash to shareholders. As we have already stated, during the first quarter, we repurchased approximately 1.2 million shares for roughly $20 million. This puts us on a really good path to meet or exceed our current year target of returning at least 1/3 of free cash flow to shareholders. On the final leg of the stool in terms of capital allocation is something that I have already covered, and that is maintaining a strong balance sheet. In doing so, we have the financial flexibility and resilience to act on our other capital allocation priorities. For example, even with an unexpected subpar free cash flow generation during the quarter, we were still able to make significant process on our share repurchase target for the year and still maintain the company in a healthy net cash position. This last example also reflects our ability to manage our capital allocation priorities dynamically with one not dominating the ranking. Along those lines, it's important to note that even in a seasonally weak quarter, we were able to execute across all of these capital allocation priorities recently. We invested organically in our business through CapEx. We returned cash to shareholders. We executed on accretive M&A, and we maintained a strong balance sheet. Before turning to our segment performance, I do want to reiterate and summarize our financial outlook for 2026, as Mike previously addressed in Slide 10. Overall, we remain very optimistic with the industry outlook for the second half of 2026 and beyond. Our current projections assume the adverse impacts of the Middle East conflict we seen in the second quarter with no lasting impacts for the third and fourth quarters. And Mike alluded to several real and live opportunities across the regions that we see providing tangible sequential increases in the back half of the year, which when combined with the more favorable working capital changes will result in more significant free cash flow generation. Now I'd like to quickly address our segment performance this quarter. These are covered in Slides 18 through 21 in the accompanying presentation. Turning to regional results. For North and Latin America or NLA, first quarter revenue was $128 million, down just $2 million quarter-over-quarter, reflecting various puts and takes comprised of lower well flow management revenue in Guyana and reduced well construction revenue in the U.S. and Brazil, partially offset by higher subsea well access revenues in the U.S. and increased well flow management revenue in Mexico. Segment EBITDA margin at 20% was down compared to prior quarter at 24%. This decrease was primarily attributable to a less favorable activity mix in the region due to normal seasonality during the quarter. For Europe and Sub-Saharan Africa or ESSA, first quarter revenue was $114 million, also down just $2 million on a sequential basis due to lower well flow management revenues in Angola and Bulgaria and lower subsea well access and well construction revenue in Ghana, partially offset by higher well construction revenue in Ivory Coast. Segment EBITDA margin at 28%, was down sequentially, also reflecting an unfavorable product mix relating to a reduction of higher-margin projects given the normal 1Q seasonality. The Middle East and North Africa region, or MENA, though impacted to some extent by the Middle East conflict that began late in the quarter, still delivered a fairly solid quarter. Revenues of $82 million were down sequentially from the previous quarter of $93 million. The decrease in revenue was primarily driven by lower well flow management revenue in Algeria, Saudi Arabia and Iraq, together with reduced well intervention activity in Qatar due to the ongoing conflicts in the Middle East. MENA segment EBITDA margin was 29% of revenues, decreasing from 39% in the prior quarter. The decrease in the segment EBITDA margin is consistent with the decrease in revenues and change in activity mix experienced during the quarter. Finally, in Asia Pacific or APAC, first quarter revenue was $44 million, a modest increase of $1 million sequentially. Here, the increase was a result of the puts and takes relating to higher subsea well access activity in Malaysia and increased Coretrax-related activity, partially offset by lower well flow management and subsea well access activity in Australia. Asia Pacific segment EBITDA margin at 16% of revenues was consistent with the prior quarter. With that reviewed, I'll turn the call back to Mike for a few closing comments. Michael Jardon: Thanks, Sergio. As we conclude our prepared remarks and before opening the call for questions, I'd like to conclude with the following comments. We share the industry's increased optimism over the medium and long-term, though recognizing it has come at a cost, both from a financial perspective, but also at a human level. I remain confident in the company and that our employees will continue to provide value-added services to our customers, which we intend to translate into value for our shareholders. As part of that, we continue to demonstrate our ability to execute across multiple capital allocation priorities and we'll continue to do so in the future. We thank our employees, customers and shareholders for their continued support and look forward to building on our momentum in the quarters and years ahead. Finally, I look forward to welcoming all the folks at Enhanced Drilling into the Expro family. We are very excited about the opportunities that we can jointly pursue. With that, we can open up the call for questions. Operator: [Operator Instructions] Our first question for today comes from Caitlin Donohue of Goldman Sachs. Caitlin Donohue: Can you walk us through your anticipated growth prospects with the acquisition of Enhanced Drilling, just the strategy of how you anticipate to further expand Expro's wallet share in certain geographies of existing services with the portfolio expansion with MPD? Michael Jardon: No, Caitlin, thank you for the question. And we're -- first off, we are so excited about the Enhanced Drilling acquisition. I mean, this is one we've been looking at and we've been working on for a while, and we've been able to get this closed out here over the last few weeks. And this is -- this really is beyond wallet share expansion for us. This really is a market share expansion opportunity. The technology has tremendous application. It's only in offshore, particularly deepwater, allows operators to drill more complex casing strings and those type of things because it's a dual gradient technology. So the predominant deepwater basins are really where this is going to have application. And as we talked about in the earlier and we've highlighted in the press release, today, it's really -- on the market penetration really has been in Norway and in some here in the U.S. Gulf. So places like Guyana has tremendous application. Brazil, especially with the sub-salt new applications, you start to move into West Africa, the Ghana, the Angola, Australia, I mean, this is a tremendously positive advancement for us that really allows us to expand our service offering into much more of the managed pressure drilling services. So the good thing for us is it's a very similar playbook to how we rolled out the technology from Coretrax. And so our ability, both from an integration standpoint as well as from a market penetration standpoint, we think we'll be able to do that. But I think over the course of the coming few months, we'll be able to get some good penetration into some of those key geographies and in particular, Guyana, to be frank. Caitlin Donohue: Just one more on my end. For the Drive 25 initiatives, bringing down costs over the long-term is a continued goal. Can you give some color on the progress there, particularly as now you have this Enhanced Drilling acquisition, some growth that you might now see from the expanded portfolio? Sergio Maiworm: Caitlin, this is Sergio. I'm happy to address that. So I mean, we are continuing with our cost outs, and we're continuing to make sure that we're getting as efficient as we can as a company. So this is a bit of an ongoing process, the efficiency gains, et cetera. I would say from a Drive 25, we've achieved way more than what we had set out to achieve initially. If you remember, at the beginning, we said that we wanted to take out about $25 million of costs per year. Then we actually increased that to $30 million per year. I think we're close to $40 million now, and a lot of those projects have already been completed. So you should see the full impact of that Drive 25 in our 2026 numbers and beyond. So all of those increased efficiencies, which means that we're taking some of these structural costs out of the system. This is not just we removed a number of people, given the level of activity that we have, but then we will have to bring those costs back into the system if the activity increases. These are sticky cost removals or meaning these are structural cost reductions that will give us a lot of operational leverage as we continue to see the market picking up in the second half of '26 and into '27. That will allow us to grow the top line without actually any meaningful increases in our -- or any increases to be frank, to our support cost structure. So that gives us a lot of incremental torque in the business and cash flow generation with that. Operator: Our next question comes from Eddie Kim with Barclays. Edward Kim: So obviously, the world has changed since your last earnings call. Are you seeing any noticeable change in your customer conversations? And if so, any specific products or business lines where you are seeing or where you expect activity to pick up meaningfully as a result of what's taken place over the past 2 months that's different from your expectations at the very beginning of the year? Michael Jardon: No, Eddie, and thanks for the question. Thanks for joining. I guess so. I was just in Asia here recently. And the Asia market is really -- there was an awful lot of customer conversation and dialogue around more production type projects, more OpEx-related type things, kind of incremental oil. So I think that's -- I think we're going to see that start to strengthen up. But also, quite frankly, both in Asia as well as other customer conversations I've had, there is much more of a situational awareness today around energy security. I think it's going to go well beyond the kind of phenomenon we saw in Europe to begin with, with the Russia-Ukraine conflict. I think there's just a lot more situational awareness around that. So I think that's going to translate into especially some of the deepwater basins, those have got very efficient breakeven costs at this point in time, I think can help add to energy security. And frankly, that means what we're going to see is more drilling and completions type activity. And that's really kind of a sweet spot for us today with our well construction product line, with our subsea product line. And that's one of the reasons that I'm so excited about Enhanced Drilling, because I think you've even heard commentary from the drilling guys here over the course of the last couple of weeks. The second half of 2026, I think if 60 days ago, we thought it was going to be at x level. I think what we see now globally, it's going to be x plus some margin in the second half of the year. I think it's going to kind of step up and ramp up. More drilling activity means more well construction activity means more completion activity. And I think we're really well positioned for that. I think it just sets up 2027 and beyond to be even more robust. Edward Kim: Great. My follow-up is just on the Enhanced Drilling acquisition. Adoption of MPD has picked up a lot over the past several years. Do you have a sense of what the overall market penetration is of MPD globally? Just of the -- I don't know -- 130 deepwater rigs today, how many rigs are utilizing MPD today? And for this Enhanced Drilling acquisition specifically, is it more about market penetration into rigs that don't have MPD currently? Or is it more about replacing incumbents? Michael Jardon: Yes. No, Eddie, it's a really good question. I can say it's part of what we spend an awful lot of time trying to make sure we had a good understanding of as we went into the acquisition. So of those kind of 130-ish floating assets today, there's probably roughly 100 of those have MPD on them today. And with Enhanced Drilling, we've probably got less than a 10% market share today. All 130 of those rigs have an application, have an opportunity for Enhanced Drilling. The difference with this technology is because it's a dual gradient, it allows the operators to drill more complex geology, more complex reservoir pore pressures, also allows them to have different casing designs. They can run larger casing designs to much deeper in the well. So it's going to help them enhance them from a safety, from an operational type standpoint. So we really see of those 130 rigs, you could run this dual gradient technology on all 130 of them, probably not required on all 130 of them, but it's required on an awful lot more than a 10% market share we have today. So long answer, but it's more around displacement of current MPD techniques with this particular technology. Operator: Our next question comes from Keith Beckmann of Pickering Energy Partners. Keith Beckmann: I want to say congrats on the acquisition. Obviously, MPD is not bad to get into if the floater market plays out like we all hope it does. But I wanted to kind of think about the technology side of things, given it's tech day. So I was wondering if maybe given maybe improved 2027 thoughts, maybe how are you thinking about the timing of potentially rolling out technologies? And if you could just kind of talk through how you plan to capture the value and the deployment of those technologies. Michael Jardon: No. Keith, thank you. It's really so much of our innovation focus and our engineering efforts really today is on creating additional operational efficiency. I mean, the things we've done around Drive 25 and really trying to make sure we have sticky cost efficiency, cost-out efforts, we're trying to do the same thing from an operational standpoint. We're trying to reduce the number of personnel that are required. We're trying to make things more autonomous, to make things more repeatable and more -- just more efficient. And so some of the technologies I highlighted earlier around our remote clamp installation system, it really does that, reduces personnel, makes things more efficient. Our iTONG technology allows us to reduce the number of personnel, reduce personnel in the red zone. And we're trying to do the same thing with our well flow management, our well testing operations as well. We're moving to more automation. You're talking about a technology that's been in the industry for 70 years. We've been doing it for 50 plus, and we're actually bringing some efficiency to it. We're reducing the number of personnel that are required, and that brings more efficient operations, but frankly, also helps us with being able to redeploy those personnel to other operations. So it's really kind of that same mantra of efficiency, both from a cost standpoint, but also from an innovation, engineering, technology deployment standpoint as well. Keith Beckmann: Awesome. The second question that I wanted to ask was just around slight Middle East headwinds in 1Q, 2Q. But really, the thing that I wanted to hit on was, how do you expect that you guys could potentially participate in a recovery once the conflict is essentially over? Are there ways that you've identified or you think in particular, you could try to capitalize on potentially in the event that the Middle East needs to start producing a lot more? Michael Jardon: Yes. I mean, it's -- we've had a lot of conversations around the Middle East. Several of us internally have lived and worked in the Middle East earlier in our careers. And I think what we're going to see is we're probably going to observe a different customer and operating dynamic in the Middle East than what we have historically. I think we saw that starting with the Emirates now announcing that they're going to exit from OPEC. They've already been kind of not staying consistent with their production quotas and those kind of things. I think we're going to see much more of a drive for enhanced production and enhanced operations out of the Middle East. So I think that's going to allow us to participate because an awful lot of that is going to be around drilling and completions. And especially on the drilling side for our well construction portfolio, we think that's something we can continue to expand in that marketplace. I just -- philosophically, I mean, right now, our assumptions are that we've come back to kind of more of a normalcy in terms of security and those kind of things in the Middle East here in the second quarter. I think we're going to have to see how that plays out. It seems to be we get one message in the morning and then we get a different message in the afternoon with how things are progressing from a geopolitical standpoint from the Middle East. So we'll continue to be flexible and adaptable with our business and our operations. Short-term, we'll see how that plays out. I do think medium and long-term, the reservoirs are so prolific in the Middle East. They're going to have to play a really strong role in future global production. So I think it will be tremendous in the medium and long-term. We'll just have to kind of see with this choppiness, how that plays out here in the coming weeks and months. And hopefully, we're not talking quarters. Operator: Our next question comes from Josh Jayne of Daniel Energy Partners. Joshua Jayne: You highlighted no logistical issues today as a result of the conflict, but maybe you could just go into a bit more detail on how you're positioning yourself to not be impacted in the event that this goes longer than we all think it may. Michael Jardon: Yes, Josh, thanks for joining us. I think it's -- today, especially for our activity in the Middle East, the vast majority of our revenue and our service intensity comes from services. It doesn't come from product sales. So we're less dependent upon the ability to transport equipment and gear into the region. So in the short-term, it hasn't had a significant effect on us. But frankly, we go beyond weeks and months and we start talking about quarters of conflict, it will become a little bit more of a constraint for us just because we actually have to be able to ship in M&S supplies for maintenance and those type of things. Those tend to be smaller volumes, smaller items that can come in via land, they can come in via air. So right now, we just don't see a significant impact in it. But if this goes on for an extended period of time, and frankly, I personally don't see anything that makes me think that this is going to go on for an extended period of time, we could get to the point where we would have an impact. But today, it's just not because of the makeup of our business and our activity in the Middle East, much more service related, just not having a tremendous influence today. Joshua Jayne: Okay. And then I just wanted to touch on the acquisition one more time. You talked about expanding it geographically as it's obviously relatively well concentrated today. You mentioned Guyana as an opportunity, for example. Maybe just could you go into a bit more detail on how long -- how long it may take once you're fully on board? Do you think it takes to really start to see diversification in the business and just how you're thinking through that a bit more would be great. Michael Jardon: No. I mean, Josh, it's another -- it's a good question. I appreciate you following up. I mean, this is one where the playbook that we've gone through for Coretrax is we've been very intentional on we're going to go to country A first. We're going to go to country B, second. We're going to go to country C, third. We did it in a very specific order because we wanted to maximize the market penetration. We want to maximize the pricing, and we'll go through that same type of process with Enhanced Drilling. The good thing here is, from a technology standpoint, this is so critical and really brings so much value to the operators that it almost sells itself. I think part of the challenge and part of why that management team is so excited to be part of a bigger platform is we've got more channels. We've got more customer engagements. We've got more opportunities to do that. So I think one of our -- and I don't want to call it limitation, but I think one of our throttling mechanisms here is going to be really our ability to -- from a CapEx standpoint to deliver additional incremental systems. We've got a certain number in flight right now, and we'll have to go through and reevaluate which markets we think we can get penetration in. So it's going to be the deepwater basins. We're going to focus on those. It brings efficiency. It brings additional safety. And frankly, I think brings -- could potentially bring an overall cost reduction element to the operators as they can start to change some of their casing designs, I think that brings some tremendous flexibility. So long answer, lots of things to say there, but I think it's part of what you'll really be able to hear from us over the course of the next few months as we start to move that thing forward, get it closed and then being able to really start to action and implement it. You'll hear a lot more about our plans on some of those things. Operator: Our next question comes from Derek Podhaizer of Piper Sandler. Derek Podhaizer: Sorry if I missed this before, I jumped on a little late here, but hoping to get some more color around the 2Q guidance. Just trying to think through it. We obviously, get the seasonal rebound, some margin expansion, but then trying to interplay of the $10 million to $15 million impact from the current Middle East conflict. You said that's going to come with fairly high decrementals, but just also just trying to think of the shape of the recovery as you maintain the full year guide and the big -- the sharp step-up in the second half of the year. So maybe just some help on second quarter would be great. Sergio Maiworm: Derek, this is Sergio. Happy to answer those. So I mean, as we've mentioned before, even before the conflict began and now it's even more so, this is going to be a stair step type of results, right? So second quarter results are going to be higher than first, and third is going to be higher than second and et cetera. So that is the shape of kind of how we should think about kind of revenues and EBITDA and cash flow generation throughout the year. So just kind of just using that as a starting point, as we talked about second quarter will have about $10 million or $15 million impact on our revenue generation in the Middle East because of the conflict. That comes with pretty high decrementals. So you shouldn't assume that there is a pretty significant EBITDA deficiency on that as well. So if you think more about a little bit of the third quarter is a bit of the fulcrum here. So if you think there's so much kind of EBITDA and cash flow that we need to generate throughout the rest of the year and assuming that second quarter is going to be better than first, but not quite as high as the third. So that kind of gives you a little bit of that shape of the recovery there, if that helps you. Derek Podhaizer: It does. Maybe just a bit of a holistic question, just given the Enhanced Drilling acquisition, which was pretty accretive. But just thinking about consolidation in the offshore space, we've seen it on the floater side. We've seen it with support vessels, decommissioning, P&A, obviously, Enhanced Drilling with you guys more through a technology lens. But just given we're entering this what appears like a multiyear up cycle in offshore, what else could we expect from the markets from a consolidation lens to keep up with the demand of these upstream customers that are about to deploy multiyear development projects? Just maybe some thoughts around what you could see when we look out over the next few years from a consolidation standpoint. Michael Jardon: Yes. Derek, it's Mike, and thanks for the question. I think it's -- you're asking the really key important element there. And it's -- for us, we're more relevant today post the Enhanced Drilling acquisition than we were yesterday. We need to continue to become more relevant to our customers. And if we're more relevant to our customers, I know we can be more relevant to investors. I think we need to continue to have consolidation in the market. I think especially offshore, international type areas, I think we need to continue to start to try to see that. We're active in it every day of the week. This is another acquisition. I think some of you heard me refer before that I really like the -- my 7-year-old grandson math. This is another one of those. My 7-year-old grandson can do the math to figure out this one is accretive. So we continue to look for those kind of opportunities. We continue to try to do things that help us be more relevant for our customers. I'm going to be particularly excited to talk to customers about Enhanced Drilling, because I think it's going to be like some of the other acquisitions we've made, it's going to make perfect sense to them why that brand under the Expro umbrella is really going to make a lot of sense. So we continue to be active in it. We continue to -- we're not just trying to become big for bigger sake, but we're trying to become more relevant to our customers. And I think that's where we'll continue to have our efforts. Some of it's going to be technology focused. Some of it's going to be market expansion focused. Some of it's going to be geographic expansion. It's all those kind of things that we continue to really put a lot of emphasis on internally. Operator: At this time, we currently have no further questions. Therefore, that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Good morning, everyone. Welcome to today's Transocean Ltd. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. During the question and answer session, to register to ask a question at any time, please press 1 on your telephone. Additionally, you may remove yourself from the queue by pressing 2. Please note today's call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the meeting over to David Kiddington, Vice President and Treasurer. David, please go ahead. David Kiddington: Thank you, and good morning, everyone. Welcome to Transocean Ltd.'s first quarter earnings call. Leading today's call will be Transocean Ltd.'s President and Chief Executive Officer, Keelan I. Adamson. Keelan I. Adamson will be joined by other members of Transocean Ltd.'s executive management team, Chief Financial Officer, Thaddeus Vayda, and Chief Commercial Officer, Roderick J. Mackenzie. In addition to the comments that will be shared on today's call, we would like to direct you to our earnings release, fleet status report, and 8-Ks filed yesterday that contain additional information, all of which is available on Transocean Ltd.'s website at www.deepwater.com. Following our prepared comments, we will open the conference line for questions. Please limit your inquiries to one question and one follow-up, as this will allow us to hear from more participants. Before we begin, I would like to remind everyone that today's call will include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. With that, I will hand it over to Transocean Ltd.'s CEO, Keelan I. Adamson. Keelan I. Adamson: Good morning, and welcome to our first quarter conference call. Today, we will address several topics. First, an overview of our accomplishments in the first quarter. Next, I will provide some market updates, including a few thoughts on the impact of events in the Middle East on our business. Then I will update you on the pending acquisition of Valaris. And finally, Thaddeus will make a few comments on our financial results and guidance. First, the quarter. Operational performance was very strong, with uptime of 98%. Adjusted EBITDA was $440 million, implying a solid margin of over 40%. Our average daily revenue in the period was $476,000, the highest in over a decade. These results were accomplished while working safely and efficiently with zero life-changing injuries or operational integrity events. This exceptional performance is due to our team's dedication to providing best-in-class service to our customers. We are committed to eliminating costs from our business and are on track to deliver, versus a 2024 baseline, savings of $250 million in aggregate through 2026. As we have discussed, these savings are associated with continuous improvements in how we run our rig operations, removing idle and stacked assets from the fleet, more efficient maintenance spending, and a reduction in shore-based support infrastructure. Since our February call, we have announced approximately $1.6 billion of backlog, including new contracts and contract extensions on five rigs in Norway, Brazil, and the Eastern Mediterranean, increasing our backlog to over $7 billion as reflected in our fleet status report published yesterday. Nearly one third of this backlog increase is related to a three-year contract on the Transocean Barron with Vår Energi in Norway at a rate of $450,000 per day. The program is expected to start in mid-2027 and includes options that, if fully exercised, could keep the Barron working in Norway into 2034. We are very excited to be commencing a new long-term strategic relationship with Vår Energi. In Brazil, three of our ultra-deepwater ships—two sixth gen and one seventh gen—were awarded contract extensions by Petrobras. The sixth generation drillships, the Deepwater Orion and Deepwater Corcovado, were each awarded three-year contract extensions, collectively contributing about $845 million in incremental backlog, committing the rigs into 2030. The seventh generation drillship Deepwater Aquila was awarded a one-year extension, contributing about $160 million in incremental backlog, committing the rig through mid-2028. Lastly, in the Eastern Med, the Deepwater Asgard was awarded a five-well contract, contributing about $158 million in backlog and committing the rig through 2027. Including these announcements, our firm full-year 2026 and 2027 contract coverage is currently 86% and 73%, respectively, providing a strong base for future cash flow and a line of sight to continued debt and interest expense reduction. On a related note, and as previously disclosed, we retired the balance of the Deepwater Titan notes, reducing debt by $358 million in excess of our scheduled maturities. This is consistent with our commitment to delever, simplify the balance sheet, and reduce interest expense as quickly as possible. Moving to our outlook for the business, we continue to see improving demand for our rigs and services. While not directly affecting Transocean Ltd.'s operations, recent events in the Middle East have further exposed the vulnerability of the global energy supply chain and, at an absolute minimum, have amplified the energy security imperative around the globe. This reinforces our thesis that offshore exploration and development will comprise an essential component of oil and natural gas supply for the foreseeable future. I will now provide a summary of developing opportunities around the world. The number of contract awards and tendering opportunities during the quarter remains high, with visibility into multiyear programs improving meaningfully. So far in 2026, S&P Petrodata has cited 80 rig years added across 61 newly signed floater fixtures. Assuming opportunities materialize as expected, we now see deepwater utilization approaching nearly 100% by 2027, setting the stage for a significantly improved business environment. Looking first at the U.S. Gulf, long-term demand remains stable, supported by recent lease awards. In the near term, any softness may result in some high-specification assets incurring idle time before securing new work. However, with elevated crude pricing, we would not be surprised if certain customers operating in this market chose to take advantage of this short-term opportunity. In Brazil, following the recent blend-and-extend negotiations, Petrobras awarded approximately 38 rig years, securing its strategic capacity for the coming years. We expect Petrobras to return to the market later this year to secure additional capacity for 2027 onward to satisfy additional exploration and production activity. Supported by incremental IOC demand, the overall rig count in Brazil is expected to remain stable between 30 to 33 rigs over the next five years, at least. As we highlighted last quarter, Africa is finally showing measurable and more consistent growth. We expect the regional count to increase from roughly 15 units today to at least 20 over the next one to two years. In Mozambique, one multiyear program has already been awarded by Eni, with two additional awards expected this year from Exxon and Total. In Nigeria, Shell, Chevron, and Exxon have recently awarded their development programs, while Total has just issued a new tender for a multi-well program starting in 2026. In Namibia, we continue to expect more activity as several majors, including most recently BP, evaluate opportunities in the country. And in the Ivory Coast, Eni has issued a one-rig tender for a three-year program beginning in early 2027. In the Med, our recent fixture for the Deepwater Asgard satisfies a portion of increasing demand in the region, with several other awards expected soon for drilling programs starting in 2027. Rig count in the region is expected to stabilize at around seven units going forward. Turning now to Southeast Asia and India, we expect domestic production and exploration initiatives to drive a material increase in activity beginning in 2027. In Indonesia, programs are currently being tendered, adding potentially 10 rig years across five rig lines to a market that currently only has one rig operating. As previously discussed on our last call, in India, ONGC and Oil India are expected to substantially expand the regional fleet by up to four drillships and two semisubmersibles in 2027, potentially adding 20 incremental rig years. In Norway, utilization of high-specification harsh-environment semisubmersibles remains robust through 2028, supported by recent awards from Vår Energi, Equinor, and Aker BP. Most operators are already in the market to secure capacity from 2028 onward, suggesting that utilization for these units should remain near 100% in the coming years. In summary, both the development of known reserves and the call for new exploration continue to build strong momentum. As evidenced by the recent increase in award announcements and numerous ongoing tenders for multiyear opportunities, our fleet is ideally positioned to capture value in this improving business environment. Finally, regarding the acquisition of Valaris, we are required to seek antitrust approval in seven countries, and we have received that approval in Saudi Arabia and Trinidad and Tobago. As of yesterday, we received a second request for additional information from the U.S. Department of Justice as a continuation of their antitrust review. Further, we continue to work with antitrust agencies for approval in Angola, Australia, Brazil, and Egypt. We remain confident that the outcome of the global regulatory review will be favorable and that we are on track to close the transaction in 2026. We remain excited about the capabilities and potential of the combined company. Until the transaction closes, we will continue to conduct business as separate companies. However, we have materially progressed our integration and business continuity planning. We remain confident in our ability to achieve over $200 million in cost synergies incremental to our standalone cost reduction initiatives of approximately $250 million that I mentioned earlier. On a pro forma basis, Transocean Ltd. is expected to have about $12 billion in backlog. The combined company's robust cash flow will continue to accelerate the reduction of gross debt, resulting in leverage of approximately 1.5x EBITDA within about 24 months of closing. The acquisition of Valaris is fundamentally aligned with Transocean Ltd.'s strategic priorities. We will be an industry leader with the scale, scope, and geographic reach that allows us to effectively support our customers in the cost-effective delivery of hydrocarbons from the world's offshore reserves. I will now hand the call over to Thaddeus to provide some brief comments on our financial performance and guidance. Thaddeus? Thaddeus Vayda: Thank you, Keelan, and good day to everyone. Most of the information you should need to update your models is provided in the materials we published last night; I will only make a few remarks this morning. Our performance during the first three months of the year exceeded our forecast and the guidance range we provided to you in February. As Keelan pointed out, contract drilling revenues of $1.08 billion reflected outstanding operations in the quarter, including revenue efficiency in excess of 97% versus our guidance of 90.5%. This is worth about $9 million in the quarter. Also included in the top line is $18 million of revenue recognized due to the early contract conclusion of the Deepwater Proteus. Additionally, higher recharge revenue and favorable foreign exchange effects, which are largely offset in our O&M cost, totaled about $18 million in the period. Operating and maintenance and G&A expense were $606 million and $49 million, respectively. Adjusted EBITDA of $440 million translated into a margin of over 40%, and cash flow from operations was $164 million. Free cash flow of $136 million reflects operating cash flow net of $28 million of capital expenditures in the period. Lower sequential free cash flow in the first quarter of the year is not unusual for us and is typically related to, among other items, the timing of collections and higher payroll obligations. We closed the quarter with an unrestricted cash balance of $330 million, which has since increased to about $495 million as of May 4. Our earnings report includes guidance for the second quarter and only slightly updated guidance for the full year for Transocean Ltd. on a standalone basis. There are only two changes to note in our annual guidance. First, the upper end of our full-year revenue range has been reduced by $50 million to $3.9 billion, primarily to reflect the passage of time. While there are a number of negotiations ongoing, given necessary lead times to plan and commence work, there is a somewhat lower probability of filling certain gaps in our 2026 contract schedule. As we discussed in February, our revenue guidance is otherwise based primarily on firm contracts, with the upper range reflecting the possibility of new contracts commencing slightly ahead of schedule or the extension of existing contracts. The lower end of our revenue range assumes that no additional fixtures with 2026 commencement dates are secured. Second, we have increased our capital expenditure expectations for the year by $20 million due to certain customer requirements that were not anticipated in our initial guidance. Approximately half of this increase is related to environmental upgrades to exhaust systems on a rig operating in Norway. We will substantially recover the cost of this upgrade by the end of the year through specific contract provisions. As we highlighted in February, our cost guidance for the full year reflects our ongoing cost efficiency initiatives and also contemplates slightly lower levels of activity in 2026 versus 2025, with idle time assumed on certain rigs with contracts ending this year. This includes the KG2, Deepwater Proteus, and Deepwater Skiros, as well as costs associated with the mobilization and preparation of the Deepwater Asgard and Transocean Barron for contracts we have recently announced. As you might assume, given the dynamic nature of the market, we may incur incremental expense to position and prepare idle rigs to pursue work. These new opportunities, likely commencing primarily in 2027, will increase utilization, revenue, and cash flow. To the extent that this occurs, we will provide updated cost guidance. With respect to inflationary trends resulting from events in the Middle East, we are just now beginning to observe some small effects on our costs, mostly as it relates to scheduled projects rather than on our active rigs. Recall that we have escalation provisions in certain contracts to permit some cost recovery. While prices for fuel have nearly doubled, our customers are generally responsible for providing it, which means we are only affected by this increase for our idle rigs, for which fuel currently amounts to less than 1% of O&M expense. Ocean and air freight costs are also up as much as 30%–50%, respectively, but logistics in general comprise only 2% to 3% of our annual O&M costs. We do expect that over time, higher energy and logistics costs will influence the pricing of goods and services we procure, but for now, that does not warrant modification of our guidance. As Keelan noted, in March we opportunistically retired the 8.375% notes due 2028 that were secured by the Deepwater Titan, reducing debt by $358 million and saving nearly $40 