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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: 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: Thank you for your continued patience. Your meeting will begin shortly. For optimal sound quality, we ask that you silence your electronic device. Star zero, and a member of our team will be happy to help. Good morning. My name is Stephanie, and I will be your conference operator today. Welcome to the Ecovyst Inc. First Quarter 2026 Earnings Call and Webcast. Please note, today’s call is being recorded and should run approximately one hour. Currently, participants have been placed in a listen-only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to hand the call over to Gene Shiels, Director of Investor Relations. Please go ahead. Gene Shiels: Good morning, and welcome to Ecovyst Inc.’s first quarter 2026 earnings call. With me on the call this morning are Kurt J. Bitting, Ecovyst Inc.’s Chief Executive Officer, and Michael P. Feehan, Ecovyst Inc.’s Chief Financial Officer. Following our prepared remarks, we will take your questions. Please note that some of the information shared today is forward-looking information, including information about the company’s financial and operating performance, strategies, our anticipated end-use demand trends, and our 2026 financial outlook. This information is subject to risks and uncertainties that could cause actual results and the implementation of the company’s plans to vary materially. Any forward-looking information shared today speaks only as of this date. These risks are discussed in the company’s filings with the SEC. Reconciliations of non-GAAP financial measures mentioned in today’s call with their corresponding GAAP measures can be found in our earnings release and in the presentation materials posted in the Investors section of our website. I will now hand the call over to Kurt. Kurt J. Bitting: Thank you, Gene, and good morning. Consistent with the positive outlook for 2026 that we shared in our fourth quarter earnings call in late February, our first quarter results provide an excellent start to the year, with strong growth in both our regeneration services business and for virgin sulfuric acid. Sales for Regeneration Services were up on a double-digit percentage basis compared to 2025, reflecting high refinery utilization, favorable alkylation economics, and lower planned customer downtime compared to the year-ago quarter. First quarter sales for virgin sulfuric acid were also up significantly, benefiting from increased mining demand and the contribution from the Wagaman sulfuric acid assets that we acquired last May. As a result of the strong volume growth and positive pricing in the quarter, we reported adjusted EBITDA of $40 million, which is up 87% compared to 2025. During the quarter, we also maintained our focus on the implementation of our long-term strategic plan to accelerate growth and enhance value for our stockholders. During the first quarter, we repurchased approximately $36 million worth of our outstanding shares. And with regard to the pursuit of inorganic growth opportunities, our efforts over the course of the first quarter led us to last Friday’s announcement that we had reached an agreement to acquire the Calabrian sulfur dioxide and sulfur derivatives business from INEOS Enterprises in a transaction that will broaden our portfolio and further position Ecovyst Inc. for attractive growth in end uses we currently serve, such as mining and water treatment, and new end uses, including pharma and food processing. Kurt J. Bitting: As we move to the next two slides, I want to provide a brief overview of the Calabrian business and highlight the details and strategic merits of this transaction. What makes the Calabrian acquisition so compelling is how closely the business aligns with Ecovyst Inc. strategically, operationally, and commercially. The combination directly leverages our core competencies in sulfur chemistry and extends our platform into highly complementary adjacent chemistries. Just as Ecovyst Inc. is a leading provider of virgin sulfuric acid and sulfuric acid regeneration services, Calabrian is a leading provider of sulfur dioxide and sulfur-based derivatives. It is the sole on-purpose producer of sulfur dioxide in North America with a significant supply share, a leading producer of sodium bisulfite alongside Ecovyst Inc., a leading producer of sodium thiosulfate, and the sole North American producer of sodium metabisulfite. These products are critical inputs into a range of attractive end uses that overlap meaningfully with the markets we serve today, reinforcing the natural fit between the two businesses. Looking at a rough breakdown of Calabrian’s 2025 sales, nearly one-third of sales were to the mining sector, where we have well-established and long-standing relationships. Roughly a quarter of Calabrian’s 2025 sales were in water treatment, a market that we currently participate in with our virgin sulfuric acid, sodium bisulfite, and aluminum sulfate sales. Approximately 15% of sales were into specialty chemical applications and the balance of 2025 sales included sales into food preservatives and other applications. Similar to Ecovyst Inc., Calabrian has longstanding customer relationships with blue-chip customers, significant long-term contracts, and sales visibility. In terms of the strategic fit with Ecovyst Inc., I will first say that Calabrian has a seasoned and engaged management team, and we look forward to leveraging their expertise and enthusiasm as we move forward on a combined basis. Equally as important, Calabrian provides us with a very attractive opportunity to expand our reach and product offering in sulfur-related chemistries while leveraging our existing supply chain and manufacturing infrastructure. In doing so, it provides an opportunity to diversify our sales mix and increase our penetration into high-growth industries such as mining, water treatment, pharma, and food processing. Calabrian has two manufacturing locations: Port Neches in Texas, situated in the middle of our existing Gulf Coast infrastructure, and the Timmins site in Ontario, Canada, which we expect to broaden our exposure to Canada’s growing mining sector. Given our existing footprint in the Gulf Coast region, the acquisition provides opportunities to leverage our existing supply chain and manufacturing infrastructure. Finally, the financial profile is equally compelling. Calabrian brings attractive growth prospects, strong margins, and a track record of high cash conversion. On a trailing twelve-month adjusted EBITDA of approximately $24 million, the $190 million purchase price represents a multiple of approximately 8x, stepping down to roughly 7x as we capture synergies over the next three years. The transaction is expected to close by the end of the second quarter. We plan to fund the acquisition through cash on hand and a new debt offering, with specific allocation to be determined as we move towards closing. At this time, we expect that our pro forma net debt leverage ratio at close of the transaction will be approximately 2x. Before I hand the call over to Mike to review the details of our first quarter, I want to comment on our expectations for near-term demand trends and our confidence in the longer-term outlook for Ecovyst Inc. While the geopolitical and global macroeconomic environment remains dynamic, our outlook remains very positive. As a leading provider of products and services that are essential to our North American-based customers, we expect demand trends to remain favorable, underpinning our growth expectations for 2026. We see U.S. refinery utilization remaining high in 2026, with far less planned and unplanned customer downtime than we experienced in 2025. As such, we continue to expect higher volume for our Regeneration Services in 2026 with favorable contract pricing. We also expect volumetric growth for virgin sulfuric acid in 2026 with increased sales into mining, and a full year of contribution from the Wagaman sulfuric acid assets we acquired last year. Sales into the nylon end use are expected to be generally in line with 2025, and we anticipate relative stability across the broader range of industrial applications. Looking beyond 2026, we believe the long-term outlook remains extremely favorable. We expect that high refinery utilization will continue to support demand for our Regeneration Services business. And for virgin sulfuric acid, we believe we are positioned for growth, with sales into mining applications benefiting from multiyear expansion projects, growth in industrial applications associated with onshoring, and the prospect for continued sales recovery in the nylon end use. I will now turn the call over to Mike, who will review our financial results. Michael P. Feehan: Thank you, Kurt, and good morning. We are very pleased with our results for the first quarter and believe that we are off to a great start to the year, as stable demand and favorable pricing helped deliver solid results. Our sales were up 50% compared to the first quarter of last year. Higher sales volume for both virgin sulfuric acid and Regeneration Services, as well as positive pricing, translated into adjusted EBITDA of $40 million, up $19 million compared to the prior-year first quarter and ahead of our previously provided guidance range. Our favorable earnings compared to our guidance range were driven by higher-than-expected volume and pricing. We realized stronger-than-expected volume in Regeneration Services and, to a lesser extent, Treatment Services compared to our original expectations. With a significant spike in the cost of sulfur, we also realized a temporary benefit associated with the timing between when we incur the cost of our sulfur purchases and when we pass through those costs to our customers. Adjusted free cash flow for the first quarter was $4 million. Our net debt leverage ratio at quarter end was 1.2x, unchanged from year end, and our available liquidity remained strong at $237 million as of March 31. As we look at the first quarter financial results, sales were $215 million, up $72 million. Excluding the $33 million impact of higher sulfur costs passed through in price, sales were up nearly 27%. Regeneration Services volume was driven by less customer downtime compared to 2025. Sales volume for virgin sulfuric acid was also higher year over year, reflecting the contribution of 2025 and higher overall demand, including into nylon and mining applications. Average selling prices were higher, driven by virgin sulfuric acid pricing and favorable contract pricing for regenerated sulfuric acid. Adjusted EBITDA of $40 million was up $19 million, or 87%, driven by higher sales volume and favorable pricing, partially offset by higher manufacturing costs driven by higher turnaround costs, the impact of general inflation, and increased transportation costs. Favorable price-to-cost ratio at the contribution margin level remains evident in our first quarter. As previously mentioned, the pass-through effect of higher sulfur costs on sales was approximately $33 million, with the pass-through having no material impact on adjusted EBITDA. Excluding the sulfur pass-through, the price-to-cost uplift in the first quarter was approximately $11 million, largely driven by the net price impact, including favorable variable costs. Higher sales volume, including the contribution from the Wagaman assets, accounted for nearly $15 million of the period-over-period increase in adjusted EBITDA, and this was partially offset by higher manufacturing costs, including the incremental cost of the acquired Wagaman assets, as well as higher SG&A and other costs. Turning to cash and debt, adjusted free cash flow for the first quarter was $4 million, up compared to a use of cash of $13 million in 2025. The lower-than-average free cash flow for the first quarter reflects the normal cadence of cash generation, with the first quarter typically low primarily due to timing of working capital. During the quarter, we repurchased $36 million of our common stock at an average price of approximately $11 per share, and we have $146 million remaining under our existing authorization. We ended the first quarter with a strong liquidity position of $237 million, comprised of cash of $163 million and availability under our ABL facility of $74 million. With net debt of $234 million at quarter end, our net debt leverage ratio was 1.2x, unchanged from December 31. Turning to our 2026 outlook, note that the guidance included in our materials and discussed on this call does not include any contributions from the recently announced Calabrian acquisition. Our previous guidance provided in late February anticipated higher sulfur costs in 2026. However, disruption associated with the Iran conflict has resulted in further increases in sulfur costs. We now expect the impact of higher sulfur cost pass-through in price to be $30 million higher than previously guided, resulting in full-year 2026 sales to be in the range of $890 million to $970 million, up from our previously guided range of $860 million to $940 million. With a strong start to the year and having one quarter under our belt, we are revising our adjusted EBITDA guidance by tightening the range, now expecting full-year 2026 adjusted EBITDA to fall in the range of $180 million to $195 million. Similarly, we are tightening the range for adjusted free cash flow to be $40 million to $55 million. While we are not changing our guidance due to the announced Calabrian acquisition, we do intend to finance a portion of the acquisition through a debt offering along with cash on hand. As a result, we would expect cash interest to increase an additional $4 million to $5 million on a full-year annual basis. As we provide directional guidance by quarter for the balance of the year, for the second quarter, we continue to expect higher year-over-year sales of Regeneration Services, with favorable contractual pricing. We also continue to expect higher volume of virgin sulfuric acid driven by mining demand and the contribution of the acquired Wagaman assets, along with stable pricing for virgin sulfuric acid. Turnaround costs are expected to be lower than in the year-ago quarter. As a result, we project second quarter 2026 adjusted EBITDA to be in the range of $50 million to $55 million. For the third quarter, we continue to expect higher sales of Regeneration Services compared to 2025, and we currently project that virgin sulfuric acid volume will be slightly lower than the year-ago quarter, driven by the timing of our sales into nylon applications. With higher projected turnaround costs than in 2025, we expect third quarter 2026 adjusted EBITDA to be in the range of $50 million to $55 million. Finally, for the fourth quarter, we continue to expect higher sales of Regeneration Services compared to 2025, with favorable contractual pricing. We are currently expecting lower virgin sulfuric acid volume than in 2025. We also are anticipating that sulfur costs will ease from the current historic highs. As a result, we expect that sulfuric acid pricing, excluding the pass-through effect, will be lower due to the overall customer mix and timing between when we incur the cost of our sulfur purchases and when we pass through these costs to our customers. Lastly, we expect higher turnaround costs compared to 2025. As such, we currently anticipate that the fourth quarter adjusted EBITDA will fall in the range of $40 million to $45 million. I will now turn the call back to Kurt for some closing remarks. Kurt J. Bitting: Thank you, Mike. We had a great start to the year, and we are energized by the positive momentum we see as we move into the second quarter. While the global macroeconomic landscape continues to evolve, we believe Ecovyst Inc. remains well positioned to deliver on our objectives. Moreover, we are extremely pleased with our progress on strategic implementation as we maintain our focus on growth and on value creation for our stockholders. The disposition of our Advanced Materials and Catalyst segment at year end was a transformational event that resulted in a strengthened balance sheet and a robust liquidity position that provides us with the resources and flexibility to execute on multiple capital allocation alternatives, including the funding of organic growth projects, the pursuit of attractive inorganic growth opportunities, and the return of capital to our stockholders. During the first quarter, we returned $36 million in capital to our stockholders through share repurchases. As previously indicated, to support organic growth this year, we are investing in the expansion of our Gulf Coast storage and logistics capabilities that will further enhance our ability to serve our customers’ growing needs. Building upon last year’s successes, we also expect further contributions and network optimization benefits from the acquisition of our Wagaman site, as we continue to leverage the site’s capacity to meet the growing needs of our customers. With regard to our stated objective to pursue attractive inorganic growth opportunities, we are excited about the agreement that we have reached to acquire Calabrian, which will broaden our portfolio of sulfur products that we can offer to growing end uses. We look forward to the completion of the Calabrian acquisition and to providing you with updates on our ongoing progress as we move throughout the year. At this time, I will ask the operator to open the line for questions. Operator: Thank you. At this time, we will open the floor for questions. We will take our first question from John Patrick McNulty with BMO Capital Markets. Please go ahead. Your line is open. John Patrick McNulty: Yes, good morning. Thanks for taking my question, and congrats on a really solid start to the year. I wanted to dig into the changes since your last guide, both in the virgin acid markets and the scarcity around sulfuric acid on a global basis, maybe a little less so in the U.S., and also the strength of U.S. refining, which seems to be even better now given what has gone on in the Middle East. How have your expectations changed and how is that woven into the guide? I am a little surprised, with a couple of things being reasonably better, that you were not ready to raise at least the upper end of the guide. Can you help us think about that? Michael P. Feehan: Yes, John, thanks for the question. I think the first way we would look at that is there were some things that did change positively for us during the quarter. Certainly compared to the guidance that we had provided, we saw some strength in Regeneration Services and some positivity on the virgin pricing, but that is a little bit more based on timing. As we talked about, we expect to give some of that timing back in the fourth quarter. That Regeneration strength is clearly a tailwind for us, but we also are tempered with some of the other potential macroeconomic items that are going on. So we want to continue to keep our guide relatively where we were. We did raise the bottom end of it, so our midpoint is up to $187.5 million. We believe that there is strength in the numbers of what we have seen but want to be tempered with what we are expecting for the rest of the year. John Patrick McNulty: Okay, fair enough, and I understand it is a fluid situation. Maybe just speaking to Calabrian, can you give us some color as to how that business has grown over the past few years and what the longer-term growth outlook is? Kurt J. Bitting: Yes, sure. Thanks for the question, John. Calabrian has been in its current form since the 1980s with the site in Port Neches. They built a site in 2017 up in Timmins, Ontario, which is primarily used to service the mining sector in Canada. A lot of the growth in the Calabrian business has been from mining, and that backstops gold, which at current gold prices has been very healthy. So their business has grown from that. There has also been some growth in pharma, food, and other industrial applications. We look at that business as probably GDP to GDP-plus type growth, with some end uses moving faster than others, like mining and industrials. They are the only on-purpose North American producer of sulfur dioxide and the only producer of sodium metabisulfite in North America. They have a strong position and proprietary technology that is completely different from how competitors produce it. We are very happy with the acquisition and confident in its future potential. Operator: Thank you. We will take the next question from Patrick David Cunningham with Citigroup. Please go ahead. Your line is open. Analyst: Hi, everyone. This is Rachel Li on for Patrick. Adjusted EBITDA margins were meaningfully stronger than you expected this quarter, driven by higher volumes and incremental pricing above the sulfur pass-through, despite some other headwinds from transportation and manufacturing costs. As we look through the balance of the year, how should we think about the net price-cost dynamics? Michael P. Feehan: Thank you for the question. Yes, the margins were favorable. As we have discussed in the past, the pass-through of the sulfur cost is relatively neutral to EBITDA, so it does lower the margin percentage, but we did see positivity around overall pricing and volume that dropped straight through to the bottom line. That provided us with the higher margin. The price-to-cost ratio was positive in the quarter, and we expect that to continue throughout the year. We have been consistent over several quarters where we are making more EBITDA on a per-ton basis comparatively. So while the margin percent will look lower because of the sulfur pass-through, the earnings benefit is intact, and we expect that to continue through the rest of the year. Analyst: Great, thank you. And on the Calabrian acquisition, could you provide more detail on the contract structure and the level of visibility you have into forward sales and earnings? Michael P. Feehan: Yes. The business is similar to the general construct of the Eco Services asset business, where there are long-term agreements or certainly long-term customers with blue-chip users, whether in mining, industrials, pharma, food, and so forth. The contracts also have a high pass-through component, given it is a sulfur-based chemistry, so passing through sulfur is very important, and they have a similar dynamic to the Eco Services business. In terms of visibility, the customers tend to have very steady offtake. The products they purchase from Calabrian are critical to their processes, and there is generally very good visibility in terms of forecasting and readability of volume. Operator: Thank you. We will take our next question from Laurence Alexander with Jefferies. Please go ahead. Your line is open. Daniel Rizzo: Good morning. This is Dan Rizzo on for Laurence. Thanks for taking my questions. Looking at prices and structural change, oil analysts now expect about a 5% structural risk premium for oil due to what is going on in the Middle East. Do you expect a similar structural reset in sulfur prices over the long term that will flow through to your business, or should we view the sulfur spike as a net negative because it hurts industrial volumes? Michael P. Feehan: For our business, sulfur is at all-time highs right now, and the run-up in sulfur actually started well before the conflict in Iran. A lot of that is due to the need for the sulfur molecule and sulfuric acid to produce copper and other metals. We do feel there is definite demand for sulfur that will support higher prices. I do think right now we are in an extremely high situation given the geopolitical conflict. Long term, we continue to have the ability to pass through sulfur to our customers. Unlike fertilizer, which is very heavily dependent on commoditized markets where sulfur impacts demand a lot, our customers’ use of sulfuric acid tends to be a small component of their overall cost. While it is not ideal that sulfur prices increase, it remains a small component, so we are able to pass it through. Daniel Rizzo: Thanks, that is very helpful. On the most recent acquisition and synergies, should we think mostly about supply chain and procurement synergies as opposed to production and revenue, and will you quantify later? Michael P. Feehan: When we look at synergies, there are certainly some cost-based synergies, including procurement across sulfur chemistry, and we have a large supply and manufacturing infrastructure that should provide synergies, especially with the Port Neches site sitting in the middle of our Gulf Coast footprint. We also see revenue synergy upside, given the ability to leverage our sales force across sulfur products, one of which we already sell, sodium bisulfite. So we see a nice mixture of both cost and revenue synergies, stemming from the fact that we are both in sulfur chemistry and the products are closely related. Operator: Thank you. We will take our next question from Hamed Khorsand with BWS. Please go ahead. Your line is open. Hamed Khorsand: First, on the acquisition, you were talking about potentially selling into Canadian mining. Would these be relationships that Calabrian brings to the table? Kurt J. Bitting: Yes. We will be selling sulfur dioxide to Canadian mines, and these would be new mining relationships. Ecovyst Inc.’s mining relationships are primarily focused in the southwestern part of the U.S. Hamed Khorsand: And on the refinery side, is the increase in activity and utilization more about the current environment, or is it more of a normalization given where Q4 was? Kurt J. Bitting: The answer is both. Coming into this year, and as we guided on the previous call, we expected healthy refinery utilization due to significantly less planned and, hopefully, unplanned maintenance outages in the U.S. refining complex. Utilization was expected to be high. The current conflict has certainly added a tailwind—margins are high right now, not only for oil but for refined products, and U.S. refineries can take advantage of that. For us, the alkylation units that we service with regeneration are expected to run at very high rates this year, and really in all years, outside of maintenance. They do not have the ability to flex up a tremendous amount given the margin climate, but the current environment provides a tailwind for everything to run as hard as it can. Hamed Khorsand: Thank you. Operator: At this time, I would like to thank everybody for joining today’s event. You may now disconnect.