million in interest expense. Right now, we have about $5.1 billion of debt principal remaining. At the end of 2024, we were forecasting a principal balance of $6 billion of debt remaining at the end of 2026, meaning we are currently over $900 million ahead of schedule in our efforts to reduce debt and strengthen the balance sheet. We ended the quarter with a trailing twelve-month net debt to adjusted EBITDA ratio of approximately 3.1x, and we expect to retire at least $750 million in total debt in 2026, ending the year with a principal balance of around $4.9 billion, excluding our capital lease obligation. Based upon the consensus EBITDA, this would imply a ratio of about 3.3x at the end of this year. We will continue to evaluate opportunities to accelerate debt repayment and reduce interest expense. We closed the first quarter with total liquidity of approximately $1.1 billion, adjusting for the effect of the Deepwater Titan note retirement. This includes unrestricted cash and cash equivalents of $330 million, restricted cash of $285 million after the reduction of $87 million associated with the debt service reserve for the notes, and $510 million of capacity from our undrawn credit facility. On a standalone basis, and absent any additional early retirement of debt, we expect to end the year with between $1.25 billion and $1.35 billion of total liquidity, inclusive of our undrawn credit facility. This range is consistent with our previous liquidity guidance when adjusted for the early repayment of the Deepwater Titan notes. This concludes my prepared remarks. Keelan, do you have any final thoughts? Keelan I. Adamson: Thanks, Thaddeus. To conclude, we will continue to focus intently on achieving our strategic priorities, including optimizing the value of our differentiated asset portfolio in this improving market to maximize free cash flow, reduce total debt and interest expense, and simplify our balance sheet to create a sustainable and resilient capital structure. This is our 100th year in business, and we are striving to be the most attractive offshore drilling investment for those desiring exposure to increasingly favorable energy and industry dynamics. We will now open the call for questions. Operator: Thank you, Mr. Adamson. Ladies and gentlemen, at this time, if you do have any questions, please press 1. Additionally, you can remove yourself from the queue by pressing 2. As a reminder, we do ask that you please limit yourself to one question and one follow-up. We will go first this morning to Eddie Kim with Barclays. Eddie Kim: Hi. Good morning. I wanted to start off with a bigger-picture question. The world has clearly changed since your last earnings call in mid-February. It feels like the market is tightening based on the number of fixtures announced year to date. You also raised your utilization expectation next year to approach 100% versus 90% previously. If I go back four or five years, 2020 and 2021 were extremely challenging years for the market, but things started to turn in a big way in 2022 and 2023. By mid-2023, leading-edge rates were in the mid-$400,000s with an expectation that pricing could exceed $500,000 a day by the end of that year. Unfortunately, we ran into some industry white space which halted that trajectory, but nonetheless 2023 was a very strong market environment. Based on how you see things now and the customer conversations you are having, do you think the market environment next year in 2027 could be as good, if not better, than it was in 2023? Keelan I. Adamson: Good morning, Eddie. Thanks for the question. As you look at the business and the current situation in the world, we are not seeing an impact per se of what is happening today. What we are seeing is the development of a market that we were forecasting prior to any of the recent conflicts. As an industry, we have been talking about improved tendering opportunities, growth in the market, a real concern about hydrocarbon demand and more so about hydrocarbon supply, and many of our customers starting to lean into the exploration activity that needs to progress. We are seeing the results of that in the number of awards that have been announced year to date. The term of those awards has nearly doubled, and we are starting to see what we expected to happen with respect to rig utilization into 2027. We said we expected 90% utilization into 2027 and then improvement from there. The activity and the forecast are being realized from our perspective. The continual concern with energy security is a real topic of conversation around the world and is amplifying the need for further investment in the offshore space, particularly in deepwater. Utilization is building, backlog is building, and the rate progression will reflect the supply and demand dynamics that exist in the industry and the visibility for future work. Roddie, would you like to add anything to that? Roderick J. Mackenzie: Yes, probably just to pick up on one of the things that you mentioned. In the previous run-up, we kind of stalled out—yes, we posted a few rates above $500,000, but the context is important. We hit a bit of a global economic bump that coincided with a moment when many of the majors were focused on capital discipline, and part of that was their push for M&A. That created white space. The difference now is that at that time there was still a heavy skew towards shale, but now everything is pointing towards offshore. Offshore CapEx is going to be a much larger chunk of the pie, going from about 13% of total CapEx to nearly 30% by 2028. Basically, CapEx spend in offshore and deepwater is expected to approach $100 billion annually by 2030. In that context, the upside for us is very significant. There are not as many M&A opportunities available on the operator side, and to Keelan’s point, everybody is now looking at exploration. Basins that were previously explored and had discoveries are now shifting to development, and on top of that, we are adding a lot of exploration work. Eddie Kim: Got it. That is very helpful color, and that is a great point on the changing mindset of the majors. My follow-up is on the Petrobras blend-and-extends. They extended both of the 6G rigs, the Orion and Corcovado, for three years, but the 7G rig, the Aquila, was only extended for one year. Was there some intentionality behind that decision on your end to not lock in your high-spec asset on a multiyear deal in a rising dayrate environment? Roderick J. Mackenzie: Yes. As we have always alluded to, it is very important to us that we get appropriate value for our assets. The sixth gens are workhorses of the fleet and do a fantastic job, and Petrobras were very keen to extend the rigs. It is an interesting moment because Petrobras is traditionally the barometer of where things are going, so when you see them go long, that is a pretty good sign for us. In that instance, note the delta between the average dayrates between the sixth and seventh gen, somewhere in the region of $50,000 to $70,000. That is a fairly big deal. In our view, the market tightness is not projected; it is already here. A few quarters back, we were talking about things that were going to happen; now the scoreboard has fixtures on it, and they are prolific. As Keelan pointed out earlier, we are a third of the way through the year, and we have already significantly eclipsed what happened in all of 2025. So 2026 is shaping up to be something potentially as big as 150 rig years awarded, and that is before we consider direct negotiations that are not necessarily on the market. You are spot on in that strategy. We have always taken a portfolio view on the fleet—very keen to see those sixth gens go long and give us a bit of optionality on the higher-spec units as we move forward. Operator: Thank you. We will go next to Fredrik Stene with Clarksons Securities. Fredrik Stene: Hey, team. Hope you are well. Happy to see that the market is looking better. According to my numbers, we have the highest market-wide visibility contracting-wise, even above 2023 levels. Something is happening, and I am happy to see that. Today, my question relates more to the M&A process—the acquisition of Valaris. You gave some color in your prepared remarks, Keelan, but could you elaborate a bit more on what this second request actually means and the implications for potential deal risk? You still said confidence in second-half closing, but is that timeline potentially delayed now compared to before? And what does this potentially mean for remedy sales, etc.? I am not trying to be a devil's advocate; I am just trying to get clarity on what this actually means, even though it seems like most deals that receive a second request end up going through. Any color would be helpful. Keelan I. Adamson: Sure, Fredrik, and thanks for the question. We remain confident that the DOJ will approve the transaction. The second request is part of the process. For a deal of this nature, it is simply a case of needing a little bit more time to understand the competitive dynamics post-close. We have been heavily engaged with the DOJ, working productively with them, answering their questions, and helping them understand the nature of our business in the U.S. Gulf and the market worldwide. Those conversations have been going very well. There is no read-through I would suggest to you that changes our expectations. When we declared the timeline we believe this transaction would close in, we are still in that window and very much believe so. We are happy with the progress we are making and will continue to work with the DOJ as they assess the situation. Fredrik Stene: Thank you very much. As a follow-up, I think you said Saudi and Trinidad and Tobago have cleared approval already. In addition to the U.S., it was Australia, Brazil, and Egypt. Are there any risks of similar second requests or hurdles in those countries, or do you feel confident that those discussions are on the track you originally perceived? Keelan I. Adamson: It is following the exact process and timeline that we would have expected to go through the regulatory approval process. Some are further along than others. We are engaged with all of those countries, and everything is moving as we would have expected at this point in time. Operator: Thank you. We will go next to an analyst from Morgan Stanley. Analyst: Hey, thanks. Good morning, guys. I wanted to ask: you shared a couple of years ago, or more recently, some of the terms and components around reactivating a cold-stacked rig. Could you refresh us with your latest thoughts on the cost to reactivate a rig, the timeline, and what type of contract terms or macro backdrop you would need to move forward with that decision? Keelan I. Adamson: Good morning, and thanks for the question. It is timely as we talk about a constructive market going forward. However, we are a little bit away from a situation where either the market needs it or the economics are present for a cold-stack reactivation of a deepwater drillship right now. In a few years, it may be slightly different. From a cost perspective, we are still in the $100 million to $150 million range to reactivate one of these assets. We are comfortable with the stacked fleet we have, the condition they are in, and we have a good handle on the timeline it would take to bring one back to market; we are still in the 12 to 15 month range to reactivate and bring one of those rigs back to service. We will not do that speculatively. We will want a contract that fully recovers that cost and provides a return on top. We are not quite there yet. We would look for 100% utilization in the drillship market, with visibility into market programs, to justify bringing one out. You can imagine we will be looking for term and productive dayrate for that to happen. Roderick J. Mackenzie: To add to that, term and return economics are very important. At this point in the year, the average award has been 480 days, which is double what it was in all of 2025. But that is still not enough, in our view, to bring out one of the cold-stacked assets. It is encouraging to see a doubling of duration and effectively a four-times multiple on how many fixtures are being made today, but we still think there is room to run before we reactivate the cold-stacked fleet. Analyst: Great, that is helpful. A higher-level question: as you toured the world and pointed to areas where you see potential for incremental tendering, are there any areas where customer conversations or incremental activity are more related to events over the last two months in the Middle East—more related to building strategic reserves or reducing reliance on Middle East exports? You highlighted Southeast Asia and India previously, and you mentioned some big numbers in Indonesia. Can you parse out any areas where incremental need or demand is more related to diversifying away from Middle East exports? Keelan I. Adamson: The conflict is not that old at this moment, but nations around the world are reassessing their energy security and policies for energy supply. You highlighted a couple that come to mind straight away. In India, Prime Minister Modi has set his government in motion with a mission to establish the nature of their reserves in country. That is driving ONGC and Oil India action. It was a bit of a surprise when it came—we announced it last earnings call—and from our conversations in country with both the ministry and the oil companies, this is not a short-term effort. This is a significant investment with several years of CapEx commitment to establish their position from an offshore oil and gas reserve and supply perspective. That is just one country. In Indonesia as well, and when you look around the world at what the IOCs are looking at, they are focused on ensuring a diversified global supply—major developments going through sanction right now in Suriname, Namibia, Mozambique, into the Med and West Africa. The importance of a globally diversified supply is only more heightened now for secure, reliable, and affordable energy. Roderick J. Mackenzie: We have already exceeded last year’s fixtures and rig-year awards, and none of that was based on the Middle East conflict. The tenders on the market today—collectively we think somewhere in the region of 150 rig years awarded this year, maybe more—are not predicated on what happened in the Middle East. It is based on the macro shift over the past 12 months: the shift towards deepwater, customers ramping up exploration and development, moving beyond the strict capital discipline mantra. All of that was predicated on $60–$70 per barrel outlooks. Now we are in a different position, which is good for our customers’ earnings near term, but our fixtures are predicated on mid-range oil prices, not elevated prices. We have not yet seen the impact in our business of a prolonged increased oil price; our current work is predicated on oil prices of six to nine months ago. Operator: Thank you. We will go next to Gregory Robert Lewis with BTIG. Gregory Robert Lewis: Hey, thank you and good morning. I was hoping to spend a little time talking about the harsh-environment market. It is good to see the Barron move back to Norway. We have the traditional North Sea, but there was a rig that just won work in Canada, we have Australia, you hear about other pockets like the Falklands. This is a market where there is not a lot of supply. As you think about positioning Transocean Ltd.’s harsh-environment fleet for 2027 and 2028, should we expect more of a return to the North Sea, or are there going to be opportunities to keep this fleet spread? How tight could we be for the harsh market as we approach 2028? Keelan I. Adamson: Good morning, Greg. The harsh-environment market, while in balance currently, was expected to get tighter based on projects being sanctioned and growing activity. You are right—the harsh-environment market is no longer just Norway. It is returning to places like Canada and Australia, and rigs can be used in other, not-necessarily harsh, shallower-water environments. The opportunity set for the harsh-environment fleet is more global now, and we are not even considering yet what could happen in Namibia. With licensing rounds and the imperatives of Equinor, Aker BP, Vår Energi, and the energy security conversation in Europe, Norway is going to get busier. The opportunity presented itself to take the Barron back to Norway. We are very pleased to begin that relationship with Vår Energi again. We will continue to keep our assets in the most strategic locations and ensure we are available to the market upswing we expect in harsh environment. Roderick J. Mackenzie: To add, the name of the game over the last few years was operators retaining optionality on rigs without making large commitments, but the dynamic has shifted. Awards in Canada have been made; there is another tender for an incremental rig there. Within Norway, you see commitments—Vår, Aker BP, and Equinor’s NCS 2035 plans. The number of wells and the longevity of the programs speak to the Norwegian government’s commitment to sustain energy security in Europe. Those are strong fundamentals. We are about to enter a period of a very tight market because there is a shift towards longer-term contracting. That showed up in some numbers already and will be more prolific as operators need to secure assets because there are not many of them. There is a high chance more rigs will return to Norway because demand is well beyond the fleet currently in Norway. Operator: Thank you. We will go next now to Noel Augustus Parks with Tuohy Brothers. Noel Augustus Parks: Hi. Good morning. I was intrigued by what you were saying about exploration conducted long ago, with some of those projects now heading for development. For perspective, can you think of what may be the oldest exploratory project that you are now seeing greenlighted for development? Roderick J. Mackenzie: Good question. A lot of activity in Nigeria fits that description. Nigeria is expected to go up to five rigs; they had gone down to one. Much of what is triggering the incremental rigs now is based on exploration that took place some time ago—some as long as eight to ten years ago, certainly at least five years ago. A shorter example is Namibia. You saw lots of announcements about discoveries, then a lull as results were digested, and now we are seeing several long-term tenders based on development. Even there, there are still several exploration wells on the books. It is a treadmill: you have to keep discovering and exploring. Petrobras is vocal that they must contribute a significant portion of the portfolio every year to exploration. If you take your foot off the gas on exploration, your reserves dwindle quickly. Reserve replacement is becoming more of an issue, and the only way to address it is to explore. Noel Augustus Parks: Thanks. With energy security coming to the fore and the ripple effects for importing countries and their plans, assuming sustained higher oil prices, are there any regions where the economic opportunity could become so compelling that it overcomes some political inertia or opposition to moving forward? Roderick J. Mackenzie: It is definitely a theme. The war in the Middle East reinforces decisions already taken over the last several years, particularly by NOCs, to look at what they have within their own borders. Domestic production makes sense: you retain taxes, employ your people, and reduce dependency. Energy security reinforces domestic exploration. India is a top example. Even in places like the UK, I think you are going to see a U-turn; they have been cutting back for some time, but it is almost inevitable that will shift in the near term. Norway is a great example—linked to energy security and providing energy for Europe as the biggest producer in Europe. Overall acceptance that hydrocarbons are here for a very long time—there is no peak oil this side of 2050—so time to get on with it. Keelan I. Adamson: To add, deepwater is a very long-cycle business, and the economics are compelling at much lower oil prices than today. Activity we are seeing is based on fundamentals regarding supply and demand of hydrocarbons, concern on replacement of reserves, and the need to explore. Layering in energy security amplifies the case and will continue to promote more investment in offshore. It is a very good place to get affordable, secure, and reliable energy, and we continue to see it playing that role going forward. Operator: Thank you. Gentlemen, it appears we have no further questions this morning. David Kiddington, I would like to turn things back to you for any closing comments. David Kiddington: We would like to thank everyone who participated in our earnings call today. We invite you to follow up with us for any additional inquiries. With that, we will close the call. Operator: Ladies and gentlemen, this concludes the Transocean Ltd. First Quarter 2026 Earnings Conference Call. Thank you all so much for joining us, and we wish you a great day. Goodbye.
Operator: Welcome to the 2026 First Quarter Results Announcement Conference Call for Budweiser Brewing Company APAC Limited. Hosting the call today from Budweiser APAC is Mr. YJ Cheng, Chief Executive Officer and Co-Chair of the Board; and Mr. Bernardo Novick, Chief Financial Officer. The results for the 3 months ended 31st of March 2026, can be found in the press release published earlier today and available on the Hong Kong Stock Exchanges and Budweiser APAC websites. Before proceeding, let me remind you that some of the information provided during this result call, including our answers to your questions on this call, may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It is possible that Budweiser APAC actual results and financial condition may differ possibly materially from the anticipated results and the financial condition indicated in these forward-looking statements. Budweiser APAC is under no obligation to and expressly disclaims any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For a discussion of some of the risks and important factors that could affect Budweiser APAC's future results, the risk factors in the company's prospectus dated 18th September 2019, the 2025 annual report published and any other documents that Budweiser APAC has made public. I would also like to remind everyone that the financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed during today's call are both organic and normalized in nature and unless otherwise stated, percentage changes refer to comparisons with the 2025 full year. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Budweiser APAC's normal activities. As normalized figures are non-GAAP measures, the company disclosed the consolidated profit EPS, EBIT and EBITDA on a fully reported basis in the press release published earlier today. Further details of the 2026 first quarter results can also be found in the press release. It is now my pleasure to pass the time to YJ. Sir, you may begin. Yanjun Cheng: Thank you, Ari, and good morning, everyone. Thank you for joining today's call. We entered 2026 with a clear focus on recovering volume through disciplined execution across our market. For Bud APAC total volume returned to a positive growth, supported by continued strong momentum in India. In China, our increased investment shows a sign of progress. With the quarter-over-quarter volume decline tightening further as we remain committed to our strategy of enhancing our in-home route to market enriching our portfolio and innovating behind our mega brand to rebuild momentum. In South Korea, we gained market share in both on-premise and in-home channels. Before we go over our financial results, I wanted to take a moment to introduce Bernardo Novick, our new Chief Financial Officer, effective from April 1 this year. Novick joined ABI Group in 2009 through the global MB program and has worked across various functions in multiple markets. He brings deep finance and global resource allocation expertise, having led projects, delivering savings and meaningful value creation. I'm pleased to welcome him to the Bud APAC team. Let me now hand over to Novick for a brief introduction. Bernardo Novick Rettich: Good morning, everyone. I am delighted to join the Bud APAC team. I would like to thank you, YJ for your trust and invitation to join the team. I joined AB InBev 16 years ago and spent 5 years in finance roles, 5 years in commercial roles and 5 years in innovation roles where I led the corporate venture capital arm in New York. Most recently, I was responsible for our global capital allocation division reporting to the global CFO. I hope I can bring this experience to grow Bud APAC's business in a profitable way. I have already had the pleasure of meeting some of you joining the call today, and I look forward to meeting many more in the next weeks and months ahead. Let me share our financial results for the first quarter of 2026 in more detail. In the first quarter, APAC volume returned to growth, even if it's just 0.1% after many quarters, driven by strong growth in India, and a sequential improvement in the industry and our volumes in China, with volume decline narrowing quarter-over-quarter. This progress was driven by both enhanced execution as well as increased investments across channels and our portfolio, which added temporary pressure to our bottom line. We also maintained strong brand momentum in South Korea, despite a soft industry and a challenging comparable last year. In India, we continue to advance premiumization, delivering strong double-digit volume and revenue growth. In summary, for Bud APAC, total volumes increased by 0.1%. Revenue and revenue per hectoliter decreased by 0.7% and 0.8%, respectively. Normalized EBITDA decreased by 8.1%, while our normalized EBITDA margin contracted by 246 basis points. Now let me cover some of the highlights from each of our major markets. In China, volumes decreased by 1.5%, improving sequentially with a quarter-over-quarter decline continuing to narrow since the second half of 2025. Revenue and revenue per hectoliter decreased by 4% and 2.5%, respectively, impacted by increased investment to support our wholesalers and activate our brands in the in-home and emerging channel. Normalized EBITDA decreased by 10.9%, impacted by our top line performance and increased investments. We continue to make progress in expanding our distribution in the in-home channel, while increasing the distribution of our premium brands. This premiumization is more clear in the online to off-line or O2O channel, which grew strong double digits in the quarter. Now let me share with you some of the investments we are making on our brands through our marketing campaigns as well as liquid and package innovations to better connect with our consumers across more occasions and increased sales momentum particularly in the in-home channel. On Budweiser, we accelerated the national expansion of Budweiser Magnum, building on its strong consumer traction and sustained sales growth. In March, Budweiser Magnum, launched an integrated nationwide campaign, anchored by a strategic partnership with global football icon Erling Haaland, and the FIFA World Cup mega platform to drive geographic and channel expansion. Regarding our Harbin family, we introduced Harbin 1900, celebrating its brewing heritage as the birthplace of Chinese beer. Position in the Core++ segment, which is the RMB 8 to RMB 10 price range. This new innovation is 100% pure malt classic lager, pairing distinctive vintage packaging with a rich authentic taste. The launch reinforces Harbin's role in driving innovation and placing new bets in this growing and important Core++ segment. In South Korea, volumes decreased by low teens and revenue decreased by mid-single digits, mainly due to a challenging comparable in the first quarter of last year, driven by shipment phasing ahead of a price increase that if you recall, was in April 2025. Revenue per hectoliter on the other hand, increased by low single digits, also comparing with the first quarter last year before the price increase. This led to a normalized EBITDA decreasing by low teens. Having said that, we maintain a good commercial momentum in both in-home and on-premise channels, and we foresee a recovery in the second quarter. Finally, India continues to grow and will play a bigger role in our footprint. Industry momentum continued in the first quarter, and we gained total market share. We delivered strong double-digit volume and revenue growth led by a strong growth in our premium and super premium portfolio. We also continue to see momentum in the moderation agenda with states like Maharashtra and Karnataka introducing changes that decreased the current relative tax advantage of hard liquor versus beer. We see this as a step in the right direction and a sign that some states understand the importance of evolving towards an alcohol tax policies that are consistent with global policy standards where high alcohol products are taxed higher than low alcohol products like beer. And with that, YJ and I are here to answer any questions that you might have. Operator: [Operator Instructions] Our first question is coming from Xiaopo Wei from Citi. Xiaopo Wei: Can you hear me now? Operator: Yes, we can hear you very well. Xiaopo Wei: I'm sorry. That -- I have two questions on China. I'll ask one by one. The first one, in the past 2 years, we have seen a few senior management leadership changes in the company. So far is any achievement or breakthrough that the company would like to share with us with the new leadership? [Foreign Language] Yanjun Cheng: I'm YJ. Let me take these questions. So let me start in English, then let me turn to Chinese, if needed. So the changes we have, mainly happened first half year last year. And the reason for the change is kind of retention between either global other between the region in China. So and also between Headquarter in China versus operation in the field in each sales region. And the reason for that is to share some best practice and to further strengthen their strengths in each area or each function and also learn each other best practice sharing. So that's kind of a normal retention changes. And to be able to share the more the answer to your question about the changes of the people. As I mentioned earlier, we keep a consistency of our strategy which is focused on portfolio, brand portfolio, which is meaning Harbin and Budweiser and also focus on in-home and market. And third one is focus on execution. So those are the 3 strategies we set up early last year and we have no changes. And also, you see the progress we have been made as Novick just mentioned, quarter-over-quarter on decline narrow quarter-by-quarter and see very good trends. And also, we see the execution in each area make a huge improvement, and we put a lot of effort to invest in our brand and also further focus on the in-home channel that the channel changes reached which and that's our further opportunity in our operation. So we see starting from second quarter last year and the fourth quarter last year, and first quarter this year, the things getting improved quarter-by-quarter. So I think that's I tried to answer your question. Xiaopo Wei: Shall I start a second question? Yanjun Cheng: Yes, go ahead. Xiaopo Wei: Okay. The second question is about the channel inventory. As far as I can recall, the company in China start destocking the channel in 4Q '24. It has been a few quarters of destocking and I remember in the last quarterly earnings call, you mentioned that actually, our China inventory actually was young and lower versus historic level. But we know that China is a very dynamic market and the changing areas on a daily basis. So were you foreseeing the future that the China channel inventory will be below historic level as a new norm? Or is any factor you expect to see before you become more exciting and try to restock the channel looking forward. [Foreign Language] Yanjun Cheng: Thank you for your question. You're right. We have been proactively taking steps to adjust our inventory given the current business environment. [Foreign Language] Operator: Our next question is coming from Ye Liu from Goldman Sachs. Ye Liu: Thanks. Can you hear me? Yanjun Cheng: Yes. Ye Liu: This is Liu from Goldman Sachs. Thanks for the opportunity and welcome Novick for your first earnings call with Bud APAC. I have 2 questions. The first one is on China. So basically, our ground check shows that there has been some volume recovery in the super premium segment, including Corona, Blue Girl in the first quarter. So how to look at the sustainability of this trend? How to comment on the on-trade consumption recovery so far, including any color on 2Q to date on the on-trade performance in China? I will translate to Mandarin by myself. [Foreign Language] Yanjun Cheng: Let me take this question. I will start the summary of the answer first, then I'm going to talk a little bit detail in sort of answer in Chinese. Indeed we grow Super Premium volume by double digit in the first quarter 2026 as we focus on premiumization in the in-home channel and O2O. In terms of on-trade recovery nightlife channel contribution was stable, and we grew volume in the nightlife the first quarter 2026. However, Chinese restaurant channel remains under pressure. [Foreign Language] Ye Liu: The second question is to our new CFO, Novick. So I would like to know what's the 3 key focus for you this year, would you please share with the investors on the call. Thank you so much. Bernardo Novick Rettich: Thank you, Liu. Nice to hear from you, and thanks for the question. So let me share the 3 priorities that me and my team will focus this year. The #1 priority is growth. And the main objective here is to stabilize the volumes in China. The second priority is to improve execution. And the third priority is value creation. So on the #1, the #1 is consistent to the business strategy that YJ was describing. And the main objective of the business is to grow volumes here, right? And in order to do that, we really need to stabilize volumes in China. And the finance role to do that is increasing investments and making the investments more effective. I think it's important here, when we manage to stabilize volumes in China, given our footprint in India and in Southeast Asia, will be able to reignite growth for the whole Budweiser APAC. Number two priority is execution. I think here, finance has an important role, collaborating with our commercial team in China to enable and upgrade our route-to-market model to help on this transition to more volume in the in-home channel. That's another important priority for us. And the third one is value creation. Here, we are reviewing internal investment decisions, improving efficiencies, cost controls. One example here, for example, we are reviewing the unit economics of different packs to make decisions that can help us be more efficient with resource allocation. But ultimately, Liu we are here for growth, and that's our main priority for this year. Thank you very much for the question. Operator: Our next question is coming from Elsie Sheng from CLSA. Yiran Sheng: Thank you management for taking my questions. Thank you, YJ, and also welcome Novick. I have 2 questions. My first question is on China in-home development. Do you have any update or progress to share on the development of off-trade channel in China. I will translate myself. [Foreign Language] I will ask my second question later. [Foreign Language] Yanjun Cheng: Thank you, Elsie. This is YJ. Let me take this question. As a channel shift to in-home channel, we are taking actions to expand in the in-home channel to adapt. As we have a relative low exposure in in-home channel, which means we have a massive growth potential. We are investing to catch up. [Foreign Language] Yiran Sheng: My second question is on China commercial investment. So previously, management mentioned that you will increase marketing this year. Is that plan still on track? And what's the marketing plan for the coming peak season and sport events like World Cup? [Foreign Language] Yanjun Cheng: Yes. So as Novick mentioned, as I mentioned earlier, in 2026, our top priority in China is a stabilized volume. To achieve this, we have given room to the team, to the commercial team to increase commercial investment. So that's the direction we set up for the commercial team. [Foreign Language] Operator: Our next question is coming from Mavis Hui from DBS. Mavis Hui: My first question is on China. Could we have some more updates on the growth of your emerging channels such as O2O instant retail and e-commerce in China. More importantly, how do margins and pricing dynamics across these channels compared with traditional off-trade and how are we managing potential channel conflict with our distributors? But let me translate first. [Foreign Language] Yanjun Cheng: Thank you for your question. I will take this question as well. O2O is one of faster emerging channel in China. We have started to make a fair significant effort to increase our presence with it. And we see this as a great opportunity for us in 2026 and beyond. We partnered with a major O2O platform to further expand our participation. [Foreign Language] Mavis Hui: And my second question is on Korea. Excluding shipment phasing effects, are we still seeing underlying share gains in South Korea? What are the key challenges to sustaining outperformance in the market? [Foreign Language] Yanjun Cheng: Thank you. Let me take this question again. Total industry in Korea have remained soft in the first quarter 2026. With a soft consumer environment continued to impact overall alcohol consumption. However, our underlying momentum in Korea continued and we outperformed the industry in both the on-premise and in-home channel. [Foreign Language] Operator: Our next question is coming from Anne Ling from Jefferies. Kin Shun Ling: I have 2 questions here. First is on the cost of goods sold in general. We saw some raw materials price volatility, and this has been coming up recently for example, like aluminum. So what will be our view on the raw material costs for year 2027? [Foreign Language] Yanjun Cheng: In 2026 of first quarter our cost per hectoliter has decreased by 0.8%, mainly driven by efficiency improvement, partially offset by commodity headwind. [Foreign Language] Kin Shun Ling: [Foreign Language]. So my second question is on the India side. So could you share with us now on the Indian market update? How do we see the market competition and our strategy over there? I understand that we are focusing on more market share. So may I know when the company will start focusing on the profitability of the market? Is it still a little bit too early? And that competition is still very keen? Should -- I mean should Carlsberg be listed? What is your view on the competitive environment afterwards? [Foreign Language] Yanjun Cheng: Thank you. In India, we are focused on sustainable and meaningful top line growth that can translate to EBITDA and cash flow growth accordingly. [Foreign Language] Operator: Our next question is coming from Lillian Lou from Morgan Stanley. Lillian Lou: And thank you, YJ and Bernardo for the detailed answer previously. Congrats to Bernardo for your new role. I have two questions. The first one is on China pricing because YJ just mentioned that the raw materials are fully hedged and were relatively stable. But on the pricing side, any price action and mix shift that you observed that could improve the overall pricing in the market in general? [Foreign Language] Bernardo Novick Rettich: I can take this question YJ. Yanjun Cheng: Go ahead. Bernardo Novick Rettich: Lilian, nice to hear from you. Thank you for the question. I think all the answers should start with the same reminder that our main priority, right, is growth and particularly to stabilize the volumes in China. It's true that in the first quarter, our net revenue per hectoliter was below last year and this was impacted by investments, mainly in 3 objectives for the investments to support our wholesalers, to activate our brands and also to accelerate the growth in O2O. But on the other hand, we had positive mix effects coming from our brands, mainly driven by our Premium and Super Premium brands. I think it's important to mention to you and the press that we expect to continue to invest in 2026. Regarding price, we will continue to monitor always the prices in the market, and we are open to adjustments if something changes. But at this moment, we don't have any news regarding price increase for China. Lillian Lou: My second question is on Korea -- South Korea market. We all know that last year, April, you had a price increase, which still benefited the first Q this year on the pricing side. But what will drive the South Korea revenue and also pricing and the EBITDA growth for the rest of the year, in particular, the industry remain a little bit soft and the competition is still there. So this is the question on Korea. [Foreign Language] Bernardo Novick Rettich: I can take this one too. Very good question, Lillian, thanks. When we think about like a medium-term margin growth for APAC East and Korea, I think there are mainly 3 things that can drive this. One is, of course, pricing. The second one, operational efficiencies. And the third one, I think it's important to mention is mix and innovations. Maybe let me talk about each one of them. On prices, of course, we always consider our pricing decisions looking at what's happening in the beer market, but also the macroeconomic situation in the country. We'll continue to monitor similar to China. We don't have anything to announce at this point. On the second part, operational efficiencies. Here, we continue to implement cost management initiatives. This is one of our main strengths at Budweiser APAC, as YJ was talking about our efficiency and excellence programs that we have so this is something that we still see opportunities. And number three, I think mix and premiumization and innovations are very important for us in the future. Maybe I can share a couple of examples one of them is the growth of Stella Artois in the on-trade. I think that's a prudent healthy growth. The other one is the nonalcoholic beer, like example like Cass 0.0. I think both of them are good examples of innovations that can both drive volume growth, but also margin expansion. So overall, I think that we see opportunities to keep recovering margins in Korea in the future. Thank you for the question. Operator: In interest of time, our final question will come from Linda Huang from Macquarie. Linda Huang: My first one is regarding for the dividend. And given that Bernardo has really taken up the CFO role. So I just want to know that whether from the group perspective, whether you will change the capital allocation approach. Especially the last 2 years, right, we -- they paid out USD 0.0566 per share dividend to the shareholders. So whether this is the dividend per share policy under review. So this is my first question. [Foreign Language] Bernardo Novick Rettich: Thank you, Linda. Nice to hear from you. Thanks for the question. So I think it's important to remind everybody, right, we are working to deliver sustainable long-term results for our shareholders, right? And the other message is that our capital allocation strategy remains the same. Our first priority continues to be to invest in our business like we are doing this year to drive organic growth. followed by M&A when we see opportunities for acquisitions. That's the second one. And then the third one to return to our shareholders, for example, via dividend, but it's also what we have been doing, right? So I think we are very proud of our dividend track record since the beginning, recently with the announcement of the $750 million dividend that we announced for 2025, which by the way, was consistent to the dividend for the previous 2024. So I think if I have to summarize, we are working towards improving our business performance this year to be able to keep this consistency in the future. Thanks for the question. Linda Huang: My second question is regarding for our products, and I think this may be YJ can help. So when we compare China to the other Western countries. I think there's always plenty of alcohol product innovation. So I just want to know that, again, whether the management can elaborate more about our product innovation plans? And then what kind of the innovation strategy will fit well for our China market. [Foreign Language] Yanjun Cheng: [Foreign Language] Operator: Thank you. That concludes our Q&A session today. I would like to turn the conference back over to YJ for the closing remarks. Yanjun Cheng: Thank you. As I mentioned on our 2025 annual results call early this year, our priority is to stabilize volume and rebuild our market share momentum in China by investing in our in-home route to market and a leading permium portfolio. The progress we have been seeing in the first quarter and have been encouraging. On this positive note, thank you all for joining us today, and I'm looking forward to speaking to you soon. Operator: Thank you. And this concludes today's results call. Please disconnect your lines. Thank you.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to Compass, Inc. 2026 Q1 Earnings Call. [Operator Instructions] I would now like to turn the call over to Soham Bhonsle, Head of Investor Relations. Please go ahead. Soham Bhonsle: Thank you very much, operator, and good afternoon, everybody, and thank you for joining the Compass First Quarter 2026 Earnings Call. Joining us today will be Robert Reffkin, our Founder and CEO; and Scott Wahlers, our Chief Financial Officer. In discussing our company's performance, we will refer to some non-GAAP measures. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our first quarter 2026 earnings release posted on our Investor Relations website. Additionally, note that since the financial results from the Anywhere transaction are not included in the prior year period or the first 8 days of Q1 2026, the current year and prior year results are not comparable. We have provided supplemental information included in the Form 8-K filed today that presents our revenue and commissions expenses and key business metrics on a pro forma basis as though the businesses were combined from the beginning of 2025. We believe this additional information will be useful to investors to assist in comparing the periods prior and subsequent to the closing of the Anywhere transaction. We will also be making forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the second quarter of 2026 and full year 2026 and comments related to our expectations for realizing cost synergies and operational achievements. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, May 5. We expressly disclaim any obligation to update this information. I will now turn the call over to Robert Reffkin. Robert? Robert Reffkin: Good afternoon, and thank you for joining us for our First Quarter Conference Call. Before I go over our strong Q1 results, I would like to provide an update on our cost synergy targets and highlight a few early wins since we closed the Anywhere transaction. First, on our cost synergies. On our Q4 earnings call in February, we shared our target of $250 million in cost synergies to be actioned by the end of year 1 and $400 million in net cost synergies over 3 years. I am very pleased to share that we are increasing our target to $300 million in cost synergies to be actioned by the end of year 1. And $500 million in net cost synergies over 3 years, of which $420 million is expected to be realized through the P&L and $80 million is expected to be realized as a CapEx synergy. Moreover, we have now actioned over $250 million in cost synergies as of April 1, which is only 82 days since we closed the Anywhere transaction. The acceleration results in an increase in our 2026 in-year realized cost synergies from approximately $100 million to $200 million. We previously expected $40 million of the $100 million of our cost synergies to be realized through the P&L as an OpEx synergy with the remainder being realized as a CapEx synergy. Based on the increased realization of the target, we now expect about $130 million to be realized through the P&L and $70 million expected to be realized as a CapEx synergy. This reflects a roughly $90 million increase in our in-year realized OpEx synergy expectations and a $10 million increase in our in-year CapEx synergy expectations compared to our prior expectations due to the larger in-year realized target of $200 million. Shifting now to our early Q1 wins that represent the growth and success in our brokerage brands. Sotheby's International Realty sold the most expensive home in the history of the world at $350 million. While Coldwell Banker sold the most expensive home in the history of Miami-Dade County at $170 million. Both sales reinforce the combined company's authority in the luxury segment. Corcoran Sunshine, which is Corcoran's new development business, posted its strongest contract volume quarter in over 10 years with $1.5 billion in contracts signed in Q1. ERA executed its largest franchise sale transaction in 15 years. Better Homes and Gardens executed its largest franchise M&A transaction in the entire history of the brand. Christie's International Real Estate signed on 8 new franchise agreements in the quarter, all for new markets, which reflects the largest quarterly expansion in the history of the brand. CENTURY 21 recently executed its largest franchise sale transaction in 10 years with our stance on home seller choice being a key reason for the broker owner, Greg Hague, choosing to join. In fact, Greg will be coaching our real estate professionals across our brands on home sales strategy given his impressive track record, which includes building a home sale strategy consulting and training company that Inc. 5000 ranked among the top 250 fastest-growing privately held firms in America. Compass recruited more principal agents in Q1 than any prior Q1 in our history. We are now also scaling Compass' most effective recruiting strategies across all brands, starting with demand generation and brand-specific recruiting websites that outline how our technology platform helps agents grow their business. And finally, Coldwell Banker GCI retention rate in its top 2 quartile of agents, representing 82% of its total GCI over the trailing 12-month period, hit a 10-year high at 94.6% retention rate in Q1. In our title and escrow business, we are consolidating our operations onto a single technology platform, which we expect will unlock sizable long-term savings through centralization once completed. In our mortgage business, GRA, which was Anywhere's JV with Guaranteed Rate, achieved its highest attach quarter in 2.5 years, while OriginPoint, which is Compass' JV, achieved its highest attach rate ever in Q1 and delivered its best quarter of profitability. Going forward, we see a significant opportunity to continue to improve both our attach rate and profitability in our mortgage JVs. Lastly, we are moving forward with our digital mortgage partnership with Rocket Mortgage, with Rocket's prequalification experience now embedded across all listings on compass.com. Our data and analytics team, led by Dave Crosby and supported by our Chief Economist, Mike Simonsen is executing a radical simplification of our significantly expanded data state. Since closing the Anywhere transaction, we've identified over 6,000 legacy reports and have already deprecated over half of them and are on a disciplined path to standardization across the entire company to get to approximately 100 high-fidelity reports. By minimizing the number of reports, it will allow our data team to focus on critical integration tasks and the development of proprietary insights by Q4 of this year, which we believe will provide our real estate professionals, title agents and mortgage officers the ability to win more business in the marketplace. Now turning to our Q1 2026 pro forma results. [Technical Difficulty] Operator: Ladies and gentlemen, thank you for your patience and standing by while we experience technical difficulties. I will now turn the call over to the management team to continue their prepared remarks. Robert Reffkin: Thank you. And again, sorry for the technical difficulties. Let me continue. In Q1, Compass, we delivered pro forma revenue of $2.76 billion, up 7% year-over-year compared to pro forma revenue of $2.58 billion a year ago. We reported adjusted EBITDA of $61 million. Our Q1 revenue came in above the midpoint of our guide and our adjusted EBITDA came in above the high end of our guide. In our brokerage business, which includes the Coldwell Banker, Compass, Corcoran and Sotheby's International Realty brands, pro forma transactions were up 2.6% year-over-year compared to the market, which was flat year-over-year. This means that for 20 consecutive quarters, our brokerage business has outperformed the market on an organic basis. Pro forma brokerage GTV was up 7.3% year-over-year compared to the market that was up 1.5%. Pro forma total agent adds on a gross basis were 3,503, which was higher than Q4 2025 levels. Pro forma total agent retention in our brokerage business was 94%, flat compared to Q4 2025. Excluding agents with 0 GCI in the last 12 months, pro forma agent retention would have been 97% in Q1 and excluding agents with $20,000 or less in GCI in the last 12 months, which on average equates to less than 2 transactions at our price points, pro forma agent retention would have been over 98% in Q1. Pro forma productivity per agent, which we measure as GTV per agent was up nicely year-over-year. Going forward, our brokerage recruiting and retention strategy as a combined company will be focused on productive agents as well as up and coming agents. We expect this to lead to a healthy level of agent adds, combined with improving agent retention and agent productivity growth. In franchise, pro forma GTV was up 4.6% year-over-year compared to housing market volumes that were up 1.5%, reflecting 310 basis points of outperformance. Our Sotheby's International Realty and Corcoran brands continue to outperform the company average, while total franchise sales experienced a meaningful increase year-over-year. Pro forma integrated services revenue grew 11% year-over-year with title -- T&E revenue being the primary driver. The quarter benefited from strong refinance activity with pro forma refi transactions up 100% year-over-year, while pro forma purchase transactions grew 4% year-over-year. Purchase transaction growth outperformed overall housing market growth at 0.2% year-over-year. These strong results would not have been possible without each and every member of our team. I want to thank the entire team for their focus and hard work in a quarter of significant change for our company. Now let me provide a few thoughts on our partnership with Rocket, Redfin and the industry's shifting stance on phased marketing. First, we are pleased to see several other portals and brokerages following our lead on home seller choice and phased marketing. Sellers want more choices, not less choices. And as coming soon are provided as an option to more sellers, they will realize they have more options and more choices on how to market a home than any -- and we, as a company, have consistently provided sellers with more options than our other competing brokerage firms. We believe that will help our real estate professionals continue to outperform the market and win listings with their sellers. Second, while we see others in the marketplace attempting to recreate an offering similar to ours, for several reasons, we are confident that the Compass 3-Phased Marketing option with the coming soon phase also being on Redfin is the best option for phased marketing in real estate. Here are a few reasons why. First, unlike the other option in the marketplace, all of our coming soon buyer inquiries are always sent directly to the listing agent. The person that knows the property the best as opposed to when you click the contact tour or schedule appointment contact agent button it being rediverted to a third-party agent who doesn't know the listing the best. Second, unlike the other major portals coming soon option, in our case, we always allow the listing agent to do showings and we always allow open houses. That is not the case for the alternative options. Third, real estate is a local business. And with our depth of inventory in major markets, we believe we'll be able to send a strong signal to consumers to search compass.com and our other brokerage websites. Of note, compass.com was the fastest-growing real estate website in Q1 with 38% year-over-year growth in monthly average users and is now the sixth largest audience in real estate for a Similarweb. Fourth, our agents can offer their buyers 1% off the mortgage rate through Rocket, a significant advantage, particularly in the current environment. And our advantage is being borne out in the numbers. In the Chicago metro area, which is the third largest housing market in the country by unit count, we have launched roughly 1,000 coming soon since we announced the partnership. This compares to virtually no unique coming soon inventory in the Chicago metro area that we can observe on the other portals as of last week. To date, we sent approximately 3,000 buyer inquiries back to listing agents from Compass coming soon on Redfin. These inquiries charge no referral fee from Redfin to the listing agent. And all of these buyer inquiries are incremental to what our listings -- real estate professionals would have received without the Redfin partnership. In addition to free buyer inquiries, our real estate professionals are also receiving a minimum of 1.2 million leads from Rocket and Redfin over the next 3 years with over 24,000 leads already having been given to our real estate professionals since the partnership was announced. Furthermore, we have also seen recruiting momentum pick up in the Compass brand since our announcement and principal agent recruiting is off to a faster start in Q2 than expected. One of the reasons for this is their interest in the Redfin and Rocket partnership as they want to benefit from these leads as well. Shifting to the earnings potential of our combined business. A common question we received from the investment community is what the earnings profile of the combined business could be in various housing market scenarios. In our investor deck this quarter, we have provided a scenario analysis to demonstrate how we are positioned to generate resilient financial performance even in a flat housing market and capture significant upside as the market improves and once we realize our cost synergies. Importantly, these scenarios assume no agent adds, no organic share take, no margin improvement, no improvement on T&E or mortgage attach or any contribution from leads or other ancillary revenue streams, which we view as incremental growth levers in our business beyond the housing recovery. I also want to emphasize that this is not guidance, but these scenarios should help provide a range of expectations around the earnings power of our combined company, simply from an eventual recovery in existing home sales and once we've realized our cost synergies. Specifically, assuming the housing market remains flat at 4.1 million existing home sales, we would generate roughly $1 billion in adjusted EBITDA and $750 million in unlevered free cash flow. In the next scenario, which we've assumed as 4.8 million existing home sales for this analysis, we would generate $1.5 billion in adjusted EBITDA and $1 billion in unlevered free cash flow. At mid-cycle levels of 5.5 million home sales, we would generate $2 billion in adjusted EBITDA and $1.5 billion in unlevered free cash flow. And lastly, we also provided an upside scenario of 6 million home sales. And at those levels, we would generate $2.5 billion in adjusted EBITDA and roughly $2 billion in unlevered free cash flow. So what you can hopefully see from this analysis is that, one, even at 4.1 million existing home sales, which we believe is the trough of the cycle, we could -- we would expect the business to generate $750 million in unlevered free cash flow, giving us confidence that we can make progress in reducing leverage even in conservative scenarios. And two, once we begin the recovery up to mid-cycle levels, that the earnings growth and free cash flow potential in this business is incredibly significant. Now I want to end by talking about our AI strategy. Last quarter, I touched on our 3 defensive pillars around AI. This includes: one, our growing base of proprietary data from our 3-Phased Marketing listings, which cannot be scraped by foundational AI models. Two, trust, which we believe will become even more important in a world where AI agents will bring inaccurate and fake information into the market like fake offers, fake listings, fake accounts, fake pictures, fake renderings, I'm already starting to see it. In this future, human validation will continue to be important given the high stakes, high-ticket transaction. Trust will matter even more than before. Three, positive network effects that our 330-plus thousand real estate professionals will create to continuously improve our Agentic AI capabilities on the platform. Combined, we believe we have the attributes required to evolve with the AI landscape. And despite all the fears around AI, the data indicates that agent utilization is now at the highest level in recorded history. Per NAR's annual consumer profile, 91% of home sellers and 88% of homebuyers choose to use a real estate professional to complete their transaction in 2025. I want to reiterate that, that is the highest level that we have ever seen in record history. Moreover, we're seeing the lowest level of for sale by owner listings in record history at just 5%. So even with AI making significant progress in the last 2 years, we're seeing an increase in the number of people using agents and a decrease in the number of for sale by owner listings and both at historic levels. So the data I just shared, 91% of home sellers using an agent and 88% of homebuyers using agents, that compares to a similar 90% of home sellers using an agent in 2024 and 88% of homebuyers using an agent in that period as well. And if you go back in time to 2005, what you see is 85% of home sellers using an agent and 77% of homebuyers using an agent. What this data is showing is that greater access to information or better search capabilities is not the reason why consumers choose to work with an agent. But rather, it's the agent's critical role in managing a highly complex and a highly emotional transaction. One where trust matters, where it's high stakes, high value. I cannot overstate how emotional these transactions and negotiations can become. The localized nuances that are prevalent in real estate are abundant and the nuanced deal process where no deal is the same as another is why people use a real estate professional. Moreover, what history shows is that as information becomes more prevalent as it did with the rise of the Internet from that 2005 period, where less buyers and sellers were using an agent. As the information becomes more prevalent, where more information and data has been out there over the last 2 decades. With that -- with more information, you see a greater need for the average consumer to feel like they need to hire a professional to make sense of all the information and all the data. Said simply, history shows that more information and more data in the public domain increases the demand for advice from a real estate professional. So now let me take a moment to speak about what we are doing to position ourselves and our business offensively for the AI opportunity. First, we are using AI to reduce OpEx, as you would expect. In Q1 alone, our internal initiative to train Compass and their 2,300 employees on how to best use AI tools has freed up an estimated $2 million of resources by deploying targeted AI workflow automations across support, compliance and brokerage operations, and the team has identified potential annualized efficiencies in the vicinity of $23 million as part of our overall cost synergy goal. Furthermore, we are transforming our engineering organization by successfully deploying AI coding assistance and automated testing frameworks organization-wide. We now estimate that 30% to 40% of all new code written at Compass is produced by AI, which is helping accelerate product development velocity by 20%, while keeping our technology OpEx unchanged even as we upgrade the platform for the Anywhere integration. Second, on productivity, we can help our real estate professionals, title agents and mortgage loan officers within our ecosystem become even more efficient and gain an edge in the market by using AI. For real estate professionals, we are fully integrating Compass AI 2.0 into their workflow to create an on-demand partner designed to help unearth business opportunities and streamline their daily workflows. Examples include a newly rolled out suggestion model, which suggests new steps an agent should take with their client to move their transaction along or proactively serving up buyer and seller leads through what we call our structural advantage tools, such as reverse prospecting, make and sell or the network tool to help a listing agent close a transaction faster. By giving our 330,000-plus real estate professionals these insights and reducing the number of manual tasks they perform each week, we are enabling them to service, win and close transactions faster. For our title agents, we are planning to leverage our significant data advantage now created by the Anywhere transaction to execute a targeted local sales approach. By layering predictive analytics into our one-click title and escrow integration, our title agents will be able to identify and intercept high probability transactions with greater precision, which we believe will improve our attach rates. For our mortgage loan officers, we can plan to apply similar predictive AI principles to capitalize on our expanded mortgage coverage. By utilizing our platform's proprietary transaction signals, we can provide loan officers with what we believe are highly qualified, highly high-intent leads exactly when a client needs financing, giving them an edge to win the business. Ultimately, we believe AI will be an accelerant to how much business our professionals do, and we are confident that we have the assets to help them win. With that, I will now hand it over to Scott. Scott Wahlers: Thanks, Robert. I want to start by saying thank you to our consolidated team for the extraordinary effort and collaboration put in over the past 4 months, which has led to the great results we're sharing today. With the Anywhere transaction closing on January 9, Q1 was truly a transformational quarter for our company. Where possible, I'll provide some information about the contribution to our consolidated results from the acquired Anywhere businesses. However, we're integrating the entities quickly and therefore, do not generally expect to break out separate results going forward. Please note that beginning this quarter, we'll also be providing additional information on an operating segment level. Our 3 operating segments going forward will be brokerage, franchise and integrated services. The Brokerage segment includes the results of our owned brokerage operations that now include the Coldwell Banker, Corcoran and Sotheby's International Realty brands. The franchise segment includes the results of the franchise brands we just acquired through the Anywhere transaction as well as the Christie's International Real Estate franchise we acquired in January 2025. The Integrated Services segment includes the results of our joint title and escrow operations as well as the operations of the Cartus relocation business that came through the Anywhere transaction. The Integrated Services segment also includes the equity method income from our 49% owned mortgage joint ventures, including the guaranteed rate affinity JV from the Anywhere transaction and our Origin Point JV. While certain direct expenses are allocated to each of the 3 operating segments, there are additional expenses that are not allocated to any of the operating segments because they relate more to the corporate entity or because they are shared across multiple or all of the operating segments. These include expenses related to our technology, finance, legal, human resources and executive functions. Therefore, the total adjusted EBITDA for the consolidated company will be equal to the total of the segment adjusted EBITDA results for our 3 operating segments, less the unallocated corporate expenses. We've reclassified our prior year results on the same operating segment basis for consistency with the current period presentation. With all that said, revenue in Q1 reached $2.7 billion, at the upper end of our revenue guidance range of $2.55 billion to $2.75 billion. Excluding the Q1 revenue contribution from the Anywhere transaction of about $1.2 billion, revenue increased 10.9% year-over-year. We are very pleased with this result as Q1 was a tough year-over-year quarterly comp in 2026 as on a Compass stand-alone basis, we grew organic revenue in Q1 2025 by 14.6% compared to Q1 of 2024. Brokerage segment revenue was $2.467 billion for Q1. On a pro forma basis, Brokerage segment revenue increased 7.1% in Q1 2026 compared to Q1 2025. Gross transaction value for the Brokerage segment was $97.3 billion in the first quarter. On a pro forma basis, brokerage segment GTV was up 7.3% year-over-year, a favorable comparison to the market that was at 1.5%. On a consolidated basis, including Anywhere, our average selling price was $978,000 for the quarter, representing a decrease of about 8% from a year ago as Anywhere's brokerage business has slightly lower average selling prices. Commissions and other related expense as a percentage of our brokerage segment revenue improved to 81.4% for the quarter. compared to 83.2% in Q1 of last year as Anywhere's brokerage operations operate with slightly lower commission rates than Compass' brokerage operations. On a pro forma basis, commissions and other related expenses as a percentage of our brokerage segment revenue was 81.3% in Q1 compared to 81.0% in Q1 of last year. Pro forma franchise segment GTV was up 4.6% year-over-year compared to a housing market volume that was up 1.5%. And finally, pro forma integrated services revenue grew 11% year-over-year with title and escrow revenue being the primary driver. Our total non-GAAP operating expenses were $641 million in Q1, an increase from $236 million of OpEx in the year ago period, driven by the operating expenses assumed in the Anywhere transaction. Note that this OpEx figure for Q1 of $641 million excludes Anywhere's expenses for the first 8 days of the quarter prior to the transaction closing or about $40 million of expense. Adjusted EBITDA for Q1 was $61 million, a record level of adjusted EBITDA for any first quarter period in our history, exceeding the high end of our $15 million to $35 million guidance range and a strong improvement of 280% from adjusted EBITDA of $16 million a year ago. Last quarter, I talked about the impact of Anywhere's long-term incentive plan, or LTIP, which is comprised of cash settled RSUs that require mark-to-market accounting through the P&L. The run-up in Anywhere stock price at the end of 2025 led to higher operating expenses in the P&L. And since these LTIP awards started to be indexed off of Compass' stock following the closing of the merger, we expected that elevated level to continue into Q1, which is built into our Q1 guide. However, given the decrease in Compass' stock price from the time we issued our Q1 guidance in late February to the stock price as of March 31, the actual expense from the LTIP wound up being $19 million lower than expected, which benefited adjusted EBITDA in Q1. Even after excluding the $19 million benefit from the LTIP, adjusted EBITDA would have been $42 million. This result still exceeded the high end of our adjusted EBITDA guidance range in the quarter, driven by higher-than-expected revenue and some other favorability in operating expenses, including slightly better realization of our cost synergies in the quarter. Several items are excluded from adjusted EBITDA as follows: First, during the quarter, as expected, we incurred $183 million of transaction and integration expenses related to the Anywhere transaction. This includes expenses such as investment banking, legal fees and severance costs, including $61 million of stock-based compensation expense, primarily related to the change of control severance provisions from Anywhere's former executives. We do expect additional expenses in this line item throughout the year as we continue our cost synergy and integration efforts, but not near the level seen in Q1. Second, you'll notice an elevated level of noncash depreciation and amortization expense this quarter at $163 million, up from $29 million a year ago. This increase is driven by the additional intangible assets and fixed assets we assumed in the Anywhere transaction, and this level of noncash depreciation and amortization expense will continue in the future. Third, stock-based compensation expense in the quarter was $47 million, excluding the aforementioned $61 million day 1 charge related to Anywhere's former executives. Last quarter, I guided you that you should expect stock-based compensation on a consolidated basis will not exceed $50 million in any future quarter beginning in Q2, and that continues to be our expectation. And finally, during the quarter, we recognized a $401 million onetime noncash deferred tax benefit related to the reversal of valuation allowances on our deferred tax assets. This reversal was related to the establishment of deferred tax liabilities for the recognition of intangible assets from the Anywhere transaction that are nondeductible for tax purposes. This $401 million deferred tax benefit offset the other noncash expenses and actually pushed us into a GAAP net income position this quarter of $22 million compared to GAAP net loss of $51 million a year ago. Our basic weighted average share count for the first quarter was 734 million shares, just slightly above the guidance range of 720 million to 730 million shares. And as expected, free cash flow was negative at $168 million in the quarter, driven by the Anywhere transaction and integration expenses, including the transaction costs incurred by Anywhere prior to the closing of the transaction that were paid on or subsequent to the closing date. That said, we ended the quarter in a strong cash position with $484 million of cash on the balance sheet, an increase of $285 million from year-end. Cash increase was driven by the $880 million in net proceeds from the convertible debt offering, offset by the use of $345 million in the Anywhere transaction related to the payoff of the revolver, net of cash acquired from their balance sheet. At the end of Q1, we had no outstanding borrowings on our $500 million revolver, and we remain well within our net leverage ratio covenant, which is the primary financial covenant on the revolver. As Robert touched on earlier, we have continued to make strong early progress on cost synergies. We have already actioned over $250 million of our cost synergy target, which was previously our year 1 target. As a result, we've now increased our year 1 action target from $250 million to $300 million and raised our 3-year action target from $400 million to $500 million. Furthermore, last quarter, we guided to an expectation to realize about $100 million of cost synergy in 2026, but that we now expect to realize about $200 million in 2026. About 2/3 of this amount or $130 million will be reflected as reduced operating expenses in 2026, benefiting adjusted EBITDA and cash flow and the remaining 1/3 or about $70 million will be reflected as lower CapEx, which won't directly benefit adjusted EBITDA, but will benefit free cash flow. As I discussed last quarter, the reason why a portion of the cost synergies will be realized through CapEx is because Anywhere historically capitalized a large amount of employee and contract labor to its balance sheet, approximately $80 million in 2025. And as part of our cost synergy work, a significant portion of Anywhere's technology projects that had historically been subject to capitalization will be cut as we shift the technology focus to the Compass platform. Importantly, as we've already made significant progress on the CapEx portion of our synergies, the vast majority of future actions over the next 3 years will generally all benefit the P&L and adjusted EBITDA. Now turning to financial guidance for Q2. For the second quarter of 2026, we expect consolidated revenue in the range of $4 billion to $4.2 billion. We expect second quarter consolidated adjusted EBITDA to be in the range of $310 million to $350 million. For the full year, we expect non-GAAP operating expenses in the range of $2.7 billion to $2.75 billion when considering the actual OpEx of $641 million for Q1. Included in the full year OpEx range is the 3% to 4% OpEx inflation we typically expect and the $130 million of the OpEx synergies we expect to realize through the P&L. On average, the OpEx for Qs 2, 3 and 4 reflects a step-up from the OpEx level of $641 million for Q1 for a few reasons. First, OpEx in Q1 excluded 8 days of Anywhere's operating expenses due to the transaction closing on January 9. Second, our annual employee compensation adjustments occur at the end of March, leading to a step-up of these payroll expenses starting in Q2 of each year. And offsetting these natural increases would be the higher P&L realization of synergies in the second, third and fourth quarters compared to the cost synergy realization in Q1, which was lower. We expect our weighted average share count for the second quarter to be between 755 million to 760 million shares. This is a step-up from Q1 as the shares issued for the Anywhere transaction were only weighted for the period post closing January 9. Finally, a few thoughts on cash flow and debt levels. As I talked about last quarter, we fully expected to report negative free cash flow in the first quarter from the Anywhere transaction and integration cost spend. We expect to be free cash flow positive for the balance of the year. However, Q2 could be close to free cash flow breakeven or maybe even slightly negative based on the timing of severance and other payments to achieve our cost synergies, the timing of the semiannual interest payments on our debt, which are concentrated in the second and fourth quarters of the year and the timing of certain legal payments related to Anywhere, including the $54 million NAR related class action settlement that is still open and expected to be paid in the near term. That said, we expect to deliver strong free cash flow in Q3 and Q4 of this year, which should put us in a cash position to deliver positive free cash flow on a full year basis and give us a clear path to prioritize aggressively delevering our balance sheet, which remains a high priority for us. Our first target in delevering is the highest cost tranche in our capital structure, the $500 million of 9.75% notes. These notes can't be prepaid today and will first become callable on April 15, 2027. The bonds will carry a redemption premium of 4.78% over par. And while this redemption premium will cost us $25 million in cash, it will save us nearly $50 million in annual interest cost. So it's a good use of cash. So April 15 of next year is circled on our calendar and assuming cash flows materialize as we expect, we'll be taking out the full tranche of the 9.75% notes in Q2 of next year. In the meantime, we'll build cash on the balance sheet while earning mid-3% returns in short-term treasuries. To wrap up my comments, in early April, Moody's and S&P initiated credit ratings on Compass. As prior to this point, Compass had no debt and therefore, had no credit ratings. Their respective reviews concluded a month ago, and S&P initiated a B+ corporate rating and Moody's initiated a B2 corporate rating and each issued positive outlooks on Compass Inc, which were upgrades from where Anywhere was rated on a stand-alone basis before the transaction. Additionally, ratings on the outstanding bonds were each upgraded between 2 to 3 notches. We're pleased to see that 2 of the big 3 credit rating agencies have come out with positive outlooks on the cash flow generation capabilities of Compass and Anywhere on a combined basis. Before I turn the call over to begin Q&A, we'll be attending the BTIG Conference on May 7 and the JPMorgan TMT Conference in Boston on May 18, and hope to see you there. Soham Bhonsle: [Operator Instructions] Thank you, everyone. This is Soham. For the Q&A portion of the call, we're going to take questions that we received by e-mail in the text box. And apologies again for the technical difficulties. So I guess the first question is from Jason Helfstein from Oppenheimer. How should we think about the timing of Anywhere's agents getting access to the Compass technology platform? And what do you expect in terms of adoption rate? Robert Reffkin: Thank you for the question. The Anywhere owned brokerage will get the technology starting next month and then more in each month following with everybody getting it by the first week of September, if not earlier. everyone in the owned operations. The franchise affiliate business will start getting it in January, and it will be released over the following 2 months as well, so in advance of the spring market. Soham Bhonsle: Great. The second one from Jason is, have you seen the uptick of 3-Phased Marketing since you settled with Zillow and launched the Redfin partnership? Robert Reffkin: Yes, we've seen an uptick in the 3-Phased Marketing. It's been modest as the -- you're in the middle of the spring market when usually it's more towards the third phase, but we've definitely seen an increase. Our coming soon went from, I think it was low 20s to mid-30s, and I expect it to be much higher in the months ahead. My expectation is that coming -- that 80% of our listings will go through the coming soon phase. Extension comes from where before the restrictive rules that were put in place, i.e., clear cooperation, we had 90% of our listings start off as coming soon. Soham Bhonsle: Okay. Next one is from Dae Lee from JPMorgan. You've gone from managing one brand to multiple brands across own brokerage and franchise network. That's now larger than your brokerage by transaction volume. That's a step change in complexity. What's the tangible benefit of maintaining distinct brands and catering to