Operator: Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hercules Capital First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead. Michael Hara: Thank you Stephanie. Good afternoon everyone and welcome to Hercules conference call for the first quarter of 2026. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules financial results were released just after today's market close and can be accessed from Hercules' Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations web page following the call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date, and Hercules assumes no obligation to update any such statements in the future. And with that, I'll turn the call over to Scott. Scott Bluestein: Thank you, Michael, and thank you all for joining the Hercules Capital Q1 2026 Earnings Call. In the first quarter of 2026, Hercules delivered another strong quarter of record originations, record total investment income and stable credit performance. During the quarter, we navigated through a period of significant market volatility. This was driven by a sharp pullback in certain parts of the equity and credit capital markets, macro concerns largely centered around the conflict in the Middle East as well as industry-specific concerns surrounding across private credit and the long-term impact from AI disruption. Since our first origination over 21 years ago, Hercules has maintained a disciplined credit first model that has served our shareholders and stakeholders well through a variety of market conditions and multiple cycles, and that will remain our focus going forward. Our balance sheet and liquidity position is strong. Our portfolio credit performance remains stable and our investment portfolio continued to generate net investment income in Q1 that comfortably covered our base shareholder distribution by 120%. Coming off a record-breaking year in 2025 for both originations and fundings, our momentum accelerated in Q1 with all-time record originations of over $1.81 billion. This is consistent with the guidance that we provided on our Q4 earnings call in February and the release that we put out in early April. The strong new business activity in the first quarter helped to deliver a new record for total investment income despite operating in a declining rate environment since late 2024. Driven by the growth of both the public BDC and our private credit funds business, Hercules Capital is now managing approximately $6.1 billion of assets. An increase of 21.8% from a year ago. To manage our growing asset base and expanded platform. We currently have 65 investments in credit professionals, over 25 finance and accounting professionals and 120 dedicated full-time employees in total at Hercules. As we entered 2026, we noted on our last earnings call that we continue to expect higher-than-normal market and macro volatility, and it certainly has played out that way. Aside from the general market volatility experienced year-to-date, largely from AI disruption fears and the conflict in the Middle East, the results have been enhanced focus on liquidity and redemption across the broader private credit space. These particular issues are concentrated largely in the non-traded BDC segment where the investor base is predominantly retail and the shareholders hold quarterly redemption rights. Hercules is different. 100% of the equity capital that we manage in the publicly traded BDC is true permanent capital that is not subject to redemption. Our investment adviser subsidiary manages exclusively institutional GP LP funds with predetermined long-term or evergreen investment periods, no retail investors, no non-traded BDCs, no near-term redemption risk. This capital structure is deliberate and we believe it allows us to execute a long-term strategy through cycles without unpredictable redemptions and without forced asset sales. We remain confident in the strength and stability of the Hercules platform and our ability to continue to generate strong operating results irrespective of the market backdrop. With the expansion of our platform capabilities over the last several years and our expectation for continued market volatility, we continue to expect a robust new business environment for Hercules in 2026. Our platform scale, balance sheet and liquidity allow us to play offense during market volatility, which should position us to see a robust pipeline of high-quality companies throughout the year. As we have done over the last several years, we will continue to manage our business and balance sheet defensively, while maintaining the flexibility to take advantage of market opportunities. This includes continuing to enhance our liquidity position as needed, further tightening our credit screens for new underwritings, staying focused on asset diversification and maintaining our higher-than-normal first lien exposure, which was approximately 89% in Q1. Let me now recap some of the key highlights of our performance for Q1. In Q1, we originated record total new debt and equity commitments of $1.81 billion and gross fundings of over $706 million, which led to $298 million of net debt investment portfolio growth. We generated record total investment income of $141.5 million and net investment income of $88.1 million or $0.48 per share. We generated a return on equity in Q1 of 16.9%, and our portfolio generated a GAAP effective yield of 12.8% and a core yield of 12.2% and which was consistent with our guidance. We expect core yield to remain relatively flat in Q2, given that the Fed is holding interest rates steady. As we have consistently communicated throughout 2025, we have increased leverage to support our continued growth and return effectives, allowing us to continue to focus on what we believe are high-quality originations versus chasing higher-yielding assets with more risk. While delivering record new originations in Q1, we still maintained a conservative and defensive balance sheet. Consistent with our objectives, GAAP leverage increased to 115.4% in Q1, up from 104.4% in Q4. Our Q1 GAAP leverage was at the high end of our typical historical range of 100% to 115% but still below the average of our BDC peers. We ended Q1 with over $1 billion of liquidity across the Hercules platform. The current market volatility is creating a very favorable capital deployment environment for Hercules and we want to ensure that we are positioned to opportunistically take advantage of that for the long-term benefit of our shareholders and stakeholders. The focus of our origination efforts in Q1 and was on maintaining a disciplined approach to capital deployment while emphasizing diversification across the asset base. Our Q1 commitments and fundings activity was weighted slightly towards life sciences companies. which reflects a more defensive posture. In Q1, approximately 56% of our commitments and 60% of our fundings were to life sciences companies. while approximately 44% of our commitments were to tech companies. We funded debt capital to 34 different companies in Q1, of which 13 were new borrower relationships. During the quarter, we were again able to opportunistically increase our commitments and fundings to several portfolio companies that have continued to demonstrate strong performance. As it always has been, being able to continue to support our portfolio of companies as they scale is an important part of our business and a key differentiator of our expanded platform capabilities. Our available unfunded commitments increased slightly to $397.4 million from $385.6 million in Q4, still maintaining a more defensive positioning of the portfolio. Coming off a record Q1, we expect originations to moderate in Q2 and be more back-end weighted. Since the close of Q1 and as of May 1, 2026. Our investment team has closed $79.2 million of new commitments and funded $32.3 million. We have pending commitments of an additional $506.1 million, in signed, nonbinding term sheets, and we expect this number to continue to grow as we progress in Q2. We will maintain a high bar for new originations. Our investment teams are continuing to update our modeling assumptions, structuring and underwriting criteria given the rapid pace of change that we are seeing across the technology ecosystem. The volume of deals that we are screening and passing on remains elevated, and we intend to continue to remain disciplined, patient and focused on the long term while being aggressive where we believe it makes sense. Early loan repayments of $225.8 million came in at the higher end of our guidance for Q1. For Q2 2026, we expect prepayments to increase materially and be in the range of $350 million to $500 million, although this could change as we progress in the quarter. The increased guidance on prepayments in Q2 is being driven largely by M&A. And we believe that this positions us well to redeploy this capital in what we expect to be a more favorable originations environment. Our net asset value per share in Q1 was $11.90 a decrease of 1.9% from Q4 2025. We had $31.1 million of net unrealized depreciation from debt investments during the quarter approximately $23.2 million or 75% of which was attributable to market yield adjustments associated with the general market volatility. In addition, we had $12.3 million of net unrealized depreciation attributable to valuation movements in publicly and privately held equity positions. Again, largely associated with the general market volatility experienced during the quarter. We ended Q1 with solid liquidity of $454.5 million in BDC and over $1 billion of liquidity across the platform. With healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade credit ratings we remain well positioned to compete aggressively on quality transactions, which we believe is prudent in the current environment. Credit quality of the debt investment portfolio remained strong quarter-over-quarter. Our weighted average internal credit rating of 2.11 was stable relative to the 2.20 rating in Q4 and remains within our normal historical range. Our Grade 1 and 2 credits increased to 70.5% compared to 66.6% in Q4. Grade 3 credits decreased slightly to 28.6% in Q1 versus 31.7% in Q4. Our rated 4 credits decreased to 0.8% from 1.7% in Q4 and we had 1 rated 5 credit at 0.1%. Our loans rated at 4 and 5 as of Q1 were a combined 0.9% which is the lowest that we have reported since Q2 2022. In Q1, the number of companies with loans on nonaccrual remain the same with a single loan on nonaccrual with an investment cost and fair value of approximately $10.7 million and $3.7 million, respectively, or 0.2% and 0.1% as a percentage of our total investment portfolio at cost and value, respectively. As of the most recent reporting that we have, 100% of our debt investments that are on accrual are current with respect to the payment of scheduled principal and interest. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level but our portfolio monitoring remains enhanced given the continued volatility in the markets. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we do will continue to serve us well. Our asset base is intentionally diversified with approximately 50% of our assets in our life sciences vertical, and approximately 50% of our assets in our technology vertical. No single subsector makes up more than 25% of our total investment portfolio and our bet investments are spread across 139 different companies. Consistent with our historical experience as of the end of Q1 -- the average loan duration across our debt portfolio was approximately 21 months. While we remain pleased with the exit activity that we saw in our portfolio during the quarter, we are seeing that in certain parts of the market, there appears to be some ongoing pricing and process discovery. The sharp pullback in equity valuations year-to-date in certain technology sectors has slowed some ongoing M&A discussions as buyers look to establish what the new norm may be for exits, particularly with respect to valuation and exit multiples. This is something that we will monitor over the coming quarters. In Q1 and Q2 quarter-to-date, we've had 4 new M&A events in our portfolio, which included 1 life sciences company, and 3 technology companies announcing acquisitions. We also had 2 portfolio companies file registration statements for their IPOs with 1 of those companies completing their IPO in April. We view this as a positive sign for our ecosystem. Based on current market conditions and volatility, we continue to expect M&A exit activity to accelerate in 2026, although with more uncertainty with respect to valuations and process timing. In Q1, PIK declined meaningfully as a percentage of total revenue. falling to approximately 9.1% from 10.5% in fiscal year 2025. And we expect that figure to continue declining in the near term as loans pay off and accrued PIK is collected in cash. The most important point on PIK, however, is its source. Approximately 91% of our Q1 PIK income came from PIK that was part of the original underwriting, not of the result of any credit or performance-related amendment. This is PIK by design, not PIK by distress. Reinforcing that point, more than 98% of our Q1 PIK income came from loans rated 1, 2 or 3 and excluding a single convertible loan, every loan with a PIK component on accrual status is also paying cash interest. Cash collections support the same conclusion. We collected $15.3 million in cash payments on accrued PIK during Q1. And because the majority of our PIK bearing loans were originated in 2024 and 2025, we expect strong cash collections to continue throughout 2026 as those loans approach their expected duration. We continue to use PIK judiciously and where we do, it is typically a small component of the overall deal economics. Our investment and credit teams continue to monitor the impact of AI on our portfolio and the broader markets. The pace of change is rapid and we expect the disruption we are seeing to play out over several years. Our most recent reporting and our ongoing dialogue with our companies and their investors continue to be constructive. Many companies across our portfolio have been embracing AI as a competitive differentiator and are experiencing tailwinds from AI adoption, greater operating efficiency and faster cycles of innovation and go-to-market. Those companies that are more aggressively integrating AI into their core product offerings are benefiting from increased adoption and AI acceptance. We continue to expect AI to disrupt numerous industries over time and that there will be both winners and losers. Over the coming years, business models will change, margin profiles may change and in many cases, companies may actually become more efficient and innovative. Our investment teams will continue to pursue software transactions as part of our origination efforts, and we will remain disciplined and conservative in terms of our approach to financing the sector. Venture capital investment activity in Q1, again, paralleled what we experienced in our deal flow and originations. Q1 2026 investment activity was the highest quarter on record at $267.2 billion according to data gathered by PitchBook and VCA. While the aggregate data remains strong, it again needs to be noted that the deal value was extremely concentrated and that over 88% of the Q1 deal value involved AI and machine learning companies. Q1 fundraising improved and totaled $47.8 billion, across 172 firms. The capital was heavily concentrated among a few established managers. M&A exit activity remained consistent with Q4 but exit value in Q1 was extraordinary at $311.7 billion compared to $143.9 billion for all of 2025. Consistent with the aggregate data for the ecosystem. During Q1, capital raising across our portfolio reached an all-time high with 21 companies raising approximately $3.4 billion in new capital. Despite the market volatility year-to-date, we have not observed a pulled portfolio. Subsequent to quarter end, we have had an additional 10 companies raised over $900 million in new capital. Given our strong sustained operating performance, we exited Q1 with undistributed earnings spillover of $149.1 million or $0.80 per ending shares outstanding. For Q1, our net investment income covered our base distribution by 120% and our full distribution, including our $0.07 supplemental distribution by 102%. This is our 23rd consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. Finally, I would like to highlight our recent announcement on May 4 regarding the expansion of our leadership team. Effective May 18 and Seth will become President of Hercules. Seth and I will continue to work closely on scaling our platform and enhancing our operational capabilities to ensure that we continue to deliver long-term value for our shareholders and stakeholders. Succeeding him as CFO will be Andrew Olson, who is returning to Hercules after working most recently at Revelation Partners, and prior to that, SVB Capital. Andrew's experience and track record in finance, alternative assets and private credit is strong, and I welcome him back and look forward to working with Andrew again. To continue to build on our success and position Hercules for its next phase of growth. As we set our sights on the continued growth and scaling of our platform, I believe that this expansion of our leadership team will best position us for continued long-term success. In closing, our scale institutionalized lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. Our continued success is attributable to the tremendous dedication, efforts and capabilities of our 120 employees and the trust that our venture capital and private equity partners place with us every day. We are thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth. Seth Meyer: Thank you, Scott, and good afternoon, ladies and gentlemen. Q1 2026 was another all-around strong quarter for Hercules Capital, building on the record-setting pace established in 2025. As communicated by Scott, our strong business momentum continued into the first quarter as we delivered all-time records for both new originations and total investment income. We delivered strong growth across both the BDC and our wholly owned RIA managed private credit fund business, which continues to provide us with significant capital flexibility and capacity. Notwithstanding a more volatile and challenging market backdrop in Q1, the Hercules platform delivered strong and stable financial results. We continue to maintain strong available liquidity of $454.5 million as of quarter end in the BDC and more than $1 billion across the platform, including the advisers funds managed by our wholly owned subsidiary, Hercules Adviser LLC. As previously disclosed, during the quarter, we strengthened our liquidity position even more by issuing $300 million of institutionally backed 5.35% unsecured notes due in 2029. In addition, we raised over $50 million in accretive capital via our ATM to help support our nearly $300 million of net debt portfolio growth during the first quarter. Finally, based on the performance of the quarter, Hercules Adviser delivered another quarterly dividend of $2.1 million to HTGC which, when combined with the expense reimbursement of $4.6 million resulted in approximately $6.7 million of NII contribution to the BDC for the quarter. These points in mind, we'll review the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and finally, the financial outlook. Turning first to the income statement performance and highlights. Total investment income in Q1 was a record $141.5 million, an increase of 3% quarter-over-quarter and 18.4% year-over-year, supported by our continued debt portfolio growth. Core investment income, a non-GAAP measure, increased as well to a record $134.9 million compared to $133.3 million in Q4 and was up 16.8% on a year-over-year basis. Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was $88.1 million or $0.48 per share in Q1, an increase of 1.3% quarter-over-quarter and 13.8% year-over-year. Our effective and core yields were 12.8% and 12.2%, respectively, compared to 12.9% and 12.5% in the prior quarter. The decrease in core yield was near the midpoint of our communicated range, in line with our guidance and driven by the continued impact of rate reductions in the second half of 2025. Although as noted previously, this impact has been progressively muted. As of quarter end, more than 75% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will continue to be muted. First quarter operating expenses were $58.1 million compared to $54.9 million in the prior quarter. Net of costs recharged to the RIA, our net operating expenses were $53.4 million. The increase in operating expenses was largely driven by increased compensation tied to record quarter for new originations. Interest expense and fees increased to $30.8 million compared to $28.2 million in Q4 due to the growth of the business and corresponding increase of leverage to support our record origination activity. SG&A increased to $27.2 million, just above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses were $22.6 million. Our weighted average cost of debt remained stable at 5.1%. Our ROAE or NII over average equity increased to 16.9% for the first quarter compared to 16.4% in Q4, and our ROAA or NII over average total assets was 8.1% compared to 8.2% in Q4. Switching to NAV unrealized and realized activity. During the quarter, our NAV per share decreased by $0.23 to $11.90 per share or 1.9% quarter-over-quarter. The main driver was net unrealized depreciation on investments, primarily reflecting broad-based increases in market yields during the quarter. Our $45 million net unrealized depreciation was primarily attributable to $31.1 million -- excuse me, of net unrealized depreciation on debt investments, approximately $23.2 million of which was attributable to market yield adjustments associated with market volatility in the quarter. There was also $7.9 million in fair value markdowns of 2 previously impaired loans. Additionally, $12.3 million of net unrealized depreciation was attributable to valuation movements in publicly and privately held equity and $1.9 million of net unrealized depreciation was due to reversals of previous quarter appreciation upon a realization event. This was partially offset by $0.3 million of net unrealized appreciation attributable to valuation movements in public and privately held warrants. Hercules had unrealized losses or net realized losses of $0.6 million in Q1, primarily due to losses on legacy equity investments. Turning next to leverage and liquidity. In line with our previous guidance, our GAAP and regulatory leverage increased to 115.4% and 99.7%, respectively, compared to 104.4% and 88.6% in the prior quarter due to the growth in the balance sheet being financed primarily by leverage to support our record originations activity. Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 113.5% and 97.8%, respectively. We ended the quarter with $454.5 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of available liquidity as of quarter end. The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities. As previously disclosed, the quarter -- during the quarter, Hercules Capital raised $300 million of institutional 5.35% unsecured notes due in 2029. As a final point, we continue to opportunistically access the ATM market during the quarter and raised approximately $52 million in the first quarter, selling 3.5 million shares. The ATM usage was driven by our record new business originations and which drove very strong net debt portfolio growth in Q1. Finally, on the outlook points. For the second quarter, we expect our core yield to again be in the range of 12% to 12.5%. As a reminder, 98% of our debt portfolio is floating with the floor. And as of today, more than 75% of our prime-based portfolio is at the contractual floor. Although difficult to predict, as stated by Scott, we expect $350 million to $500 million in prepayment activity in the second quarter. The expected elevated prepayments in Q2 will provide us with significant flexibility and optionality and with respect to liquidity and capital raising. We expect our second quarter interest expense to increase compared to the prior quarter based on the debt portfolio growth. For the second quarter, we expect SG&A expenses of $27.5 million to $28.5 million and an RIA expense allocation of approximately $4.5 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter. In closing, we have started 2026 with record-setting momentum, delivering all-time highs in originations and total investment income while navigating meaningful market volatility. Our balance sheet, liquidity position and credit discipline positions us well to continue scaling our platform and capitalizing on opportunities throughout the year. As Scott noted, effective May 18 I will be transitioning to the role of President at HTGC where I will continue to work closely with Scott and the rest of our senior leadership team to further scale and diversify the Hercules platform. During my 7-plus years at Hercules, the company has delivered exceptionally strong operational and financial performance as well as record platform growth. And this expanded leadership team positions us for continued success. I look forward to working closely with Andrew and the rest of the Hercules Capital team in my new role. I will now turn the call all over to the operator to begin the Q&A portion of the call. Stephanie, over to you. Operator: [Operator Instructions] We'll take our first question from Brian McKenna with Citizens. Brian Mckenna: Okay. Great. Hope everyone is doing well. And congrats, Seth, on the new role. So given your focus on the venture market, it's not shocking you have more exposure to "software" but your portfolio is really one of the best, if not the best performing BDCs in the market today based on ROE and credit quality. It would be helpful to get your perspective on why there's such a big disconnect between the reality and fundamentals of your business relative to perceptions? And then from your seat, what are the biggest drivers of your portfolio delivering such strong results despite all the recent volatility. Scott Bluestein: Yes. Thanks for the question, Brian. I think it's sort of consistent with what we talked about on the last call that we did in February. Underwriting and venture in growth -- in growth -- venture in growth stage market is fundamentally different than traditional underwriting. If you look at how our investment teams underwrite software loans specifically, and we talked about this extensively on the last call, we are generally targeting to be under 1x debt to ARR. We are generally targeting to be sub 20% LTV. We are generally targeting to be debt to invested equity of less than 30% so there is significantly more equity cushion beneath our debt across the majority of our software companies. We've also said consistently we are very confident in our portfolio. We're not perfect. We've made mistakes before. I'm sure we will make mistakes again. But from everything that we are seeing to date, we continue to feel pretty good about how our portfolio is holding up. I would also emphasize that our portfolio is highly diversified. 