fundamentally different needs of agents spanning different brands and models? Robert Reffkin: Yes. So I think part of your question is the answer. Our customers are agents, right? You said agents have different needs. And so we need to serve those needs. And one of the needs that people have is a desire to have a local culture, local traditions, local beliefs and a local unique brand. And so this allows being able to support different brands allows us to serve more agents in the markets that we're in. And again, if our customers are agents, the -- I don't think I've heard an agent say they want us to merge all the brands as an example. But I have heard agents say that they want us to maintain their brands and we've given them that commitment. The technology platform is -- the reason why it's taking the time it is taking to roll out is half of the reason is so that it can work in a brand-agnostic way. And with that flexibility that we're bringing frankly just towards the summer, it can serve different brands without any more investment. And the same way Shopify is able to support a bunch of different brands, our platform should be able to support brands as well. Soham Bhonsle: Okay. The second one from Dae Lee is how much incremental synergy opportunity remains beyond the $500 million? Robert Reffkin: There is -- yes. I'll just -- yes, I'll start and I'll pass it on. There is incremental opportunity, but I wouldn't expect another increase in any time in the near future. Scott Wahlers: Yes. I was going to follow up with the same thing. I mean to say, we moved very quickly in these first 100 days since closing the transaction. We wanted to make a big impact early on just for the clarity of the organization and moving forward. And so as we get into the next phase of the synergies, we're getting into the deeper operational type integrations. And so we've got the runway to complete the rest of that phase, which we've clearly derisked ourselves with the great progress we've made to date, but we would not expect to be raising that target anytime soon. Soham Bhonsle: Great. Next is from Ryan McKeveny at Zelman. The first one is on the synergies target and increase in the target of $500 million, can management drive -- dive into the primary areas of cost savings, presumably from a combination of leases, headcount, tech development. Should we think about the mix of those big buckets and what categories of expenses is the drivers for the incremental synergy? Scott Wahlers: Just repeat last... Soham Bhonsle: Okay. I'll repeat it again. So on the synergies target and the increase to $500 million, can management dive into the primary areas of cost savings presumably leases, headcount, tech and development, how should we think about the mix of those big buckets? Scott Wahlers: Yes. Look, the reality is nothing has changed in terms of the buckets. I mean those big buckets were there. The reality is what's changed is more time has elapsed. We've had more ability to get into the details. And just to kind of like recap it, when we first put out the $225 million, that was at the time of announcement back in September of last year before we had any opportunity to get into the details, right? We increased that again to $300 million when we started doing some pre-close planning work, gave us more confidence of increasing that. The buckets didn't change then either. We just had more confidence on the total. We increased it to $400 million in February after we had 7 weeks of actual progress working with the leadership team of Anywhere and Compass coming together. And then after now having almost 4 months completed since we closed the transaction on January 9, it's just that much additional confidence. I mean I think the one thing I'd add that is why we're seeing such good progress here is that the management teams are really working very well together. In a typical situation, I think you often have the target comes in, makes a lot of changes, makes decisions. And this has been a much more collaborative approach with the Anywhere and Compass management teams working really closely with each other, and I think it's been a good contributor of the reason for our success. So it's not really any new buckets. It's just really kind of, I think, a team that's working really well together and making good progress towards the original goals. Soham Bhonsle: Okay. Great. The next question is also from Ryan. On the recent announcement with you and TPG and the stake in Peerage, firstly, can you give some context on the dynamics driving that transaction in terms of how that impacts the model? Does the ownership structure change? And just how does it sort of flow through the P&L? Scott Wahlers: Yes. Look, on the Peerage transaction, it's really a positive transaction for us. Peerage one of the key franchises under the Sotheby's International Realty brand, and it's an important relationship for us. They grew quickly through M&A prior to when mortgage rates spiked. This is going back into the early 2000s or 2020s, I should say. And so they just got into a situation where they were overlevered, took out too much debt as a result of their expansion and just had trouble keeping up with the debt payment. So it's a good business. It's fundamentally a good business. They just got overlevered on debt. So this transaction allowed them to restructure their finances, clean up their balance sheet and that puts them on the right path going forward. So we pick up a 51% common ownership interest in this transaction. They're back on being cash flow positive. Nothing changes from the standpoint of how those revenues will flow through our business on the franchise side. That will stay coming through franchise revenue going forward. And as we talked about, in the announcement, we kind of restructured some amounts they owed us from some royalty payments they were behind on. And so we'll get those paid back just over a little bit longer period of time that we'll provide. So overall, a net positive transaction for us. Soham Bhonsle: Great. Next one is from Alec Brondolo from Wells Fargo. Could you speak to the cost buckets that drove the increase in the 3-year synergy target from $400 million to $500 million? How much of the $130 million in anticipated P&L cost synergies will be realized in the first half of the year relative to the second half? And could you speak to the learnings of the Anywhere franchise business since the acquisition closed? How are you thinking about bringing technology and the best practices to the franchisees? Scott Wahlers: Maybe I can start with the synergies question. On the synergies, I think if you think about the $130 million that will be realized through the P&L in 2026, about $10 million of that was realized in the first quarter, just given timing of the actions in relation to Q1. So that by default puts the remaining $120 million coming forth in Qs 2, 3 and 4. If you just divide that up at $40 million even. I'd say you could assume a little less than that average of $40 million in Q2 and a little more of that average in Q4 as a lot of the synergies are action now. They'll continue to build in terms of realization through the quarters of the year, and we still have another $50 million to go. And so that's a good way to kind of frame how that's going to come through the P&L. Robert Reffkin: In terms of franchise, historically, our company served real estate professionals with agents and with the goal of making them more profitable, serving them as entrepreneurs, helping them realize their entrepreneurial potential. Now we have a second customer base as broker owners, which are the franchise affiliate businesses. And they have the exact same goals as the real estate agent, which is to become more profitable to realize their entrepreneurial potential. And we are giving them the same advantages that helped Compass grow. We're giving them as broker owners to help them grow. Obviously, it's the technology platform as one example, but also our enterprise sales team that recruits agents, our M&A team. So we are giving them both on the revenue side and the cost side, the same advantage that Compass had at a brokerage level, we're giving that to the franchise broker owners so that they can be more profitable businesses. Soham Bhonsle: Okay. Great. The second one from Alec is, how should we be thinking about the size of the Anywhere agent base that has a low amount of GCI? How long do you anticipate attrition from that group of users that will last? Scott Wahlers: On the -- go ahead Rob, do you want to take that? Yes. I was going to say on the agent base, I mean, I think the important point that we wanted to call out there is that the attrition during the quarter, a significant percentage of that was really kind of underperforming or nonperforming agents. 56% of the agents we shed had 0 production. Another 21% on top of that had production of $20,000 or less in the past 12 months. So these are reductions of numbers of agents but really having no impact on the business. On the Compass side, over the last several years, we've kind of really operated under this methodology of kind of focusing on the strong producing agents and the underperforming agents, if they pay their fees and they are otherwise in good standing with amounts owed to the brokerage, we'll keep them on. But if they're not producing and they're not paying bills as due, we'll move them out of the business. And so Anywhere is now operating in that same capacity in recent periods of time, and I think they're just catching up to us a little bit. So it's good to see we're both aligned on that strategy. It's the right strategy. So there might be a little bit of more choppiness over the near term on that, but it's not going to be -- the important thing is that we're just dropping numbers of agents. It's not dropping any production at all. And that's the main goal. As we've always said before, there's been this limitation with principal agent counts and total agent counts that not all agents are created equal. Even when we used to report principal agents on the Compass side, one principal agent could be operating as an individual contributor, another principal agent could have a team of dozens of agents doing extremely high production. So there are limitations to that metric on a principal agent basis, and there's also limitations on that on a total agent basis. But the important thing we wanted to get out there is that the lost agent counts really had very, very limited production associated with them. So no meaningful impact on the business. Soham Bhonsle: Great. All right. Next one is from Bernie at Needham. With the guidance, can you provide some color by revenue buckets? How should we expect seasonality throughout the year? Are there any differences than typical housing market seasonality? Robert Reffkin: Could you repeat the last part... Soham Bhonsle: With the guidance, can you provide some color by the revenue buckets? How should we expect seasonality throughout the year? Is there any difference in housing -- difference in the housing market seasonality? Scott Wahlers: It's probably going to be pretty similar. A lot of the GTV coming through franchise will follow similar to the brokerage seasonality. And so I'd expect those two to be fairly aligned. And you can actually see, just as a reminder, we put on our on our website through the investor deck, we provided today the pro forma revenue for 2025 as though Anywhere and Compass were combined from the beginning of 2025. And you can see the breakout for the Brokerage Franchise and Integrated Services segment, separated for Compass, separated for Anywhere and then, of course, in total. So you have good visibility of what that looks like on a trailing 12-month basis to hopefully give you some sense as to what that trending could look like going forward. Soham Bhonsle: Great. So the next one is from Bernie as well. 84,000 agent count was lower than expected. I don't think we had the exact apples-to-apples comparisons with the principal versus nonprincipal agent count last quarter. How did agents trend quarter-over-quarter? Can you talk to agent retention? Scott Wahlers: Yes. I mean, look, I think we touched on that a little bit already with -- we had good recruiting we talked about the attrition and the portion of that attrition that was really kind of related to nonproductive agents. I think the gap to consider is that what we're talking about here with the 84,000 agents we're talking about owned brokerage agents, right? There's obviously a lot of agents on the franchise side of the house that we're not including in that count. That leads to our total, the 330,000-ish total count across the company, which includes international franchise. Soham Bhonsle: Great. Next one from Michael Ng at Goldman Sachs. What were the key sources of the upgraded synergy outlook given 3 quarters of upgraded synergy outlook? Could we expect further upside from here? And as a housekeeping item, how much in P&L synergies was realized in Q1? And do you expect -- and how much do you expect in Q2? Scott Wahlers: Yes. I think we covered that one as well in an earlier question. Again, about $10 million was realized in the first quarter, which is up a little bit from what we expected. And then that leaves you with about $120 million of P&L realization that will come through in the last 3 quarters of the year. I'd expect a little less than $40 million in Q2, about $40 million in Q3 and a little more than $40 million in Q4, if you want to kind of like phase that out that way. Soham Bhonsle: Okay. And this should be the last few questions here. So from Michael Rindos at Benchmark. Please discuss what's going on with private listings in Chicago -- in the Chicago MLS, sharing it nationally and Washington State, Wisconsin enacting laws around private listings. Robert Reffkin: Yes. So -- there are 2 types of laws that states are coming with. One is a model, which I believe is Wisconsin and Connecticut, where they're saying that if a seller signs that they don't -- that they want to be private listing, they can be private listing. So that actually means that some states are saying sellers have the legal right to be private listing and to market however they want. That's one model. I guess -- and well, there's 3 models. And the second model is one where the states aren't seeing anything. And the third model would be states like Washington state, where they're saying if a listing is marketed to some, it must be publicly marketed. But public marketing per -- at least per MLS is assigning the yard. And so what is public marketing? So is that saying if you're marketing to this private listing, you have to assign your yard? I'm not sure that's fine. Public marketing is put on social media. So is that state saying, if you have a private listing, you also on your social media, I think that would be fine. Is public marketing saying that you have the days on market or price drop history or a bunch of information. Public marketing could just be a picture of the house, the neighborhood and say, contact me, an agent, come to compass.com, we'll show you all these listings. And so in those states like Washington, they're saying if it's -- they're saying coming soon are perfectly legal and if nothing else, that it meets the requirement because clearly, it's a public marketing. And even private exclusives on compass.com, they're available per request. And so private exclusive is just a name, like private label for clothes, like private banking, like private equity, like private client group, it's just a name. Obviously, it can't be private because it's private -- you can't sell something to yourself, right? So what private exclusives are on compass.com, they're available by request, and they are publicly marketed. A different way to say it, Zillow bans private exclusives because they're public marketing. And even Zillow believes they're publicly marketed. And so that's what's happening in the state level. For MRED what we are bringing MRED national as well as it will be just a select number of MLSs that are pro seller choice, where we're going to give them all of our listings, where we're going to subsidize our agents joining. And the reason why it's not that I want to create a national MLS to replace local MLSs. I want to create a national MLS to compete against local MLSs because if they have to compete, who are they competing for? For us, for agents, agents deserve more choices. Sellers deserve more choices, not less. And so I think this is a very positive -- in the same way, look what we kicked off. Now you have Zillow previews and realtor previews and coming soon in all these sites. Didn't the seller deserve that 5 years ago and 10 years ago? Why didn't they have it? Shouldn't sellers have more choices, not less choices. And so what we are doing, we are pushing on the system so that sellers and agents have more choices, less mandates. The seller should be the only person that decides how they market their home in the context of the law. And fiduciary duty and statutory duty, which are a majority of states, say that the agent, the real estate agent has must -- and this is the law. MLS rules are just rules of a business, they're private entities. But the fiduciary duty of statutory duty says the agent must follow all lawful instructions of their clients. If a seller wants to market without days on market and price drop history, however they want, that is a lawful instruction. And MLS with restrictive rules should not be able to tell an agent that they cannot follow the law or if they don't follow the law, their sellers' instructions that they're going to be fined $5,000 and can lose their access. So I think I'll close with this. The dominant portal that likes banning agents for marketing outside of their platform to scare them from marketing outside of their platform, their tagline is we are trying to bring into the light these listings, bringing transparency into the light. Well, here's what we're bringing to light. We're bringing to light that sellers have been losing the disinterested advice of their fiduciary because of MLS fines and debarments. And we are bringing to the light that sellers should be -- with their agents should be able to decide how they market their home in any way they want, not third-party portals and third-party platforms like an MLS. The seller hired the agent and the broker firm the seller didn't hired MLS. The seller hired an agent. They didn't hire a portal. And again, I think that history will look back and they'll see that sellers will have more choices because of the efforts that we've been pushing forward. And I'm thankful for all of the agents and employees that have advocated for seller choice over the last number of years. Soham Bhonsle: Great. I think we will end it there. I know we went a little bit over. So again, thank you, everyone, for joining the call, and apologies for the technical difficulties. We are available tonight and over the next few days to answer any of the questions you may have. Thanks again for joining. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the OPENLANE Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Bill Wright. Please go ahead, sir. William Wright: Thank you, operator. Good morning, everyone. Welcome to OPENLANE's First Quarter 2026 Earnings Call. With me today are Peter Kelly, CEO of OPENLANE; and Brad Herring, EVP and CFO of OPENLANE. Our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that may cause our actual results or performance to differ materially from such statements. Factors that may cause such differences include those discussed in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations of GAAP to non-GAAP measures are provided in our earnings materials and available in the Investor Relations section of our website. Please note that all financial and operational metrics presented during this call are on a year-over-year basis, otherwise specifically noted. With that, I'll turn the call over to Peter. Peter Kelly: Thank you, Bill, and thank you, everyone, for joining the call today. I'm very pleased to report on OPENLANE's strong first quarter results and to provide you with an update on our strategy and our outlook. I'll begin with a few opening remarks, and then Brad will walk you through our financial and operational performance and our increased guidance for 2026. But before I turn to our results, I'd like to highlight that this week marks the 3-year anniversary of our rebrand to OPENLANE. As I stated at our March investor events, the rebrand was never about a new name or logo, it was about forging an entirely new company founded on a single purpose, which is to make wholesale easy so our customers can be more successful. Over the past 3 years, our investments, strategy and execution have delivered on that commitment and reinforced several key pillars of differentiation for OPENLANE, including the leading commercial off-lease solution that connects thousands of franchise dealers into our marketplace. a dealer business that is outpacing the industry and capturing meaningful market share, a high-performing finance business that is synergistic with our marketplace, an accelerating network effect of new buyers, sellers, listings and transactions and a winning culture and team that I consider to be the very best in the industry. The performance and outcomes OPENLANE is delivering are the direct result of the strategy we began executing 3 years ago. And I believe our first quarter results are further evidence to OPENLANE's strength and differentiation in the market. During the first quarter, we continued to build on OPENLANE's positive momentum, growing consolidated revenue by 15% and delivering adjusted EBITDA of $97 million, a 17% increase. We also generated $160 million in cash flow from operations. These results were led by strong performance in the marketplace business with both commercial and dealer customers and solid contributions from our finance business. In the Marketplace segment, we grew overall vehicles sold by 19%, increased gross merchandise value by 32% to $9.1 billion and delivered $52 million in adjusted EBITDA, representing a 39% increase. In our dealer-to-dealer business, we grew vehicles sold by 13%, with similar geographic dynamics to those experienced in Q4 of 2025. In the United States, OPENLANE dealer-to-dealer transactions continue to accelerate with growth in the upper 20% range. This represents a significant outperformance of the industry and a meaningful gain in market share. Our go-to-market strategy in the U.S. is working and OPENLANE's unique inventory, technology advantage and superior customer experience are expanding our dealer network and compounding our growth in transactions. In Canada, we were pleased to see some improvement in the macroeconomic and automotive retail environment. And while Canadian dealer unit sales declined versus a strong prior year comp, we did see sequential improvement over Q4 of 2025. On the commercial vehicle side, the 25% increase in vehicles sold was driven in large part by the onboarding of our latest private label customer. Even excluding that step function increase, commercial vehicle sales grew by 6% during the quarter. This reinforces that the inflection of off-lease supply has officially begun, and we expect to see year-on-year growth in off-lease volumes throughout the remainder of 2026 and beyond. Moving to our Finance segment. AFC also had a good quarter, growing average receivables managed, holding the loan loss rate to 1.6% and generating $45 million in adjusted EBITDA. Now we do believe the industry experienced a strong spring market driven by higher-than-normal tax refunds and constrained supply paired with high consumer demand, which led to high conversion rates and appreciating asset values. That said, there is no question that OPENLANE's digital operating model is resonating in the market, and I am highly encouraged by the output of our investments and our focused execution. So now let me turn to our strategy and outlook. As I mentioned at the start of the call, our strategy is delivering results, and we remain committed to advancing our three strategic priorities. First, delivering the best marketplace, expanding our depth and breadth with more buyers and more sellers and offering the most diverse commercial and dealer inventory available. Second, delivering the best technology, innovative products and services that help our customers make informed decisions and achieve better outcomes. And third, delivering the best customer experience, keeping our marketplace fast, fair and transparent, making it easy for customers to transact and making OPENLANE the most preferred marketplace. And I'll touch on each of these in a little more detail. First, in terms of offering the best marketplace, we continue to make significant gains and drove another quarter of double-digit increases in new buyers, sellers and unique vehicles listed, each of which were up over 20% in the United States. Customer anticipation for the off-lease recovery is also driving more franchise dealers from our private label programs into OPENLANE's open sale. During the quarter, we nearly doubled the number of commercial vehicles sold in this higher-margin channel versus the prior year. And on the independent dealer side, AFC new dealer registrations also increased during the quarter, each of which also presents a new dealer opportunity for OPENLANE. At the end of Q1, approximately 54% of all AFC dealers were registered with OPENLANE. From a best technology perspective, we extended our technology advantage in the first quarter with our public release of OPENLANE Intelligence. OPENLANE Intelligence unifies our human and AI-enhanced capabilities to deliver actionable insights that improve customer decision-making. We see AI as a true enabler and accelerator of our digital solutions. And during the quarter, we released several new offerings and features that leverage our AI expertise and deep data resources. In Canada, we launched our new MyLot inventory management solution. Initial interest has exceeded our expectations with hundreds of early sign-ups, and we are optimistic about the potential of this subscription-based SaaS offering. Across the U.S. and Canada, we also released our new predictive pricing feature, the only technology in the industry that provides dealers with a forward-looking 30-day, 60-day, 90-day view into the anticipated value of every dealer vehicle offered on OPENLANE. And finally, in terms of providing the best customer experience, we are also leveraging our human and AI capabilities to streamline and enhance the customer experience, improve the consistency, accuracy and speed of arbitrations and to help address dealer inquiries as quickly as possible. At the end of Q1, our transactional NPS scores across all geographies sits squarely in the excellent range with our U.S. seller NPS achieving the highest scores, indicating exceptional customer loyalty and brand satisfaction. So as we look into the remainder of 2026, while we cannot count on an industry environment as strong as Q1, there is still a lot of opportunity for OPENLANE. We are continuing to build momentum, and I'm very optimistic about our ability to execute our strategy with precision. As our 2025 go-to-market investments in dealer-to-dealer continue to ramp up towards full productivity, we remain focused on increasing market share and wallet share. As stated earlier, we expect off-lease supply to scale up throughout the year, and OPENLANE will be a primary beneficiary of this cyclical recovery. Our Canadian business is leveraging its strong market position to introduce new revenue-generating products and services. Used vehicle values significantly appreciated in Q1 and remained strong. This is a positive for the marketplace and for AFC, though any sharp decline in used vehicle values could lead to a higher risk environment for floor plan financers. And while no industry is immune to geopolitical or macroeconomic events, we have not seen a material industry impact from fuel prices, new and used vehicle affordability, chip production or any other external factors that we monitor. So just to summarize, OPENLANE remains well positioned to capture the opportunities ahead, and we're executing a strategy that is delivering results, winning customers and outpacing the industry. Because of that, I believe the key elements of our value proposition for investors remain very compelling. OPENLANE is a highly scalable digital marketplace leader focused on making wholesale easy for automotive dealers, manufacturers and commercial sellers. There is a large addressable market for our services, and OPENLANE is uniquely well positioned with commercial customers and franchise and independent dealers. Our customer surveys and third-party research indicate we are the most preferred pure-play digital marketplace in the industry. Our technology advantage is a competitive differentiator. Our floor plan finance business, AFC, is a high-performing business that is synergistic with the marketplace. We generate significant cash flow and have a strong balance sheet. And we believe our business has the capability to deliver meaningful growth, profitability and cash generation over the next several years. So with that, I will now turn the call over to Brad. Bradley Herring: Thanks, Peter. Good morning to everyone for joining us today. On behalf of our management team and all of our employees, we are very proud to report a record quarter for OPENLANE. For the quarter, we transacted more GMV, sold more vehicles, generated more revenue and produced more adjusted EBITDA than any quarter in our company's history as a digital marketplace. These results would not be possible without the tireless commitment and stellar execution of our nearly 5,000 employees that work every day to make wholesale easy for our customers. Before we dive into the financial results, I'd like to thank all of our investors and sell-side analysts that came to visit us in Fort Lauderdale for our Investor Day on March 3. During my remarks and Q&A today, I may reference selected slides we reviewed during our presentation. These slides can be found on the Investor Relations section of our website. Moving on to actual results. We reported total revenues of $528 million, which represents growth of 15%. Revenue growth in the quarter was exclusively driven by the results in the Marketplace segment, which I'll dive into more shortly. Consolidated adjusted EBITDA for the quarter was $97 million, which represents an increase of 17%. I'll talk more about our adjusted EBITDA results within the discussions about each business segment. Consistent with previous quarters, we will be discussing adjusted free cash flow metrics on a rolling 12-month basis due to the inherent volatility in our quarterly cash flow numbers. For the trailing 12 months, our adjusted free cash flow totaled $259 million, representing an adjusted free cash flow conversion rate of 75%. The 75% conversion rate is slightly above our expected range of 65% to 70% and reflects the strong cash generation of both our marketplace and financing businesses. As you may have heard, on March 26, the Canadian Parliament enacted a bill repealing the digital service tax or DST. This action resulted in a $17.3 million reduction to our marketplace cost of services. $15.9 million of the reduction represents prior period expenses that have been removed from our current quarter adjusted EBITDA calculation, while the remaining $1.4 million is reflected as an in-quarter expense savings. Moving to the performance of our business segments, I'll start with the marketplace. In Q1, we transacted GMV totaling $9.1 billion, which represents growth of 32%. GMV growth in the dealer category was 20%, representing a 13% increase in vehicles sold and a 6% increase in average vehicle values. In the commercial category, the GMV growth of 38% was made up of a 25% increase in vehicles sold with an 11% increase in average values. Auction and related revenues were $242 million, which reflects growth of 22%. The primary driver of this growth was in the U.S. dealer category, where we saw a 38% increase in auction and related fees driven mostly by the strong vehicle sold performance that Peter mentioned earlier. In addition to the growth in vehicles sold, U.S. dealer GMV growth also included a 22% increase in average vehicle values, driven by a higher mix of sales from our large dealer group customers and an overall increase in wholesale auto prices. Exclusively due to the significant increase in average vehicle values, yields for the U.S. dealer business declined approximately 60 basis points from the 680 basis point to 700 basis point baseline range that we provided in our Investor Day materials. On a per vehicle sold basis, revenue generation in U.S. dealer improved by high single digits. Complementing our performance in the U.S. dealer business, auction and related fees in our U.S. commercial business were up 42%. GMV in the U.S. commercial business was up approximately 46% due largely to the successful launch of a returning private label customer as well as improvement in the lease return waterfall. Yields in the U.S. commercial business remained largely consistent with the baseline that we reviewed at Investor Day. SaaS and other revenues in the quarter were $68 million, which is up 1% due to increases in our subscription-based revenue streams. Rounding out the revenues in the Marketplace segment, our purchased vehicle sales grew 31% to $112 million. The variance was driven by the increase in U.S. vehicles sold as well as an increase in the average vehicle values in both U.S. and Europe. Adjusted EBITDA for the Marketplace segment was $52 million, which results in an adjusted EBITDA margin of 12%. That represents growth of 39% in adjusted EBITDA and 160 basis points of expansion in adjusted EBITDA margin. The year-over-year expansion in adjusted EBITDA margin was driven by the structural scaling effects of our digital platform and a higher mix of revenues coming from our U.S. commercial business that comes with an accretive variable contribution. In our Finance segment, the average outstanding receivables managed in the quarter was $2.4 billion, which is up 3%. Growth here was driven by a 3% increase in the average vehicle values, offset by a 1% decrease in transaction counts. Net yield for the quarter was 13.6%, which is down 30 basis points. The decrease was primarily attributable to a decrease in transaction fee yields driven by slightly lower transaction counts and increasing loan values. The Q1 provision for credit losses was 1.6%, which is consistent with our results from last quarter and 7 basis points higher than the same quarter last year. While recent performance has hovered in the mid-1% range, we continue to reiterate our targeted range of 1.5% to 2.0% for credit losses. The combination of the changes in the portfolio balance, the net yield and the loss provisions are an adjusted EBITDA for the Finance segment of $45 million, which was down 1%. With respect to capital considerations, I'll refer investors to Page 75 of the Investor Day deck where we laid out our objectives for capital deployment. To summarize that message, our first and foremost priority is to fund the organic growth of our business. That will be followed by share repurchases and finally, debt repayment. In addition to our investments in go-to-market, we repurchased 964,000 shares in the first quarter at an average price of $27.20. This represents the retirement of approximately 0.7% of our fully diluted share count that includes the assumed conversion of the remaining preferred shares. As we also mentioned in our Investor Day, we are considering debt repayment options, although investors should not expect to see any material paydowns to start until later in 2026 or early 2027. From a liquidity perspective, we ended the quarter with an unrestricted cash balance of $180 million and capacity of over $400 million on our existing revolver facilities. Moving along to our guidance. We are raising our full year expectations for adjusted EBITDA from a range of $350 million to $370 million to a range of $365 million to $385 million. The entire increase is coming from our Marketplace segment and is driven mostly by strong performances in both our U.S. dealer and U.S. commercial businesses. This revision also reflects the full year impact of the repeal of the Canadian DST that I mentioned earlier. Countering the strong performance in the marketplace, we remain cautious around downstream impact of evolving and volatile macro conditions. Sustained increases in fuel prices, the impact of rising auto prices on consumer affordability and subsequent impact on our customers and the automotive supply chain challenges are all front of mind as we look into the back half of 2026. With respect to our Finance segment, we maintain our previous guided position as the volatility and macro trends are largely offsetting the decreased likelihood of any rate cuts in 2026. To summarize, we're very pleased with our quarterly results and are proud to increase our full year 2026 projections. Our revised outlook represents strong momentum in both the dealer and commercial elements of our Marketplace segment, while at the same time reflecting on some potential challenges. We are also proud of our prudent balance between growth and risk management in our Finance segment. With that, I'll turn it over to the operator for questions. Operator: [Operator Instructions] The first question that we have comes from Bob Labick of CJS Securities. Bob Labick: Congratulations on a great start to 2026. Sure. So obviously, really strong performance on commercial volumes, and you mentioned the returning off-lease customer there. Can you tell us, was there a full impact from that customer? Meaning did you have it for the full quarter? Or do you get a little incremental benefit in Q2 as well? Just trying to figure out the kind of run rate from that and the impact kind of going forward? Peter Kelly: Yes, Bob, it launched mid-January. So it's pretty much a full quarter. But I guess, if you're doing precisely, there was an extra 2 weeks that wasn't live, but it was live for 11 weeks of the 13 weeks. Bob Labick: Okay. Great. And then kind of sticking with commercial, lots of EVs coming off lease and there's pretty significant negative equity on that side. How are they behaving in the OPENLANE auctions, EVs in general? And then similarly, how are the ICE vehicles that may still have a little bit of equity behaving? Just give us a sense as we see this divergence of off-lease coming on more EVs probably this year and more ICE next year? Peter Kelly: Yes. Thanks, Bob. Let me tackle it. I'll start with just the commercial overall, and then I'll go into the EV piece of it, if that's okay. Bob Labick: Right. Peter Kelly: So listen, really good quarter from commercial. As I said, 25% growth, a lot of growth in GMV as well. With a strong spring market, used vehicle values did go up about 7% by the end of the quarter relative to January 1. So GMV was strong. The new customer also had a premium vehicle portfolio that contributed to EV. But in addition to the sort of volume increase, we also saw an improved mix relative to a year ago. So relatively fewer payoffs across the portfolio, although payoffs remain abnormally high, but they've come down a little bit in percentage terms. And corresponding to that, an increase in sort of non-grounding and open sales, which are higher revenue, higher-margin transactions for us. So we saw an improved mix through the commercial funnel. I'm talking generally here, EV and ICE combined, okay? So listen, a lot of encouraging signs there. And again, feel really good about the setup for commercial vehicles through the balance of this year and into next year and beyond. Going specifically into EVs, yes, we certainly saw an increase in EV volumes in the first quarter. The good news is they're performing very well. Conversion rate for EVs is comparable to that for ICE vehicles. It varies a little bit by portfolio, which indicates certain sellers are adopting different strategies in terms of how to remarket them. But overall, conversion rates on EVs in our marketplace is very strong. If anything, we're seeing because of the equity situation on EVs, which is more negative, as you know, we're seeing even fewer payoffs, so almost no payoffs. So those cars are flowing deeper in the funnel. So relatively higher conversion of EVs in the nongrounding and open channels, which from a margin perspective is very good for us. So we're seeing good performance with EVs. Obviously, in the quarter as well, we saw the stuff in the Persian Gulf and oil prices, that has probably boosted EV demand at the retail level a bit. So if anything, I would say that demand has strengthened late in March and into April as well. So good positive momentum on EVs. And I think the real question is the seller has to be prepared to sort of acknowledge what the value of the car is in the marketplace as opposed to what is the residual value that they might have written on a contract 2 years or 3 years ago. But absent that, I feel really good about it. And as we're looking to the future, and again, I'll say this comment is more general. as commercial volumes are generally picking up, our commercial sellers are getting more and more interested in, okay, what techniques and plans can we put in place to maximize conversion and improve outcomes in the digital channel because it is such a fast channel. It's a low expense channel, but also a high price realization channel. So we're having very constructive discussions with many of our customers running pilots and various programs to drive adoption and drive conversion of the vehicles. Operator: The next question we have comes from Craig Kennison of Baird. Craig Kennison: I wanted to go to Slide 11, if I could, and just ask you, Brad, if you could just help us understand the yield dynamic in Q1, why it dropped and what the mix issues are that impacted that? Bradley Herring: Yes, perfect. This is Brad. I'll take that. So yes, if you look at the yield, you're talking about on the commercial side where the yield drop. So it's a mix issue. If you think about -- when we talked about at Investor Day, we talked about the different yield setup for commercial across the different geographies, and we mentioned that the U.S. range was certainly lower than Canada and Europe. So if you look at the mix in the commercial space, last year, first quarter, U.S. made up about 71-ish percent of the GMV that flew through the commercial space. Q1 of this year with the ramp-up of the new customer we talked about as well as kind of the increase just from the lease returns, now that number is north of 75%, 76%. So that's a mix issue that drove that yield down from a 1.59% to 1.43%. The yields across the different categories are relatively stable. So that means it's purely mix across the geographies that's driving that. Craig Kennison: And while I have you, Brad, could you just help us understand the full year implications of the repeal of the digital service tax? Bradley Herring: Yes. The full year impact on an annual basis is $5.5 million to $6 million. It's about $1.4 million in the first quarter is what I disclosed. That's a relatively steady run rate across the different quarters. It will kind of vary a bit with volumes. But if you use a $5.5 million to $6 million impact number for the full year, you'll be in line. Craig Kennison: And are there any offsets to that, like charges or fees you may have charged to offset that, that would also go away? Bradley Herring: No, that will just -- that will be the only impacting item. Operator: The next question we have comes from Jeff Lick of Stephens Inc. Jeffrey Lick: Congrats on a great quarter. Peter, I was wondering, as it relates to the U.S. dealer-to-dealer, you said it was in the upper 20 range, which implies a little bit of a sequential improvement from Q4, which was in the 20-ish up 20%. The market was actually down a little more in Q1 than Q4, which kind of implies your spread to market is widening. I was wondering if you could elaborate on any of that? And then does the lease return business kind of have a halo effect like some kind of symbiotic effect, synergistic effect that's helping drive that? If you could elaborate, that would be great? Peter Kelly: Yes. Jeff, I appreciate that. Listen, we were very pleased with the dealer performance in Q1. in aggregate, dealer volumes grew year-on-year by a higher number than in Q4, and that was driven by the U.S. where the year-on-year growth, as I said, increased to the upper 20s. And as you point out, that was an acceleration. So we feel really good about that. We don't have a full industry picture yet, but we do know that dealer volumes of physical declined a little in the first quarter. So it definitely looks like OPENLANE had a strong performance in terms of market share and share gains based on those results. So we feel pleased about that. It also looks like an increased portion of the industry volumes move towards digital, largely driven by our volume increase, right, based on the data we have at least right now. So listen, we feel really good about that. I think it's driven in large part by the things I've talked about on many calls, our focus on the value proposition that digital offers our customers, the speed, the ease, the access to a broader network of buyers, ultimately better outcomes for sellers and for buyers, the convenience, the peace of mind, the ability to search for vehicles and purchase vehicles without leaving your dealershipments and all those types of benefits. So we're very focused on that. Obviously, we've made go-to-market investments as well, Jeff, that continue to help drive those results. To the specific question on lease, does improving commercial volumes create a halo effect? I think it probably does. I think dealers are aware that lease volumes are going up and OPENLANE is well positioned to benefit from that. And if dealers want to get access to those units, then doing business with OPENLANE would be a wise choice. So I think we're seeing franchise dealer registrations have improved. Our ability to convert dealers from private label buyers across into our open sale have improved. So I think there is some of that for sure. I think the other thing, Jeff, is there's just a network effect, right? There's a network effect in any marketplace as that you add more buyers, your marketplace becomes more valuable for every seller on the marketplace. And as you add more sellers, more inventory, it becomes more valuable to every buyer in the marketplace. So I think there's a compounding benefit that takes place over the longer term on that dimension as well, and I think we're benefiting from that. So listen, very pleased with the results. I did also say in my remarks, it was a strong spring market. Tax refunds were relatively high. Inventory remained relatively scarce. So there was a lot of demand, conversion rates were up. I would not forecast an upper 20s growth rate for the full year in the U.S., candidly. But obviously, we're going to drive our traction in the marketplace as strongly as aggressively as we can. Jeffrey Lick: And then just a quick follow-up on commercial. Did you say in your prepared remarks, commercial was up 24.6%, call it, 25% that ex the new customer, commercial would have been up 6%, implying that the new customer was 19%? Peter Kelly: Yes. That's -- well, yes, that's what I said. Commercial is up 25-ish, excluding the new customer, up 6%. So the new customer was a pretty significant step function. And maybe one comment on that. With this new customer, we're essentially handling all of their transactions, including all payoffs. And that's not always the case. In fact, I would say the majority of our customers, that's not the case. We do it for a number of others, but we do it for this one. So this customer, we're kind of indifferent to -- we're not indifferent from an economic standpoint because the economics are different. But from a transaction count standpoint, all those transactions get processed through our platform. So it was a pretty significant volume impact, but it had some -- as Brad alluded to, some mix impact because we got a bunch of payoffs and lower revenue transactions as part of that. But still, it's very good. And by the way, all of those transactions, whether it's a payoff or not, it brings a dealer to our platform to do a transaction. And that's always going to be a good thing because that's sort of a touch point where they then can launch into other parts of our services. Jeffrey Lick: And was Q1 disproportionately high because maybe there was some bottleneck units from Q4 that flow into Q1? Or will this type of similar impact flow through for the next three quarters? Peter Kelly: It's hard to say. I don't think there was a bottlenecking, Jeff. But every customer has different quarterly profiles of their maturities based on the lease programs that they ran 2 years, 3 years ago, the incentives that they ran 2 years, 3 years ago. So it will ebb and flow, but I don't think there was a bottlenecking. So I would expect a solid positive volume impact from this customer through the rest of this year. Jeffrey Lick: And I would assume, given that this is a luxury customer, most -- a greater portion of luxury leases happen in Q4, so Q4 could be even bigger? Peter Kelly: I hadn't thought of that. It's possible. I wouldn't know. I don't know at this moment. Operator: The next question we have comes from John Babcock of Barclays. John Babcock: I guess just to quickly follow up on that last one. So it sounds like that mix impact is going to continue through the year just because of this new customer. Is that fair to say? Peter Kelly: I'd say there's a whole bunch of different things going on in the mix, and Brad touched on them. If I could kind of summarize, I'd say we're seeing -- because of the new customer, obviously, a volume impact and that customer, we're handling a lot of payoffs there. So that tends to sort of have sort of, I'll say, a somewhat negative impact on yield. Offsetting that, we're seeing cars flow deeper in the funnel, more into the nongrounding dealer and open. That has a positive impact on mix. And then we're seeing our U.S. private label volumes increase relative to all of our other commercial volumes. So there's a lot of puts and takes in there that are driving that, John. Brad, do you want to comment? Bradley Herring: Yes, John, just to add on to that. I mentioned in my comments that the yields in the U.S. commercial were flat. But to kind of peel back Peter's comment a little bit, this new customer certainly was dilutive to that. It's a higher end, higher GMV per sale transaction at a lower yield because of that mix, a little bit more concentrated at the top of the funnel related to those payoffs that we're processing. On the other side of that, you actually saw some pretty substantial yield improvement on the non-new customers as those transactions have now flowed deeper into the waterfall. So what that netted out to was a yield that was essentially around flat from what we talked about at Investor Day, but it does have those two moving components embedded in it. John Babcock: Okay. That's very helpful. And now as we think about the off-lease volumes for the year, I was just kind of curious because it seems like demand is probably going to be pretty strong for those, especially with affordability challenges, and it seems like people are more willing now to take on used vehicles than pay the higher prices for new. Are there any concerns that those off-lease volumes will stay more with the grounding dealer? Or is there any reason to think that, that will happen? Or is that not necessarily a fair assumption? Peter Kelly: It's a good question, John. I think One thing we saw in Q1 was used vehicle values went up in value. Used vehicles went up in value, right, because of the supply-demand situation you talked about. What that does is that essentially increases the equity that consumers have in their off-lease volumes. So to some extent, that could delay a little bit or could impact the sort of consumer payoff percentage, and that's something we've talked about in the past. So there's a lot of sort of give and take here. But I think fundamentally, what do we know is true? Maturities coming off lease, those are going up, okay? They're going up in the second quarter and accelerating into the third and fourth. We have seen consumer payoffs come down a little bit. They were down a little bit Q1 versus Q1 of last year. So there's more cars flowing our way, and then those cars are flowing deeper in the funnel. But market conditions do drive those things, John. And I don't know if I can predict with precision all of the puts and takes on that. But I think fundamentally, I feel very optimistic and very positive about the setup for commercial, both for the balance of this year, but also looking further out into '27 and '28. John Babcock: Okay. Very helpful. And then just last question, if you don't mind. I was just kind of curious, I mean, dealer volumes were quite strong in the first quarter. Are you able to provide any sort of sense or do you have any sense as to how those volumes have done so far in 2Q? It seems like 1Q was generally a pretty good quarter overall, at least for the used market. It seems like that market was pretty tight, but just curious to what you're seeing? Peter Kelly: Yes. Well, listen, in our industry, there's normally a spring market, we call it -- that's what we call it a spring market driven by the tax refund season. The spring market usually kind of loses a bit of steam around mid-April, and there tends to be a little bit of a fallback, but not a massive one. You could look at previous year's results to see how the quarters trend. I would say this year kind of is exhibiting sort of a similar pattern to the normal seasonal pattern, nothing abnormal. And that I'd say it's still, in my view, continues to be a pretty robust market in terms of used car demand versus supply. Operator: [Operator Instructions] The next question we have comes from Gary Prestopino of Barrington Research. Gary Prestopino: Peter, I just had a question. You said your open sales in commercial doubled in the quarter, which means things are flowing down the funnel. But given that we've just seen this turn in lease returns, were you surprised at that magnitude of what's coming outside of the franchise dealers buying these cars? And what does that indicate? Does that indicate that the franchise dealers have solid used vehicle inventory and more of this is going to flow down to the independent dealers? Peter Kelly: Yes. Good question, Gary. I wasn't massively surprised by the doubling. I was expecting high growth, 50% to 100%, somewhere in that range. It's growing off a fairly small number. So there's that impact as well. But nonetheless, it was a strong year-on-year increase as we have seen for at least a few quarters in that commercial open transaction piece. Just because they sell an open, doesn't mean they sell to an independent dealer. I want to be clear about that. Like if there's a -- let's say, for example, a Ford vehicle coming through the Ford private label, well, a Honda dealer can't buy that on the Ford private label. If a Honda dealer want to buy, they've got to wait until it gets to the open sale because they don't have access to the private label. So even though they're selling in the open, there's still a high percentage of franchise dealers buying them in that channel. They're just buying them across brand. You have the large used car retail operations, buying them there too as well as independent dealers. So it's a mix of all three customer groups that represent the buyers there. So no, I think generally, listen, pleased with how it's going. We're working with many of our commercial sellers to improve their performance and drive further conversion in the open sale channel because sellers increasingly see it as very strategic to them. It's kind of their last chance to sell the car before they start incurring significant downstream expenses for moving the vehicle, waiting a number of extra weeks before they sell the car, all that sort of stuff. So we're having very productive discussions and strategies that are helping drive that performance, and we're going to be doing more and more of that in the quarters to come. Operator: The next question we have comes from Rajat Gupta of JPMorgan. Rajat Gupta: Just to follow a couple of clarifications after that. Could you quantify the open sales units that you're seeing in commercial? Any unit number or percentage number you could throw out for the quarter? Peter Kelly: Yes. We don't comment on that number, Rajat. I would say our open sale in the U.S. skews heavily towards dealer, but commercial is an increasing percentage over time. And if I look at our year-on-year growth in the open sale in the U.S., again, we said dealer grew high 20s. Commercial grew approximately double. So from that, we can determine commercial, obviously, was a bigger percentage in Q1 this year than a year ago. But we don't release that exact number. Rajat Gupta: Understood. And just on the guidance, given the strong first quarter, if you assume normal seasonality, it would imply somewhere above the upper end of the new range. I'm curious if -- and especially in light of the off-lease picking up later this year. I'm curious, is there any conservatism baked in, in the second half with regard to new car sales or anything around the macro? Is it not right to assume normal seasonality? Just making sure we're looking at this correctly. Any color would be helpful. Peter Kelly: Yes, let me comment sort of high level, then Brad can comment on maybe specifics and then let me move. Again, listen, very pleased with Q1, a strong quarter with traction kind of across the board. But as I mentioned in our remarks, there was a strong spring market in Q1. I would say a stronger spring market this Q1 than in any of the last 2 years or 3 years for sure. And that was reflected -- that was driven, I'd say, by high tax refunds and generally inventory being somewhat constrained. It was reflected in used vehicle price appreciation and high conversion rates. So one judgment is how are those going to trend going forward? Is there going to be an above-average correction from that? I haven't seen it yet, right? But that possibility would exist. And then the other thing we're mindful of is just the geopolitical and macroeconomic impacts out there, high oil prices, potential impacts from those in the markets in which we operate. Again, I can't say we've seen any material impact from that yet, except that we're seeing increased interest in EVs. But we're one quarter in, three quarters left. I didn't want to get too far out in front of our skis on what the remaining quarters could be. I'd also say, particularly in U.S. dealers, as we get into the second half of this year, we do see tougher comps on the B2B side. We're going to be lapping some bigger quarters that we had in the second half of last year. So again, I would expect some deceleration in our dealer-to-dealer growth rate in those quarters. So anyway, we've kind of reflected all of those to the best of our judgment. I would say, notwithstanding any of that, I think there's a ton of opportunity out there for OPENLANE. I'm very pleased with how our customers are responding to our offering and the feedback we're getting and the growth in the customer base. So I really feel good about the strategy we're executing and the opportunities that offers not just for the next three quarters, but for the long term. Brad, do you want to comment? Bradley Herring: Yes. I think that's a really good summary, Peter. I think the only thing I would add, look, as the quarters play out, if things change and our view of the remaining quarters of the year changes, we'll certainly be updating that in our next quarterly discussion. Operator: The next question we have comes from John Healy of Northcoast Research. John Healy: Peter, I just wanted to ask just about the relationship between lease returns and wholesale sellout. So if we're thinking about this, I think we've all kind of penciled in a growth rate based on lease returns. But how should that lease return number impact the timing through your P&L? And let's just say, hypothetically, in a quarter, off-lease grows 25% or something like that in terms of returns. Is that going to be spread out over multiple quarters? So perhaps the volume that you guys move through your platform might be elongated. I'm just trying to think about the how we should kind of think about the returns to market and dealers and then the actual flow-through to your business in terms of a processing standpoint to make sure you get the most value for your remarketing partners. Peter Kelly: Yes. John, I guess, first of all, I'll say the equation to sort of determine what volume we actually get it is very, very complex. I don't know that it really exists because there's obviously different customers in there. They have different portfolios. Sometimes a customer will execute what's called a pull ahead. I've got these leases coming off 6 months from now, but my retail market share looks a bit weaker. I'm going to try and pull these leases ahead and get those customers to buy a new in-brand vehicle now to get my market share up on the new car side. So we see that. We also see the opposite of that, lease extensions. I've got too many cars coming back. I don't want that many. I'm going to try and push some of these out and extend those leases. So there's all these things that can happen. But I guess the net-net is, I do look at the maturity forecast in aggregate, how many leases were written 3 years ago. That's the best barometer I actually have of how many leases will be returned. And generally, John, I'd say, if anything, they tend to come back a month or 2 early. So leases that you expect to come in Q3 can sometimes come in a month or 2 or maybe 3 months ahead of that. And I generally assess that the consumer that's kind of said, okay, I know my lease is up, but I've made a decision on what the new car is that I want, and I just want to pull the trigger and get that done now. So I guess, take what does all that mean? I expect -- if we look at that maturity curve, I believe off-lease volumes in the back half of this year are up around 20% to 25%. So I'm expecting that kind of volume growth in our off-lease volumes, not without the addition of a new customer, okay? So that's the kind of math I'm looking at, and it's obviously fairly robust. But I guess we'll see what happens. John Healy: Great. That's helpful. And I just wanted to ask about the AFC business. Obviously, you guys are seeing a nice bounce in the auction business. But AFC loans kind of originated in the quarter, pretty anemic growth the last few quarters. Curious if you think that gets better? And is there a desire to really grow that business? Or are you just kind of happy keeping it about the same size that it is right now? Because I would just think with the activity and the attractiveness and the network effect in your business that you talked about on the dealer car side, I'm kind of perplexed why would it also take place on the AFC side? Peter Kelly: Yes. Well, John, listen, I think, first of all, AFC is a great, great business. It's a category leader in the space, an industry leader in terms of its risk management and loan loss rate. strong return on assets, return on equity and strong EBITDA and cash flow generation for our company. So it really is a great business. It's also synergistic with the marketplace, and it is helping us drive some of the marketplace results that we've talked about on multiple calls and we talked about at our Investor Day. So I feel really, really pleased about AFC and the performance that it's delivering and the AFC team. I'll also say we don't chase growth for growth's sake. We have a somewhat conservative view. We like managing within a risk band that we've talked about 1.5% to 2%. There's obviously a lot of customers you could take that are outside of that band, but we generally try to avoid that. We like to manage it more conservatively. But that said, it is growing. We are growing the customer base on AFC. And we're seeing something interesting start to play out now, started in the first quarter, and I think we'll see it through the balance of the year. It's not maybe yet showing up in the results. But we've been driving can we get more of these AFC dealers to register on OPENLANE? Well, so that's been successful. But now we're also seeing there's a whole bunch of independent dealers on OPENLANE that haven't registered in AFC. But they see on OPENLANE, there's an AFC floor plan that they could potentially utilize if they go register. So we're seeing that sort of cross-pollination flow back the other way. So again, I think there's growth opportunity there. It absolutely is going to be more modest. We're going to manage that business for risk, but it is a great business, and it's very synergistic in helping drive our overall results. Brad, do you want to comment? Bradley Herring: Yes. I'll just add to that, John. We've talked about it. I think at Investor Day, we've always kind of seen AFC as really a low single-digit grower for those reasons. It's about staying in that risk band that we're very comfortable with and extracting the value that AFC provides some within the AFC vertical of a segment report, but also the value that manifests itself in the marketplace. And I think that's the part. When we think about the growth in AFC, we combine those two as opposed to just looking at the segment results of AFC independently. Operator: We have a follow-up question from Rajat Gupta. Rajat Gupta: [Technical Difficulty] commercial [Technical Difficulty]. You just mentioned on the previous question that you expect 20% growth in your off-lease plus the new customer. And it looks like the new customer was 20% of units analyzing that would be like 20% plus. So am I reading that correctly, the 25% plus 20% for your commercial U.S. business this year? Peter Kelly: Rajat, I guess what I said is I think the growth in maturities is a good number to take in our underlying customer base. And I believe in the back half of this year, that is in the 20-ish percent level, maybe a bit higher. So I would expect that kind of volume in our non-new customer. And then we got the new customer in addition to that. I'm not saying that new customer is going to be 20% every quarter. They have a portfolio that has its own seasonality to it, and I don't have that in front of me right now. I will say that our initial results from that new customer in volume terms exceeded our expectations. I don't know that they'll continue to exceed our expectations every single quarter, but we were surprised by the volume they had in Q1. Bradley Herring: And also keep in mind, Rajat, that new customer was a step function in January, so that will not recur -- that element of growth will not recur to that same degree in Q1 of '27, of course. Rajat Gupta: For sure. And then just a quick question. We heard from some of your larger public customers that there are some luxury OEMs that have dialed up early lease terminations to manage captive finance losses. I'm curious if that is something you've observed? Has that benefited with just like incremental off-lease inventory recently? Just curious to get your thoughts there and how we should think about implications for OPENLANE? Peter Kelly: Yes. Well, again, that's an example, as I was saying on just a question a few moments ago. Captive finance companies can put these types of programs in place from time to time. You don't really get a lot of sort of advanced warning as to when they might happen. But early terms, that's kind of a pull-ahead program. I'm not aware of that having had a specific benefit on our volumes. But that said, the new customer we launched does have a premium portfolio and those volumes are quite strong in the first quarter. So maybe there was some aspect of a pull ahead in that or an early term offer within that. It's possible, Rajat. Operator: At this stage, that was our final question. I will now hand back to management for any closing remarks. Please go ahead. Peter Kelly: Well, thanks again, everybody, for your time this morning. We really appreciate your interest in our company and your questions here this morning. Listen, very pleased with the quarter that we had and continue to be focused on our strategy and our purpose of making wholesale easy so our customers can be more successful. I'm looking forward to reconnecting with you all in 90 days where we can talk about our second quarter results. Thank you all very much. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Hello, everyone. Thank you for joining us, and welcome to Telesat First Quarter 2026 Financial Results. [Operator Instructions] I will now hand the conference over to James Ratcliffe, Vice President of Investor Relations. Please go ahead. James Ratcliffe: Thank you, Jericho. Good morning, everyone, and thank you for joining us today. Earlier this morning, we filed our quarterly report for the period ending March 31, 2026, on Form 6-K with the SEC and on SEDAR+. Our remarks today may contain forward-looking statements. There are risks that Telesat's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties. For a discussion of known risks, please see Telesat's annual report and updates filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I would now like to turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer. Daniel Goldberg: Okay. Thanks, James, and thank you all for joining us this morning. I'll start with a few words about the business, and then I'll hand the call over to Donald, who will speak to the numbers in more detail. We'll then open the call up to questions. My opening remarks this morning are relatively short since it's been only 7 weeks since we reported our full year 2025 numbers. I am pleased with our performance in the quarter, during which we made significant strides in developing and commercializing the Telesat Lightspeed constellation. The development of the satellites themselves continues to move ahead, and we're also making good progress on a number of related fronts, including user terminal and software development and the development -- I'm sorry, and the deployment of our ground station network. We continue to expect to start full global commercial service around the end of the first quarter of 2028. I'm also pleased with the progress we're making on the commercial front for Telesat Lightspeed. Last month, we signed a contract with Northwestel for Lightspeed service to provide broadband connectivity to communities across the territory of Nunavut in the north of Canada, and we see attractive commercial opportunities across our target verticals. I'd note we're seeing a very positive response to our incorporation of the military Ka-band capacity to Telesat Lightspeed from allied government customers who are keen to leverage the benefits of an advanced secure and resilient LEO satellite constellation operating on frequencies these users have long used for mission-critical operations. A number of allied governments are currently evaluating plans to secure Mil?Ka satellite services in LEO, and so adding this capability to Telesat Lightspeed is both important and timely. As you know, late last year, the government of Canada announced that it selected Telesat and MDA to deliver a multi-frequency satellite network called The Enhanced Satellite Communications Project – Polar or ESCP-P to meet the communications requirements of the Canadian Armed Forces in the Arctic. Since that announcement, we've been engaged with the government to finalize the contractual arrangements for a significant portion of the ESCP-P program. which we anticipate will be concluded in the coming months, recognizing, of course, that there can be no assurance an agreement will ultimately be reached. Assuming we do finalize these arrangements and recognizing that ESCP-P is a material opportunity for the company, our intention is to update our financial projections at that time so that investors can take into account the expected impact on our business. In our GEO segment, first quarter results came in largely as we had expected, with most of the year-over-year decline coming from nonrenewals and lower revenue renewals in our broadcast activities and to a lesser extent, reduction in services for fixed broadband customers. That was partially offset by new contracts for broadband services to commercial airlines. Even though GEO is a largely fixed cost business, we remain focused on reducing costs where possible, and that effort was visible in the quarter with adjusted operating expenses, excluding costs related to our debt refinancing, down 11% year-over-year. As noted in our release, we're reiterating our full year 2026 guidance for GEO revenue and adjusted EBITDA and for total LEO investment. One other note regarding our GEO segment. Last month, we changed the name of our GEO operating subsidiary from Telesat Canada to Telesat GEO Inc. In an effort to reduce confusion between our public entity, Telesat Corporation and the GEO operating subsidiary. Now things should be clearer the Telesat Lightspeed business is in our Telesat LEO subsidiary and our legacy GEO business is in the Telesat GEO subsidiary with both subsidiaries ultimately being wholly owned by Telesat Corporation, our publicly listed entity. Finally, I'd note that we continue to work closely with our advisers last quarter on refinancing the Telesat GEO debt that begins to mature in December of this year, something that remains a high priority for the company. So with that, I'll hand over to Donald, who will speak to the numbers in more detail, and then we'll open the call up to questions. Donald Tremblay: Thank you, Dan, and good morning, everyone. My prepared remarks today will focus on highlights from this morning's press release and filings. In the first quarter of 2026, Telesat reported consolidated revenue of $87 million and adjusted EBITDA of $35 million. Consolidated net loss for the quarter was $151 million compared to $51 million loss for the first quarter in 2025. The negative variation of $100 million was principally due to noncash impairment of goodwill and lower adjusted EBITDA of our GEO business. I'll cover the performance of our GEO segment in more detail in a few minutes. Interest expense for the quarter totaled $50 million, down from $57 million in the first quarter of 2025 as we benefited from lower interest rate on our floating rate debt. Interest expense on our USD-denominated debt was also positively impacted by a stronger Canadian dollar during Q1 of 2026 versus the same period in 2025. Interest relating to Telesat Lightspeed totaling $14 million during the first quarter of 2026 was capitalized to the project compared to $3.5 million for the same period last year as the amount outstanding on the Telesat Lightspeed financing is increasing. The result of our GEO segment was in line with our expectation in Q1. We generated $86 million in revenue during the period, down 26% or $29 million compared to the same period last year. Most of the revenue decline was in our Broadcast segment, driven by expiration of contract for service on Nimiq 4 and Anik F3 satellites in 2025 and lower capacity and rate as part of renewal of contract on Nimiq 5. In our Enterprise segment, the decline was primarily driven by lower revenue from our Xplore contract renewed in October 2025, which did not impact materially our operating cash flow as the contract was mostly prepaid at inception. These declines were partially offset by contract added in 2025 in our Aviation segment. The utilization of our satellite was 55% at the end of Q1, and the backlog of our GEO segment was just below $800 million at the end of March. Our adjusted EBITDA of GEO segment was $55 million for the first quarter, down 37% year-over-year. The decline was primarily driven by lower revenue. Our first quarter 2026 expense excludes approximately -- include approximately $7 million in costs related to our debt refinancing process, up approximately $3 million compared to the same period last year. Adjusting for these expense, our GEO adjusted EBITDA would have been $62 million during the period. Turning to the cash and liquidity position of our GEO business segment. Cash on hand at the end of Q1 was just over $200 million, largely unchanged from the end of 2025. We believe the combination of this cash on hand and the cash flow generated by our GEO assets in 2026 to be sufficient to meet all the company's obligation prior to the Telesat GEO debt maturity in December. As a result of this performance, we are reiterating our GEO business segment guidance for the year of revenue of $300 million to $320 million and adjusted EBITDA of $210 million to $230 million, excluding debt refinancing expenditure. We invested $170 million in the Telesat Lightspeed program during the first quarter of 2026, including $152 million in capital expenditure and $19 million in labor and other operating costs. We continue to expect full year investment in the program to be between $1 billion to $1.2 billion as we announced earlier this year. In the LEO segment, we ended the quarter with almost $300 million in cash on hand. This cash, combined with $1.72 billion in availability under our Telesat Lightspeed financing and USD 325 million from our vendor financing is expected to be sufficient to fully fund the Telesat Lightspeed project until it achieved global commercial service around the end of Q1 2028. Our backlog for Lightspeed totaled approximately $1.1 billion as of the end of Q1. Note that this does not include the recently signed agreement with Northwestel. Before I conclude my prepared remarks, I would like to confirm that we are in compliance with all the covenants in our credit agreement and indenture. I'll now turn the call back to the operator for the Q&A. Operator: [Operator Instructions] Your first question from the line of David McFadgen with ATB Cormark. David McFadgen: Let me just start off by asking you a little bit more about the ESCP-P program. Given the government's committed to lend you over $2 billion in capital and the government wants military Ka-band capacity, isn't it logical? Or isn't the deal going to be that the government -- the Canadian Armed Forces is going to license a lot of the military Ka capacity from you off Lightspeed? Daniel Goldberg: David, it's Dan. So I guess the first thing I'd say is I don't, in my own mind, connect the $2 billion loan to future business with the government of Canada. The government of Canada whether that's Department of Defense or other government satellite users, they're always going to choose the solution that represents the best value prop for them and the taxpayer. So I mean that's just what I've seen in my years doing business with them. It is the case that one of the ESCP-P requirements is for military Ka-band capacity in the Arctic. The other requirements are for UHF and [ X-band ] capacity in the Arctic. And it is the case that, as we said on our last call, we've incorporated Mil?Ka in Telesat Lightspeed, and it serves the globe, including the Arctic. So it could be a good fit for the government, but -- we can't get out ahead of this process. As I mentioned in my remarks, we're engaged with the government now on getting the contractual arrangements in place for the overall program. And so stay tuned. What I also did say, though, is, look, it is a material contract for Telesat. And if and when we conclude the arrangements with the government for ESCP-P, and again, our expectation is that will happen later this year, we will organize an investor call and update our financial projections so that everyone can, yes, appreciate the impact it's going to have on the business. So anyway, that's something that we're committed to do. David McFadgen: Okay. And just a follow-up on that. I mean I was kind of surprised to hear that because if you're licensing or you're allocating 25% of the network to Mil-ka, then you're losing that commercial opportunity, right, on the 25% you give the Mil-ka. So I would have thought that the TAM or the forecast will kind of be the same, but you're kind of implying that the forecast will actually be higher. Is that what you're implying? Daniel Goldberg: Well, I'd say stay tuned. We do believe that the market that the Mil?Ka addresses is a very large market. There as I again noted in my remarks, there are a number of governments around the world right now that are evaluating how to get a military Ka-band capability in LEO, and we're out there engaging with a lot of those folks now. Look, we think that ESCP-P, again, assuming we close the contract, will be meaningfully accretive to the company and our business plan and our outlook. And so once that -- once those arrangements are done, yes, we want to get that out there and share it with the market. Operator: Our next question comes from Edison Yu with Deutsche Bank. Xin Yu: I wanted to just clarify when you say an update on financial projections, is that basically you're going to give an update to those numbers you gave back in 2023, where you had like this Lightspeed annual revenue EBITDA. Is that what you mean that you're going to provide an update when you say that? Daniel Goldberg: So I'd say two things, Edison. One, we'll update our guidance for the year to the extent that ESCP-P is impactful on the numbers for this year. So that's number one. Number two, to the extent that Lightspeed is used in connection with ESCP-P, then yes, the financial projections that we have already made available to the market for Lightspeed, we would update those to the extent that the ESCP-P project incorporates Lightspeed capability. Xin Yu: Understood. And then a follow-up, just higher level, if I think back to actually that same presentation on the TAM, so more high level, you obviously -- you had this huge, huge piece. I think it was $320 billion of enterprise. And I think the government part was actually a very, very small piece of that. And I guess if we look at the situation now, would you say that, that government piece, just from a TAM perspective, regardless if you add or subtract anything on your own, we think that TAM is actually substantially bigger than you thought 2.5 years ago? Daniel Goldberg: Yes. I'd say a couple of things about that. I can't remember just because I don't have that material in front of me, I can't remember what we had estimated the government sort of defense TAM to be. But for sure, I bet almost anything because