50% of our investment portfolio is in our life sciences vertical, and then a significant portion of our technology portfolio is not in software companies. Many of the non-software industries are performing incredibly well in the current environment, and that gives us confidence that the portfolio as a whole will continue to perform well. Brian Mckenna: That's helpful, Scott. And then I appreciate the commentary around prepayments for the second quarter. I mean, it is a significant amount of capital coming back to you and ultimately, that's going to get redeployed. Two questions here. How should we think about fee income in the second quarter? And then how do all-in yields and spreads on new deals today compare to the investments tied to the prepayments? Seth Meyer: Sure. So a couple of things there. On the prepayment side, we did increase our guidance pretty significantly for prepayments in Q2. I want to emphasize that we view that as a positive indicator of the quality and strength of our portfolio. The majority of that increased guidance is coming from known M&A events that have either already happened or that we expect to happen in Q2 and that gives us confidence in the overall portfolio quality that will lead to slightly higher fee income in the quarter. We're not going to give any specific guidance on what that will be because that still has to play out? And then with respect to the second part of the question on spreads, I would say a couple of things on this. So first, in the midst of the most volatile parts of the last 4 months, which I would sort of highlight as late February and early March, we did see probably 50 to 75 basis points of spread widening on new originations. I would caveat that by saying that over the last 30 days or so as the volatility has decreased -- we've seen some of that come back in. So while we are seeing some spread benefit, I would sort of say 25-ish basis points relative to where we were at the beginning of the year. I think the most important thing that I would highlight is actually not on the spread, but it's the fact that we are very focused on enhancing structure across the underwriting on new loans. And that will continue to be our priority going forward versus pushing or fighting for an incremental 25 to 50 basis points of spread. Operator: We'll take our next question from Crispin Love with Piper Sandler. Benjamin Graham: This is Ben Graham on for Crispin Love. I'm just wondering if you could discuss the deployment backdrop for 2026. I know you've touched on how market volatility can create a favorable backdrop for you and just wondered if that's continued for the most part. And if there's been heightened deployment in any particular sector such as tech or life sciences? Scott Bluestein: Sure. Thanks, Ben. So with respect to just deployment, a couple of comments. Number one, we're going to continue to focus on diversification. We think having a diversified portfolio on the asset side has been critical to our historical success and we think that it will be critical to our go-forward success. So continuing to try to find the right balance between life sciences and technology. From a big picture perspective, I would tell you that we continue to be very optimistic about originations in 2026. Our Q1 activity was a record-breaking for us at $1.8 billion of commitments. We've closed an additional approximately $79 million of commitments quarter-to-date, and we have another $506 million of signed nonbinding pending commitments. And as I said in my prepared remarks, based on the current pipeline, we expect that number to continue to grow. And our investment teams are continuing to stay very focused and patient and disciplined with respect to capital deployment. But given the volume of deal flow that we are seeing given how we've positioned our business in terms of having appropriate liquidity and conservative balance sheet, we feel pretty optimistic about what that will translate into for 2026 capital deployment. Operator: We'll take our next question from Cory Johnson with UBS. Cory Johnson: I was wondering if you can maybe square '08. So you guys have had or having quite a bit of M&A in your portfolio when the M&A market is a bit slow, I guess, at the moment. So I guess what maybe are you seeing in your portfolio, what type of companies are you seeing the M&A market where you're able to see the success and have upcoming higher prepayments and such? Scott Bluestein: Thanks, Cory. I think honestly, the credit goes to our investment teams. I've said this consistently over the last several years. I think our investment teams do an incredible job at identifying, selecting and underwriting deals for the best companies that are out there. And they've done a great job over the last few years, finding companies that we think are very attractive M&A targets for both strategic and financial buyers. Year-to-date, we've had, as I mentioned in my prepared remarks, we've had 4 new companies announced M&A events that covers both life sciences companies and technology companies. I would also emphasize that we are aware of several additional companies in our portfolio that are in active M&A discussions and so I think that gives us confidence that we'll see continued strong M&A activity for the remainder of 2026. I would sort of caveat that statement by saying and reiterating what I said in my prepared remarks is that we are seeing some, I would say, increased variability with respect to timing and valuation, and that's something that we'll continue to monitor over the coming quarters. Cory Johnson: And then just one other thing, going back to the structural changes that you mentioned that you've been able to see in the terms of your underwriting. You also had mentioned earlier about how there was a significant decline in PIK. Is that decline in PIK that you're expecting, is that just to do with the payoffs? Or are you sort of more leaning a way towards PIK. Is that something that's possibly changing in the terms that perhaps you might not have to give as much on that end as perhaps you did before to win deals? Seth Meyer: Sure. Great question Cory. And I would sort of say 2 specific things. So first and foremost, the majority of the deals that we underwrote with PIK occurred in 2024 and 2025, and that was consistent with our public guidance about moving into larger, later-stage, more mature companies where PIK is a little bit more prevalent. Given the fact that our average loan duration has tended to be roughly 18 to 24 months over the last several years, we expect, and we're currently seeing many of those loans now come up for prepayment. As those loans prepay, the accrued PIK is satisfied and paid in cash. So we saw significant activity related to that point in Q1 and we expect to continue to see significant activity over the next several quarters in that regard. The second element is also what you just asked, which is we are intentionally deprioritizing PIK on new investments. And so it's really a combination of those 2 things. But the largest driver of the decrease has to do with the fact that we had significant cash collections, and we expect that to continue in 2026. Operator: We'll take our next question from Casey Alexander with Compass Point. Casey Alexander: First of all, congratulations, Seth, on the new posting. And Andrew, welcome back to the publicly traded BDC marketplace. I'm struck by -- that's a really healthy amount of prepayments that you're suggesting. And to my knowledge, at least one of them is a really good-sized software prepayment and I'm just wondering, this gives you -- does this give you a chance to kind of influence and restructure the portfolio a little bit and move off of software some or Hercules' history has been to kind of fly into the wind when things get turbulent, and that's where better results have come from? Seth said, there's higher optionality coming from these repayments. And I'm just kind of curious as to how you think you might use that optionality to influence the portfolio? Scott Bluestein: Yes. It's a great question, Casey. And again, we did increase the guidance pretty considerably, and we feel very confident with that increased guidance because of either already occurred or known M&A events and you identified one, which is a large software loan that has already repaid as a result of M&A. We view it very favorably and it does give us the opportunity to reposition the portfolio on a go-forward basis. That does not mean we are deprioritizing software. That does not mean that we are running from software companies. And I said that specifically in my prepared remarks, our team is continuing to look at, evaluate, identify what we think are very strong, attractive software loans, and we're going to continue to pursue that. Having said that, all of that recycling gives us the ability to also redeploy that capital into other parts of our technology book, space tech, defense tech, network communications, business services, et cetera. And so I would expect to see a repositioning of the portfolio as that capital comes in from payoffs and as our teams get to redeploy it. We are focused on identifying what we think are the most attractive debt opportunities irrespective of specific subsector allocation. Casey Alexander: Okay. Great. My follow-up to that is, I would imagine that if there's a software deal being done, that spreads are considerably wider, but most participants that we've heard from thus far have said that as health and happens, when there's volatility and considerable widening of spreads deals just kind of dry up in that sector. Is there stuff that can actually be done? Are there deals that are actually getting done that are out there because some of the other participants in the market have said that it's really short. Scott Bluestein: Yes. So it is certainly less than it was, but it has not dried up. So we are continuing to see, we are continuing to evaluate, we are continuing to talk to venture and growth stage software companies. I would say that the volume right now is lower than it was, for example, in the second half of last year, but I would absolutely not characterize it as having dried up. The ones that we are speaking to in our team's opinion, are of a very high quality and deals that we would feel very comfortable underwriting. Whether we can get to a point where a deal makes sense for us and them is still TBD, but that's certainly not slowing down our capital deployment, as evidenced by the fact that we have between closed quarter-to-date and pending quarter-to-date over $580 million of signed term sheets. Operator: We'll take our next question from John Hecht with Jefferies. John Hecht: I think this is just sort of an extension of the last discussion, and that is when you are getting to the table to do a new debt deal or with a software company or somebody that might be in the thesis of vulnerable to changes from AI. What are -- you guys are getting consistent terms well covered, which is consistent with what you guys have had forever. What are the -- I'm interested in the other side of that equation are the venture capitalists, when they're adding more capital to the businesses, are they taking a different approach to valuation or how they think about deploying their capital back into these businesses? Scott Bluestein: Yes. Thanks for the question, John. A couple of things. First, with respect to new investments, I want to emphasize again -- as we think about underwriting in this environment, we are choosing to prioritize structure over pricing. So rather than pushing for an additional 20, 25, 30 basis points of yield, our teams are pushing for tighter structure, stronger covenants and better overall underwriting. Whether you ultimately close a deal with a 12% yield or a 12.25% yield, not going to make a big difference. You closed the deal that's not structured appropriately and it results in a loss it's going to make a big difference. So that's what we are emphasizing. That's what we are prioritizing with respect to new originations. John Hecht: Okay. And then -- you mentioned -- I mean this is consistent with what everything you would say, but a little bit more in bioscience and less in tech and the time frame given what you just said. Anything worth calling out in life sciences that is an interesting development that you guys are sort of following and think could be the big new wave of opportunity? Scott Bluestein: Yes, it's a great question. I think the key for us is portfolio balance, right? We tend not to overreact to a material degree in either direction. For the last several quarters, we have been slightly more weighted towards life sciences, but we're talking about 55%, 60% allocation versus our sort of traditional 50-50 target. We're seeing high-quality opportunities on both life sciences and technology. I think specifically on the life sciences side, I would sort of note a couple of things that we think are ultimately tailwinds. Number one, there's obviously been a fair amount of disruption and turmoil with the FDA. I think that has caused a lot of what we believe to be very strong companies to want to be positioned from a balance sheet strength perspective. And so we're seeing companies that maybe historically where the FDA was a little bit more sort of consistent and reliable. We're seeing those companies want to strengthen their balance sheet and get ahead of that. So I think that's working in our favor. Obviously, we're watching the developments at the FDA pretty closely. But we have continued to see companies produce strong positive clinical results. We have continued to see companies get drugs approved. So we're very optimistic about what the life sciences ecosystem looks like on a go-forward basis. And I do just think these companies right now, given some of the FDA uncertainty and volatility want to strengthen their balance sheets and get ahead of that, and that's working in our favor. Operator: We'll take our next question from Christopher Nolan with Ladenburg Dolman. Christopher Nolan: Scott, on your comments on prioritizing structure over yield, given AI right now is everything is in flux for these companies, and it could result in replacing a lot of headcount. Is the structure about expense -- income statement related items, more so than in the past? Scott Bluestein: Yes, Chris, I certainly appreciate the question. I'm not going to give our road map on a public call, just given that we're doing some very specific things right now on the underwriting and structuring side, and we want to keep that internal and proprietary. I will say that we have made some changes with respect to how we are thinking about structuring these deals that involves duration that involves structure that involves covenants. It really involves the totality of things. And there's no one size fits all. There's no cookie cutter for us. We try to custom tailor a solution for each individual company that we think gives us the best risk-adjusted returns. Christopher Nolan: Great. And then as a follow-up on the increased M&A activity, how much of this is being driven by AI just companies looking to exit? Scott Bluestein: Very little of it, to be honest. There's a balance -- our increased guidance reflects the balance of life sciences and technology companies. In the majority of those, there's really no correlation at all to AI. On a couple of the larger M&A events, you could argue that strategics are trying to get ahead of the AI curve, but we would not attribute the increase to anything specifically with respect to AI. Operator: [Operator Instructions] Our next question from Ethan Kaye with Luca Capital Markets. Ethan Kaye: I'll keep it relatively short here. You mentioned, just a follow-up on the PIK conversation. You mentioned you're deemphasizing pick on new investments. I guess I'm just curious what's the motivation for doing that? We've heard kind of many peers over the last several years defending the virtues of PIK usage. I guess I'm curious whether something has changed in your view on that topic? Scott Bluestein: It's a good question. Nothing has changed outside of -- we were pretty consistent that we did not want PIK to become a significant part of our income. Towards the end of last year, our PIK as a percentage of revenue increased to approximately 10.5%. That was close to sort of the self-imposed limit that we have put internally. So I think naturally, we just want that to slowly work its way down. And I would also say in the current environment, we are not finding a need to use PIK as frequently as we were over the course of '24 and '25. And all else being equal, we would certainly prefer cash versus PIK income. Operator: I'm showing no further questions. I would like to now turn the call back to Scott Bluestein for any closing remarks. Scott Bluestein: Thank you, Stephanie, and thanks to everyone for joining our call today. We look forward to reporting our progress on our Q2 2026 earnings call. Thanks, and have a great rest of the day. Thank you. Operator: This does conclude today's Hercules Capital First Quarter 2026 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.
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: Good day, everyone, and welcome to Fresh Del Monte Produce First Quarter 2026 Conference Call. Today's call is being broadcast live over the Internet and is also being recorded for playback purposes. [Operator Instructions] Thank you. For opening remarks and introductions, I would like to turn today's call over to the Vice President, Investor Relations with Fresh Del Monte Produce, Ms. Christine Cannella. Please go ahead, Ms. Cannella. Christine Cannella: Thank you, Krista. Good day, everyone, and thank you for joining our first quarter 2026 conference call. Joining me in today's discussion are Mr. Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Ms. Monica Vicente, Senior Vice President and Chief Financial Officer. I hope that you have had a chance to review the press release that was issued earlier via Business Wire. You may also visit the company's IR website at investorrelations.freshdelmonte.com to access today's earnings materials and to register for future distribution. This conference call is being webcast live on our website and will be available for replay after this call. Please note that, our press release and our call today include non-GAAP measures. Reconciliations of these non-GAAP financial measures are set forth in the press release and earnings presentation, which is available on our website. I would like to remind you that much of the information we will be speaking to today, including the answers we give in response to your questions, may include forward-looking statements within the safe harbor provisions of the federal securities laws. In today's press release and our SEC filings, we detail risks that may cause our future results to differ materially from these forward-looking statements. Our statements are as of today, May 5, 2026, and we have no obligation to update any forward-looking statements we may make. During the call, we will provide a business update, along with an overview of our financial results, followed by a question-and-answer session With that, I will turn today's call over to Mr. Mohammad Abu-Ghazaleh. Please go ahead. Mohammad Abu-Ghazaleh: Thank you, Christine. Good morning, everyone, and thank you for joining us. Following up on our last quarter, we reached an important milestone this quarter with the closing of the Del Monte Foods transaction, bringing the brand back under a single owner for the first time in nearly 4 decades. The quarter included approximately 1 week of contribution from the acquired business. So the financial impact in the quarter is limited due to timing. We are encouraged by the initial performance of the Del Monte Food business, and we see clear opportunity as we begin to thoughtfully scale the business and believe there is a meaningful opportunity to realize the full potential of these assets. As I mentioned during our last call, this acquisition is not expansion for expansion's sake. It's alignment, bringing the brand, the portfolio and the platform back under a single focused owner. This acquisition not only reunites one of the oldest and most recognized brands in the world, but it also positions us to operate from a more complete platform, expanding our presence across both the perimeter and center of the store and allowing us to offer customers a broader, more integrated portfolio. Our priority during this early phase remains continuity, ensuring stability for customers, partners and employees, while taking a disciplined approach to evaluating the business and identifying where we see the strongest opportunities. We are focused on strengthening the platform, prioritizing key customer relationships and building a more focused, high-quality portfolio over time. It is important to dedicate a portion of today's call to discuss the broader environment shaping our business, the industry and the global food system. The conflict in the Middle East has introduced a meaningful shock across key input fundamentals to food production, energy, fertilizers, packaging and transportation. There is no part of agriculture that is not energy dependent from inputs to packaging to transportation. As a result, movements in energy costs do not remain isolated. They cascade through the entire system. Agriculture does not operate in real time. The timing of impact varies meaningfully by category. In crops like pineapples, for instance, where production cycles extend to approximately 18 months, the inputs being deployed today will be reflected in cost and pricing later this year. Bananas by contrast, move more quickly through the system and therefore, respond more immediately to changes in input costs. As a result, the pressures that emerged during the quarter are now embedded in the system and will continue to move through the value chain in the periods ahead, regardless of how conditions in the Middle East evolve from here. We are already seeing this dynamic take hold from higher fertilizers and packaging costs to increase ocean freight and inland transportation driven by fuel and labor. The impact is more pronounced in our fresh business given its production cycles and input intensity, while other parts of the portfolio are affected differently based on their supply chain structures. This is not a short-term volatility. It's a natural transmission of input costs through a global time lag system. The situation remains dynamic, and we are managing the business with discipline and flexibility. This is an environment we are well positioned to navigate, but it will not be without challenges. We expect pressure to build in the coming quarters, particularly in the second and third quarter, as these costs continue to flow through the system and the full impact move through the value chain. Our global footprint, diversified sourcing and integrated supply chain enable us to adjust and respond across markets. While our scale and disciplined execution position us to manage through this period effectively, these are the conditions where those advantages become more evident. We have navigated complex operating environments before, and we will continue to do so with clear focus on execution, cost management and operational efficiency. With that, I will turn it over to Monica Vicente, our CFO, to discuss our financial results. Monica Vicente: Thank you, Mr. Abu-Ghazaleh, and thank you, everyone, for joining us this morning. I will begin with our first quarter results and then share our expectations for the year ahead. I will cover key items affecting comparability, most notably the Del Monte Foods acquisition and updates to our segment reporting structure. We closed the Del Monte Foods acquisition late in the quarter. Results include 1 week of contribution and have no meaningful impact on the first quarter results. We are assessing the cost structure and spending profile to establish a near-term cost baseline while identifying efficiency opportunities we expect to execute over time. We are also evaluating the operating footprint, including a recent purchase of a warehouse previously leased by Del Monte Foods in Wisconsin with a focus on optimizing asset utilization and portfolio alignment across our facilities. We paid a total cash consideration of $308 million, which included $285 million base purchase price plus $23 million in cash, representing wind-down and closing costs, along with adjustments for working capital associated with the transaction. The acquisition was funded through a combination of cash on hand and borrowings under our revolving credit facility. The consideration closely approximated the fair value of the identifiable net assets acquired. The acquisition is expected to be accretive to net sales by $600 million and adjusted EBITDA by approximately $23 million in 2026 as operations normalize. As a result of the acquisition, beginning this quarter, we updated our business segment reporting to better align with internal management reporting. A new reportable segment, Prepared Foods, combines the Del Monte Foods business acquired with our existing Prepared Foods operations. Prior period segment information has been recast for comparability. We also completed the previously announced divestiture of Mann Packing in December 2025. Our first quarter results reflect continuing operations. Prior period comparisons are presented as reported and where applicable on an adjusted basis with reconciliations in today's earnings press release. With that context, I will turn now to our first quarter financial performance. Year-over-year results reflect portfolio changes following the divestiture of Mann Packing, alongside pricing, volume, cost and foreign exchange dynamics, as well as the recent geopolitical developments. Net sales were $1 billion, primarily driven by lower net sales in our fresh and value-added products segment. This reflected the divestiture of Mann Packing and lower net sales in our avocado product line due to industry-wide oversupply, which resulted in lower per unit selling prices. The decrease was partially offset by the initial contribution of Del Monte Foods and the favorable impact of fluctuations in exchange rates, primarily the euro. Gross profit was $89 million, reflecting lower gross profit in our other products and services and Prepared Foods segment, where results were impacted by lower selling prices in our poultry and meats business due to softer demand and the conflict in the Middle East. In our Prepared Foods segment, higher per unit production costs weighed on results. Gross profit was generally affected by supply chain disruptions in the Strait of Hormuz and the unfavorable impact of a stronger Costa Rica colon. These impacts were partially offset by higher per unit selling prices in our banana and pineapple product lines, as well as the contribution of Del Monte Foods. Gross margin increased to 8.5%. Adjusted gross profit was $91 million and adjusted gross margin was 8.7%. Operating income was $20 million, primarily driven by higher asset impairment and other charges net. Adjusted operating income was $40 million. Asset impairment and other charges were related to the Foods acquisition. Income from equity method investments was $7 million. The increase reflected higher equity earnings from unconsolidated investments, primarily from distributions received in excess of our carrying value upon the liquidation of a fund in which we previously held an interest. Fresh Del Monte net income was $10 million. And on an adjusted basis, Fresh Del Monte net income was $30 million. We delivered earnings per share of $0.21 and adjusted earnings per diluted share of $0.63. Adjusted EBITDA was $58 million, with a margin of 6% as a percentage of net sales, reflecting disciplined cost management amid a dynamic cost environment. I will now go into more detail on the quarter performance for each of our business segments, starting with our fresh and value-added products segment. Net sales were $549 million, primarily driven by strategic reductions in our fresh and fresh-cut vegetable product lines, reflecting the divestiture of Mann Packing, as well as lower per unit selling prices in our avocado product line driven by industry-wide oversupply. These declines were partially offset by higher net sales in our pineapple product line, reflecting higher per unit selling prices and the favorable impact of exchange rate movements, primarily the euro. Gross profit was $60 million, driven by the divestiture of Mann Packing, which generated negative gross profit in the prior year, as well as higher per unit selling prices in our pineapple product line. The increase was partially offset by higher per unit production costs as well as weather-related events in North America that negatively impacted sales volume in our fresh-cut fruit product line and contributed to lower per unit selling prices in our melon product line. Gross margin increased to 10.9%. Adjusted gross profit was $61 million. Turning to our banana segment. Net sales were $357 million, primarily driven by lower volume and market disruptions across regions, including adverse weather and supplier changes. The decrease was partially offset by higher per unit selling prices across all regions and the favorable impact of fluctuations in exchange rates. Gross profit was $16 million, driven by higher per unit production and procurement costs, partially offset by higher per unit selling prices. Gross margin was in line at 4.6%. Adjusted gross profit was $18 million and adjusted gross margin increased to 5%. Moving to our Prepared Foods segment. Results reflected 1 week of contribution from the Fresh Del Monte Foods acquisition, along with contributions from our existing Prepared Foods operations. Net sales were $83 million, including $22 million of net sales from the acquisition, partially offset by lower net sales in Europe due to supply availability constraints of pineapple used in our canned pineapple product line. Gross profit was $9 million, primarily driven by lower net sales in Europe and higher per unit production and distribution costs. Gross margin decreased to 10.8%. Lastly, our results for other products and services segment. Net sales were $56 