that was done probably 24 months ago or something like that. For sure, I got to believe that TAM will be meaningfully higher. And when we update our numbers, we'll also be able to talk to investors about our expectation in terms of how the future revenue is going to be distributed across the various applications, government, aero, maritime, fixed broadband. And my recollection is that the current plan has our kind of government defense revenues around 15% in the out years of that forecast. And my expectation is when we update it, given what we're seeing in the market, given the change to military Ka-band for Lightspeed that those government defense revenues will be a much more meaningful portion of our projected Lightspeed revenues in light of the changes that we're seeing and the addition of Mil-Ka to the network. Operator: [Operator Instructions] Our next question comes from Chris Quilty with Quilty Space. Christopher Quilty: Dan, what are your thoughts on the Globalstar Amazon tie-up? Are you impacted in any way directly or indirectly? Daniel Goldberg: I don't think it -- I mean, we certainly watched it with interest, and there were certainly a lot of rumors in the market before the deal was announced. It's more tangential, obviously, to what we do. We certainly weren't surprised by it. And it certainly puts Amazon kind of more on that same trajectory in terms of focus as the moves that Starlink has made with their recent spectrum purchases. So -- but I don't think it's something that really has a direct impact on our business, Chris. Christopher Quilty: Fair enough, and I'd agree. The other thing I wanted to dial into was your terminal strategy. We've seen some activity in the market. AllSpace was just acquired by York and Stellar Blu by Dot before that. When you look at your strategy in terms of using either Telesat supplied modules and then having ODMs to manufacture them, do you feel like you're in the right place now given the timing of the constellation? We've seen challenges certainly with OneWeb and their launch of having terminals available timeliness? Daniel Goldberg: Yes. No, it's a great question. And the short answer is -- I mean, frankly, there's a very long answer, but I'll try to give you the short answer. The short answer is I think we're in an excellent spot right now. And frankly, I think having gone after OneWeb, for instance, we've probably captured some of the hard work that they had to do having come out a little bit earlier. So maybe just a couple of things. The terminal strategy is overwhelmingly flat panel antennas for the user, number one. The different verticals that we're serving will, for the most part, have different flavors of those flat panel antennas, maritime, aero and then there'll be different antennas for commercial aero and for commercial jets. The government users will have a range of antennas and some of those might be hardened to look after their requirements. And then, of course, there'll be terminals for kind of terrestrial fixed broadband connectivity. So what we've announced to date, we've announced cooperation with Intellian and Intellian has done -- back to OneWeb, they've done good work already establishing a very capable factory line for producing flat panel antennas for the OneWeb constellation. And we've obviously been working with them to adapt the products for Ka-band. We've announced something with [indiscernible], and they're a very innovative provider as well. And then Farcast, we've made an investment in Farcast and so have others like Gogo and Lockheed Martin. They've got a very innovative technology where they interleave the transmit and receive capabilities, which allows for a smaller form factor. And so -- and they're making great progress. So all to say -- and then you mentioned AllSpace. What's interesting about them is the government users are quite familiar with them, and they've got capabilities. everything that I talked about just up until now has all been about Ka-band, including Mil?Ka in many instances. The AllSpace antennas can do a range of frequencies, which some of the government users will prioritize for certain of their applications. So anyway, all to say, yes, we feel good about it. And again, our strategy is we'll work with a couple of the antenna manufacturers, and our focus is to try to get the volumes up as high as possible because the higher the volumes are, the lower the unit cost for the flat panel antennas. But it's also the case that the network is open. And so government users, for instance, if they have their own desired user terminals, we can certify those to operate on the network as well. So they're not in kind of a closed ecosystem where we limit their choices in terms of who they can work with. Christopher Quilty: Got you. And final question. I know you said the gateway build-out is sort of on track. But I think in the past, you had talked about potentially looking at ways to bring in third-party financing for the ground segment. Can you give an update on that? Daniel Goldberg: I'll just say that our -- the base case plan that we're executing on is that we fund our gateway rollout and the financing that we have in place is sufficient to fund the landing stations around the world to support the network. So that's the base case. And that's what we've been doing up until now, and we've announced some of the gateways in Canada, in Europe, and Australia, and we've got more in the pipeline. But it is the case that we would consider working with a third-party company to change the model a little bit where they would fund some of that, and we would just simply become a customer. I mean it's already the case that all of us whether that's OneWeb or SpaceX or Amazon, all of us are using, to some extent, third-party sites, right? So whether we own the -- whether these companies own the antennas at that site, that's one thing. But it's almost always the case that all of us building out these global gateways are working with third parties at some level to host antennas, to host racks of equipment and whatnot. So then the next question is, would we go a step further and actually work with a third party who would fund some of those components, the antennas and whatnot. So I'd say that's something that's still under consideration. We would only do it. Obviously, if we had confidence that a third party could deliver the capabilities at the level in terms of reliability, security resiliency that we require for the network, number one. Two, if it's obviously somebody that has to have a strong financial wherewithal and then somebody that can meet other considerations around sovereignty, security, that sort of perspective. So that's where we are right now. But to date, it's been just as originally conceived, we're doing it on our own right now. Operator: Our next question comes from James Bratler with New Street Research. James Ratzer: Dan, I question is interested about the kind of growth buildup for Lightspeed kind of outside of Canada and outside of the military opportunity. I'd just be really interested to hear you talk about kind of when you go out and start speaking to customers, how are you seeing the kind of competitive dynamic with other offerings out in the market from people like Starlink, kind of Amazon Leo, TerraWave. What feedback are you picking up in the market about the competitive dynamics? Daniel Goldberg: So maybe a couple of things. For sure, Starlink is, at this point, far ahead of everyone else in terms of having a highly capable LEO network that's serving these various verticals in many the same ones that we're focused on, plus they do obviously B2C as well. So when we're out there in the market, I'd say they've become, in many instances, a benchmark for the users in these different verticals, which is -- and I think it's a great network and that they have a great service. So the market is competitive. Amazon Leo is coming. They're out there in the market promoting their services and their capabilities. They're not as far along as Starlink in terms of service readiness. But there -- we're seeing and hearing them out in the market. And they won an important Arrow deal within the last quarter. They won an opportunity with Delta. So -- and I'd say TerraWave, that's not really a network that we're hearing a lot about at this moment in time out there in the market. So I'd say the good news about Starlink being out there is they've demonstrated how impactful an advanced LEO network is. And as a result, there is significant receptivity to having other players in the market, more competition and whatnot. And then I'd say beyond that, what we're hearing is, look, and we know this, in order to be successful, we're going to need to compete on some mix of quality of service, price and customer support going forward. And then there are some other features in our network. So we're out there offering a Layer 2 service that is absolutely compatible with the mobile network operators and the telcos standards in terms of metro MEF standards and the like. And we've developed our APIs in a way that makes it very seamless for the telcos and the mobile network operators to integrate our capability kind of with their network backbone and whatnot. So what we're hearing is a significant amount of receptivity to Telesat Lightspeed, provided that it's cost competitive and we can meet all these service capabilities that they're looking for. I will say maybe one other thing is because we're not a B2C provider as well. We're not seen as a competitor in these markets. I think when some of the operators show up, they're oftentimes competing with the incumbent operators in these different countries. They're taking rural broadband subs. Their direct-to-device networks might end up competing for mobile network subscribers as well. That's not our posture when we come into these markets. We're really looking to be a supplier to the incumbent operators and just trying to help them be more competitive in what's a very dynamic, fast-moving market. Donald Tremblay: Yes. And I'd say that deal that we announced with Northwestel last month is an indication of how Lightspeed can offer a service that's transformative for rural broadband users, but working with a long-standing telco that's been operating in that case, in the market of Nunavut for decades. So we think it's a model that works. Operator: There are no further questions at this time. I will now turn the call back to Dan Golberg for closing remarks. Daniel Goldberg: Okay. Well, thank you, operator, and thank you all for joining us this morning, and we look forward to speaking with you again when we issue our second quarter numbers. So thanks again. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning and thank you for standing by. Welcome to Dorman Products First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead. Alexander Whitelam: Thank you. Good morning, everyone. Welcome to Dorman's First Quarter 2026 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chairman, President and Chief Executive Officer; and Charles Rayfield, Dorman's Chief Financial Officer. Kevin will begin with a high-level overview of the quarter and share our segment level performance and market trends. Charles will then walk through our first quarter financial results in more detail, discuss capital allocation and then turn it back to Kevin for closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I would like to remind everyone that our prepared remarks, earnings release and investor presentation include forward-looking statements within the meaning of federal securities laws. We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q, 10-K and earnings release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found in the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves with one question, one follow-up, and rejoin the queue if they have additional questions. With that, I'll turn the call over to Kevin. Kevin Olsen: Thanks, Alex, and good morning, everyone. Thank you for joining us today. I'll begin with a brief overview of our first quarter results and then provide commentary on the performance and key trends we're seeing across our business segments. Turning to Slide 3. We delivered solid performance in the first quarter with results that were largely in line with our expectations. Consolidated net sales were $529 million, representing an increase of 4% compared to the first quarter of last year. The year-over-year growth was primarily driven by pricing actions implemented across the business, partially offset by lower volumes compared to the exceptionally strong first quarter we experienced in 2025. Adjusted operating margin for the quarter was 12.1%, down 490 basis points compared to the prior year period. This margin performance reflects the highest levels of tariff-related costs that we expect to see in 2026. Again, due to our use of FIFO, the costs recognized in this year's first quarter are associated with the inventory we purchased last year when tariff rates peaked in the earlier stages of the tariff implementation. Similarly, the sourcing, productivity and automation initiatives that we executed over the last several months and continue to drive today are expected to support improved margin performance as we move through the balance of the year. Adjusted EBITDA margin, a new metric we've included this quarter was 15.2%, down 440 basis points compared to the same period last year. This decrease is driven by lower operating margins, as I just covered. Please see the reconciliation in our appendix for details on this metric. Adjusted diluting earnings per share for the quarter was also in line with expectations at $1.57, down approximately 22% year-over-year. As we've discussed over the last several quarters, this decline was primarily driven by higher levels of tariff-related costs that were recognized in our cost of goods sold during the quarter. Cash generation continued to improve sequentially as expected with operating cash flow in the quarter of $44 million. We also invested in opportunistic share repurchases, deploying $51 million in the quarter, a record for our company. Charles will cover this in more detail shortly. Overall, we began the year with solid performance and met our expectations. Combined with our positive outlook for the remainder of the year, we have reaffirmed our 2026 guidance. Turning to Slide 4 in our Light Duty segment. Net sales increased approximately 4% year-over-year, driven primarily by the pricing actions we undertook in 2025. Volume was lower compared to last year's first quarter, but let me highlight a few driving factors. First, this year's performance was up against a difficult comparison to last year's first quarter, where we drove exceptionally strong 14% year-over-year growth in net sales. Looking back over the last 2 years combined, we delivered 18% growth in net sales. Second, ordering patterns with the customer we discussed on our last call began to normalize during the quarter. Lastly, I'd call out that we estimate POS with our large customers was up mid-single digits in the quarter. While there was inflation embedded in that growth, we remain confident in the non-discretionary nature of our portfolio, and we'll continue to monitor the overall economic conditions of our end users and the impact that the ongoing geopolitical tensions are having on the broader economy. Operating margin performance in the quarter was consistent with our outlook as Q1 2026 reflected the highest level of tariff expense. As the ongoing benefits of our supplier diversification, productivity and automation initiatives are recognized, we expect Light Duty's margin performance to improve as the year progresses. From a market perspective, underlying Light Duty fundamentals remain positive, with vehicle miles traveled increasing year-over-year in the first quarter. Also, higher used vehicle values are impacting consumers' buying decisions, which we believe will result in extended vehicle life and support sustained aftermarket demand for repair and replacement parts. In addition, Light Duty trucks and SUVs continue to represent a growing portion of the VIO, providing further opportunity for product portfolio expansion with higher average selling prices. A good example of how our innovation strategy supports this opportunity is our OE fix air suspension compressor for a broad set of GM SUV models. This product addresses a common OEM failure mode caused by overheating, which can lead to cascading failures throughout the air suspension system. Our patent-pending design improves heat dissipation by approximately 25%, incorporates thermal protection and utilizes proprietary software to optimize performance and reliability. By delivering an upgraded repair solution designed to last longer and at an attractive aftermarket price point, products like this not only create value for installers and end users, but also reinforce Dorman's leadership in product innovation. Just an excellent job by our Light Duty team to deliver another OE fixed solution. Turning to Slide 5 in our Heavy Duty segment. Net sales increased approximately 12% compared to last year's first quarter, driven by pricing initiatives and the year-over-year impact of certain commercialization initiatives we have installed in the business. While the dollar change is relatively small, operating margin improved 110 basis points versus the prior year. I'll also point out that the lower overall margin reflects tariff-related costs that were elevated in the first quarter of 2026. With the impact that tariffs will have on our margins this year, along with the infrastructure investments we've made in the business, we're not expecting significant year-over-year incremental operating margin improvement in 2026. That said, we'll continue to appropriately manage the business in the short term while executing on our strategy to drive a significantly improved operating margin profile for Heavy Duty over the long term. On the broader sector, market conditions remain challenged. The great freight recession continued through the first quarter and geopolitical tensions created further economic uncertainty for consumer demand. As a result, near-term visibility remains limited, and we are not expecting meaningful growth in freight tonnage throughout the year. However, we continue to capture market share in certain channels such as the OE dealer network, where there has been an increased appetite for aftermarket solutions. Overall, we continue to see opportunities for growth. We remain focused on balancing our approach with cost discipline and strategic investment that will allow us to continue capitalizing on these opportunities when the market improves. As a great example, we are encouraged by the opportunity we see within our diesel aftertreatment portfolio, which we believe represents a meaningful long-term growth driver for the Heavy Duty segment. Modern diesel engines rely on diesel exhaust fluid or DEF systems to meet increasingly stringent emissions regulations. These systems are subject to high failure rates due to harsh operating conditions, temperature extremes and sensor degradation, making reliable aftermarket solutions critical for fleet uptime. Through our Dayton Parts brand, where we offer one of the most comprehensive portfolios of replacement parts for diesel after treatment, including DEF, headers and pumps. Our solutions provide plug-and-play installation and meet or exceed OE performance at an aftermarket price. These products are built with durable materials, subjected to extensive testing and incorporate best-in-class sensor technology designed for long service life. As the installed base of DEF-equipped vehicles continues to age and fleet acceptance of aftermarket solutions increase, we believe our leadership in after-treatment systems positions us exceptionally well to serve fleet customers and capture incremental share over time. Congratulations to our Dayton Parts team for bringing this opportunity to market. Turning to Slide 6 and our Specialty Vehicles segment. Net sales were flat year-over-year as pricing actions in certain categories offset slightly lower volume year-over-year. Keep in mind that from a seasonality standpoint, Q1 is typically the slowest quarter of the year. Operating margin performance was in line with our expectations, reflecting higher tariff-related costs. We're also investing in our expanded dealer network to drive more wallet share and optimize our footprint. From a market perspective, we are seeing early signs of stabilization as we enter the 2026 riding season with new vehicle sales increasing year-over-year in the first quarter. We also continue to see strong engagement with our ridership as attendance at the national UTV-ATV events remain high. Additionally, we're seeing new lower-cost entry-level vehicles entering the market that offer improved opportunities for aftermarket enhancements. One new product that illustrates this opportunity well is the power steering kit developed for the new Polaris RANGER 500 platform. As many of you know, Polaris recently introduced the RANGER 500 as a more stripped-down cost-effective utility vehicle designed to appeal to a broad customer base, including fleet users, recreational riders and first-time buyers. By design, this platform ships with more basic features, which creates an attractive opportunity for the aftermarket to enhance functionality and performance to accessories and add-on components. Power steering is a good example. While the RANGER 500 does not include power steering as standard equipment, demand for steering assist remains high, particularly among users operating in rough terrain or using the vehicle for work applications. Super ATV power steering kit provides a bolt-on solution that significantly reduces steering effort and feedback, improving control and reducing operator fatigue. This system is engineered for easier installation and features sealed input and output shafts along with water tight connectors designed to withstand harsh riding environments. Congratulations to the team at Super ATV for being the first to bring this solution to market. With that, I'll turn it over to Charles to cover our results in more detail. Charles? Charles Rayfield: Thanks, Kevin. First, let me say it's been great getting to know a number of our analysts and investors since joining the company in January, and I'm looking forward to spending more time with all of you in the future. Turning now to Slide 7. I'll walk through our consolidated financial performance for the first quarter. Total net sales for the quarter were $529 million, up 4% compared to the prior year period. The increase was primarily driven by pricing actions across our segments, partially offset by volume declines versus last year, where we had an exceptionally strong quarter from a volume standpoint. As Kevin mentioned, compared to Q1 of 2024, our 2-year net sales growth rate was a strong 18%. Adjusted gross margin was in line with our expectations of 36%, down 490 basis points compared to last year's first quarter. As the company has previously covered, our pricing initiatives have been implemented to address a range of incremental costs, including tariffs, while considering the competitive dynamic of our parts in the marketplace. This has resulted in a negative impact to our overall margin profile in the short term. That said, we expect our margin profile will meaningfully improve as the year progresses for 2 main reasons. First, as we discussed previously, this first quarter had the highest level of tariff expense we'll see in 2026, given the inventory we sold was associated with the highest level of duties that were levied in 2025. Second, we anticipate that our supplier diversification, productivity and automation initiatives will make significant contributions to our margin profile as the year moves forward. While our teams did an excellent job managing discretionary costs during the quarter, our adjusted operating income margin was 12.1%, down in conjunction with our gross margin. Adjusted diluted EPS was $1.57, driven by lower operating income, partially offset by lower interest expense and lower shares due to repurchases. Turning to Slide 8. Operating cash flow for the quarter was $44 million and free cash flow was $35 million. As you can see on this slide, our cash flow improved sequentially from Q4 2025 and has rebounded nicely from this time last year when our cash payments for tariffs peaked in the middle of 2025. I'll add that we've reduced inventory significantly year-over-year, and we remain on track to generate a more normalized level of free cash flow for the year. On the capital allocation front, we deployed more than $51 million in the quarter to retire approximately 435,000 shares at an average price of approximately $118 a share. This represented a quarterly record level of repurchases for our company and also our view that there was a dislocation in the market valuation for our stock, which prompted us to utilize our strong balance sheet to return capital to our shareholders. We currently have $408 million remaining in share repurchase authorization, which extends through 2027. Turning to Slide 9. Our long-term capital allocation strategy remains unchanged. We first review our debt levels and leverage ratios, then we deploy capital on internal initiatives as this is where we see our greatest returns. Next, we invest in M&A, which continues to be a key component of our growth strategy. Finally, we will continue to return capital to our shareholders through opportunistic share repurchases. With this consistent approach, we've deployed $1.8 billion of capital since 2020 and expect that our overall strategy will continue to drive long-term growth. Turning to Slide 10. Our balance sheet remains a significant strength for Dorman. We ended the quarter with net debt of approximately $413 million and total liquidity of $627 million. Our total net leverage ratio at the end of the quarter was 0.99x our adjusted EBITDA, demonstrating our ample flexibility to support the business, manage through tariff-related working capital demands and continue investing in strategic growth opportunities. As we highlighted on the previous slide, our target net leverage ratio is less than 2x adjusted EBITDA and approximately 3x for the 12 months following an acquisition. Turning to Slide 11. We are reaffirming our full-year 2026 guidance. We continue to expect net sales growth in the range of 7% to 9%, driven by the full-year impact of our pricing initiatives, along with a modest level of volume growth that we expect to be primarily in the back half of the year. Looking across the segments, we expect all 3 segments to directionally perform within this range. We also continue to expect adjusted operating margin to be in the range of 15% to 16% for the full-year with a more normalized high teens rate as we exit the year. Adjusted diluted EPS for 2026 is expected to be in the range of $8.10 to $8.50. This guidance includes the expected impact of tariffs enacted as of May 4, 2026. Due to uncertainty around the recovery of IEEPA tariffs previously paid, our guidance excludes any impact from the potential IEEPA tariff refunds. Additionally, our guidance does not include any potential tariff changes after May 4, 2026, future acquisitions or divestitures or additional share repurchases. Lastly, we continue to expect a full-year tax rate of approximately 23.5%. With that, I'll now turn the call back over to Kevin to conclude. Kevin? Kevin Olsen: Thanks, Charles. I'll just reiterate what we've said throughout the call. Our first quarter performance was solid and in line with our expectations. While uncertainty persists in the broader economic landscape, we remain confident in our strategic positioning, our ability to navigate near-term challenges and our long-term growth opportunities driven by innovation, operational discipline and our leadership position in the aftermarket. We appreciate your continued interest and support. With that, we'll open the call up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from the line of Jeff Lake with Stephens. Jeffrey Lick: Kevin, I was wondering if you could maybe just elaborate a little more, provide a little more color as the year plays out. Obviously, this is probably one of the trickier quarters you're going to face selling the most tariff-affected inventory from last year with the FIFO and then obviously, you had the added wrinkle of the major customer disruption. I was wondering as you just think through as you step Q2, Q3, Q4, how that's going to progress? Then maybe if you could weave in anything with regards to complex electronic parts and product innovation, that would be great. Kevin Olsen: A lot there, Jeff, but let me give that a shot. Good questions. Jeff, let me start with the sales progression. You mentioned the dislocation we had with a large customer that we mentioned in the fourth quarter. I'll just comment that as we entered the quarter, we saw some dislocation continued, but as we exited the quarter, it was more normal rates and ordering patterns kind of fell more in line with the out-the-door POS sales. When you look at the overall growth rate, you got to keep in mind that last year, particularly in the first half was an extremely strong volume growth period for us. Light Duty grew 14% in the first quarter last year, so a very difficult comp. The first half of the year was up about 12% in light duty. We know that growth from a year-over-year perspective will be challenged in the first half. As we exit the back half, we're still very comfortable with our 7% to 9% full-year guide as we have a full-year of the pricing initiatives in play. We also have a lot of new business coming online as well as continued new product launches. We still feel very comfortable with that guide. In terms of the margin progression, as we've said multiple times that Q1 was going to be our most difficult quarter as the tariff rates coming through our P&L because of FIFO will be the highest. As we move through the year, those tariff rates reduce because they were the highest when they first implemented starting back in April of last year. Also, all the initiatives that we undertook since April of last year in terms of further diversification, productivity initiatives, dealing with our supplier community, those also have to go through FIFO. We have very good visibility to what that looks like going forward because of FIFO. We feel confident that we'll continue to see margin progression as we move through the quarters. As we said in the guidance, operating margin should be in that 15% to 16% for the full-year, and we expect to exit Q4 at a higher rate in the high teens area, which is kind of back to normal levels. Jeffrey Lick: Then anything further on just the complex parts and innovation? Is the environment just moving along at a linear pace? Or are you seeing it maybe step up a little more exponential? Kevin Olsen: Yes. Great question, Jeff, and I didn't address that first time through. Complex electronics in the first quarter met our expectations. It's a category that continues to -- the growth continues to outpace our overall portfolio, and we expect that to continue. We did highlight a few new products that we launched in the quarter that have complex electronics embedded in them. Yes, it's a category we're going to continue to invest in, and it will continue to grow at an outsized pace in the overall portfolio. That is our expectation. Operator: Our next question comes from the line of Scott Stember with ROTH Capital. Scott Stember: Maybe talk about the Heavy Duty. We've seen granted coming off of a low base, but we've seen a nice recovery here in sales, but the margins -- you talked about the margin recovery just really not being there for the most part for this year. Maybe just give us an idea of when you're putting through price increases for tariffs, are you able to get all of it in this segment like you are in light duty? Then maybe just talk about the level of investments that we should expect in new product development there. Kevin Olsen: Yes. Good question, Scott. I'd tell you that the tariff -- we continue to pass tariffs through in all 3 of our segments. Heavy Duty is no different. We will see early on in the process of passing through some margin dilution as we continue to -- we have to continue to be competitive where we have competitors. You just get some margin percent compression if you pass through dollar for dollar. In general, that's been our approach. We're able to recover the tariffs, but you do see some margin compression, and we did kind of call that out in the prepared remarks. Growth in the quarter was very strong, up 12%. Some of that was due to tariff pricing, but we also did see some nice share gains in the quarter. We expect that to continue. However, as we also said in our prepared remarks, we're not expecting the market to recover at this point just based on some of the freight indexes that we're looking at. We don't have any major expectation. We're going to continue to focus on taking share where we can take share and working on driving productivity initiatives throughout the business and driving new product launches and commercialization through that channel, which we've had some good success, but we still have a long road ahead of us there. Scott Stember: Then related to tariffs, a lot has changed in the first quarter with the IES going away, the 232s changing and the 122s coming in. It sounds, at least from the tenor of your comments regarding guidance that the changes there were essentially net neutral. Is that correct? Kevin Olsen: Yes, Scott, that's correct. When the IES went away, the Section 122, which is essentially 10% across the board came into play. There just wasn't a major change either way just based on how the HTS codes are applied. Most of our codes now are Section 232, whether that's the steel and aluminum tariff or the auto parts tariff on top of the 122 tariffs. Now, as everyone knows that there will be a new tariff regime coming into place when the Section 122s expire later in the summer. We don't know what that's going to look like. Our assumption is basically it's going to be roughly in the same neighborhood as it is today. Operator: Our next question comes from the line of David Lantz with Wells Fargo. David Lantz: POS for large customers grew mid-single digit in Q1, but curious if you could talk about how that trended through the quarter, what you're seeing quarter-to-date and expectation through 2026? Kevin Olsen: David, I'd say the progression was very similar of POS, up mid-single digit in the quarter. Frankly, it's been very similar to what we saw in Q3 of last year and Q4 of last year, so not a lot changed. This continues to be very solid out-the-door growth at our customers. No real change in progression. I'll say that April is very much in line with what we saw in the first quarter. To answer the second part of your question, our expectation is similar as we move through the rest of the year. David Lantz: Then considering the really healthy balance sheet, curious how you're thinking about M&A through the balance of 2026 with potential tuck-ins or geographic expansion? Kevin Olsen: Yes. I mean M&A, as we talk quite a bit about, it continues to be a large part of our strategy, our growth strategy. I would tell you that as we look at our pipeline today across all 3 segments, it continues to be very healthy. I would say that deal activity was muted or has been muted since liberation day, at least in our industry. I think we're now starting to see that loosen up a little bit as there's more understanding of the impact of tariffs on different companies, different parts of the industry. We expect deal activity to pick up as we move through 2026 and into 2027. Our strategy in terms of the segments has not changed. I mean when we look at Light Duty, we're very interested to continue to geographically expand our business there and continue to enhance our technological capabilities. In Specialty Vehicle, we continue to look to expand geographically. We also look to grow our portfolio of brands through a series of tuck-ins, still very highly fragmented space. In Heavy Duty kind of similarly where there are opportunities in the Heavy Duty market. We're a very small player in a very large market for us to enter different segments of that space via tuck-in acquisitions. Operator: Our next question comes from the line of Bret Jordan with Jefferies. Bret Jordan: On the single-digit POS, could you sort of carve out what is actual price versus units? I guess, specifically within units, could you comment on the chassis category? Did it benefit from any seasonal demand creation this winter? Kevin Olsen: Bret, I'll first answer. I mean, we don't -- historically, we've never broken out price versus units for competitive reasons. I will say, look, the POS, there is certainly inflation embedded in those numbers just based on the tariff impact across the industry. There's no question about that. I would say that it's remained relatively steady the last 3 quarters and into April. We don't specifically comment on any specific category, but I will say in regards to chassis question, look, it was a good solid year in terms of the weather. Weather, as you know, does impact certain categories more than others and undercar. -- chassis is certainly one of those. That season really starts late in the first quarter into the second quarter, and so far, we feel really good about that category. I think we had certainly a good winter with a lot of precipitation that helps that category from a growth perspective. Bret Jordan: Could you give us a sort of idea of what you paid in IEEPA last year just in case we could get a windfall out of that this year? Kevin Olsen: Yes. Look, I'll tell you that we've just started the process of recovery on IEEPA, and it's still too early to tell how everything is going to settle out and whether or not there'll be any appeals. It doesn't appear that there's going to be at this point. At this point, we're not going to disclose it because we need to work through the process, and we don't want to get ahead of ourselves because it's just such an unprecedented situation. More to come, Brett, as that plays out. Operator: Our next question comes from the line of Justin Ages with CJS Securities. Unidentified Analyst: This is Will on for Justin. A lot of my questions have been asked, but you noted light trucks and SUVs is a growing portion of prime vehicles in operation. Can you give us some more color on how that breaks down further with electric vehicles? Kevin Olsen: Well, let me just clarify for electric vehicles, are you talking about in heavy and specialty or light duty? Unidentified Analyst: Light duty. Kevin Olsen: Light Duty, yes, certainly. Light Duty right now, from a VIO perspective in North America, Light Duty is still less than 2% of the VIO, slightly larger portion of that we would consider alternative drivetrains like hybrid. The vast, vast majority is still ICE, and it's going to take a very long time for that mix to change substantially. Irregardless, we continue to be drivetrain agnostic, right? Our technologies and our capabilities can address any drivetrain. We see a lot of opportunities across the new drivetrains. Obviously, in a hybrid, there's 2 drivetrains. There's a lot more addressable content. We're comfortable with whatever drivetrain becomes prevalent in the future from a BIO perspective. Operator: Ladies and gentlemen, this concludes our Q&A session and today's conference call. We would like to thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Graphic Packaging Holding Company First Quarter 2026 Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. [ Mom ], the floor is yours. Melanie Skijus: Good morning. Thank you for joining Graphic Packaging's First Quarter 2026 Earnings Results Conference Call. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings. We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer. During this call, we will reference our first quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides if you are participating today through the webcast. Now let me turn the call over to Robbert. Robbert Rietbroek: Thank you, Melanie, and good morning, everyone. As many of you know, Melanie has just rejoined Graphic Packaging as Vice President, Investor Relations, and we are excited to benefit from her leadership in the role. Over the past 4 months, I've been getting to know the team visiting our facilities both domestically and abroad and meeting with many of our customers around the globe. Separately, I'm pleased to report that we have now completed our 90-day review of the business. Our review has confirmed several important conclusions. First, our foundation is strong in points that is consistently validated during by site visits and in discussions with our major customers. Second, we have talented experienced teams, including world-class operators support growth with customers. And lastly, our integrated high-quality asset base and production footprint, enhance our service capabilities, expand innovation opportunities and provide a competitive advantage. All in, we see meaningful opportunity ahead. We're taking decisive focused actions to strengthen our operations and position the business for improved profitability. In the first quarter, we delivered strong performance at the high end of our expectations. Net sales were up 2% year-over-year to $2.2 billion. Volumes were up 1% compared to last year. with volume performance improving as the quarter progressed. Adjusted EBITDA was $232 million. Adjusted EBITDA margin was 10.8% and adjusted EPS was $0.09. While adjusted cash flow was a negative $183 million in the quarter, this represents a significant year-over-year improvement from negative $442 million in the same period last year. As we look at the demand environment this quarter, scanner data across our markets continues to reflect a more selective and value-conscious consumer, our innovative packaging solutions that span the grocery store from the center of aisle to the perimeter and on-the-go foodservice items meet consumers wherever they go. As we proceed to the first half of the year, we are encouraged to see customers increasingly taking actions to store volume growth. Looking across our end markets, Food and Health & Beauty were bright spots for us during the quarter, with higher packaging volumes from value products and consumption of every essentials. Bars, refrigerated ready meals and yogurt continue to perform better due to more protein products entering the market to satisfy consumers' desire for higher protein diets. Health & Beauty, which is primarily an international business for us, delivered strong growth consistent with the trends we saw in the second half of 2025 as consumers continue to prioritize small indulgences like skin care and perfume. Our beverage business remains stable, while food service and household reflect ongoing consumer affordability trends. Now I will provide an update on the results of our 90-day review of the business. The decisive actions we have begun taking to achieve our strategic priorities and an update on our views and expectations for 2026. As I walk through each of these topics, you will note that we are focused on accelerating the pace of execution across our business. That means enhancing operational efficiency and generating free cash flow to drive shareholder value in an evolving market. While we are taking swift action and implementing tactical improvements to drive efficiency, there is still significant work ahead. Our path forward is clear. We're focused on advancing our 5 near-term strategic priorities. First, we are committed to disciplined organic growth and providing exceptional customer service. Second, we intend to drive profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, we will continue to optimize operations, footprint and portfolio mix to better focus on our core competencies. Fourth, we will generate free cash flow through inventory rationalization and reduced capital spending. And finally, free cash flow will be used to pay down debt and return capital to shareholders. Over the last 4 months, I have spent time at our Atlanta and Brussels offices, world-class mills and manufacturing facilities, met our talented teams across the globe and witnessed our technical capabilities and commitment to sustainability in action. I visited four of our five paperboard mills and several packaging facilities. Waco in Texarcana in Texas, Stone Mountain, Berry and Macon in Georgia, Elk Grove in Illinois, Kalamazoo, Michigan, Cholet, France and Bristol, England. I have met face-to-face with 6 global CPG customers in North America, Belgium, Switzerland and the Netherlands and engaged with leading QSRs and retailers who deeply value our long-standing relationships These customers have confirmed the value that Graphic Packaging brings as a trusted partner. We are one of the world's most innovative paperboard packaging companies and hold a leading position with a large addressable market, supported by sustainability trends. With the comprehensive 90-day review completed, we are taking decisive steps to optimize our operational footprint, reduce structural costs and impose discipline across capital and operating decisions. I will walk you through our key takeaways, actions and where we will continue to focus our efforts. Strategically, our review has reinforced our commitment to the core North America and European markets, and we will make selective disciplined moves to optimize our portfolio while maintaining our scale advantage. That means expanding with customers in our core markets and driving new growth opportunities through innovation. With regard to our portfolio, we have started to simplify and streamline our business and organization. We recently reached an agreement to divest our noncore assets in Croatia. We are in the final stages of the transaction which we expect to complete in the second quarter. Operationally, our transformation office is driving continued improvements in both our operations and cost structure. We are executing this transformation in real time with a focus on network optimization, disciplined capital allocation and aligning our commercial teams to highest value opportunities. To increase efficiencies and better align with the business environment, we have taken actions to streamline our global workforce and eliminated over 500 roles. The majority of these roles were salaried, including both employee separations and eliminating vacant roles. These were difficult decisions but the changes we have made are based on structural improvements and element to business needs, while maintaining vital frontline operations. Importantly, these actions will not impact our commitment to customer service and growth-focused initiatives. Reductions represent less than 3% of all global roles. Though they account for over 10% of global full-time salaried roles. We are instituting a rigorous capital spend process. One that demands every dollar of spend be justified against our highest priorities. As we continue to progress, we are confident we will deliver on our full year 2026 capital spend commitment of approximately $450 million. To further enhance productivity and operational efficiency, we are deploying AI to streamline areas of our inventory management and procurement processes. We are also utilizing remote monitoring of machine usage and performance, leveraging machine learning to generate predictive analytics and enable proactive maintenance, reducing unplanned downtime. I am confident all these actions will deliver the $60 million in cost savings announced last December and enhance our agility and decision-making, enabling us to move faster, reduce complexity and empower our teams. Continuous improvement is an ongoing effort and we are actively pursuing opportunities for additional cost savings. We will operate with fewer layers, increased focus, more accountability and clear priorities. Concentrating on what drives the greatest impact for our customers, our people and our business. Our efforts and the many actions underway Graphic Packaging, reflect a company focused on value creation. We are committed to strong financial discipline, building a more resilient cost structure and accelerating free cash flow. Chuck will elaborate on this further. I would like to focus now on the aspect of our business that I'm very passionate about, our partnership with our customers. We are focused on driving disciplined organic growth by building on our strong customer relationships and capturing new business through our commercialization efforts. In the face of changing customer growth strategies, we are strengthening our position across categories and have recently reorganized our commercial team to better align globally with customers and to support them through different ages and market conditions. Our customers continue to experience a dynamic consumer environment. While demand is relatively resilient, we recognize that consumers are continuing to prioritize value with about 47% of global shoppers now considered value seekers. Shoppers are switching to private label options, opting for value packs or sizing down to smaller pack sizes at lower price points. To appeal to this value-seeking population, consumer brands and retailers are investing in their product quality and value perception. Leveraging price pack architecture and novel pack designs while also focusing on selling through value-oriented channels. Consumer preference for store brands continues to grow creating meaningful opportunities for our retail partners to enhance their private label strategies and drive sustainable packaging solutions. Recently, we partnered with one of the world's largest retailers to produce packaging for its private label butter using our PaceSetter Rainier recycled paperboard. This is a great example of how we are helping our customers address consumer preferences for more sustainable packaging. By replacing bleached paperboard with 100% recycled alternative the large retailer is making measurable progress towards its sustainability objectives without sacrificing print quality. The private label butter is expense to reach store shelves in the coming weeks and we are proud to support that journey. Our customers are also looking to drive volume growth and gain market share. We continue to see customers selectively upgrade to our premium packaging solutions as our innovative differentiated designs, allow their products to stand out and win on the shelf. We recently partnered with Keurig Dr Pepper to create a premium package for their coffee collective take-up launch. They wanted a premium unboxing experience for consumers to match the elevated coffee blends. We created a custom 2-piece box set utilizing our unbleached paperboard for stiffness and applied mat and glass coatings and foil stamping to enhance the look of the carton and differentiate it on the shelf. This example highlights our innovation, operational capabilities, and commitments to helping customers achieve their goals. In addition to CPG customers, QSR brands are increasing promotional activity and limited time offers in an effort to drive foot traffic and bring consumers back into the restaurants. We are supporting a number of our QSR customers across multiple geographies in these initiatives. My experience leading and growing CPG companies and their brands will supplement and strengthen the team efforts to be an even stronger partner to our customers. We are supporting our customers' pursuit of meeting consumers where they are in order to grow volume and expand market share. There are many ways we partner with our customers to successfully elevate their brands. Customers rely on us to lead with innovation and accelerate their adoption to more sustainable packaging solutions preferred by consumers. A broader understanding of customer economics and their decision-making processes will enable our team to better anticipate customer needs and leverage insights to drive commercial and innovation engine. Graphic Packaging has a unique ability to partner more effectively on pack design, brand architecture and growth. And we are actively strengthening partnerships, taking a proactive commercial strategy and having conversations with top CPGs, QSRs and retailers around the globe. We continued to build on our strengths and had an exceptional quarter driving packaging innovation. We filed 13 new patents, adding to our portfolio of approximately 3,100 patents. Looking ahead, we remain committed to growth of intellectual property and extending our competitive advantage in serving customers. Our capabilities in sustainable packaging are truly differentiated and position the company for continued leadership. Graphic Packaging is seen as the premier sustainable packaging partner by the brands we serve. We are differentiated with our scale and capabilities, superior innovation and technical expertise and talented people. With a broad portfolio and a strong innovation engine, we are partnering with customers to bring even more innovative products to life. From our childproof laundry pod box to our double wall cups have retained heat and cold to our produce pack [ puts ] for fruit and vegetables. Our addressable paperboard packaging market opportunity is an estimated $15 billion with roughly 85% of it plastic to paper packaging conversion. Representing opportunities we have solutions for right now. Over time, we anticipate regulatory retailer, consumer and NGO scrutiny on the use of single-use plastics and foam packaging to increase with the continued customer focus and innovation and an evolving regulatory environment, this market opportunity is expected to grow and will be an area of differentiation for us. We recently commercialized an innovation in partnership with a health focused emerging brand. We are supporting their transition from plastic to a more sustainable paperboard multipack to better align the packaging with their environmentally conscious consumer base. We developed a custom carton solution for the 10-pack SKU and seasonal formats. The structure optimizes in-store merchandising. The plastic back to box transition is available today on shelves at leading retailers. As customers increase commitments and their desire to move to more sustainable packaging, they often evaluate solutions that move away from plastic or greatly reduce its usage. These packaging transitions to paperboard alternatives can increase brand equity without compromising product performance or shelf life. We are proud to help these advancements and for the recognition we have received for our leadership and support of customers on their sustainability journey. In January 2026, two of our solutions earned World Star Best of the Best Awards. PaperSeal Shape deployed with leading European retailers delivers roughly an 80% reduction in plastic per tray while maintaining full shelf life performance and runs on existing customer lines. Our produce Pack Pet tray was also recognized for replacing PET with renewable recyclable paperboard, eliminating more than 17 million plastic trays annually in a single retail application. In addition, Enviro [ Club Duo ] received an award of distinction at the PAC Global Awards for sustainable packaging design, reflecting our continued ability to replace plastic bile-preserving functionality and shelf appeal. This award was one of 8 PAC Global Awards we received. From an operational standpoint, this quarter was marked by a number of wins. At Waco, we continue to make meaningful progress ramping production. Commercial performance is meeting expectations, and we are ahead of plan with customer qualifications. This positions us to better penetrate new geographies and more efficiently support existing geographies while taking advantage of available recovered fiber streams in our Texas triangle. In parallel, we are completing our cogeneration plant projects, strengthening power supply assurance while helping to advance our customers' sustainability goals. We expect Waco to be a durable competitive advantage for us over time. We are excited to help prepare our customers for promotions through the 100 days of summer at large events select the upcoming World Cup. 24 brands across our food and beverage customer base are running promotions for the World Cup and our customers are planning for increased demand from spectators advance. For large global events like these, customers rely on a consistent, trusted partner who can deliver to time-sensitive deadlines can execute critical graphic changes. We are prepared to provide the excellent customer service Graphic Packaging is known for. We also took a significant step forward in our renewable energy strategy. Finalizing a virtual power purchase agreement with NextEra Energy Resources. This agreement increases renewable electricity coverage across our North American operations and supports disciplined execution against our long-term emission targets. The 250-megawatt solar energy plant in West Texas is expected to begin commercial operations at the end of 2027. This agreement better positions us to support our customers, the world's leading consumer brands and making progress towards their sustainability goals. We continue to build an award-winning culture and be recognized for our values in the way we do business. In March, we were recognized as one of the world's most ethical companies by Ethisphere. This recognition alongside our placement on the 2026 ranking of America's -- most -- just Companies by -- just Capital and Fortune World's -- most Admired Companies shows that others recognize the values our people put into action every day. Finally, as we build on our strong foundation, we are also strengthening our team with highly selective new hires to ensure that we have the right talent and leadership roles as we drive performance across our business. As I mentioned at the start of the call, I'm excited that Melanie Skijus has rejoined Graphic Packaging to lead Investor Relations. Additionally, we recently appointed Randy Miller to serve as Vice President of Treasury and Capital Finance, Randy will lead global treasury with a focus on cash flow generation and capital structure optimization. We just announced that Daniel Fishbein will join as General Counsel in June. Daniel brings more than 2 decades of legal experience having spent his career as a corporate attorney focusing on strategic transactions, corporate governance and securities law matters. He most recently served as Executive Vice President and General Counsel of Corpay, where he oversaw the company's global legal and regulatory function. These leadership appointments and talent upgrades support our priorities. Starting with our commitment to enhancing shareholder value. We aim to deliver greater returns for shareholders by harnessing the significant cash generative business we operate with our immediate priority to reduce leverage and strengthen the balance sheet while continuing to return capital to our shareholders through our established dividends. Our progress gives me confidence in our strong market position and the many expansion opportunities ahead. Our first priority is to strengthen the balance sheet. We are utilizing our strong capabilities to drive sustained growth through a robust proactive commercial strategy and commitment to innovation. You can expect future investment in growth to be more disciplined and focused on the highest return opportunities. Looking ahead, we have an opportunity to reduce our operational complexity and improve accountability by focusing on driving profitability and business excellence, including the ramp-up of Waco. We expect to reduce our capital spend to 5% of sales or less and reduce our inventory from 20.5% at the end of 2025 to between 17% to 18% of sales this year toward our long-term goal of 15% to 16% of sales. We will also continue to innovate and develop world-class products for our customers. We remain on track to generate $700 million to $800 million of adjusted free cash flow in 2026. Moving forward, I am encouraged by the opportunity to grow alongside our customers and partner with them to achieve their goals. We are uniquely positioned with our broad product portfolio, strong innovation engine and integrated network, we are on offense. Now I will turn it over to Chuck to provide more details on our financials. Charles Lischer: Thank you, Robbert, and good morning, everyone. I'm pleased with our performance in the first quarter, including the strengthening of packaging volumes we experienced as we progressed through the quarter. Total volumes were up 1% from the same period in 2025. Top line growth and higher packaging volumes are a direct result of the resilience of our business, the markets we serve and the execution of our team. Sales increased 2% year-over-year to $2.2 billion, driven by the volume increase and a $50 million benefit from favorable foreign exchange. Partially offsetting these gains, price experienced a decline of 2% in the quarter. The pricing decline reflects third-party index changes and bleach paperboard that occurred in the fourth quarter of 2025 along with the continuation of unusual competitive packaging pricing experienced in the last few quarters of 2025. Innovation sales growth was $42 million in the quarter, reflecting the strength of our innovation pipeline, continued strong partnerships and engagement with customers. Adjusted EBITDA in the first quarter was $232 million, including a $6 million foreign exchange benefit. This represents a $133 million decline from the first quarter of 2025. Price volume and mix combined were a $46 million headwind and again were a result of the unusual competitive price environment. Commodity input and operating cost inflation of approximately $37 million was roughly $10 million higher than we were expecting. Unfavorable net performance in the quarter of $56 million was driven by several factors. Severe weather in January across the Central and Eastern United States and the domestic disturbances in Mexico during the quarter caused an approximately $25 million impact from disruption and downtime in our facilities. In addition, heavier scheduled maintenance in the quarter and our decision to curtail production, produce inventories resulted in additional costs of $20 million each as compared to the year ago period. Robbert discussed, we are executing cost reduction and efficiency initiatives, which drove about $10 million of savings in the quarter. And though these savings were offset in the quarter by the factors mentioned, we will swing to positive overall contribution to earnings from net performance later in the year. Adjusted EPS in the first quarter was $0.09 and included a higher tax rate due to the vesting of employee equity awards during the quarter. We still expect the full year tax rate to be approximately 25%. In line with historical seasonality of cash flow and working capital, first quarter adjusted cash flow was a negative $183 million which is an improvement of $259 million from the first quarter of 2025. First quarter adjusted cash flow results included heavier capital spending than we expect for the rest of the year. Attributed to the work to complete our recycled paperboard mill in Waco, Texas. We ended the quarter with $5.6 billion of net debt and net leverage of 4.4x. As Robbert alluded to, our environment remains dynamic with geopolitical uncertainty and inflation impacting the business. During the quarter, we experienced incremental commodity cost inflation resulting from the conflict in Iran which embedded our logistics, energy and resin spend. With energy, we're about 60% hedged for both natural gas purchased in North America and electricity purchase in Europe and have commodity cost recovery mechanisms embedded in many of our contracts. However, these recovery mechanisms can experience lags due to contractual terms. We are proactively addressing the inflation and working on initiatives to offset it. On April 9, we announced a $60 per ton price increase for bleached cup stock effective May 8. While this price increase will be realized in Q2 for non-index-based paperboard sales, most of our affected contracts require price recognition by the industry's third-party index before we can pass it through our packaging business. Looking ahead to second quarter. From a volume standpoint, our expectation for Q2 is consistent with our full year range of down 1% to up 1%. We see pricing similar to Q1 and expect foreign exchange to be a slight benefit. With adjusted EBITDA, we anticipate certain commodity costs to stay elevated in Q2 before moderating towards the end of the year. Accordingly, we estimate a sequential $10 million incremental inflationary impact in the second quarter versus the first quarter totaling $30 million of incremental inflation in the first half of 2026 compared to our original expectations. Q2 adjusted EBITDA is now expected to be in the range of $230 million to $250 million. We are reaffirming 2026 guidance. Many initiatives that we laid out today in addition to the contractual recovery mechanisms to be realized in the second half of the year and our pricing actions are expected to help offset the incremental inflationary impacts throughout the remainder of the year. As a result of these efforts, we remain confident in our ability to deliver 2026 adjusted EBITDA in the range of $1.05 billion to $1.25 billion, in line with our prior guidance. Our 2026 adjusted free cash flow outlook remains unchanged in the range of $700 million to $800 million, a significant step-up from 2025. Cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures and timing of inflationary cost recovery. We intend to pay down approximately $500 million of debt in 2026 and remain committed to our dividend. We understand that our dividend is important to many of our shareholders and also reflects the confidence that we have in the future cash flows of the business Capital expenditures in 2026 are expected to be approximately $450 million. As a result of our completed 90-day review, we identified certain projects and investments that no longer align with our operational priorities, so we canceled them. One of these projects, the automated roll warehouses at Texarkana and Kalamazoo resulted in a onetime primarily noncash write-off of approximately $40 million. Importantly, this decision avoids approximately $200 million of capital spending over the next few years and is a prudent move given the project no longer yields the original return thresholds since we will be operating with less inventory. In conclusion, we are moving out of a heavy investment cycle to a cash harvesting cycle. This is an exciting and much anticipated phase. The past few years have been characterized as building years with capital investments and acquisitions made to differentiate our packaging and service offerings in the marketplace and position the company for long-term growth. Now we are focused on optimizing our footprint and operations, executing disciplined capital allocation, expanding profitability in the business and to my prior point, delivering the free cash flow we committed to. 2026 will be a foundational year for Graphic Packaging, and we are excited about what our future holds. With that, I will turn it back to Robbert. Robbert Rietbroek: Thank you, Chuck. To conclude, we see a clear line of sight to long-term value creation, supported by the value we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026. With that, operator, let's open it up for questions. Operator: [Operator Instructions] Our first question today is from Ghansham Panjabi with Baird. Ghansham Panjabi: First off, welcome back memory -- Melanie, we look forward to working with you. I guess first off, on the heat map on Slide 5, can you touch on if you're actually seeing any sort of inflection in food or just easy comparisons from several quarters of just minimal growth? Just trying to get a sense as to what you're seeing in that market, specifically to that category, which has been weak for several years at this point? And then second, as it relates to the realigned commercial teams, can you just give us a bit more insight into what's going on there? Robbert Rietbroek: Yes. Thank you, Ghansham, and thanks for welcoming Melanie back. We're very happy to have you back, Melanie. With regards to your first question on food, let me just reflect on the macro environment for a second, and I'll zoom in on food. What we're hearing from our customers continues to be a focus on growth, gaining share investing in product quality that specifically applies to food and value perception, pack size and pricing promotions and there is an increased emphasis on overall across the categories of price pack architecture as well as novel pack designs and obviously, a localized, reliable supply chain. And the consumer environment of which food is a part remains very value driven, and there is a focus on affordability. And we are seeing stable demand signals, Ghansham, with certain pockets of strength and we're seeing select growth across larger customers and key segments, particularly in what we call everyday essentials. So food is performing rather well with strength, particularly in protein-driven categories like yogurt, bars, refrigerated meals, and that really reflects underlying consumption trends. If you look at some of the other categories like Health & Beauty, that's performing well as consumers continue to prioritize small indulgences like skin care, perfume, beverages is stable, and foodservice was a little slow due to the weather and consumer affordability trends but is expected to gain momentum throughout the year. So that's how we see food as part of the broader macro environment. With regards to the realigned commercial organization, we are seeing a big need to serve our customers better both at the national level, in some cases, international level where we see more and more procurement team centralized in locations like Switzerland or the Netherlands or even Ireland, so we are organized now in a way where we can serve both the global procurement organizations of our large CPG customers as well as domestic customers with a slightly enhanced organization. And we feel very good about the leadership we put in place under Jean-Francois Roche who is really doing a great job in getting me in front of customers as well. I've met 6 global customers across different geographies in the first quarter and in the last month as well. And that's really given me a good perspective on how our commercial organization is now organized and how well we are serving customers. Ghansham Panjabi: Okay. And then just for my follow-up question. On the EBITDA reconciliation in the press release, what is the $71 million add back specific to the first quarter of '26, just quite a bit higher than the first quarter of last year. And then just to clarify, as it relates to the commodity cost comment, are you expecting a sequential moderation in commodity costs? Is that what you're assuming in that $30 million incremental impact in the first half? And what would that number be comparable in the second half? Charles Lischer: Yes. Ghansham, this is Chuck. I'll take those. So on the -- what we have in the special charges bucket, I mentioned on the prepared remarks, the $40 million from the automated roll warehouse write-off. So that was the biggest component of it. We also had severance from the actions that we took that we talked about in the quarter, that's about $20 million. And then for the Croatia business that we're divesting, we had about a $13 million write-off of assets, and that's primarily for intangibles that we had acquired with the AR Packaging acquisition. So those components are the majority of what you see in the quarter. On the inflation, so yes, what we called out is $10 million of incremental inflation in Q1 $10 million incremental to that in Q2. So for a total of $30 million versus our original expectations in the first half. And then at this point, we see about the same number, about $60 million to $65 million of incremental inflation for the full year. That environment, of course, remains very fluid and dynamic, so changes every day. But what you see us doing is pulling several levers to offset that inflation. We talked about on the call, the contractual recoveries and pass-throughs, and that will account for about 1/3 of it. I talked about the cup stock price increase, and then we're further evaluating some packaging price increases. And then as Robbert mentioned, we're looking at other cost savings, procurement initiatives to provide a further buffer. So with all of those offsets, we're confident that we can neutralize the inflationary impact that we see. Operator: Our next question is coming from Mark Weintraub with Seaport Research. Mark Weintraub: Chuck, just a point of confusion for me. So the -- I think that $71 million, that was on adjusted EBITDA. Was the warehouse and Croatia, were those not noncash write-downs primarily? Or maybe if you could just clarify for us? Charles Lischer: Yes, it's primarily noncash, but just in the add back to get to the -- effectively the number that the EBITDA is, of course, an all-in number. It does include depreciation and amortization, but it does include noncash charges before you adjust for them. Mark Weintraub: Okay. And then second, and I know you were kind of answering this in Ghansham's question as well. So basically, you have about $200 million of improvement in the second half of the year to the first half of the year. If you'd be willing, would you kind of share in terms of the way you provide those buckets, volume, price, the big drivers, where the majority of that $200 million would be shown up? Charles Lischer: Yes, happy to do that. So broadly, we see the year playing out similar to what we laid out in the original year-end call other than inflationary impact that I already talked about. But if you look at first half to second half, as you mentioned, there's a step up second half versus first half. Think about a few things. So first of all, our first half includes several unfavorable items as we talked about the January weather that caused facilities downtime that we don't expect to recur in the second half. Second, our first half has a larger unfavorable impact from several items, including scheduled higher maintenance and then also the market downtime that we're taking to lower inventory levels is higher in the first half. And then finally, the second half has a bigger impact from some of the positive items that we're seeing. For example, we mentioned the contractual cost recoveries, the packaging price initiatives and some of the procurement and other cost savings initiatives. So several moving parts. But of course, with our current expectations for inflation, we are confident that we'll be able to hit our full year EBITDA guidance. Mark Weintraub: Okay. Super. I mean any chance getting a little bit more granular? I think you talked about weather being $25 million in the first quarter. I think on the last quarter's call, you -- roughly downtime would be about $50 million -- inventory-related downtime about $50 million lower. Are those numbers about right? And then so if we're kind of left with like $125 million in the drivers you were providing kind of just round numbers to where they might come from, it's not understood, but just trying to get a bit more granular. Charles Lischer: Yes. I'll just give you a couple of more nuggets and then we can talk more offline. The phasing of the cost savings that we called out $10 million in Q1. It will pick up a little bit in Q2, but then the majority of that will be back-end loaded. You mentioned the downtime. That, of course, is something that we'll be taking more market downtime in the first half than the second half. So we can work through it more offline. Operator: Our next question is coming from Hillary Cacanando with Deutsche Bank. Hillary Cacanando: So just the breakdown that you were just -- you were talking about to get to your guidance. Last quarter, you actually had guided to $100 million incentive compensation impact for 2026, and I didn't see that in today's presentation. Is that included anywhere and maybe in like net performance in the first quarter? And like what type -- what phasing should we expect for incentive compensation through the year? Charles Lischer: Yes, that's all included within the original numbers that we had expected and all included in what we've reported, so we didn't talk about it again. It is a year-over-year factor in that performance. Hillary Cacanando: It's all included in the first quarter. So there's -- we're not -- you're not expecting any additional incentive comp this year for the remainder of the year? Charles Lischer: Of course, it will roll throughout the year. It's the Q1 impact that we had expected recorded in Q1. Hillary Cacanando: Okay. And then -- and then how much should we expect for the remainder of the year? Charles Lischer: Again, we embedded about the $100 million in our full year guide. Hillary Cacanando: Okay. Got it. And then just on pricing, I know you had asked for price increase. Does that have to go -- like is [ RISI ] involved in this? Or do you have is it pretty fast? Like is it just between you and the customer? Or is it really involved? Like is it like -- is it going to depend on what they come up with -- in terms of like what the final number will be or if there will actually be an increase? Charles Lischer: Yes, a couple of components of our price. Specifically, what I talked about in the prepared remarks was an increase in cup stock paperboard price, and that is something that will impact our open market business more quickly than it would pass through our foodservice packaging business. That will be once [ RISI ] recognizes it and then whatever the contractual period is before it starts getting reflected. And so that is on that side. Then on the other packaging price increases, those would go into effect in our, let's say, around $1 billion of revenue that we have that's not under direct pricing contract. Operator: Our next question is coming from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess maybe I can just clarify maybe the walk on free cash flow. So it looks like you have kind of harvested some amount of working capital and inventory. But does that maybe reverse as you take some downtime? And then maybe next year also, would you have to kind of rebuild those inventories? And do you expect kind of less contribution from work capital and then related to that point, just kind of curious if you still expect kind of an $80 million uplift from Waco and is that being offset by maybe some downtime at Kalamazoo? Charles Lischer: Yes. So I'll start with the last part. First of all, on Waco, what we're seeing there is the business case for Waco is indeed playing out in terms of the variable cost. What we -- the benefits we have recommitted to the specific benefits number because until we're able to cover the fixed cost with the volume that we -- then that's when you'll see the additional impact of the fixed cost. But as Robbert talked about on the call, the operations are running well. The ramp-up is going well and everything overall is going very well. And in terms of the first part of your question, inventory will not be rebuilt in next year as we talked about or as Robbert mentioned, we expect to get the 17% to of inventory -- inventory as a percentage of sales this year on our way towards our longer-term target of 15% to 16%. So we will continue to see some working capital benefit in next year from lower inventory. And then also 2027, if you think about 2027's cash flow, that will continue to benefit from lower cash taxes and then, of course, lower interest expense. So some of the items will come back. And then as we talked about at the year-end call, we still see the post 2027 free cash flow number of $700 million plus. Arun Viswanathan: And then if I could ask on supply/demand. So obviously, there's been some changes in SBS. Our understanding is, I guess, that may not necessarily have the impact as to reduce supply to tighten up that market enough to get pricing power. Would you agree with that? And are you still kind of facing some pricing headwinds in SBS? And is that weighing on CUK and CRB as well? Maybe you can just comment on kind of potential pricing in those -- across the different substrates to cover inflation. Robbert Rietbroek: Yes. Let me take that question. With regards to the paperboard grades, the 2 grades that really matter most to us, as you know, are recycled and unbleached because that's what we primarily use. And both of those markets are in good balance. With regards to the cross-category dynamics, we're not necessarily seeing a lot of impact of bleached on recycled with regards to cannibalization. So we're not seeing recycle lose volume to bleached, but it does have to respond to price competition. So switching is rare. And with our new PaceSetter Rainier grade, that matches bleached printability, but it's 100% recycled and cheaper to make. And we continue to believe that PaceSetter Rainier will take volume from bleached over time. And when it comes to the balancing of supply and demand, I just want to remind you that we closed Tama, Iowa, which was a CRB mill in '23. We decommissioned our K3 machine in Kalamazoo in '23, and we closed Middletown, Ohio, which was a CRB mill in '25. Then we closed East Angus in Quebec in '25 and '26, and we sold the Augusta mill, as you know. So bleached continues to be oversupplied, but accounts for the smallest part of our business. And we have been very proactive in our approach to supply whilst others have added capacity, as you know. So what we do here is we actively match our internal supply with our demand profile, and that's supported by our integrated system and our portfolio as a result is structurally advantaged. Operator: Our next question is coming from Anthony Pettinari with Citi. Anthony Pettinari: Just following up on, I think, Hillary's question. If you look at your total tonnage, is it possible to say what percentage is on a [ RESI ] index versus like a custom index, maybe what the lag is in terms of price increases if it's realized in RESI versus you see it in a custom index and then how much of your volumes would be covered by that cup stock price increase that you talked about earlier? Charles Lischer: Yes, this is Chuck. I'll take that. So in our bleach business, we have more of our packaging tied to [ see ] than we do in our other models. And so the majority of our packaging volume is indeed tied to [ res ] that's for the cupstock business, a couple of hundred thousand tons and generally