million, driven by higher net sales of our third-party freight services business, partially offset by lower net sales in our poultry and meats business due to lower per unit selling prices. Gross profit was $4 million and gross margin decreased to 6.8%. Now moving to selected financial results for the first quarter of 2026. Our income tax provision was $8 million, reflecting changes in the global tax and regulatory environment and higher earnings in certain jurisdictions. Net cash provided by operating activities was $44 million. Cash flow was primarily driven by net earnings and partially offset by higher noncash items, including asset impairments as well as working capital movements, mainly lower inventory levels and higher trade receivables due to the timing of period-end collections. Turning to capital allocation. At the end of the first quarter, long-term debt stood at $438 million, and our average adjusted leverage ratio is at 1.4x EBITDA. This compares to $173 million in long-term debt at year-end, with the increase reflecting the closing of the Del Monte Foods acquisition. Capital expenditures totaled $14 million during the quarter, reflecting pineapple expansion and packing facility construction in Costa Rica, equipment investments in Kenya and the replacement and maintenance capital. As previously announced, our Board of Directors declared a quarterly cash dividend of $0.30 per share payable on June 11, 2026, to shareholders of record as of May 19, 2026. On an annualized basis, this equates to $1.20 per share, representing a dividend yield of approximately 3% based on our current share price. During the quarter, we repurchased 100,000 shares of our common stock for $4 million at an average price of $40.24 per share. As of March 27, we had $116 million available under our $150 million share repurchase program. Together, our capital allocation actions during the quarter, including dividends, share repurchases and the completion of the Del Monte Foods acquisition reflect our balanced approach to capital deployment. We continue to prioritize reinvestment in the business and a competitive, reliable return to shareholders. Turning to our outlook for the full year of 2026. We are providing our expectations for our business segments and key financial priorities, including SG&A, capital expenditures and cash flows. This outlook is based on the information available to us today and our experience managing through comparable industry and macroeconomic cycles. Given the current environment, our priorities for 2026 are clear: first, protecting the long-term earnings power of the portfolio; second, maintaining balance sheet and liquidity flexibility; and third, managing through near-term volatility with discipline. Our 2026 outlook reflects Fresh Del Monte's continuing operations. It excludes the Mann Packing business exited in December 2025 and includes 9 months of contribution from Del Monte Foods transaction. We expect net sales on a continuing operation basis to increase between 13% and 15% year-over-year, reflecting execution across our base business and the contribution from the Del Monte Foods transaction, which we expect will contribute $600 million of net sales in 2026. As discussed, developments in the Middle East have driven higher energy, shipping and commodity input costs. Based on current assumptions and observable market conditions, we estimate the impact of these cost pressures to be approximately $40 million to $45 million, which will impact us starting in the second quarter. These impacts are primarily related to ocean freight costs, including bunker fuel and war-related surcharges, inland transportation, fertilizer and packaging costs, consistent with recent elevated oil and fuel price trends. Our outlook also reflects approximately $20 million to $25 million of headwinds over the balance of the year, roughly 50% from foreign exchange impacts, primarily related to the Costa Rica colon and the remainder driven by higher domestic transportation and logistic costs resulting from shortage of -- of driver availability in the U.S. Separately, tariffs implemented beginning in March 2025 continue to function largely as a pass-through. Tariffs had a modest impact in the first quarter. And given the uncertainty around recoverability and timing, we have not assumed any tariff refunds. In banana, near-term industry supply and cost dynamics, combined with trade dislocations following Middle East-related disruptions are creating incremental volume pressure in North America and Europe markets, which is reflected in our guidance. At the same time, per unit costs are higher, driven by lower production from Costa Rica and the disease management efforts on our own farms. Fertilizer inflation has added further pressure. These headwinds are reflected in the segment gross margin ranges we are providing today. Consistent with our established cost management approach, our outlook reflects a disciplined and active response to the current environment. This includes targeted pricing actions where market and customer dynamics support them, contractual fuel recovery mechanisms and continued focus on cost containment and operational efficiency. Just as important, it reflects ongoing deliberate trade-offs around timing, mix and service to protect customer relationships, sustain throughput and preserve long-term earning capacity during a period of elevated volatility. Turning to gross margin expectations by segment. In our fresh and value-added products segment, we expect gross margin to be in the range of 11% to 12% compared with 14% last year. This reflects higher per unit production and distribution costs across the segment as well as industry-wide supply constraints in pineapple volumes that limit our ability to fully benefit from increased market demand from our premium pineapple varieties. In our banana segment, we expect gross margin to be in the range of 3% to 4%, consistent with the cost supply and market dynamics discussed before. In our Prepared Foods segment, we expect gross margin to be in the range of 13% to 14%. This reflects the combination of Del Monte Foods transaction, which brings an inherently higher-margin branded CPG profile with our existing Prepared Foods operations as well as integration, timing, input cost volatility, and mix across geographies. Importantly, the reported range does not yet reflect the full margin potential of the Del Monte Foods platform as integration progresses. In our other products and services segment, we expect gross margin to be in the range of 12% to 13%, consistent with prior years. Selling, general and administrative expense is expected to be in the range of $270 million to $280 million, reflecting the inclusion of Del Monte Foods and our intentional shift to a branded CPG operating model, which carries a higher SG&A profile than our historical fresh produce operations. This range also includes wage inflation and targeted investments in technology and organizational support to operate and scale a global branded foods platform. Capital expenditures for the full year are expected to be in the range of $85 million to $95 million, focused on production expansion in Central America, growth in our fresh cut and Prepared Foods operations in Europe, a recent warehouse investment and other investments related to the Del Monte Foods acquisition as well as investments in core technology systems. For the full year, we expect net cash provided by operating activities to be in the range of $40 million to $50 million, which reflects lower cash generation than we historically produced as a pure fresh produce company. With the addition of Del Monte Foods, our cash profile now reflects the seasonal working capital dynamics of a branded CPG business. This includes higher working capital requirements in the second and third quarters as inventories are built to support seasonal packing and processing activities that ramp through the harvest season and peak from summer through fall. As those inventories convert to sales, we expect stronger cash generation in the fourth quarter and into the first quarter, driven by peak demand during November and December holiday season and again around the Easter holiday period. Due to the timing of the acquisition, working capital needs will be higher in 2026 than in future periods. In summary, while the operating environment remains challenging, we believe the underlying fundamentals of our portfolio are sound, and our focus remains on disciplined execution, prudent capital allocation, protecting long-term value, consistent cash generation across the full operating cycle and maintaining flexibility and financial resilience as conditions evolve. This concludes our financial review. We can now turn the call over to Q&A. Krista? Operator: [Operator Instructions] And we have no questions at this time. I would like to turn the conference back over to Mr. Mohammad Abu-Ghazaleh for closing comments. Mohammad Abu-Ghazaleh: Thank you, Krista, and thank you everyone for joining us today, and hope to speak with you on our next call of the second quarter. Thank you, everyone, and have a good day. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good day, everyone, and welcome to the Lumentum Holdings Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please also note, today's event is being recorded for replay purposes. [Operator Instructions] At this time, I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Kathryn Ta: Thank you, Melissa, and welcome to Lumentum's Third Quarter Fiscal Year 2026 Earnings Call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends and expectations for our products and technologies that are being made under the safe harbor of the Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risks set forth in our SEC filings under Risk Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the fiscal quarter ended December 27, 2025, and in our most recent 10-Q for the fiscal quarter ended March 28, 2026, to be filed by Lumentum with the SEC. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise these statements, except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations and are not to be considered in isolation from or as a substitute for or superior to financials prepared in accordance with GAAP. You can find a reconciliation between non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal third quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully. With that, I'll turn the call over to Michael. Michael E. Hurlston: Thank you, Kathy, and good afternoon, everyone. Lumentum delivered an exceptional third quarter with revenue growing 90% year-over-year to a record $808 million. Top line growth was primarily driven by our transceiver business and laser chips. While revenue growth was impressive, our non-GAAP operating margin was more so, expanding by over 2,100 basis points year-over-year, fueled by a rich product mix and strong operating leverage. The margin expansion was primarily driven by our industry-leading scale-out portfolio, but another part of the story was our broad array of scale-across products. As hyperscalers exhaust the power and space limits of individual data center buildings, they are shifting to distributed architectures that link compute domains across disparate geographies. These scale-across networks require high-bandwidth synchronization across multiple data centers. To enable this, we provide critical hardware components that provide high-density optical interconnects while meeting aggressive power and performance targets. Our pump lasers allow scale-across architectures to amplify the light signal over 4, 8 or 16 fiber pairs simultaneously. Complementing this, our narrow linewidth laser assemblies provide the precision required for 1.6T speeds and a higher order modulation, all within highly compact pluggable form factors. To manage all this traffic, our wavelength selectable switches or WSS function as the optical traffic cops. WSS keeps traffic in the optical domain bypassing the latency of electrical buffers while enabling the high port counts essential for massive fiber routing between data center buildings. Looking forward, our emerging multi-rail technology will be vital for the increased parallelism required by the massive fiber counts and scale-across networks. While we have spent the last few calls detailing our revenue growth drivers, it is important to outline the considerable role the scale-across portfolio will play in our ability to expand gross and operating margins. As we look forward, we expect this part of our business to grow appreciably and the supply-demand imbalance likely improve profitability at the same time. Now let's look closer at the metrics that define our third quarter, starting with the components product category. Components revenue for the quarter was $533 million, reflecting a 20% sequential increase and 77% year-over-year growth. Shipments of our narrow linewidth laser assemblies grew for the ninth consecutive quarter, rising over 120% year-over-year, while pump laser shipments grew 80% year-over-year. These components remain effectively sold out for the foreseeable future, and we are actively working to secure long-term agreements that will help offset anticipated capital expenditures. Turning to laser chips. We achieved another quarterly company record in EML shipments, led by 100-gig lane speeds. 200-gig EML revenue more than doubled sequentially. We continue to ship CW lasers to 800-gig transceiver manufacturers, and starting in fiscal Q3, we began supplying CW lasers for internal use in our cloud transceiver business. Our wafer capacity -- wafer fab capacity in Japan remains at a premium and is fully allocated to meet surging customer demand. We shipped twice the number of laser chips as we did in the same quarter last year, and we are on track to achieve more than 50% growth in EML units by the December quarter of 2026 as compared to the December quarter of 2025. Our ultra-high-power laser chip manufacturing ramp for CPO applications is also proceeding according to plan. We achieved sequential growth this quarter and are on schedule to both deliver meaningful revenue in our December quarter and fulfill the multi-hundred million dollar purchase order slated for the first half of calendar year 2027. In addition, our development work continues with multiple CPO customers through collaborations that leverage our laser chip technologies within a pluggable turnkey ELS module solution. In mid-March, we announced our acquisition of a fifth indium phosphide fab in Greensboro, North Carolina, which provides the capacity needed for years of future growth. At our grand opening ceremony held just days ago, we highlighted our commitment to U.S. manufacturing and the significant job creation we expect to generate in the state. We onboarded the plant's team and plans to convert the facility from gallium arsenide to indium phosphide are well underway. Another positive note is that we expect to take advantage of a significant number of the tools that already exist in our Greensboro site. Now I'll move to our systems product category. Systems revenue reached $275 million, representing a 24% sequential and 121% year-over-year increase. Cloud transceivers accounted for the lion's share of this growth, increasing over 40% sequentially as we successfully leverage our expanded manufacturing footprint in Thailand. In addition, we are poised to ramp 1.6T-speed transceiver shipments in fiscal Q4 with a portion of this volume leveraging our own CW lasers. We are improving transceiver profitability through better yields and lower scrap rates. Despite these gains, supply constraints on critical components keep our shipments well below customer demand. In OCS, the multiyear, multibillion-dollar purchase agreement we recently announced ensures sustained long-term growth. Our OCS ramp is largely on track, although our pace and slope are gated by the supply chain. We are experiencing considerable tightness in this product area due largely to the significant step-up in requested output. On the other hand, the number of new opportunities we are seeing for optical switches is putting tension on our road map, and we are having to make choices across the company in order to service them. Rounding out our systems business, performance industrial lasers and cable access remains muted. Industrial lasers were approximately flat sequentially, while cable access shipments declined on quarter due to customer and timing factors. Looking ahead to Q4, we expect to set another quarterly revenue record. We anticipate that over half of the sequential growth will stem from our components business. The remainder will be driven by the continued ramp of our systems portfolio, primarily through high-speed transceivers and additional contributions from OCS. Our current numbers and guidance reflect continued success in EML lasers and our scale-across components. We are seeing improved performance in our cloud modules business, which has grown significantly across the last few quarters. In addition, while we're seeing initial contributions from both scale-out CPO and OCS, they are still relatively modest. Furthermore, our largest single growth driver, scale-up CPO is still very much in its infancy. Taken together, this gives us confidence that we are very much on track to reach our $2 billion quarterly revenue goal as we articulated at our OFC event. Now I'll hand the call over to Wajid. Wajid Ali: Thank you, Michael. Third quarter revenue of $808.4 million was above the midpoint of our guidance range and non-GAAP EPS of $2.37 was above our prior expectation range, demonstrating the leverage of our business model. GAAP gross margin for the third quarter was 44.2%. GAAP operating margin was 21.6%. GAAP net income was $144.2 million and GAAP net income per share was $1.50. Turning to our non-GAAP results. Third quarter gross margin was 47.9%, which was up 540 basis points sequentially and up 1,270 basis points year-on-year due to better manufacturing utilization across the majority of our product lines, increased pricing on select products and favorable product mix. The improvement in product mix was primarily driven by growth in data center laser chips. Third quarter non-GAAP operating margin was 32.2%, which was up 700 basis points sequentially and up 2,140 basis points year-on-year, primarily driven by revenue growth in components products. While continuing to invest in critical R&D programs serving cloud and AI customers, we have maintained the rigorous cost controls necessary to optimize our business model. Third quarter non-GAAP operating profit was $260.7 million, and adjusted EBITDA was $293.5 million. Third quarter non-GAAP operating expenses totaled $126.2 million or 15.6% of revenue, an increase of $11.3 million from the second quarter and an increase of $22.8 million from the same quarter last year in support of expanding cloud opportunities. Q3 non-GAAP SG&A expense was $47.8 million. Non-GAAP R&D expense was $78.4 million. Interest and other income was $9.6 million on a non-GAAP basis. Third quarter non-GAAP net income was $225.7 million and non-GAAP net income per share was $2.37. Our diluted weighted shares for the third quarter was 95.2 million on a non-GAAP basis. Turning to the balance sheet. During the third quarter, our cash and short-term investments increased by $2.02 billion to $3.17 billion, with the increase primarily driven by NVIDIA's direct investment in Lumentum. Our inventory levels increased by [ $62 million ] sequentially to support the expected growth in our cloud and AI-related revenue. In Q3, we spent $125 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details. Components revenue of $533.3 million increased 20% sequentially in Q3 and 77% year-on-year. Systems revenue of $275.1 million increased 24% sequentially in Q3 and 121% year-on-year. Now let me move to our guidance for the fourth quarter of fiscal '26, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the fourth quarter of fiscal year '26 to be in the range of $960 million to $1.01 billion. The $985 million midpoint would represent another new all-time quarterly revenue record for Lumentum. We project fourth quarter non-GAAP operating margin to be in the range of 35% to 36% and diluted net income per share to be in the range of $2.85 to $3.05. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume shares used for non-GAAP diluted earnings of approximately 102 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy? Kathryn Ta: Thank you, Wajid. [Operator Instructions] Now let's begin the Q&A session. Operator: We will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan. Our next question comes from the line of Ryan Koontz with Needham & Co. Ryan Koontz: Can you hear me? Michael E. Hurlston: Yes, we can. Kathryn Ta: Yes. Ryan Koontz: We do. Great. Maybe let's start with your strength in EMLs and laser supply. Clearly, demand is not a concern here, and you guys have just done an incredible job of executing. What are the dynamics both on the supply side as well as your ability to ramp production? Maybe give some color on kind of where you are in meeting demand, what the gap looks like as well as what are some of the puts and takes that you're battling with on a quarter-to-quarter basis? Michael E. Hurlston: Ryan, thanks for the question. Look, I think we're still chasing behind relative to demand. We are steadily increasing supply. I think we just gave the benchmark that we'd expect our supply line to increase 50% on year, meaning as measured from December quarter to December quarter. So we're actually stepping up our supply in a pretty significant way. That being said, as we've said kind of over and over again, we continue to lag demand. The supply-demand imbalance is probably even higher than we reported in our last call, somewhere greater than 30%. I think last time we gave a metric of 25% to 30%. We still seem to be behind significantly. We had conversations today with customers, significant customers looking to really up their demand and get output from us, and we simply can't service that. So we are stepping up. We're doing everything we can to step that up. I think you know that story pretty well, but we continue to lag demand. Ryan Koontz: And is that largely in your own control -- sorry, Michael, but largely in your own control in terms of executing against that and getting the equipment you need? Or do you have input that is a big challenge? Michael E. Hurlston: Yes. Right now, it's largely within our own control. So some of these, for example, substrate shortages that's been reported out, I think you know our story better than most, and that is that we've executed some long-term agreements that we feel leave us in pretty good shape on substrates. That being said, I mean, the number of lasers that we're going to have to output, for example, in 2027 is really a massive step-up just given the scale-out and scale-up demands that we're seeing in that time frame. So it's -- certainly, near term, it's mostly on us. I think as we head into 2027, we're going to continue to have to work the substrates. I think we have that mostly under control. But we've got a lot of work to do to sort of catch up to demand at this point. Ryan Koontz: That's great. And maybe on the scale-across part, you really highlighted that as, I think, something that's a market opportunity that's probably less appreciated with Lumentum. Obviously, you've got the kind of the components there among lasers, and you talked about the multi-rail opportunity. Can you expand on that in terms of where you fit in that supply chain in that value chain? And then how big you size that opportunity as it moves to multi-rail application densification? Michael E. Hurlston: Yes. Look, it's a significant opportunity. I think we chose this call to talk about it because I think it's a significant contributor to our margin enhancement. So we focus very much on sort of the 4 main growth drivers. I think you know those well, the transceiver business, OCS, optical scale-out, optical scale up. We spent less time, I think, on our scale-across components, and they are actually big, big contributors to the gross margin line. As we look out right now, we are probably more constrained in this area than even EMLs, particularly on things like pump lasers, narrow linewidth lasers for sure. And both of those are going into the coherent subassemblies that drive a lot of this scale-across activity, the synchronization and high bandwidth that we mentioned in the prepared remarks. Multi-rail increases that content, right, because you've got more pumps that need to go into those. We are focused right now on ramping our pump capacity. We expect to make pretty appreciable step-ups. And at the right time, we'll give you some color around that. But those numbers are going up from an output perspective, actually to a much greater degree than even our EML output. We would expect to output a lot more of these here in the near term because there's a little bit less constraint on the fab that puts these out. So we have a little more ability to inflect that line. Wupen, any more on the sort of the multi-rail and how you think about it? Wupen Yuen: Yes. So a couple of things, right? So first of all, the pump lasers actually goes into the optical amplifiers, right, at the -- we call it in-line amplifiers at the sites. And that's where a lot of the traffic and then the density has to really increase, right, to get the traffic through. So that's one big area of growth. And frankly, the multi-rail opportunities are huge. And then with all the expansion plans that Michael talked about just now, our view actually is that the multi-rail could be even bigger than that. So we don't yet have a full quantification. We'll share that when we are more ready, but we believe there's a huge opportunity for [ Lumentum ] to grow our business and gross margins. Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Can you hear me now? Kathryn Ta: We can hear you now. Michael E. Hurlston: Sounds like you figured out the mute button, good, good. Samik Chatterjee: Still learning, Michael. So maybe on OCS, I know you mentioned sort of multiple customers that you're still working with and you had the customer announcement at OFC. Can you just talk about sort of where maybe the engagements are in terms of how close you are to finalizing additional sort of award wins on the OCS front? And do you see some of the wins being sizable compared to what you announced at OFC. How should we think about the additional wins that you can sort of lock in? And how should we size them relative to the win that you announced at OFC? And I have a follow-up. Michael E. Hurlston: Yes. I mean I think, look, we continue to work with the 3 customers that we've been talking to. Two of those 3 are making up the majority of the volume, as we've been saying. I think that we are really making progress now on sort of additional wins. I think it's too early to call when we would be able to talk to those. But I would say that they're quite sizable. We really are, as I said in the remarks, working the road map to add differentiation, different port counts, different configurations to service these multiple opportunities. And these multiple opportunities are substantial. They're on the order of what we've talked to relative to this backlog that we're seeing for 2027. So it is our biggest area. Wupen and the engineering teams are working aggressively to drive those new designs. Samik Chatterjee: Got it. Okay. Great. And for my follow-up, maybe I can ask you on the revenue guide a bit. You did deliver when I look quarter-over-quarter, like a $140 million increase, and you're expecting that to accelerate as you get into the June quarter, which is in the backdrop of sort of the supply constraints that you're also dealing with. So maybe if you can just sort of highlight which are the areas you see accelerating compared to the March quarter itself as you go into June? And where are the supply constraints maybe impacting you more than others, if you can sort of highlight that? Michael E. Hurlston: Yes. I think in the guide is contemplated, obviously, the sort of the basic business, meaning EMLs, we'd expect to go up. We'd expect the scale-across components to go up. We continue to increment OCS, so that will go up. But really, the big story is transceivers, right? That is going to be quite strong. And I think it's impressive to note that as you and I have talked about, our margins there are relatively challenged, but we expect to see margin improvement in the face of a growing transceiver business. So I think that's important to highlight. As we go into the back half of the year, that's when you're going to start seeing much bigger contributions from OCS. In the fourth calendar quarter, you're going to see more contributions from the scale-out CPO. So there's a lot of things that begin to layer in. But specific to your question on the guide, I think the big headline is going to be transceivers. We appear to be ahead on 1.6T. We seem to be executing relatively well. I think Wupen and the team have done a really, really good job turning around our designs. Our constraint is going to be on transceivers. So we are -- we could ship quite a bit more in the guide, actually quite a bit more this quarter in the quarter we just completed, certainly quite a bit more in the guide have we not the supply constraints that we see. And as we detailed, there's electrical components are driving that. The laser diodes are in that mix, right, which is necessitating the switch to our internal laser diodes. So there's quite a few things that are contributing there. But the main headline is we're undershipping demand there quite significantly. Operator: The next question comes from the line of Vijay Rakesh with Mizuho. Vijay Rakesh: Just a question on -- a question back to the pump laser side on scale-across. Just wondering, given that demand pickup, obviously, it looks like those will be pretty high-power lasers as well. Just wondering what is the mix of demand you're seeing going to scale-across? And does that imply given the significant pickup in demand with that and 1.6T that you continue to see this supply-demand imbalance of 30% as you go through into next year as well? I have a follow-up. Michael E. Hurlston: Yes, Vijay, I mean, a couple of things I'd say. One, the constraints on lasers pumps are probably the biggest that we are -- it's somewhat unanticipated. I mean we haven't talked to you about this in the last couple of quarters, but it's somewhat unanticipated. It's hit us relatively suddenly. And I don't even -- I don't think we've given a number of the supply-demand imbalance, but it's certainly greater than that 30% number. We are significantly undershipping demand. And we're having to make choices as to who we support. We're trying to be as fair and reasonable as possible, but we are having to make choices as to how we allocate our pump demand. That being said, I think we're trying to ramp capacity here quickly. We have a plan to ramp capacity over the next 4 quarters. That's coming out of our local facility here in the United States, our Rose Orchard facility. And we think we have room there to build some significant capacity. And we're obviously spending a lot of money on CapEx to try to enable that as Wajid highlighted. So hopefully, that caught the gist of your question, Vijay. Vijay Rakesh: Yes, sure. And just a quick follow-up, too. Back on the OCS side, obviously, it looks like Google is now talking the v8 inference rack with 1152 TPUs and the training rack with like 130,000 TPUs. Does that drive your OCS -- should drive a pretty nice uptick there back to like the 300-radix or the 500-radix OCS racks into next year, right? And it looks like even Anthropic now announcing a massive potential, not Anthropic, but it looks like there's some information, et cetera, noting Anthropic could do $200 billion with Google, positive for you guys. But just wondering how you're looking at OCS into '27, '28. Michael E. Hurlston: Yes. Look, I mean, we're not sort of commenting on specific customers and specific customer architectures. Based on what we know, I would say that Google is obviously doing very, very well in the market. I would say that Google is driving a lot of demand on our business, right? They're certainly one of our largest customers, and we benefited greatly from that relationship. As we know it, as we understand it, the sort of the difference in v7 and v8 in terms of OCS pull is a little bit. It's incremental. It's not that big, but we would expect, as you are correctly saying, that they are doing [Audio Gap] look, hopefully, we can get engaged. I think it would drive significant upside for us just given the expansion of our business as they look at v8. Operator: The next question comes from the line of Meta Marshall with Morgan Stanley. Meta Marshall: Maybe a couple of questions. Just on -- expecting to supply some of the CW lasers into the transceivers into the next quarter. Just any kind of further commentary there on just the path and progression of kind of the in-sourcing of your own lasers into that piece of the transceiver portfolio? And then maybe just as a follow-up, just any kind of disclosure we could have in terms of, obviously, a great step-up in the gross margins, just on kind of like rough mix of pricing, yield, mix and kind of the contributions there? Michael E. Hurlston: Yes. I mean, I would say, Meta, maybe to the second question on mix, it's sort of all of the above. I think the headline has been better factory absorption. I mean that helps I think our mix, and we made some big decisions here throughout the last year to drop certain product lines that are not margin beneficial. So we really worked on the portfolio to a great degree. And I think that's helped considerably. And then, of course, there is price increases. Obviously, pricing with this kind of supply-demand imbalance is something that we consider. It's something that where we see biggest area of constraints, we have applied and we continue to think about applying. We think there's continued room, right? Gross margin is something that as a management team, we have focused on tremendously. And look, I think people who followed my history know that gross margin is super, super important. And although we're trailing what we've done in our previous instantiations, I do think there's a lot of room for improvement on the gross margin line. Relative to the in-sourcing of the lasers, that's something that's driven by margin, right? But we are forced to do that probably faster than -- and that forecast oscillated, as you know. I mean, you followed our story extremely closely. We had initially forecasted sometime in calendar Q2, we'd be introducing the lasers, and we backed off just seeing so much tension on the EML line. But now we've seen a little bit of tension in our own supply line externally to get lasers from the external market, CW lasers. And as such, now we've allocated more of our fab capacity to CW lasers. I think in our mix, roughly, as we think about it in this -- in the guide, it would be about 20% of our modules would have our own CW lasers. It's still minority, but we'd expect to step that up through time and see some of the associated margin benefit as a result. Operator: The next question comes from the line of Papa Sylla with Citi. Papa Sylla: Congrats on the very strong results. Michael, I guess one a little bit longer-term question kind of on the CPO scale-up opportunity. It seems like even at kind of you mentioned kind of the longer-term target and most of it may be more ultra-high power lasers. But at a high level, it seems like there is also a real opportunity into becoming more kind of vertical and doing some more ELS [Technical Difficulty]. Michael E. Hurlston: Papa, I don't know -- hopefully, it's not us, but at least your line seems to be cutting out a bit. I didn't catch the last part of your question. Sorry for that. Papa Sylla: Sorry about that. Yes, I was just asking on just the opportunity around the kind of CPO kind of market. Most of it, it seems like you are mostly around the ultra-high power lasers looking into maybe the second half of the year in 2027. I'm just curious on the opportunity around kind of being more vertically integrated as well, kind of providing more ELS type of product. I'm curious if you are also getting engagement from the same customers you are providing ultra-high power lasers opportunities. Michael E. Hurlston: Yes. Great question, Papa. And of course, I continue to thank you for following the company. Look, I think that on ELS, we definitely have a very significant opportunity. And it's -- we have not -- we only talked about opportunity there. I think we're getting ever closer to being able to convert and start thinking about that as part of our numbers. As we've outlined on previous calls, what I would say with ELS, in particular, is the non-primary customer engagements are largely driven by ELS. Simply, the engineering teams there are less familiar with optics, although, frankly, everybody is becoming a lot more conversed on optics. But our currency to engage those customers, at least initially, will be the ELS, and so again, we've not really talked about as yet any significant wins there. I feel that's just around the corner, quite frankly, and it's something that at the right time, we'll be able to articulate more deeply. But in particular, as we expand the CPO horizon, we are going to need that vertical integration strategy that you asked in your question. Papa Sylla: Got it. That's very helpful. And for my follow-up, it might be for you, again, Michael, as well. On the kind of supply front kind of EML capacity, it seems like across the board demand continues to be very strong despite kind of the very strong effort you're making on raising supply. But we are also hearing kind of a lot of competitors also providing very large growth numbers. I'm just curious on the risk of oversupply, if any, I guess, where would you put that risk? Is it still very low at this point? Michael E. Hurlston: I mean I feel it's low. We are engaging all sorts of transceiver customers right now. Wupen's team is out doing that actually as we speak. I just got a report in this morning from our sales leader. And the discussion is very much around extending the long-term agreements that we already have. So if there was an expectation from our customers that they see an oversupply of any kind of laser, whether it be EML or CW laser, I just think there'd be a lot more reticence to engage in the kind of conversations we're having. So yes, we're hearing the same things. I mean we know that all -- everybody is trying to add supply, but the reality on the ground now seems to be quite a bit different. We definitely have some pricing flexibility, which would indicate that, that supply-demand imbalance isn't going to be solved for a while, and we certainly are engaging and extending some of these long-term agreements that we currently have. Operator: The next question comes from the line of Ruben Roy with Stifel. Sahej Singh: This is Sahej Singh on for Ruben Roy. Maybe just, Michael, tagging on to the LTAs that you're mentioning there. Even on the scale-across portfolio, you sort of outlined that pump lasers, narrow linewidth lasers, WSS, these are not only supply constrained, but real margin levers for you guys distinct from the 4 growth levers and 9th consecutive quarter of narrow linewidth at, I think you said 120% year-on-year and pump lasers at 80%. That's impressive and you're still describing this as sort of an unanticipated bump up. And so you're talking about these LTAs. Maybe we can dive a little deeper there. You mentioned that the long-term agreements being negotiated are helping in some sense to offset CapEx. And I think that was with scale-across, but it sounds like more broadly. So could you maybe give us a sense of the structure? Are these prepayment style commitments maybe similar in maybe spirit, I would say, to the NVIDIA agreement? Or are they take-or-pay capacity reservations? Or are they volume commitments tied to ASP floors? How should we be thinking about the CapEx whether build, buy, offshore, these agreements are effectively underwriting? I'll stop there, and I have one other. Michael E. Hurlston: Yes. Look, I mean, it's all of the above. We're in active discussions right now on our pump lasers. And again, we have sort of a finite amount of capacity, and we're being asked to put on considerably more. And so we are talking to the major customers around trying to help, right, and put some skin in the game around the CapEx that we're going to try to lay out, one, that can entail prepayment, that can entail take-or-pay, that can entail price increases. And Wupen's team is in active negotiation with all of the scale-across suppliers on how that looks. And again, as I say, we're -- we have some really big customers and important historical customers of ours involved in that, and we want to treat them, obviously, as fairly as we can. But it's really coming down to how these discussions play out as to how I think Wupen and his team think about the allocation. Sahej Singh: Understood. And for the second, as I read through the print, the beat was really a margin beat and system sales, as you mentioned, was a driver and seems to be so. And this is happening all while sort of the capacity story is happening and new programs are ramping. And then as we look to the next quarter, I think the margin story kind of gets a little washed out with the diluted shares jumping up. So maybe could you help frame the waterfall dynamics on margins right now? I mean you set out the targets that you did during OFC. And I think this sort of ties into, I believe Meta asked a question around this as well. But the waterfall dynamics maybe more across a matrix of product mix and the program ramps within those segments, how CapEx is dragging on that, again, on the build buy offshore sort of dynamic? And then maybe also on the volume versus ASP conversation that is becoming more and more prevalent amid the supply constraint. Michael E. Hurlston: Yes. Look, I mean, as we said, there are many, many contributing factors to our margin improvement. I think we had a big step-up. It's an area of focus for us. I think we're going to continue to work the margin line. It obviously comes from mix, and we keep making mix decisions every single day allocated to the most margin-rich parts of the portfolio. It comes from factory utilization, right? We've historically been underutilized, and we're just now getting our utilization up to where it needs to be. As we've outlined, we have some of our fabs that are still underutilized, some of the -- for example, our fab in the United Kingdom that now Wupen has put products in that we expect to see in margin-contributing output from them and fixing some of the underutilization. And then as we said, there is some price dynamics that are working in our favor. So we think there's a lot of room on the margin line. We gave a long-term target. We feel very comfortable with that. I think there's room from here to continue to really step up margin. We've been surprised to a certain extent by how quickly we've been able to move up that margin line. And again, people that know my history know that we had 30% type moves in my last company. So it's not a total surprise that you'd be seeing this kind of step-up on the margin line. Operator: The next question comes from the line of Christopher Rolland with Susquehanna. Christopher Rolland: And Michael, I am familiar with the margin focus you have. My question is actually, I think in your prepared remarks, you might have also mentioned some constraints around OCS. So I guess, first of all, I wanted to dig a little bit more into that, but also at OFC, there were some Chinese competitors showing off some OCS boxes. I was wondering if you could speak to competition there, whether you think it's viable or whether you think the kind of MEMS market might be yours for quite some time. Michael E. Hurlston: Yes, Chris. I appreciate that. Look, one, my colleague to the right, Wajid Ali, is personally responsible for getting the supply chain right on OCS. We've assigned that to one of the most important people in the company. It's a challenge. Look, I mean, it's a big step up, right? We've gone in many instances, really from 0 to a significant number very, very quickly. We think we have things under control. We've outlined this sort of $400 million that we can ship in the back half of the year. We think we have that under control. As we look at 2027, that number continues to step up. We think we have that under control, but we are definitely on a tight rope on this product line, right? It's probably our biggest ramp now, honestly, pump lasers, CPO, all of these things are keeping us awake. The big 3 ramps are these pumps, right, OCS and the high-powered lasers. So we've got a lot of work on our hands and the biggest single tight rope that we're watching probably is OCS. I think relative to competition, we feel pretty good about our position. We really do. I think we feel like we're in a very, very strong position. That's not going to last forever, right? We know that. But I think certainly, in the next year, it's hard for me to imagine anybody is going to be able to ship one of these very innovative solutions. We are also not standing still. We are working on cost reducing. We are working on some innovative solutions in our OCS, which increases the complexity of the decisions that I was outlining relative to what Wupen is facing, right? Because we've got a lot of new customer demands coming on. And meanwhile, we are trying to focus on new architectures that would keep us in a leading position with MEMS, right? We do believe that, that's the right technology for us long term, but we do believe that there's cost we can take out simplification we can make to continue to compete with these very innovative solutions. Christopher Rolland: Excellent. And I do know you have your hands full with those 3 very large opportunities. But are there some more adjacencies for you guys to pursue? I think at OFC, you talked about maybe full module design and assembly. I don't know if this would involve silicon photonics chips, PICs, EICs, et cetera. Are there any other adjacencies or components that you may be able to absorb or organically create that you can bring into the organization as you look forward? Michael E. Hurlston: Look, there's a ton of stuff that goes into these transceivers or into a CPO-based solution that today we don't ship, right, PICs, photodiodes, right, laser drivers. There's a ton of stuff to your point. And we're looking at all of these areas. I mean I think we have road maps that contemplate all sorts of different things around our strength in lasers. And I think there is quite a bit more that we can do around that. A previous question asked, and I'd say, again, on ELS, which is a vertically integrated module that your question sort of led to, we believe that there's significant opportunity there, right? We think that we can integrate up and take more of the dollars by generating a vertically integrated ELS. And I think as we engage on CPO, we're finding that to be a more convincing and shorter path to market than is just supplying lasers. Operator: The next question comes from the line of Vivek Arya with Bank of America Securities. Michael Mani: This is Michael Mani on for Vivek Arya. My first question is on the transceiver business. Number one, how large would it have been if you had been able to address all the demand that you saw in the quarter? Or if you could peg that number relative to the 30% overall imbalance for the entire company? And then on 1.6T specifically, you talked about how the margin structure is still a bit challenged and it's a work in progress. But as we move into 1.6T, what we're hearing from many of the suppliers in the ecosystem is that the margins are just significantly better, maybe led by pricing. So to what extent does that transition that's happening in the next quarter or 2 help your margin structure for transceivers? Michael E. Hurlston: Yes. I mean on the first one, I don't think that we've given a figure of merit around our own transceiver imbalance. It was significant. I mean we had a lot of demand that was placed on us, and we simply weren't able to ship due to -- largely due to supply constraints. The 30% number that I gave is on our EMLs, right? So it's a supply imbalance. It's not relative to our whole business, it's on that particular line of business. I would say here, the supply-demand imbalance on our own transceivers was somewhere in that ZIP code, but it was definitely appreciable, although I don't know that we've calculated that. I think the second part of your question. What was the second part was... Michael Mani: 1.6T. Michael E. Hurlston: No doubt, right? The margins are definitely better. I would say that, too. When I said the margins are challenging, our transceiver business, as we've outlined over and over again, is definitely a challenge for us on the margin line. I think we are underperforming peers. We have room to grow. We're getting better. I think we are -- we've certainly gotten the lead in terms of design. And now in terms of margin, I think we're improving. We still trail. That being said, to your point, 1.6T is definitely better. Structurally from a margin standpoint is definitely better than 800-gig. So there's definitely -- we will see step-up in our margin line. We have room as a unique Lumentum entity to do better, and we will do better. Michael Mani: And for my follow-up, on OCS specifically, you said you're still constrained, maybe that's more due to your current output right now relative to demand. How do you think about engaging with more contract manufacturers? I know you mentioned that OFC, but where are you in that process, maybe not just for OCS, but for other product areas as well? And then within OCS specifically, how do you think given the demand you're seeing from multiple customers, maybe multiple different applications and multiple types of products between medium radix, high radix products, how do you think about prioritizing all those different sources of demand, right, for applications based on your own competitiveness or share? Michael E. Hurlston: Yes. Look, I'm going to answer the first part of it, right, just in the interest of time to get some more questions. I think one of the levers we do have is contract manufacturing. We have historically in-sourced everything. And we found that working with good contract manufacturers, of which there are several, we can actually improve our margins. So as we have started to shift and we're early in those innings, back to a contract manufacturing base, we would actually expect to see improvement in our margins. The margins that we pay to those contract manufacturers are more than offset by the efficiency and cost benefit that they can drive on common components. So that ends up being a lever for us. Kathryn Ta: Melissa, I think we have time for one more question. Operator: Our last question comes from the line of Ananda Baruah with Loop Capital. Ananda Baruah: I guess I have to say, apologies if this has already been asked, hopefully, it hasn't been. But Michael, you announced, I think it was last week, the opening of the Greensboro -- new Greensboro facility that you recently purchased. And I think it was also in the press release that, that capacity was new. And I think it -- as a clarification, is it also incremental to the revenue projections that you gave at OFC, so could you clarify that? And then also, what's a good way to think about the capacity potential coming out of Greensboro? Appreciate that. Michael E. Hurlston: Yes. I mean, look, that is not in our numbers, right? It is very, very significant. I think what we've said is that we are -- we will have a massive supply-demand imbalance on CPO. It's going to be very, very significant. We've seen multibillion-dollar orders that we've characterized on previous calls come in mostly on scale-out. We expect to scale-up to be significantly more than that in terms of revenue opportunity. I think it's going to be somewhere greater than $5 billion of incremental revenue that we can add if we execute properly. Now what I would say is the Greensboro fab is not going to come online until 2028. So we sort of set expectation that sort of in the early 2028 line start to be adding that incremental revenue. So we're still 6 or so quarters away from seeing significant contribution from Greensboro. Operator: I will now turn the call back to Kathy for closing remarks. Kathryn Ta: Thank you, Melissa. That is all the time we have for questions, and we look forward to connecting with you at upcoming investor conferences and meetings throughout this next quarter. And with that, I'd like to thank you for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Harry: Good morning, ladies and gentlemen. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome you to the Ferguson Results Quarter Ended October 31, 2025, Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of prepared remarks, there will be a question and answer session. Please press star followed by the number two. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's VP of Investor Relations and Communications. You may begin your conference call. Brian Lantz: Good morning, everyone. And welcome to Ferguson's quarterly earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-Ks available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non-GAAP financial measures. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin. Kevin Murphy: Thank you, Brian. Welcome everyone to Ferguson's quarterly results conference call. On today's call, we'll cover highlights of our quarterly performance. I'll also provide a more detailed view of our performance by end market and customer group. I'll turn the call over to Bill to review financials and our updated guidance before I wrap up with a few final comments. We'll have time to take your questions at the end. During the quarter, once again, our expert associates delivered strong results continuing to execute our growth strategy in a challenging market environment. Sales of $8.2 billion increased 5% over the prior year driven by organic growth of 4% and acquisition growth of 1%. Gross margin of 30.7% increased 60 basis points over the prior year. We remain disciplined on cost and generated $808 million of operating profit, which grew 14% over last year. Diluted earnings per share increased nearly 16% over the prior year to $2.84. We continued to execute our capital priorities, deploying $511 million this quarter. We declared a 7% increase to our quarterly dividend to 89¢ per share. And we acquired Moore Supply Company, HVAC equipment and supplies business in the Chicago Metro Area. We also returned $372 million to shareholders via share repurchases and dividends. Our balance sheet remains strong, with net debt to EBITDA of 1.1 times. While we continue to operate in a challenging environment, we remain confident in our markets over the medium term. And we'll stay focused on leveraging multiyear tailwinds in both residential and nonresidential end markets as we support the complex project needs of the water and air specialized professional. Turning to our performance by end markets in The United States. Net sales grew by 5.3%. Residential end markets representing approximately half of US revenue remain challenged. New residential housing starts and permit activity have been weak, Repair, maintenance, and improvement work has also remained soft. We continue to outperform the markets with residential revenue down 1% in the quarter. Nonresidential end markets performed better than residential. Our scale, expertise, multi-customer group approach, and value-added services drove continued share gains with nonresidential revenue up 12% during the quarter. Strength in large capital project activity has continued, and we've seen solid shipments, with growth in open order volumes and bidding activity. Our intentional balanced approach to end markets continues to position us well. Moving next to revenue performance across our customer groups in The United States. We grew Waterworks revenues by 14% as our highly diversified customer group saw strength in large capital projects public works, general municipal, and meters and metering technology, offsetting weakness in residential. Ferguson Home, which brings together our best-in-class showroom and digital experience, grew 1% in a challenging new construction and remodel market. Our ability to present a unified experience and cater to higher-end projects drove outperformance against the broader market. Residential trade plumbing declined by 4%, due to headwinds in both new and RMI construction. HVAC declined by 6%, against a strong 9% comparable and weaker markets impacted by the industry's transition to new efficiency standards and weak new residential construction activity as well as a pressured consumer. We remain pleased with our execution our counter build-out for the dual trade and M&A opportunities. Commercial mechanical customer group grew 21% on top of a 1% prior year comparable. Driven by large capital projects such as data centers, partially offset by weaker activity in traditional nonresidential projects. For fire and fabrication, facility supply, and industrial customer groups all saw growth during the quarter as we continued to take share and leverage our unique multi-customer group approach. Our customer groups are better together, sharing expertise to provide end-to-end solutions that help simplify complex projects and maximize contractor productivity. Now let me pass the call over to Bill for the financial results in more detail. Bill Brundage: Thank you, Kevin, and good morning, everyone. Net sales of $8.2 billion were 5.1% ahead of last year. Driven by organic revenue growth of 4.2% and acquisition growth of 1%. Partially offset by 0.1% from the adverse impact of foreign exchange rates and from a divestment in Canada. Price inflation was approximately 3%. Modest sequential improvement in finished goods pricing, offset by commodity-related categories being down low single digits. Gross margin of 30.7% increased 60 basis points over last year, driven by our associates' disciplined execution. Operating costs grew slower than revenue, delivering 20 basis points of operating leverage. And operating profit of $808 million was up 14.4% delivering a 9.9% operating margin with 80 basis points of expansion over the prior year. Diluted earnings per share of $2.84 was 15.9% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1 times net debt to EBITDA. Moving to our segment results, net sales in The U.S. grew 5.3%, with organic growth of 4.4% and a further 0.9% contribution from acquisitions. Operating profit of $806 million increased $109 million over the prior year, delivering an operating margin of 10.4%. In Canada, net sales were 2.2% ahead of last year. With organic growth of 0.7% and a 4.6% contribution from acquisitions partially offset by a 1.6% adverse impact from foreign exchange rates as well as 1.5% from a noncore business divestment. Markets have remained subdued in Canada, particularly in residential. Operating profit of $16 million was $7 million below last year. Moving next to our cash flow performance for the quarter. EBITDA of $867 million was $109 million ahead of last year. Working capital investments of $440 million during the quarter was up slightly from $376 million in the prior year. Principally driven by timing. Operating cash flow, was $430 million compared to $345 million in the prior year. We have continued to invest in organic growth through CapEx, investing $118 million in the quarter, resulting in free cash flow of $325 million compared to $274 million in the prior year. Turning to capital allocation. As previously mentioned, we invested $440 million in working capital. And another $118 million in CapEx. To further build on our competitive advantages and drive above-market organic growth. We paid $164 million of dividends during the quarter, and our board declared an $0.89 per share quarterly dividend. Representing a 7% increase on the prior year. And reflecting our confidence in the business. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. As Kevin mentioned, we completed the acquisition of Moore Supply Company during the quarter. A great addition to our HVAC presence in the Chicago area. Our markets remain very highly fragmented, and our acquisition pipeline is healthy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to EBITDA. We returned $208 million to shareholders via share repurchases during the quarter. Reducing the share count by nearly 1,000,000. And we have approximately $800 million outstanding under the current share repurchase program. Now turning to our updated calendar 2025 guidance. We are pleased with our continued market outperformance and solid growth in the quarter. We are well positioned to deliver a strong calendar year 2025 performance and remain confident in our markets over the medium term despite near-term uncertainties. We now expect approximately 5% revenue growth for the year. And we expect an operating margin range of between 9.4% to 9.6% up from our prior expectation of between 9.2% to 9.6%. Interest expense is expected to be approximately $190 million for the year. We estimate CapEx of approximately $350 million the upper end of our previous guide. We continue to expect our effective tax rate to land at approximately 26%. We believe we are well positioned as we finish the year head into the new calendar year. Thank you, and I'll now pass back to Kevin. Kevin Murphy: Thank you, Bill. As we conclude our remarks, let me first reiterate our thanks for the hard work and diligence of our expert associates. They continue to execute on our growth strategy, we work to drive construction productivity for our customers. We're particularly pleased with the double-digit nonresidential growth as our teams closely collaborate to simplify projects bring order to chaos, and deliver end-to-end solutions to help maximize customer success. We're poised to deliver a strong calendar 2025 performance and our strong balance sheet enables us to invest in organic growth consolidate our fragmented markets through acquisitions, and return capital to our shareholders. We'll continue to operate at the lower end of our target leverage range maintain flexibility and capitalizes on strategic opportunities as they arise. We remain confident in our markets over the medium term, and expect to continue to outperform our markets as we leverage multiyear structural tailwinds. Our size, scale, and strategy we believe we're well positioned to take advantage of opportunities in the underbuilt and aging US housing market nonresidential large capital projects, and the growing demand for water and air specialized professionals. Thank you for your time today. Bill and I are now happy to take your questions. Operator? I'll hand the call back over to you. Harry: A. If you change your mind, please press star followed by 2 to exit the queue. And finally, I'm preparing to ask your question. Please ensure your device is unmuted locally. And our first question today will be from the line of Matthew Bouley with Barclays. Please go ahead. Your line is open. Matthew Bouley: Good morning, everyone. Thank you for taking the questions. Wanted to start on the data center and large capital projects. I'm wondering if at this point, given all the growth you've seen, you're able to quantify, perhaps what portion of the business, that is for you today, and maybe kinda where that can get to. But also, I'm curious if you can kind of know, give us a little bit of color on the timing of bidding and the momentum and if there's any risk of kind of lumpiness given how those projects work and how you ship to them or if we should kinda think that this is gonna be more of a, I don't know, smoother kinda outlook for that business. Thank you. Bill Brundage: Yeah. Good morning, Matt. Thanks for the question. I'll start this is Bill. I'll start with that one. If you take a step back and look at overall large capital projects for us, we would estimate that that that is somewhere between mid to high single digits as a percentage of our total company revenue at this point. With data centers specifically being a bit over 50% of that a bit over half of that overall large capital project. Revenue. In terms of what we're seeing in the market, the pipeline does continue to grow. So we're seeing additional projects coming into planning. We're then seeing that continue to flow into additional bidding activity. And our open order volume on large capital projects does continue to grow. And you're seeing that, you saw it come through revenue this quarter. Principally in the commercial mechanical business, which was up 21% and then a portion of that waterworks business, which grew 14%. So we are continuing to see that activity grow. Certainly, the gestation period of these projects is much longer than maybe our traditional projects. And so, yes, there could be some lumpiness, in terms of of revenue rate as as we move into the future. But overall, we remain bullish that this is a continued growth area for us, and and will continue to be driving revenue as we as we exit '25 and step into '26. And, Matt, as Bill said, the lumpiness will likely be there in the gestation period for these projects. It's gonna be longer but that's part of the reason why we're reasonably pleased with our progress. As you look at our ability to deliver scale, a multi-customer group approach, a broad base of vendors that can bring product to the site on time and in full. The impact of modular construction on data center work, that's all serving us well in terms of what those share gains look like, especially against the backdrop where traditional nonres is in a pretty challenging spot. Matthew Bouley: Alright. That's perfect. Thanks for that, guys. And then secondly, kind of jumping into the outlook I guess, maybe this is since a bit of an unusual period here where you're guiding to just kind of the sub period. I guess I'm curious if you could kind of give us any color on the November or quarter to date results. But just given this is sort of a smaller and again, unusual guidance outlook here, If you're willing to kind of give any early twenty twenty-six thoughts, you know, across the end markets, kinda carryover inflation, etcetera, to sorta help us point us, directionally a little bit into next year. Thank you. Kevin Murphy: Sure. Yeah. Matt, as as we maybe as as we take a step back, if you recall when we set out our calendar '25 guidance at the end of our fiscal year in July, We had talked about the first half of the calendar year growth being about 5%. And our expectation that we believe that that growth was gonna get a bit more challenging as we work through the calendar year particularly towards the end of the calendar year. As we were expecting additional new res pressure, and HVAC pressure to step up. And that's what we've started to see play through, so very much in line with our expectations. Maybe I'll shift to the calendar quarter as we're gonna try to try to get to the calendar year reporting now. If you look at calendar Q4 to date, so October, November, and basically the first, you know, week, week and a half of December, our total growth is sitting at about 3% for that period. Again, very much in line with our expectations with with that additional pressure on new resi and HVAC. And so, clearly, now with about three weeks to go, I would expect our calendar Q4 growth rates to be somewhere in that that 3% range as we round out the year. And then as we look forward into '26, we will set out our calendar '26 guidance in February. We're back with you in a couple of months as we get onto that calendar year cycle. But but the early part of '26, we wouldn't expect much change from a market perspective or much difference. As we exit the year at about that 3% range and then step into the step into the new year. But, again, we'll set out our views on the market. And our views on our guidance in February. Matthew Bouley: Excellent. Thanks, Bill. Good luck, guys. Harry: Thanks, Matt. Next question today will be from the line of Ryan Merkel with William Blair. Please go ahead. Your line is open. Ryan Merkel: Want to follow-up on the last comment on 4Q. Just a little bit of a slowdown there to growth up 3%. Is there anything that stands out? Or is it just maybe just seasonally, it's just a bit softer at this at this point. Kevin Murphy: Yeah. It it it is that new res pressure continuing to play through, Ryan. If you go back, permits and starts, as everybody's well aware, had continued to weaken through the calendar year. Outside of our waterworks business, there's a little bit of a lag of those slower starts coming through the rest of our customer groups, to then then play through on revenue. I think we're just seeing that playing through on those weaker starts. And then, certainly, there's more HVAC pressure, which we talked about during our last quarterly conference call. Our HVAC business was down about 6% for our first quarter or for the quarter ended October. That growth got a little bit more challenging towards the end of the quarter as the market's in a pretty tough spot. So I think those two those are the two pressure points we would point to. Still, as you look through that, we're very bullish and optimistic on the HVAC market overall over the medium to long term. And and we would believe that residential at some point will will stabilize on on the new resi side. Ryan Merkel: Got it. That makes sense and pretty consistent with what we're hearing. Let me shift to pricing. Looks like it came in a little better than you thought. Maybe talk about that and then talk about how the commodities are trending and if you expect supplier price increases as we head into the New Year? Kevin Murphy: Yes. Overall, the quarter, inflation was about 3%. So to your point, it stepped up from about 2% in the previous quarter to 3% this quarter. Finished goods was up a little bit more than it was in the prior quarter. So I'd still consider that kind of at the high end of that low single digit range. And commodities were down in the low single digit range still. As a basket. If you look at commodities, three three main baskets within that that group, PVC, which is our largest commodity basket, is still in deflation. Down in the double digit range, kind of that low double digit range. Steel, is up. I would call that mild inflation, and then we're still seeing strong inflation on copper tube and fittings. So overall, pretty consistent with what we expected. As we as we round out the first quarter and and enter into the end of the calendar year. And if we look at entering the calendar '26, we would expect modest price increases that are in line with traditional behavior on the finished goods side of the world, and those announcements are coming through right now. Hard to say what's gonna happen with all of the different dynamics that are involved in the market right now, but our expectation is that it'll be a more normalized pricing environment knowing full well that we had six quarters of deflation before we got back to flat and then plus two in the previous quarter. Ryan Merkel: Alright. Good job. I'll pass it on. Thanks. Thanks, Ryan. Thanks, Ryan. Harry: Next question today will be from the line of Dave Manthey with Baird. Please go ahead. Your line is open. Dave Manthey: Yes. Thank you. Good morning, guys. Along the lines of the the pricing discussion here with price looking like it's going to represent a pretty positive factor year over year through the, the coming calendar year against what what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next four quarters? Bill Brundage: Maybe this is Seth. Back, Dave, we're very pleased with the operating margin in improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is nine four to nine six. So call that a nine five at the midpoint. So we're expecting a very solid progression on operating margins this year of somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the during the middle part of this calendar year. Recall, we had a a quarter with 31% and then 31.7% gross margins, and we had flagged that there were some impact of the timing and extent of supplier price increases And then we expected that gross margin to to normalize and and you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to next year. So probably actually a little bit of a headwind in the middle part of the of the calendar year versus versus the prior year, twenty-six to twenty-five. We'll set out our guidance for overall operating margins next year, and certainly, that will that will be dependent on what the market environment is like. Assuming that we have supportive market and we have decent growth, we would expect some modest progression on operating margins next year. But, again, we'll be back with you in February and give you a more clear view of what we expect at that point. Dave Manthey: Makes sense. Thank you. And second, as it relates to the $2 billion ish in revenues from major projects that you discussed, It seems like you've been having a lot of success there because of the one Ferguson effort. Could you maybe I don't know if you could quantify or or bigger than a bread basket, tell us what percentage of those projects do you get more than one product and customer group via the one Ferguson effort. Versus not. Is that something you could share with us? Kevin Murphy: Yeah, Dave. Thank you. And and certainly, when we talk about large capital projects, we're talking about those projects north of $400 million in overall construction value. And so it's it's a varied group. Certainly, data center gets a lot of the attention today, but it's beyond that to pharma, biotechnology, onshoring, reshoring, manufacturing, and and others. And so the projects do vary. I will say, and people ask us quite a bit about what happens after large capital projects aren't the talk of the day. And the answer to that is really a new way of working for Ferguson. And so we are engaged early on in the construction process, early on with general contractors and owners around what specifications look like, how we can make sure that we have supply chains that stand up to timelines, And so doing that together with the contractors on the job we're engaging most of our nonresidential customer groups on these projects, whether that be industrial, fire and fabrication, waterworks, commercial mechanical, and they vary again depending on the kind of job. But that's the way we intend to work as we move forward. Never abandoning the local relationships that we have with our core contractor base, but also making sure that we can deliver on tight timelines make sure that we got the right product set for the job to deliver. Dave Manthey: That's great, Kevin. Thanks. Harry: Next question will be from the line of Keith Hughes with Truist. Please go ahead. Your line is open. Julian: Hey, good morning. This is Julian on for Keith. Just in terms of HVAC, when do you think comps are going to start to ease from the pre shipments ahead of the standard change from last Kevin Murphy: Yeah. I'd I'd say to again, to build on what Bill has already said, the market's in a tough spot right now. We saw it get a bit worse. As we went through the quarter and exited October. It's a variety of factors, though. You've got a bit of the a two l transition. As you had pull forward. You certainly have equipment price increase playing in now. As the majority of the sell through is in that new equipment standard. And then you've got a pressured consumer that is moving a bit to repair versus replace environment. And then you had some degree of play through on multifamily new construction that is now, you know, passed. And so we're pleased with the overall execution. When does that start to get back to a replace environment? When do we start to see a bit of residential life? That's that's tough to to pinpoint. For us, we're bullish on what that market looks like over time. And we're gonna continue to build out convenient locations across The United States. Continue to build out our OEM brand representation, We're gonna continue to focus on M&A expansion as we capitalize on what we think is a growing trend with that dual trade contractor. Julian: Got it. Thank you. Harry: Next question will be from the line of Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open. Scott Schneeberger: Thanks very much. Good morning. The I want to touch on some SG and A topics. Last fiscal year, you made investments in trainees, HVAC counter expansion, large project teams. Just to could I get an update on on how these investments have been trending what you're looking for maybe going out over the coming year, and, and impacts of these, of these investments to date. Thanks. Bill Brundage: Yes. Scott, thanks for the question. First off, from a trainee perspective, our trainee program something that's been really foundational to the success of this company over decades now. And it's a it's an area that we invest in in good markets and in bad markets. So we continue to add trainees year in, year out to fuel our pipeline of talent. This year, we added roughly 250 to 300 trainees in our in our classes throughout the year, and we would expect to continue that that program and expand that program as we step into calendar '26. In terms of additional investments, Kevin just talked about our HVAC expansion plans and the build out of convenient locations. We have now completed roughly 650 counter conversions So that is both taking HVAC counters and adding plumbing products as well as taking plumbing counters and adding HVAC products. And it's not just the products. It's also the expertise of and our associates that we train to ensure that we have experts serving experts. We believe that is yielding real fruit. So despite a very challenging eight HVAC environment, we believe we are outperforming that HVAC market. And have done so for the last several quarters. And we will continue, as Kevin said, to fuel that growth to to ensure that we expand that HVAC footprint. And and and maybe lastly, we're continuing to invest from a a technology and a digital standpoint. And so we continue to invest in new technology tool, digital tools, principally in the areas of HVAC. And for the repair, replace plumbing contractor. We're very pleased with the progress that we've made with with many of those investments. If you take a step back from an overall SG and A perspective, we've been able to continue to invest in those types of areas to fuel future growth while we've managed the cost base. And we did take some cost actions earlier in this in this calendar year that we talked about a couple of quarters ago. Those cost actions have played through where we've received the benefits of that. And so while even though we're operating in still a a bit of a challenging top line market environment, we're delivering good quality SG and A leverage. While we're continuing to invest in the business for the future. So we feel good about where the cost base sits as we exit calendar '25 and enter calendar '26. And maybe to just build on what Bill was saying. Certainly, the trainee aspect is a long-term investment in the business and making sure that we have a pipeline of talented associates to grow this. Business over time. He spoke about the HVAC business, so I won't be repetitive there. But when you look at what investments we've made in waterworks diversification, and making sure that we have a broad book of business from residential to public works to water wastewater treatment plant to geosynthetics and soil stabilization that is serving us well. And, certainly, we're pleased with a plus 14% growth rate We're pleased with the large capital project space. We talked about a multi-customer group approach and engaging early on in the project. But we're also investing in value-added services like fabrication. Valve actuation and automation, and virtual design. And so that's serving us well, obviously, with plus 21 in the commercial mechanical business. We're pleased. And then lastly, when you talk about Ferguson Home, and bringing together what is a best-in-class digital platform, with a showroom experience and a consultative approach and a builder outside Salesforce that's driving growth with the connected consumer to that builder, designer, and remodeler. And so we think all of those investments are proving to be successful as we move through a it's a challenging environment. Scott Schneeberger: Great. Thanks, guys. And just a follow-up. Spoke a little bit earlier. You you were asked about, supplier pricing going into next year. I'm just curious that from a high level, how are you thinking about managing inventory as you enter 2026? Thanks. Kevin Murphy: Yeah. We think our inventories are in a good spot right now. Teams are doing a really nice job and have done so managing through a unique environment. With price increases coming through the system this year. So I wouldn't expect significant changes to the inventory profile as we exit calendar '25 and enter calendar '26. We think we have the right levels of inventory to take care of our customers and to support continued market outperformance. Scott Schneeberger: Great. Thanks very much. Harry: Thank you. Our final question will come from the line of Nigel Coe with Wolfe Research. Please go ahead. Your line is now open. Nigel Coe: Thanks for the question, guys. Appreciate it. So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. Just wondering if there's any sense on how that's been trending year to date? Bill Brundage: Yeah. I would I would think of it, Nigel, in a pretty similar range. To the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected, to get back more into that normalized range of somewhere between 30-31%, So I think you can you can expect it in that in that range. As we exit the calendar year. Nigel Coe: Great. And then a lot of helpful commentary on the larger project. Sites. In terms of I know this would probably be in quite a range, but any sense on what Stoixson's sort of opportunity would be on a typical large project? Again, I know there's no typical large project but any sense on what the kind of content might be for those? Bill Brundage: Yeah. Well, I'll caveat it with it will vary significantly. Depending on the type of project. But and and as Kevin talked about, when we talk about large capital projects, we're talking about those projects that have construction value north of $400 million. As a general ballpark, you take that construction value and somewhere 2-4% of the construction value would generally make up our product set and our customer group set. But, again, that will vary pretty significantly. And that certainly doesn't include, you know, in the likes of the data center, that wouldn't include the cost of the servers chips and those types of interior pieces of equipment to run the data center. It's more just that construction value. Nigel Coe: Right. Very helpful. Thank you. Harry: Thank you, guys. Have a great This concludes today's Q and A session. I'll now hand over to Kevin Murphy for closing remarks. Kevin Murphy: Thank you, operator. And let's end the call in the way that we began with a strong thank you to our associates for their hard work and diligence in what is clearly a challenging market. As you heard today, we're pleased with the quarter. 5% revenue growth, expansion of growth in operating margin, 16% EPS growth, operating profit growth of 14%, continued investment in the business, and a strong balance sheet. We're pleased with the execution of the teams. And the continued investment in key growth areas that are yielding solid results we're sat here today. We'll continue to focus on driving construction productivity for the water and air specialized professional. We're gonna leverage scale with the best local relationships We're gonna continue investing in value-added services and digital tools. So thank you very much for your time today, Have a happy holidays, and we'll talk to you soon. Thank you. Harry: That concludes Ferguson's results. For the quarter ended 10/31/2025 conference call. I'd like to thank you for your participation. You may now disconnect your lines.