would be recognized in price 3, 6 months after it's recognized by [ RISI ] depending on the timing during the quarter that is recognized by RESI. Robbert Rietbroek: Okay. We don't disclose exact details around the percentage of our contracts that are tied to [ RESI ], but Chuck did refer to the $1 billion of noncontractual sales, and we do have a cupstock business as well where we sell a big part of that on the external market. So that should answer your question. Anthony Pettinari: Got it. Got it. And then I guess, fiber is up, diesel is up. You've indicated that you're not seeing big cannibalization of SBS into CRB. I mean, obviously, you can't talk about forward pricing or anything like that. But can you just talk about maybe your philosophy on pricing? Do you expect graphic to be a price leader? How do you think about it? We've seen price improvement in other containerboard graphic paper grades this year. Can you just talk to us kind of how you think about pricing generally? Robbert Rietbroek: The majority of our business is converted to finished product packaging. So -- and the majority of that is either recycled or bleached. And so -- unbelieve, sorry. And so we are not necessarily spending our entire day thinking about paperboard pricing, graphic, and we continue to focus on customer service, operating excellence and taking share and growing our business by delivering better products, better finished products, which are essentially converted finished packages. That is how we think about pricing. Operator: Our next question is coming from Phil Ng with Jefferies. Philip Ng: Robbert, I appreciate the 90-day post review, volumes are up, so that's great. You got some headwinds this year that you are going to work through, but it sounds like destocking inventory could potentially still be a drag when we think about 2027. So with some of the levers that you may have a better appreciation now, is there a path where you could grow EBITDA next year with our prices going high? I just want to think through that just because, obviously, it's a big earnings reset this year. Robbert Rietbroek: Yes. Look, I just -- thank you for raising the 90-day review. I just want to give a little bit of color on that, and then I'll talk a little bit about how it's all going to impact EBITDA. We have we have concluded that review and confirmed that we have a strong foundation, an opportunity to drive better financial and operational performance as we talked. And we've taken 500 roles out of the organization. As Chuck talked about, that's going to primarily impact the second half of this year. We are advancing some of these capital efficiency initiatives where we're prioritizing higher return opportunities. We've reorganized the commercial team. We've deployed AI. So we are very confident that the work we're doing is going to allow us to deliver on the cost reduction commitment that we have, which is $60 million. Now there is some inflation, as you know, we have mitigation actions in place, which include contractual cost recovery mechanisms, those have some timing lags. There are some target price actions in the noncontractual business that we just discussed. And then we just announced a recent price increase on [ cut ] stock and primarily cost reductions and operational efficiency actions. With that and the fact that we're taking obviously an EBITDA hit this year to reduce our inventory and we are resetting the base because we're reinvesting in incentives for our associates. That's the walk that Chuck talked us through. We will continue to rely on productivity and category growth and share growth to drive top line and therefore, EBITDA Philip Ng: Okay. So it sounds like you feel like you got enough lease to grow next year from an EBITDA standpoint, Robbert? Just quickly summarize or... Robbert Rietbroek: We're not in guidance for next year at this point. It's early, we're still early days in 2026. So give us a couple of months to get a better understanding, but we're doing all the right things and the right work to set ourselves up for a great 2027. Philip Ng: Fair enough. A question for Chuck. Your guidance you reiterated, which is encouraging. Certainly, you're seeing some inflation here. Your guidance, does that embed the SBS cup stock sticking? Granted there is a lag, I don't know how impactful it's going to be. And then some of the packaging price increases that are not tied to research some of these contracts? Is it embedded that you get price? I asked just because in your prepared remarks, you mentioned you've seen some unusual price declines in packaging prices, right, not necessarily in [ SBI ], the other grades. Have you seen that component like stabilize? Like what are you seeing on some of that packaging price in the last few months? Charles Lischer: Yes. A couple of things there. So we don't embed anticipated [ RESI ] moves until they are announced. And so any impact to that on our [ track ] from our [ Cove ] would not be reflected we will embed what we see in the open market business, of course. From time to time, we would have bet packaging prices, but right now, we're still working through exactly the size of all of that. And -- and so we'll embed that as we go. So that's what we see on the price. Philip Ng: Have you seen a stabilization there, Chuck, on the packing price? What you've said that it's been unusual coming the year? Charles Lischer: What we see there is our customers, however, there's geopolitical uncertainty that the assurance of supplier becomes a bigger deal to our customers and they talked about local supply and our integrated model really sells well to them. And so it certainly gives us the opportunity to stop in negative trends or to introduce the idea of a packaging price. Operator: Our final question today will be coming from Gabe Hajde with Wells Fargo Securities. Gabe Hajde: Robbert, I'm curious if we can go back to the cup stock announcement. I find it interesting, I think, in the slide that you gave us, it's the 1 category that decelerated, it was pretty strong over the last 2 quarters. So I guess is there something unique about that supply-demand dynamic in cup stock that would afford you all to the industry to get price or maybe something unique about the input cost structure that makes it such that you can recover costs faster than maybe some of the other [ two ] grades you participate in? Robbert Rietbroek: Yes. On the -- there is a higher input cost, of course, that cup stock is barrier coded with resin. And so there's a an impact when you see [ resin ] prices increase. And so yes, a higher input cost. And then cup stock has historically been a strong grade for us and so down had a lot of excess capacity. Gabe Hajde: Okay. And then as you have conversations with your customers, I mean, you are trying to reduce inventories. Maybe they were looking around the corner at oil above 100, and we might envision some price increases. Do your sales folks in using any sort of prebuying activity that happened into the summer? And then one last one on CapEx. It sounds like the entire $200 million that you called out is specifically associated with that 1 discrete or those 2 discrete winder projects I've seen remember there were some, I guess, greenhouse gas initiatives later in the decade, and it seems pretty hard right now to get some projects still on the drawing board? Robbert Rietbroek: Yes. Let me take the one on customers, and you could talk, Chuck, about the -- how we got to the $200 million capital investment reduction and what that [ entails ], that's one project or more projects. So the question around customer stock is a good one. We haven't really seen a lot of stocking in Q1 as a result of anticipated price increases. We are having a lot of conversations with our customers regarding surety supply or assurance of supply. That's primarily related to having multiple sites producing their packaging, so that they're not relying on one side in case of a natural disaster, more so than anything related to oil and gas right now. And as Chuck said, they do really value our integrated business model. But the customers, they want value, they want to balance costs. They want to see the best performance especially in our beverage sector, you need certain properties in the packaging. They want sustainability. And most recently, there's more and more discussion on [ assurance ] of supply, as I discussed. And they are focused on cost can and are looking for ways to optimize packaging formats, reduce material usage and improve cost. So those are most of the things we're seeing, Gabe. Charles Lischer: And then, Gabe, I'll build on the I'll build on the CapEx. The $200 million that we called out, that was those two projects specifically, but that was over the next several years that, that $200 million would come out not primarily this year that the $450 million is the number that we had originally guided to for this year and clearly we've gone in and shored up our path to get there, and we'll continue to look for opportunities to even cut further. Robbert Rietbroek: So with regards to capital, we are implementing a very rigorous and disciplined capital spend review and approval process. We will be evaluating and prioritizing investments that promote safety and fulfill regulatory obligations. We will continue to consider investments that announce cost-efficient season to [ generate ] the right returns for our portfolio. So that's how we're viewing this. And there are obviously a number of projects in the future that we are currently evaluating, including the ones that you're referring to. Operator: Ladies and gentlemen, this does conclude today's Q&A session and also our call. You may disconnect your lines at this time. Have a wonderful day, and we thank you all for your participation.
Operator: Ladies and gentlemen, welcome to the Q1 2026 results conference call and live webcast. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. [Operator Instructions] At this time, it's my pleasure to hand over to Christian Stohr, Senior Vice President, Investor Relations. Please go ahead. Christian Stoehr: Good morning, ladies and gentlemen, and welcome to our first quarter 2026 results presentation. Hosting our conference call today is Yves Muller, CFO and COO of HUGO BOSS. Before we begin, please be reminded that all revenue growth rates will be discussed on a currency-adjusted basis, unless stated otherwise. In addition, starting with Q1, we have adjusted our sales reporting structure. BOSS Menswear and BOSS Womenswear are now reported jointly under BOSS, while digital sales are included within retail and wholesale. As usual, during the Q&A session, we kindly ask you to limit your questions to 2, allowing for an efficient discussion. With that, let me hand over to Yves. Yves Muller: Thank you, Christian, and a warm welcome from Metzingen, ladies and gentlemen. Thank you for joining us today to discuss our first quarter results. As outlined in our release this morning, Q1 marked the first full quarter of execution under CLAIM 5 TOUCHDOWN following its introduction at the end of last year. As such, the first quarter was shaped by implementation, translating strategic priorities into concrete actions across brands, distribution and operations. Accordingly, our focus in the quarter was on disciplined execution. We implemented targeted top line measures to strengthen brand equity, continued to advance sourcing efficiencies and maintained rigorous cost control across the organization. These actions represent the first concrete outcomes of our realignment and are already translating into structural progress, particularly in gross margin and cash generation, which I will come back to shortly. Overall, we are pleased with the progress made in Q1. At the same time, we recognize that there is more work ahead, and we remain cautious on the near-term visibility given a high volatile macroeconomic and geopolitical environment. Let me now walk you through the quarter in more detail. Under CLAIM 5 TOUCHDOWN, 2026 is designed as a year of deliberate realignment rather than a year of chasing volume. In the first quarter, we made progress across all 3 pillars: brand, distribution, and operational excellence. This included refining product assortments, reinforcing our focus on full price execution, and taking targeted steps to optimize our distribution footprint. As part of this progress, we closed a net 15 freestanding stores globally, largely through expiring leases. As expected, these deliberate actions were reflected in our first quarter performance. Group sales declined by 6%, driven by the intentional quality focus embedded in CLAIM 5 TOUCHDOWN, alongside continued muted consumer sentiment. EBIT amounted to EUR 35 million, reflecting the planned impact of our strategic measures, partly offset by solid gross margin expansion and rigorous cost management. While these actions have a temporary impact on our top and bottom line performance, they represent important building blocks in strengthening the fundamentals of the business and laying the foundation for improved profitability over time. Beyond these deliberate actions, the external environment also remained demanding in the first quarter. Consumer sentiment was subdued across most key markets with continued pressure on traffic levels. Over the course of the quarter, conditions became more challenging, driven by the geopolitical developments in the Middle East. In this context, let me briefly put our exposure to the Middle East into perspective. The region accounts for around 3% of group revenues and is served through a limited and well-defined store network, primarily in the UAE and Qatar. The Middle East is also a high-quality and very profitable business for us, reflecting an upper premium store portfolio, a favorable channel mix and disciplined cost structures. From March onwards, store traffic in the region declined sharply, leading to meaningful disruption to overall retail activity and weighing on regional demand. As a result, developments in the Middle East reduced group sales by roughly 1 percentage point in the first quarter. In addition to these direct effects, developments in the Middle East also contributed to increased uncertainty more broadly. In particular, we observed early signs of a softening in consumer sentiment in selected markets alongside some moderation in international travel flows, which began to affect demand outside the Middle East towards the end of the quarter. Against this backdrop, we actively steered the business while remaining fully committed to our strategic priorities within CLAIM 5 TOUCHDOWN. With that, let me turn to our first quarter performance, starting with our brands. At BOSS, revenues declined by 3%, reflecting the challenging market environment as well as deliberate strategic actions. Menswear performed comparatively better, supported by continued strong demand in casualwear and athleisure, underlying the relevance of our 24/7 lifestyle positioning. This resilience was particularly evident at BOSS Green and BOSS Camel, both of which recorded growth in the first quarter. Womenswear by contrast was more affected by intentional assortment streamlining and targeted distribution refinement, measures fully aligned with our strategic priorities and aimed at strengthening brand positioning and long-term profitability. Turning to HUGO. Revenues declined by 21%, reflecting the strategic repositioning of the brand. During the quarter, we further advanced the streamlining of HUGO's product architecture into one overarching brand line, creating a clearer, more focused brand proposition and a more consistent market presence. While these measures continue to weigh on volumes in the near future, they represent fundamental steps to strengthen brand relevance, operational effectiveness and scalability over time. Speaking about our brands, let me emphasize once more: investing in powerful brand moments remain a core pillar of our strategy. While marketing investments were below the prior year level in Q1, primarily due to phasing effects, marketing spend amounted to 7.3% of group sales, fully in line with our CLAIM 5 TOUCHDOWN target range of around 7% of sales. Also for the full year, we continue to expect marketing investments as a percentage of sales to remain broadly in line with last year's level. In the first quarter, our brand investments focused on key initiatives such as the BOSS fashion show in Milan, which ranked among the top 10 most engaging brands during Milan Fashion Week; the launch of our Spring/Summer 2026 collections; and the third, BOSS BY BECKHAM. Together, these moments generated strong social media engagement and brand visibility. Importantly, these initiatives are designed to drive long-term equity and relevance rather than prioritizing short-term volume. From a regional perspective, revenues in EMEA declined by 8%, reflecting targeted measures to enhance distribution quality as well as muted consumer sentiment across several key markets, particularly the U.K. Despite the solid start to the year, revenues in the Middle East declined by a low double-digit rate in Q1, reflecting a sharp decline in store traffic in March, following geopolitical developments, which also weighed on overall EMEA performance. In the Americas, revenues declined by 5%, largely reflecting deliberate CLAIM 5 TOUCHDOWN measures in the U.S. market aimed at improving distribution quality across both wholesale and retail channels. As a result, reported revenues were intentionally impacted in the quarter. In addition, developments around Saks weighed on our U.S. concession business. Importantly, underlying performance in our U.S. brick-and-mortar retail business remained resilient with comparable store sales up modestly in the quarter. Outside the U.S., Latin America saw a slight normalization following a strong period of strong growth. In Asia Pacific, revenues increased by 1%, marking a return to growth. This was supported by renewed growth in China, aided by a successful Chinese New Year, as well as early progress in strengthening brand positioning and enhancing relevance in the market. Modest growth in Southeast Asia Pacific, particularly in Japan, also supports our regional performance. Turning to our channels. In retail, which includes brick-and-mortar and self-managed digital, revenues declined by 3%, also impacted by a negative space effect. On a comparable store basis, brick-and-mortar sales declined by 2%, reflecting lower traffic and our deliberate focus on full price execution, partly offset by a higher average basket size. Retail performance was also impacted by developments in the Middle East. Self-managed digital on the other side declined by 5%, reflecting our continued prioritization of full price sales in support of brand equity and margin quality. In wholesale, revenues declined by 10%, reflecting our ongoing focus on enhancing distribution quality through greater channel selectivity, a more curated assortment and a stronger emphasis on strategic partnerships. Performance was also influenced by a more cautious order behavior in the current environment as well as the known delivery timing shift of around EUR 20 million into Q4 2025, which has supported our wholesale business in the final quarter of last year. Turning to profitability. Q1 delivered a notable improvement in gross margin. Gross margin increased by 110 basis points to 62.5%, primarily driven by additional sourcing efficiency, including a further reduction in the airfreight share as well as improved pricing associated with the Spring/Summer 2026 collection. A slightly more favorable channel mix provided additional support during the quarter. Importantly, this performance demonstrates that the structural margin improvement we have been driving over recent years remain firmly intact even in a lower volume environment. Turning to cost and earnings. We maintained strict cost discipline in the first quarter. Operating expenses declined by 4%, supported by lower marketing spending due to phasing effects, ongoing efficiency improvements and further optimization of our retail cost structures, including rent renegotiations and productivity measures across our store network. As expected in a lower revenue environment, operating expenses deleveraged as a percentage of sales. As a result, EBIT amounted to EUR 35 million, corresponding to an EBIT margin of 3.9%, while earnings per share totaled EUR 0.24. Overall, this performance is fully aligned with CLAIM 5 TOUCHDOWN and our full year 2026 outlook. Let me now turn to cash flow and working capital. Building on the meaningful inventory reduction achieved at the end of 2025, inventory developed more moderately in Q1, in line with expectations. Year-over-year, inventories declined by 13% on a currency-adjusted basis, reflecting prudent buying, more focused assortments and targeted inventory optimization measures. As a result, inventory stood at 22% of group sales at the end of March, while trade net working capital declined by 10% currency adjusted. At the same time, capital expenditure remained at 3.2% of sales, continuing its normalization and remaining fully aligned with our midterm targets. Supported by both the improvement in working capital and continued CapEx discipline, free cash flow before leases improved by nearly EUR 100 million year-over-year, amounted to EUR 33 million. Let me conclude with a brief look at the remainder of the year. 2026 continues to be a deliberate year of realignment under CLAIM 5 TOUCHDOWN. Following our first quarter performance, we reaffirm our full year outlook. We continue to expect currency-adjusted group sales to decline mid to high single digits, reflecting targeted brand and channel measures. Currency effects are anticipated to remain a moderate headwind for reported sales. We likewise confirm our EBIT outlook of EUR 300 million to EUR 350 million. Gross margin expansion and continued cost discipline are expected to support profitability, while operating expenses are anticipated to deleverage due to lower revenues. At the same time, we expect macroeconomic and geopolitical volatility to remain elevated with heightened uncertainties related to developments in the Middle East. In this context, we remain vigilant and continue to closely monitor both direct effects and broader implications for consumer sentiment, international travel flows and overall trading conditions. Against this backdrop, we maintain a clear focus on operational delivery and the strategic priorities set under CLAIM 5 TOUCHDOWN. We will continue to prioritize profitability, cash generation, inventory discipline and flexibility over short-term growth. Ladies and gentlemen, let me close with 3 takeaways. First, the execution of CLAIM 5 TOUCHDOWN is firmly underway. 2026 is a year focused on strengthening the fundamentals of the business and elevating its quality rather than pursuing growth at any cost. In this context, we have made initial progress in sharpening brand focus, enhancing distribution quality and structurally strengthening the earnings profile of the business, marking an important milestone in delivering our strategy through 2026 and beyond. Second, Q1 delivered solid underlying performance. Gross margin improved, cost discipline remained intact and cash generation strengthened despite intentional top line effects from our strategic measures. Third, based on our Q1 performance, we reaffirm our full year outlook for 2026. While the external environment remains demanding and volatile, we are confident in our strategic direction and our ability to translate execution into stronger brand equity, improved profitability and long-term value creation. With that, thank you for your attention. We are now happy to take your questions. Operator: [Operator Instructions] The first question comes from Thomas Chauvet from Citi. Thomas Chauvet: Two questions, please. The first one on your introductory remarks, you said that demand outside the Middle East weakened towards the end of the quarter. Can you elaborate a little bit on what that means in the various regions? And how much was retail in April compared to the minus 3% you registered in the quarter? Secondly, on your comments about the resilience of menswear, particularly with BOSS Green and B Camel positive, can you comment on whether this is due to a very different customer profile you're now seeing in the store purchasing these 2 lines that are quite differentiated, I believe, or rather you think some relative weakness perhaps of the offering of black and orange, whether that's -- I don't know -- product quality or value for money proposition or simply the creative part. That would be useful. Also that you perhaps elaborate a bit on the 2 divisions you've created with menswear and womenswear and how this new unit of menswear is helping on the creative side? Christian Stoehr: Excuse me, this is Christian speaking, but we have to quickly follow up on question one, which was obviously a long question, but the quality was really bad on our end. I'm sorry for that. There was a bit of constraining in it. I remember you asked for retail trends in April, but what was the beginning of your question, if you can recall that, please? Thomas Chauvet: Yes. Sincere apologies for that to everyone. Yes, the comment -- can you hear me better now? Christian Stoehr: Yes, I'd say so. I mean, it's still -- it's not perfect but. Thomas Chauvet: Otherwise move to another question or two. You commented on demand weakening outside the Middle East towards the end of the quarter. And could you elaborate on what that means in the various regions? And was retail overall in April very different from the minus 3% you registered in the period? Yves Muller: So Thomas, you're asking whether the retail performance in April was different from the minus 3% in Q1. Is this your question? Thomas Chauvet: Yes. You mentioned that things weakened outside the Middle East at the end of the quarter because of the war. So I suspect that the consumer may have been impacted in the U.S. and Europe. So could you comment on the various geographies in April, please? Yves Muller: Yes. So perhaps let's take the first question regarding, let's say, current trading question. So firstly, I think we have to see that, of course, our retail business and the Middle East business is -- the Middle East business itself is predominantly a retail business, was definitely affected -- ongoing in April. So I think this refers to everybody. We are not alone in this, but we see that traffic is very low. It has slightly improved over the latest weeks, but now the last 2, 3 days have been also bad. So I would say it's a very, let's say, volatile environment. Secondly, I think this is the question around what do we see in terms of consumer sentiment. I would say here, we see in some selected markets that consumer sentiment is also affected, for example, like U.K. is affected -- was already affected in Q1, especially March, and is also affected in April. And we see that actually also the international tourist flow is also coming down and affecting the business. On the other side, I think I want to make the comment in terms of our strategic priorities. I think for us, it's also important to stay on track with regards to our strategic execution of CLAIM 5 TOUCHDOWN. And this means also for us in April, which is the month of, let's say, mid-season sale that you see very often due to the summer. For the summer collections, we decided in executing our CLAIM 5 TOUCHDOWN for this year that we don't take part in mid-season sale. So that is also one of the deliberate decisions that we have taken in order to improve the quality of our business and to have this long-term focus on brand equity. So definitely, of course, we are looking at the current trends up and down. But I think for us, it's now very important to keep our compass and to keep the course of our strategic execution. And therefore, we do not participate in April. And therefore, the month itself, it's difficult to read between the different effects that we have been seeing. With regards to your second question, actually, we are very happy with the development of BOSS Camel and BOSS Green. BOSS Green was actually up mid-single digit. You can see that our 24/7 lifestyle image is really working, especially with younger consumers. And you can also see that this is the current trend of the business with, like sports kind of activities. You've also seen that we have announced now the cooperation with Australian Open for next year. So this creates BOSS. We are working on kind of tennis and golf collection. So we are really deliberately driving BOSS Green going forward. And on top of this, we also opened some BOSS Green stores, especially in the Asian markets, where you can see this kind of positive trend. And we are following this kind of trend. With regards to BOSS Camel, which is, I mean, the majority is definitely a retail business. You can really see because of the outpricing of the luxury players and luxury competitors that some of the high value, high affluent consumers are trading down to us, and that's also driving BOSS Camel in selected markets, especially also we saw this in Asian markets, but also in the U.S., where we are actually happy. So I would view this -- I would see this positively in terms of that we have a certain portfolio to offer, and price value proposition for Black, I think, is good. Please keep in mind that we also increased the prices for the Spring Campaign 2026. And we get actually good feedback for this kind of measurement, and this is also driving our business. Operator: Then the next question comes from Manjari Dhar from RBC. Manjari Dhar: I also had 2, if I may. My first question was on COGS and raw materials. I just wondered if you could give some color on how you see the outlook on the raw material side as a result of what's going on in the Middle East? And does that have any impact on your own sourcing facilities in Turkey? My second question was on tourism. Yves, I know you commented on international tourist flow weakness. I just wondered if you could give some color on sort of how much of the BOSS estate is exposed to international tourist flows and perhaps maybe some more color on how you're seeing the performance in some of those stores. Yves Muller: Yes. Thank you very much, Manjari, for your 2 questions. First of all, regarding the COGS. So taking your concrete question regarding Turkey. So we -- for the time being, we don't see any implications regarding our factory in Izmir. Regarding raw materials, please keep in mind that the majority of the products that we have are coming from cotton and actually wool. So they are not so much influenced by this kind of high oil prices. We only have, let's say, limited exposure to polyester. You see price increases there. We have to look at it whether it's -- whether the duration will be longer. But I think what remains is that we are not as much exposed as perhaps like other sports brands, for example, and we don't see major implications for the year 2026. I think we have to observe the situation, but rather from the COGS development and also -- this also includes freight. We feel that we can compensate those effects that we might be seeing and that from -- with regards to the COGS, that we see further improvements regarding sourcing efficiencies, further reduction in airfreight share, and that these developments will support gross margin also going forward, alongside -- although we know that the Middle East has somehow implications on the oil prices. Regarding tourism, we know that our business is around overall 20% to 25% is coming out of tourism flow. We have seen some implications because of the Middle East, because of the big hubs in Dubai and Doha were closed for a certain period of time, there's less traveling. I think this has impacted the business in March and also in April, and we have to see how long it will last. I think it will also be slightly compensated in domestic revenues then, because people might be staying more at home or might be traveling less. So we have to observe this kind of development. Operator: The next question comes from Grace Smalley from Morgan Stanley. Grace Smalley: The first one would just be a quick clarification, please. So you mentioned that you are -- you're starting to see some impact from the Middle East in regions outside of the Middle East. And I think, Yves, if I heard you correctly, the U.K. was the main region that you pulled out. I just wanted to see if there were any other regions where you're also starting to see an impact outside of the Middle East or it's mainly centered within the U.K. Also on the answer on current trading, appreciate it. It sounds like April is very difficult to read given the Middle East disruption, but also the changes in the seasonal sales. But just if there's anything you can say to help us with how we should think about modeling Q2 relative to current consensus? My last one would just be on marketing. I believe you mentioned that the lower marketing spend in Q1 was partially due to timing and phasing. So if you could just help us with how we should think about the cadence of marketing spend throughout the rest of the year and how we should think about marketing on a full year basis? Yves Muller: Yes, another 3 questions. Thank you very much. So regarding marketing, I think -- so first of all, like I said during my presentation, we invested 7.3%. We have had the Milan fashion show. We have had BOSS BECKHAM. We had also the HUGO campaign, Red Means Go. So we -- you can really see that we invested. I think we invested wisely, and we get more out of the euro spend. And regarding -- and actually, this is all well in line with what we have said during CLAIM 5 TOUCHDOWN. There will be definitely a focus on the second half of the year, especially in Q4, which is actually the holiday season, which, as you know, Grace, is the strongest quarter for us. So we will, in terms of phasing, focus broadly on the second half of the year and especially on Q4 where we have the commercial and holiday moments of the year and where you have also some gifting in this kind of big quarter because as we know, the fourth quarter is between 20% to 30% higher than the first 3 quarters. Regarding the comment in terms of global sentiment, I think, like I said, and I can just repeat this, that we have seen in some selective markets like the U.K., some implications of the Middle East conflict, also slightly less tourists from the Middle East coming into the U.K. So these were also some implications that we have seen. But I think it's -- I think we have to observe the situation. And I think nothing more to comment right now because it's really changing on a weekly basis. Then was the question, was that regarding Q2? What was that question again? Christian Stoehr: Yes. It was -- Grace, you got your question, right? It was a bit of a quarterly phasing question, right? How to think about Q2 in terms of modeling, but also for the remainder of the year given the current trading comments that were made. Is that right? Grace Smalley: Yes, exactly. Christian Stoehr: So I'll take that, Muller, if that's okay for you. So I think the 2 comments we can make is, Grace, one related to Q4. I start with the final quarter of the year. And that's basically a reminder of what we have already said in March, the comps are particularly difficult in Q4. So that's something you will have to bear in mind. And I'm sure you're doing that in any case. On Q2, I think only the comments we've made on the Middle East, I guess, you probably will try to find these numbers or these comments finding the way into your Q2 modeling numbers. But that's all the comments we are making. Hard to be overly precise on current trading given the volatility we're seeing in the markets, and you said it, weeks can be quite different from one week to the other. But like I said, I think the implications from the Middle East in April were pretty clear, and that is something you should bear in mind -- and then Q4, as I just alluded to. Operator: Next question comes from Anthony Charchafji from BNP Paribas. Anthony Charchafji: The first one would be on the guidance. Curious to know the breakdown between the gross margin expansion and the OpEx. I mean, we've seen that the OpEx were down 4% reported, but rather 2% at constant FX. Do you see the OpEx cut, I would say, fading and being a bit less of a tailwind going into Q4? And in terms of gross margin, just to know if you have in mind gross margin expansion to be really back-end loaded Q4. So can we see Q4 gross margin expansion above the 110 bps that you just delivered? My second question is on pricing, but also pricing net of markdowns. Do you expect it to be net positive like in Q1 in each quarter in 2026? And do you expect to do more pricing versus the one that you did beginning of Q4 of mid-single digit? Is there anything planned? Yves Muller: Yes, Anthony, thank you very much for your questions. So regarding pricing, we have done now the pricing in Q4 2025, which will prevail in due course for 2026. There will only be, let's say, some slight adjustments, but not this kind of broad-based adjustment we have made. We might do it smartly. We will observe, of course, the competition, but nothing that I would call out in terms of pricing. What I would also -- what I would call out is definitely that we will give less promotions. We have started this already. And I think markdowns will go down and will turn over the course of the year also into a tailwind for gross margin in comparison to last year. We will strictly actually execute our CLAIM 5 TOUCHDOWN strategy. This means less discounts in the online channels. This will be shorter sales period. This will mean not participating in mid-season sale, like I said. So these are several measurements that we are taking to reduce our markdowns, always with the implication to drive the long-term profitability and the brand equity of the company. So it's -- all the measurements that we are taking are directed to increase our full price sell-throughs, and this will also help the gross margin going forward. I think we have been happy with our gross margin development already in Q1, which was primarily driven by sourcing efficiencies. But I also expect that we will see a good performance regarding gross margin over the next quarters regarding gross margin. As we have the history of having the OpEx overall under control -- minus 4%. I think it's -- for us as a management team, it's important to have the costs under control and to reduce the costs. I think you have also seen kind of deleverage this year, but this was overall well expected also in our guidance, and we will focus on those things that we can control on our own. And these are definitely gross margin things and also OpEx. And you have seen the direction also in Q1, and you can expect that this will continue in the next quarters, meaning gross margin being up and costs going down. Operator: The next question comes from Andreas Riemann from ODDO BHF. Andreas Riemann: Two topics. One is the HUGO brand. So the HUGO brand is written in red letter. So my question would be what actually happened to HUGO BLUE? Is HUGO BLUE still relevant within HUGO? The second topic, the tariffs. So in the press call, I think you indicated that you expect that U.S. tariffs will be paid back. Can you help us to guess how much that might be? And linked to that, what was actually the impact from U.S. tariffs on your gross margin in Q1? You didn't mention it. So was it that small? That would be my second question. Yves Muller: Andreas, thank you very much for your questions. Well, I will start with customs. Yes, of course, like every other brand is expecting that this kind of surplus that was introduced last year will be paid back. I think this is what might be expected. We are not quite sure because as we all know, the administration in the U.S. is also very volatile. So no effects have been included in our numbers so far. And actually, we are not disclosing the exact amount of the customs that we are having, but it's not such a huge amount that you can expect. Regarding HUGO, definitely, we streamlined the assortment regarding HUGO. We have the big campaign Red Means Go in terms of HUGO, and we are integrating the HUGO BLUE products into our HUGO -- in our HUGO appearance and have a clear focus on contemporary tailoring. So this means that we're going to streamline the assortment going forward. This has been a kind of -- also kind of strategic measurement. And of course, the effect regarding the net sales at HUGO are visible, but they were more or less expected from our side. And on top of this, we are also reducing here and there some of our distribution points also with HUGO. So these are the effects that we have seen with HUGO, but I think the most important thing is that we are streamlining the assortment and integrate HUGO BLUE into HUGO. Christian Stoehr: Ladies and gentlemen, that actually completes today's conference call. There is no more people in the queue wanting to ask questions. So we leave it with that. And we thank you for your participation. And of course, if there's any further open topics or questions you have, please reach out to the Investor Relations team. Thank you for joining today. Thanks for your interest and speak to you soon. Thank you. Bye-bye. Yves Muller: Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.