Operator: This is the conference operator. Welcome to the Ballard Power Systems Inc. First Quarter 2026 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Sumit Kundu, Investor Relations. Please go ahead. Sumit Kundu: Thank you, operator, and good morning. Welcome to Ballard Power Systems Inc.’s first quarter financial and operating results conference call. With us today on the call are Marty T. Neese, Ballard Power Systems Inc.’s President and CEO, Kate Igbalode, Chief Financial Officer, and Ralph Robinette, Ballard Power Systems Inc.’s new Chief Operating Officer. We will be making forward-looking statements based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could differ materially. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I will now turn the call over to Marty. Marty T. Neese: Thank you, Sumit, and welcome everyone to today’s conference call. This morning, I will give an overview of our Q1 2026 performance and provide a commercial update. I will focus on the progress we are seeing in the bus market. We are also joined by our new Chief Operating Officer, Ralph Robinette. He will introduce himself and share updates on our operations. Kate will then review our financial results in more detail. We had a solid start to the year. Deliveries into the bus and rail markets drove revenue growth compared to last year. We also delivered another quarter of positive gross margins. This is our third consecutive quarter of positive gross margin. It reflects disciplined cost and commercial management and marks an important step in our transformation toward becoming cash flow positive. To build on this progress, we have set a few near-term focus areas, including deepening our partnerships with bus OEMs in key geographies, improving and expanding our fleet services capabilities and offerings, and lowering costs through automation and intelligence. I will spend a few minutes on these and provide some additional color. Turning to buses. We have made several important announcements in the bus market this year. In North America, we signed a multiyear agreement with New Flyer representing approximately 50 megawatts of fuel cell engine supply. This strengthens our position as fleets continue to scale in the U.S. bus market. In the UK, Wrightbus selected Ballard Power Systems Inc. to power its next-generation hydrogen bus platform using our newest FCmove SC engine. In the EU, Solaris also selected Ballard Power Systems Inc. as the fuel cell supplier for its next-generation hydrogen bus platform, including the FCmove SC for its 12-meter bus. These announcements matter for several reasons. First, these new agreements are multiyear partnerships with leading bus OEMs in major markets. They include both engine sales and long-term service support. This strengthens our position as fleets scale and as our fleet services business continues to grow. Our intelligent fuel cell engines help us deliver better service. They provide real-time performance data that allows us and our OEM partners to respond faster and keep buses on the road. Our remote operations center adds another layer of support by improving parts planning, logistics, and predictive insights. Combined with our industry-leading durability, these capabilities position our engines as a zero-emission solution that can match or even exceed battery electric and diesel alternatives on uptime and total cost of ownership. Ballard Power Systems Inc. Fleet Services plays a key role in this strategy. We are moving from being only a module supplier to becoming a proactive, data-driven fleet partner. Our approach is built on more than 300,000,000 kilometers of real-world operating data. Using this experience, we created the industry-first uptime standard, bringing together predictive maintenance, training, service support, and parts assurance. These offerings are designed to deliver up to 98% fleet availability. This creates real value for OEMs by reducing after-sales friction and lowering risk. It also gives operators more predictable lifecycle costs and stronger protection against budget swings. As our installed base grows, these services expand our recurring revenue and turn our fleet into a long-term strategic asset. Second, these long-term agreements support our product cost reduction goals. Both Wrightbus and Solaris have committed to our ninth-generation FCmove SC platform. This engine was designed to reduce cost and simplify installation and maintenance, cutting the number of components by more than 40%, improving power density and durability. Each new bus we deploy also creates a long tail of service opportunities. Buses stay in service for eight, twelve, and even sixteen years. Our growing fleet gives us a multiyear runway for operations, maintenance, and training services. Through Ballard Power Systems Inc. Academy, we continue to support operators and technicians with the skills they need to run these fleets effectively. Taken together, these agreements and deep relationships reinforce our long-term market position. Ballard Power Systems Inc. holds a leading share of the fuel cell bus market in North America, the UK, and Europe. Being selected for next-generation platforms positions us to maintain that leadership as adoption accelerates and total cost of ownership continues to improve. Delivering industry-leading fleet services throughout the life of the bus is a major opportunity, and we are only getting started. We will now move to operations, which are central to delivering scalable, cost-competitive, and commercially ready products. For that, I will hand it over to our new Chief Operating Officer, Ralph Robinette. Unknown Speaker: Thank you, Marty, and good morning, everyone. I am pleased to join Ballard Power Systems Inc. at this pivotal stage in our transformation. By way of background, I bring more than 25 years of experience in operations, manufacturing, and supply chain across advanced technology and clean energy companies. My career has been defined by a focus on implementing the operational frameworks necessary to move advanced technologies from lab to high-volume manufacturing, scaling production, launching new products, and using automation to improve productivity and reduce cost. Most recently, I served as Chief Operating Officer at a leader in the residential solar manufacturing and service space. I led manufacturing, supply chain, fulfillment, and factory expansion. This included the launch of an automated production facility built around a closed-loop learning process where field performance data from tens of thousands of homes fed directly back into product design and process improvement. Proactively taking actions to prevent performance issues further differentiated our products, services, and solutions in the eyes of customers. In short, I bring a track record of scaling technology and building efficient, high-quality manufacturing and service systems. This aligns directly with Ballard Power Systems Inc.’s goal of reducing costs as we move towards cash flow positivity. What excites me about Ballard Power Systems Inc. is the combination of strong technology and a market that is now scaling. As Marty noted, this shift requires a sharp focus on execution. My team and I are prioritizing what matters most to our customers: quality, cost reduction, improved throughput, consistent delivery at scale, and closed-loop issue resolution. Relentless customer collaboration used to drive product and process improvements directly from customer field data and performance is critical. A key part of our process improvement work is Project Forge, our high-volume automated bipolar plate manufacturing line. At Ballard Power Systems Inc., we already use AI-assisted vision systems to detect defects in our MEAs. With Project Forge, we are deploying the same methodology to detect defects in our plates. By moving to higher volume with significantly more automation, we expect lower unit cost, reduced material waste, and improved quality, consistency, and scalability. We continue to expect Project Forge to enter full production in the second half of the year. Delivering that ramp successfully is a top priority. As mentioned, we are increasingly focused on optimizing the value of the intelligence of our engines. While the first order of business is to maximize uptime for our customers, there is even more we can do with these data-driven insights. As our deployed fleet continues to grow, we are increasingly leveraging the engine performance data from the field, creating insights to feed back to our manufacturing, supply chain, and product development teams. Ultimately, this work is about serving our customers by driving efficiency, simplifying our processes, improving quality, lowering costs, and ensuring we can deliver high-performance products at scale. Much of this happens behind the scenes, but I expect we will see the impact in product margin expansion and improved working capital management as these changes take hold. Marty, back to you. Marty T. Neese: Thanks, Ralph. Before I turn the call over to Kate, I will close with a few brief thoughts. Across the business, we remain focused on balancing cost discipline with growth, reducing product costs, improving commercial structures, and expanding our service offerings. We are also moving into new applications where our technology provides a clear advantage. Today, we highlighted progress in commercial terms and product cost reductions through our work in the bus market and through our operational initiatives. We also have additional business development activities underway in rail, material handling, and stationary power. In stationary power specifically, we continue to see green shoots of opportunities to improve grid stability and energy resilience, including in defense applications with NATO nations. These collective efforts are important building blocks for long-term growth, and we will continue to update you as these programs advance. Stepping back, we are encouraged by the progress we are making. We are seeing stronger gross margins, better commercial agreements, and continued cost reduction. These are clear signs that our transformation is taking hold. There is more work ahead, but we believe we are building a stronger and more scalable business. As a final note, we will be hosting our Capital Markets Day event called the Ballard Power Systems Inc. Forum on October 22. This will be an opportunity to get an up-close look at our work and discuss in-depth our path to profitability. With that, I will turn the call over to Kate. Kate Igbalode: Thanks, Marty. As Marty mentioned earlier, we continue to make progress toward cash flow positive. We delivered positive cash flow in Q1. These results reflect the early impact of the transformation initiatives underway across the business. Total revenue for the quarter was $19.4 million, which represents 26% growth compared to last year and was driven by our rail and bus verticals. Gross margin improved to 14%. This is a 37% increase compared to Q1 2025. It also marks our third straight quarter of positive gross margin. The improvement was driven by higher revenue and lower manufacturing overhead. Turning to operating expenses and cash. Our total operating expenses were $16.4 million, which is a 36% reduction compared to last year. The decrease reflects disciplined cost control across R&D, SG&A, and commercial activities. It also reflects the benefit of restructuring actions completed in 2025. Cash used in operating activities was $7.8 million. This compares to $24.4 million in the prior year, a 65% improvement. The change reflects the impact of restructuring actions and stronger operating performance as the business continues to scale. Adjusted EBITDA improved to negative $11.4 million compared to negative $27.5 million in 2025. Improvement was driven by stronger margins and lower operating expenses. We ended the quarter with $516.8 million in cash and cash equivalents. This is a decrease of about 2% from the prior quarter, and we have no bank debt and no near- or mid-term financing needs. This strong balance sheet gives us the flexibility to deploy capital in support of our goal of becoming cash flow positive. Consistent with past practice and given the early stage of the hydrogen fuel cell market, we are not providing specific revenue or net income guidance for 2026. We do expect revenue to be weighted towards the second half of the year. Our 2026 guidance ranges are as follows: total operating expense of $65 million to $75 million and capital expenditures of $5 million to $10 million. I will now turn the call over to the operator for questions. Operator: We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We ask callers to kindly limit themselves to one question and one supplemental. We will pause for a moment as callers join the queue. The first question today comes from Baltaj Sidhu with National Bank. Please go ahead. Analyst: Good morning. Could you elaborate on the drivers behind the strong growth in stationary revenues? Specifically, how much was supported by one-time deliveries, and to what extent is demand coming from data center customers versus traditional verticals? And then just on the bus segment, what were the key drivers of the decline this quarter year-over-year? Was it largely delivery timing related, or are there any changes in customer ordering patterns or funding that we should be aware of? Marty T. Neese: I will start. The stationary power business that we are seeing growth in year-over-year is largely diesel genset replacement business, not necessarily tied to data centers. The data center opportunity is an area of deep exploration for the company, and we expect that to materially change as we go forward. But right now the increase that you are seeing is more what I would call diesel genset replacement business in the stationary power market. On the bus segment, it is just timing. More than anything else, it is the amount of inventory they have in the channels already and their build out, if you will. Additionally, in the EU, there was some slowness in some of the funding support, and that translated into year-over-year changes in the demand flow. We expect that to change going forward as the friction is reduced. More importantly though, the Wrightbus and Solaris announcements are huge wins for the company. Those are major design wins for next-generation buses, and no matter the lumpiness of the 2025 to 2026 epoch, if you will, we see that as being really strong indications of the value of our new product, and that will translate materially into significant demand in our order book over the protracted period of multiyear agreements. Operator: The next question comes from Rob Brown with Lake Street Capital Markets. Rob Brown: Hi, good morning. First question is on the fleet services business model that you are developing. How do you see that playing out? Do the new sales come with a service contract element as well, or what is your vision on how the service business develops? And then on the rail business, it was strong in the quarter and I think you have some contracts you are delivering. How does the rail business play out over the next few quarters? Is it delivering your current contracts, and what is the cadence of that flow? Marty T. Neese: That is a great question, Rob. Yes, for sure, each new sale does come with a service level agreement accompanying it. That is a matter of basic warranty, extended warranty, parts packages, training. We have an entire suite of value-added activities and services that we have been complementing our initial CapEx sales with. That translates into, with the long asset life, an extended service tail. You can think of that as you get the one-time sale of the CapEx but then you get an annuity of the service for the duration of the extended asset. On rail, we are expecting that the prior work done in the rail business is now opening up future opportunities for us. To be more specific, we did very large-scale deployments with rail customers, and they have had the products in their hands for some period of time. As they are starting to see the value proposition come into sharper relief and getting more and more comfortable and familiar with a fuel cell locomotive, they are starting to be more bullish on their future, which bodes well for us. We think that could be a really exciting piece of business for us. It could end up being one of those annuity-type accounts where every year there is a capability to replace diesel engines with fuel cells and do that year after year until they materially decarbonize fleets. That is early days for us, but the product is performing well, the team is happy, the customers are happy, and we expect that there will be further advancements in that market over time. Operator: The next question comes from Michael Glen with Raymond James. Please go ahead. Analyst: Can you discuss how the infrastructure and hydrogen availability have changed? Do you see any meaningful investments taking place behind the scenes to improve hydrogen availability or distribution? Historically, a lot of hydrogen has been generated from fossil fuel sources such as natural gas. Have you seen any change to bring back renewables in terms of hydrogen generation? Marty T. Neese: We have been seeing meaningful progress in the availability of molecules. The supply is reasonable; the unit economics are what need to continue to improve, and that is starting to also gain a bit more momentum. When you can provide molecule suppliers with stronger and more predictable patterns of offtake, they can get more aggressive in their pricing depending on the tenor of the contracts that they are signing with different folks. Our job so far is to focus on creating the downstream demand and the offtake signal that allows the supply to keep being built and being consumed appropriately. So far, so good on that, and we are starting to see more and more interest outside of the large-scale industrial use cases, and that bodes well for applications such as mobility and stationary power. Regarding renewable generation, my prior comments were really focused more on green hydrogen. Green hydrogen is starting to see more and more penetration. The traditional gray hydrogen, methane-based gray hydrogen, is certainly going nowhere; it is there, it is incumbent, and it is competing with other outlets for natural gas. Gray hydrogen has to have its own economic footing, but green hydrogen is starting to take more and more advantage of the penetration of renewables around the globe. To some degree, blue hydrogen will find its path as well on an increasingly ambitious agenda over the next few years. Operator: This concludes our question and answer session. I would like to turn the conference back over to Marty T. Neese for any closing remarks. Marty T. Neese: Thank you for joining us today. We look forward to speaking with you next quarter. Operator: This brings to a close today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Operator: Greetings, and welcome to the Veeco First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Alex Delacroix, Head of Investor Relations. Thank you. You may begin. Alex Delacroix: Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. The earnings release and slide presentation to accompany today's webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, the timing and expected benefits of the proposed transaction with Axcelis, market conditions or otherwise make statements about the future, these forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K, annual report and other SEC filings. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. Please note that we will not be addressing questions related to our pending merger with Axcelis. We urge you to read the joint proxy statement relating to the transaction with Axcelis. With that, I would now like to hand the call over to our CEO, Bill Miller. William Miller: Thank you, Alex, and thank you, everyone, for joining us today. Veeco executed well in the first quarter and believe we're strategically positioned to benefit from the evolving semiconductor landscape, driven by artificial intelligence and high-performance computing. Reviewing our first quarter results, revenue was $158 million, non-GAAP operating income was $9 million, and non-GAAP diluted earnings per share was $0.14, all within our guidance ranges. Now let me take a moment to highlight our top 5 key takeaways for the quarter. First, we're poised to benefit from the significant industry inflection driven by the global build-out of AI infrastructure. Veeco is well positioned across our portfolio with highly differentiated process equipment aligned with high-growth opportunities. Second, order activity that accelerated in the second half of 2025 continued into the first quarter of 2026, and our pipeline of new opportunities continues to expand. Third, as it pertains to the compound semiconductor market, a stronger-than-expected opportunity has emerged for Veeco to capture multiyear revenue in the production of indium phosphide lasers. This is a result of the broader transition from copper to optics within data centers over the next few years for increased speed and bandwidth to meet the scale-up needs of the AI landscape. This opportunity for Veeco spans across multiple products, particularly for epitaxy and laser facet coatings, which I will provide more details on later in the call. Fourth, from an operational standpoint, we're expanding our manufacturing footprint and capacity to support increasing customer demand and enable timely deliveries. Lastly, as a result of accelerated bookings activity and ongoing customer engagements, we've increased visibility with significant orders for delivery well into 2027. Overall, we believe Veeco is well positioned for durable multiyear growth driven by AI infrastructure and high-performance computing, and we remain focused on disciplined execution to deliver long-term value. Before I move to the next slide, as a brief reminder, we continue to make progress on our proposed merger with Axcelis. The transaction has been approved by shareholders of both companies, and all regulatory approvals have been received other than antitrust approval in China. We remain engaged with the authorities in China and continue to expect the transaction to close in the second half of 2026. Integration planning is progressing well, and we remain excited about the strategic fit and long-term potential for value creation. Moving to the next slide, I'll discuss Veeco's critical role in the semiconductor manufacturing landscape, which represents the majority of our revenue. Capital spending is being driven by AI investments and is becoming increasingly concentrated at the leading-edge areas where Veeco is differentiated in technology. In logic and foundry, Veeco has a long-standing and trusted position supporting advanced annealing applications across leading nodes. Our LSA platform continues to be production tool of record at all 3 Tier 1 logic customers, driving repeat business and strong customer engagement, pushing towards more complex device structures with low cost of ownership. At the same time, our next-generation nanosecond annealing platform is progressing through evaluations at Tier 1 logic customers, addressing critical low thermal budget applications such as contact annealing, materials modification and 3D device integration. These evaluations are advancing well, and we're anticipating an additional evaluation tool shipment to a third Tier 1 logic customer in the coming months. Expanding our penetration within our memory customers within the semiconductor market remains one of our most important strategic priorities. The transition toward AI-centric architectures, high-bandwidth memory and increasingly complex stack devices is driving new thermal and materials requirements, where we believe Veeco's technologies provide a clear advantage. During the first quarter, we continue to make solid progress with our top Tier 1 memory customers. In addition to serving as the production tool of record at a leading HBM supplier, we're advancing our LSA evaluation system at a second Tier 1 DRAM manufacturer with the potential for initial pilot line and high-volume manufacturing orders in 2027. We're also extending our memory opportunity through Ion Beam Deposition. Multiple IBD300 systems remain under evaluation at leading DRAM customers with activity extending throughout 2026. The systems enable low-resistance film deposition for advanced DRAM bit line metallization, providing an additional pathway to expand our served available market. Veeco remains a market leader in Ion Beam Deposition for EUV mask blanks, a critical enabling technology as logic and memory customers expand EUV adoption and prepare for high-NA lithography. We also have broadened our exposure to EUV pellicles, which are increasingly required to protect these critical masks as EUV usage scales. Advanced Packaging, supported by our wet processing and lithography tools continues to be a significant revenue driver from AI-related demand. As we discussed last year, our Advanced Packaging business more than doubled year-over-year, reflecting strong customer adoption and accelerating capacity investments. During the first quarter, we secured major volume orders for our wet processing systems from leading OSAT customers, supporting high-volume manufacturing of next-generation AI accelerators built on 2.5D Advanced Packaging architectures. These systems are scheduled to ship throughout the remainder of 2026 and into the first half of 2027, providing strong revenue visibility. To support this growth, we're continuing to expand our manufacturing footprint and production capacity, positioning the business to meet sustained customer demand as Advanced Packaging plays an increasingly critical role in AI infrastructure. As we turn to the next slide, we outline our forecast served available market within our semiconductor segment through 2030. This outlook continues to be driven by sustained investment in AI and high-performance computing. In annealing, we project the SAM to be $1.3 billion by 2030 as devices continue to shrink and shallower and more precise anneals are required to improve performance. These trends support long-term opportunities for both LSA and next-generation NSA platforms. Next, in Ion Beam Deposition, our IBD300 platform for low-resistance metals, together with our leadership position in IBD EUV mask blanks as well as the emerging opportunity in pellicles where we're production tool of record at a leading customer, all represent meaningful market opportunity and total a SAM projection of $500 million by 2030. As devices become more power constrained and EUV adoption broadens, the opportunities for our technologies continue to increase. Finally, in the back-end semiconductor process, our Advanced Packaging business for our wet processing and lithography tools continues to expand rapidly, and the SAM is projected to reach $1 billion by 2030. We continue to demonstrate our ability to support our customers' high-volume manufacturing ramps driven primarily by AI. Moving to the next slide. I want to spend time discussing our stronger-than-expected momentum in the compound semiconductor market. We're seeing a clear industry inflection point underscored by NVIDIA's recent investments in optical networking leaders. In silicon photonics, the industry is transitioning from copper interconnects to co-packaged optics as AI data centers require higher speeds, greater bandwidth density and improved power efficiency. Indium phosphide laser manufacturing is a critical component of this shift and a foundational technology for next-generation AI optical infrastructure. As the industry transitions towards future capacity requirements, we believe this represents a growth opportunity of approximately $2 billion over the next several years. Veeco plays a critical role across multiple steps of the indium phosphide laser manufacturing process, and we're seeing rapidly accelerating order demand across several of our product lines. Beginning with epitaxy, MOCVD is a critical step, and we're seeing increasing orders for our Lumina MOCVD indium phosphide platform as leading photonics customers expand capacity to support AI-driven data center growth. We also support downstream process steps with our WaferEtch and WaferStorm wet processing technologies for advanced etching and surface preparation. What I would like to highlight for investors is the laser facet coating and epitaxy opportunities are similar sized and significant for the manufacturing of indium phosphide lasers. Our SPECTOR Ion Beam Deposition system designed for the critical laser facet coating step is essential to the process. Veeco is a market leader in Ion Beam Deposition and is differentiated from traditional approaches such as e-beam evaporation, ion-assisted deposition or PVD. Compared to other approaches, the SPECTOR Ion Beam Deposition tool delivers low loss optical films with tight control of thickness, uniformity and reflectivity. Precision is required for anti-reflective and highly reflective facet coatings on indium phosphide lasers. We have engagements with industry leaders that will drive the growth of our SPECTOR IBD business in 2027 and beyond. As announced in today's press release, we received over $250 million in orders from multiple customers for our MOCVD, wet processing and Ion Beam Deposition tools to support the manufacturing of indium phosphide lasers with delivery starting in 2026 and significantly accelerating in 2027. A large portion of these orders is for our SPECTOR IBD system from leading suppliers of next-generation 800-gig and 1.6 terabyte optical transceivers for hyperscale customers. This significant order activity underscores the long-term value of our Ion Beam Deposition technology leadership and our expanding role in this rapidly growing market. We have long-standing partnerships with our customers spanning more than 2 decades, and we are well positioned across our multiple differentiated products to meet their growing needs in silicon photonics. Our focus remains on supporting customer production ramps, executing early deployments and expanding our footprint to meet customer demand. With that, I'll flip to the next slide to share our projected served available market within the compound semi space. In silicon photonics, specific to the manufacturing of indium phosphide lasers, we project our SAM to be $700 million in 2030. As we discussed on the previous slide, demand is accelerating across several of our products driven by AI data centers. Our Lumina MOCVD batch platform, WaferStorm and Etch and our SPECTOR Ion Beam Deposition for the laser facet coatings are gaining significant traction. Other photonics driving SAM growth include red MicroLEDs, solar cells for low earth orbit satellites and AR/VR applications. Additionally, a global optoelectronics solution provider accepted and qualified our Lumina plus MOCVD system for high-volume arsenide phosphide production, including for use in MicroLEDs. We expect these other photonics application SAM to total $550 million by 2030. In GaN Power, we project our SAM to be $250 million by 2030 as we continue to see strong long-term drivers tied to AI data center power efficiency, electrification and high-power density applications. Importantly, at a leading power IDM customer, we have an evaluation for our Propel 300 system in place, and we received a pilot line order for a multi-chamber system, which we previously announced at the end of 2025. This represents an important validation point as customers move from development to early production. Looking ahead, as this customer ramps and finalizes long-term capacity plans, there is potential for additional system orders in the second half of 2026 for delivery in 2027. In the next several years, we expect our compound semiconductor served available market opportunity to meaningfully grow as AI, power efficiency and advanced connectivity continue to reshape the industry. I would now like to hand the call over to John to walk through the financials. John Kiernan: Thank you, Bill. Revenue came in at $158 million, slightly below the midpoint of our guidance and previous quarter. Our semiconductor business reported $109 million, a decline of 1% and comprising 69% of revenue. Revenue in the semiconductor market was largely driven by laser annealing systems for leading foundry, logic and memory customers and wet processing systems for Advanced Packaging. Compound semiconductor revenue totaled $19 million, a 6% decline from the prior quarter, totaling 12% of revenue. Data storage revenue was $10 million, flat to the prior quarter, representing 6% of revenue. Scientific and other revenue declined 16% to $20 million, comprising 13% of revenue. Turning to the quarterly revenue by region. Revenue from Asia-Pacific region, excluding China, was 57%, no change from the prior quarter. Sales were driven by leading semiconductor customers in Taiwan for our laser annealing systems and wet processing systems for advanced packaging. The U.S. accounted for 20% of revenue, an increase from the previous quarter, primarily from semiconductor customers. Our China portion was 13% of revenue, a decrease from the previous quarter. EMEA and the rest of the world accounted for 10% of revenue. Turning to the first quarter non-GAAP results. First quarter gross margin came in at 36% and operating expenses totaled $49 million. Income tax expense was approximately $1 million, resulting in an effective tax rate of approximately 11%. Net income was approximately $9 million and diluted EPS was $0.14 on 62 million shares. Moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $383 million, a decline of $7 million. From a working capital perspective, our accounts receivable increased by $40 million to $151 million. Inventory increased by $7 million to $282 million and accounts payable increased by $5 million to $60 million. Customer deposits included within contract liabilities on the balance sheet increased $19 million to $69 million. Cash flow from operations totaled $8 million and CapEx totaled $5 million during the quarter. Next, I'll turn to our second quarter non-GAAP outlook. Second quarter revenue is expected to be between $170 million and $190 million. Gross margin is expected to be between 38% and 40%. We expect OpEx between $52 million and $55 million, net income between $12 million and $21 million and diluted EPS between $0.20 and $0.32 on 64 million shares. Based on our current visibility, we're reiterating our full year 2026 revenue guidance between $740 million and $800 million, with growth accelerating in the second half of the year as well as reiterating our diluted non-GAAP EPS between $1.50 and $1.85. I'll now provide additional commentary for each of our markets. Beginning with the semiconductor market, in 2026, we expect strong growth from our Tier 1 customers driven by AI and high-performance computing, more than offsetting declines in the mature node China business. Additionally, our advanced packaging wet processing systems are forecasted to contribute to revenue growth as customers increase manufacturing capacity to support AI workloads. In the compound semiconductor market, we see strong growth in silicon photonics, particularly for indium phosphide laser manufacturing driven by AI data center demand. We are also seeing emerging opportunities for low earth orbit satellites, MicroLEDs, AR/VR applications and GaN Power. We have received significant orders in the first quarter across this market, which is driving meaningful revenue growth into 2027. In data storage, we secured orders in the second half of 2025 and experienced continued order activity in 2026 for our Ion Beam equipment. We are seeing increase in AI-driven demand for higher capacity HDDs, supporting investments in capacity and new technologies such as HAMR. Customer engagements remain strong with our business fully booked in 2026 and extending into the first half of 2027. As we look ahead, we are seeing continued acceleration across several of our core markets, supported by increased customer engagement, expanding pipelines and strong order visibility. Our focus remains on disciplined execution as we support customer production ramps and deliver against the next phase of growth. I would now like to turn the call to the operator for Q&A. Operator: [Operator Instructions] As a reminder given the pending merger with Axcelis, the Veeco management will not be addressing questions related to the transaction. [Operator Instructions] Our first question comes from Denis Pyatchanin with Needham & Company. Denis Pyatchanin: So maybe we can start with this $250 million order with the orders beginning in 2026. Could you tell us maybe which quarter would you expect this to start Q3 or Q4? And then at what point in 2027 do you think this will kind of hit its revenue quarterly peak? William Miller: Denis, I would say we'll start shipping against those $250 million plus of aggregate orders in the third quarter. But I would say probably the most significant ramp will probably start in Q1 '27. Denis Pyatchanin: Great. And then for these systems for the Lumina, for the SPECTOR and for the WaferEtch, kind of what are your current lead times? And what do you think your maximum capacity is to meet demand for these systems on an annual basis? William Miller: We have plans to increase our SPECTOR IBD capacity about 10x from its kind of base level we're at today and starting to hit that kind of level in early '27. And we're looking at future capacity needs to potentially double that again. And in wet processing, we're looking to add some expansion capacity to our existing facility as well as looking to an outsourced partner contract manufacturer in Southeast Asia for further capacity expansion. Denis Pyatchanin: Great. And then my final one is about gross margins. So it looks like we came down a little bit to 36.2% from 37.7%. Is this predominantly due to mix like heavier advanced packaging? Or maybe were there some other variables contributing? John Kiernan: Yes. I think specifically to Q1, one of the factors that contributing is that we had one less system, LSA system to a China customer. We got recently informed by BIS that, that customer would require a license to ship to certain fabs for that customer. So that had about an $8 million impact on the top line for Q1 and also put us outside, as you mentioned, the gross margin guidance range. Operator: Our next question comes from David Duley with Steelhead Securities. David Duley: A few other questions on the significant order activity. I was wondering, you kind of addressed it, but it sounds like there are like 3 tools involved in the big order here. And are they equally split? Or could you just kind of talk about the volume of each tool in the $250 million order? And then as far as the ramp-up of this business, is this -- did you take this business from another competitor? And so I'm kind of curious about the competitive dynamics of this. And are you sole sourced? Or are you sharing the business? William Miller: Yes, Dave, let me give you some color here because we don't really talk -- haven't really historically talked a lot about the indium phosphide solutions that we have. So if you think about -- there's really 3 pieces that Veeco serves in indium phosphide laser manufacturing. First is the epi step, which I think is pretty well known and discussed. So Veeco and our competitor provide MOCVD equipment to make the business end of the laser, the indium phosphide epitaxy that makes the device. We also have wet processing, wet etch and wet clean steps as part of the formation of the laser. And then also a part that's probably not as well known by investors is Veeco has an Ion Beam Deposition product called the SPECTOR that deposits the antireflective and highly reflective coatings to create the laser facet coatings in the laser. And as you might guess, having followed the company, Ion Beam Deposition can deposit films much better than PVD or e-beam deposition, et cetera. And so we can deposit films with much better optical properties, very similar to the fact that we can make better IBD EUV films or better Ion Beam Deposition films for low-resistance metals. So here's another example of kind of ion beam core technology where Veeco sold over 100 tools during the dot-com boom lighting up DWDM fiber and then that business kind of went away for quite a long time. But during that time, Veeco maintained the deep technical relationships with a number of key customers where we are kind of process tool of record in their laser facet coating business. And so I think it's probably worth noting that when you look at the size of the 3 opportunities in front of us, the epitaxy market and the laser facet coating market opportunities are about the same size. They're pretty significant markets. And I would characterize our laser facet coating opportunity where we have a very strong incumbent position, not everywhere, but in a number of key companies. Whereas in the epitaxy space, as I think you know, our competitor has a decent, very good incumbent position, but Veeco has, over the past number of years, developed some products to improve our competitiveness. And in that group of $250 million plus of orders, a number -- we did receive a number of MOCVD orders in -- as part of that ramp. So I would say a large portion of that was for the IBD laser facet opportunity, but also includes some very important orders for wet processing because that's a really critical step in the device manufacturing as well as the epitaxy step. David Duley: Okay. So the epi step is the one where you've gone head-to-head, I think, with like AIXTRON and... William Miller: Correct. David Duley: I guess one part of the business here. Would you say you're a second source or a primary source? And I'm sorry to dwell on this, but it mentioned in the press release, I think, multiple customers. Could you just elaborate a little bit more about your positioning? William Miller: Yes. So I would say in laser facet coating, we have a very strong incumbent position. I would say in the epitaxy step, we are probably more the second provider there today as a second source. And I would say in the wet processing, we have a strong position there with a number of the leaders there. David Duley: Okay. Final question for me, and we'll turn it over to others is, the GaN opportunity, I think you talked about it and you've received an order in the past, I think, from a 300-millimeter GaN customer. How big of a market do you think that, that could be if you're able to penetrate and capture some of the business that I'm assuming all these things are -- all these GaN parts are going into the data center, but maybe I'm wrong, maybe you could just elaborate a little bit about that. And that's it for me. William Miller: Yes, Dave, you're right on there. I mean I'd say the adoption of 300-millimeter GaN on silicon is squarely targeted at the AI data centers. I would say we've had, as you know, a tool out with a major IDM for some time. The performance of our tool set is doing quite well. We have a pilot line tool order from the customer, and we're in the process of manufacturing that and would expect to ship that at the end of the year kind of time frame. So yes, it's definitely squarely in the AI data center applications. Operator: Our next question comes from Gus Richard with Northland Capital Markets. Auguste Richard: Congratulations on the huge order momentum. To hit the high end of the range for the full year, what are the levers to get there? Is it delivery times? John Kiernan: Yes. So thanks for the question, Gus. I think our opportunity to go to the higher end of the range right now, primarily rest in the semiconductor piece of our business. And I would say in the areas of laser annealing and lithography are probably sort of the drivers there. If I look at the other markets and I look at, like, for example, the data storage market, given our lead times and how we work with our customers on sort of build-to-order, there could be some upside in some service and aftermarket business, but the systems business is pretty much booked out for this year, and we're booking orders into next year. And in the compound semiconductor market, we're able to get some of this new business into the back half of the year, as Bill mentioned here in answering an earlier question about some tools coming into Q3 and Q4. And we were anticipating that as part of our view for the year already anyway. But the predominant increase in capacity and bringing on and meeting the customers' ship dates principally happen in 2027. Auguste Richard: Got it. And sort of the underneath question is the SPECTOR. Does that have a similar 3-quarter lead time as ion beam for HDD? John Kiernan: We'll work to -- on that sort of lead time. We've been in this business for a long period of time. Recent business is a few tools a quarter. And yes, I think the lead times are more in that sort of 9-month lead time there. As we look to ramp up this business here, we'll look to reduce lead and cycle times for that business in order to meet customer shipment requirements. But mainly, we're going to see sort of a step-up in the output for that business starting in Q1 of 2027. Auguste Richard: Okay. Got it. Got it. Makes complete sense. And then just in terms of some of the evals that are going on, the Ion Beam bit for the memory market. Do you think you can reach conclusion on those evals in the next quarter or 2? And sort of what are your prospects on getting over the finish line? William Miller: Yes. We're -- the feedback from our customers is it's not a matter of if, it's a matter of when. They're impressed with the -- very impressed with the film performance of the IBD, where we're working very closely with them is in areas such as particle performance, automation, reliability. And so they've extended their evals out through the end of 2026, and we're working on a few CIP improvements to the tool to address some of those shortcomings. So I would say it's really -- the customer is really quite excited about the opportunity, but we do have some, I would call it, engineering work left to do to demonstrate the high-volume requirements of front-end semi. Operator: [Operator Instructions] Our next question comes from David Duley with Steelhead Securities. David Duley: Could you talk a little bit more about the hard disk drive business? And what -- do you think that, that will -- what sort of second half growth profile should we expect versus the first half? And then you've talked about obviously having the order book is full and manufacturing costs are full for '26. Are you expanding capacity for 2027 at this point? Or it would seem to me like the disk drive guys are going to add a lot of capacity given what they're seeing from the AI data centers, but maybe I'm wrong. William Miller: Yes. I would say, Dave, we're looking to double that business in '26 over '25. And I would say the trajectory of it is more second half loaded. I think probably the first system shipment is planned to happen in Q2, none in Q1 and then ramping in Q3 and Q4 just based on lead times. As you know, we kind of do a build-to-order model. We're not a build to forecast model. And that kind of keeps us and the industry healthy, and that does seem to work for everybody. But what we are seeing, I would characterize year-to-date at this point that both of our major customers are continuing to place orders, not only for front-end equipment at the wafer level, but also the back end, what they call the slider fabs, which clearly means that they're increasing the number of heads that they're producing. So I would guess based on the order activity we're seeing here early in '26 that certainly the first half of 2027 will remain strong. And I would just characterize the commercial activity still remains pretty positive from an order book standpoint. John, I don't know if you'd like to add. John Kiernan: Yes. I think you covered that very well, Bill. I think that really sums up well where we are with 2026 and what visibility we have into 2027 at this time. David Duley: And then final one for me is, what would you expect kind of a rough cut of what you expect your semi revenue to grow in '26? And I'm guessing it's probably going to grow higher in '27, but maybe you could elaborate a little bit on some of the puts and takes in growth in both '26 and '27. John Kiernan: Yes. We see mostly sort of positive environment here in 2026 and estimates of a growing WFE environment in '26 and moving into 2027. So pieces of the business attached to AI and high-performance computing expected to grow. And so that's advanced foundry logic with our laser annealing product, high-bandwidth memory for our customer that we've penetrated there and continued strength in Advanced Packaging. I would say the one headwind for us in the semi business, but is more than offsetting the strength in the pieces of the business I just mentioned is declining business in China for mature node. So we expect that business to have headwind in 2026. We've been foreshadowing this for the last 2 years or so right now that we saw the business falling off in 2025. As a reminder, we have a narrow base of business there in China. It's really highly predominant for our LSA product for 40- and 28-nanometer fabs, and they just don't see that same level of investment in new fabs that we saw a couple of a couple of years ago. So taking all that into consideration, we see sort of our semi business growing this year over last year mid-teens. David Duley: I was going to say, since you're taking your Chinese lumps this year, I would guess that your growth rate would probably accelerate next year. John Kiernan: We're looking at a very positive WFE environment, and we have nice attachments to the areas that are expected to drive WFE. So yes, I think as we have this early look at 2027, 2027 looks positive. Bill did sort of mention earlier in the prepared remarks that we are increasing our capacity for Advanced Packaging. We see opportunities for that to continue to grow into 2027. So we're taking -- making some investments to increase capacity there as well. William Miller: It's probably also worth mentioning, Dave, that a lot of the WFE estimates that you see include a big -- some pieces of the silicon photonics market. And so you'll see that show up in our compound semi. So when you look at semi alone, really some of the compound semi will probably be categorized as WFE by -- more generally. And so our compound semi business is probably going to grow 50%. So when you take the kind of the mid-teens that John spoke about and the portion that's really significantly growing, we're probably growing much higher than that on a WFE basis. Operator: At this time, we have no further questions. I would now like to turn the call over to Bill Miller for closing remarks. William Miller: Thank you. As we look ahead, we believe Veeco is well positioned to meet the evolving needs of our customers as the silicon photonics industry reaches an inflection point driven by AI and high-performance computing. Our technologies across logic, memory, Advanced Packaging, compound semi and data storage are becoming increasingly critical as customers push for greater performance, scale and efficiency. With strong customer demand, expanding served available markets and disciplined execution, we see meaningful long-term growth and remain focused on delivering sustained value for our shareholders. I'd like to thank our employees for their hard work as well as our customers, partners and shareholders for their continued trust in Veeco. Have a great evening. Operator: Ladies and gentlemen, the conference call of Veeco has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Good morning, and welcome to the Diversified Healthcare Trust First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, May 5, 2026. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris. Christopher Bilotto: Thank you, Matt. Good morning, everyone, and thank you for joining our call today. DHC delivered a strong first quarter, demonstrating the powerful combination of our active asset management and the deep expertise of our expanded operating partners. The strategic changes we made within our SHOP portfolio in 2025 continue yielding results with the first quarter aligning with our outlook focus on driving revenue, expense synergies and overall margin improvement. Looking ahead, we are well positioned to capitalize on powerful tailwinds, including the burgeoning demand from an aging population and a historically low new supply pipeline for senior housing. We are confident that our best-in-class operators and strengthened balance sheet will continue to drive superior performance and create significant long-term value for our shareholders. Turning to the quarter. After the market closed yesterday, DHC issued first quarter results that reflect continued progress across our business. We reported normalized FFO of $33.1 million or $0.14 per share and adjusted EBITDAre of $74 million, both well ahead of the analyst consensus estimate. Consolidated NOI increased 4.7% year-over-year to $75.9 million. Our same-property SHOP portfolio delivered a robust 13.5% increase in NOI year-over-year, reaching $44.3 million. This was driven by same-property occupancy growth of 110 basis points and average monthly rate growth of 5.9%. Our sequential performance reflects the benefits of our active asset management strategy with contributions from new operator partnerships becoming even more apparent. Our same-property NOI margin expanded by 160 basis points to 14.9%, with occupancy holding at 82.4%. This margin improvement was driven by progress on both the top and bottom line. On the revenue side, growth was largely supported by an average annual rate increase of 4.5% across 70% of the portfolio in January, complemented by a favorable shift in resident levels of care. On the expense side, our progress has been equally impressive and demonstrates the immediate impact of our new operating partners. For example, during the quarter, we secured new dietary and food and beverage contracts that simultaneously enhance the resident experience while locking in significant cost savings for the year. Furthermore, a key area of focus, labor costs continues to moderate with reduced contract labor and the rightsizing of regional and community labor costs. These early results are a direct testament to the enhanced discipline and tighter cost controls our operators are bringing to the portfolio, and we remain optimistic about our ability to capture further efficiencies. Building on our operational momentum, we are increasingly focused on selectively deploying capital into high-return ROI projects to drive organic growth. Our strategy targets the repositioning of underutilized or closed skilled nursing wings and converting them into independent living, assisted living or memory care. We have identified a pipeline of opportunities across 16 communities, including 6 communities as part of the first phase. These 6 initial projects are expected to cost approximately $20 million and will add roughly 150 units to the portfolio, representing a significantly lower cost per unit relative to our view of the replacement cost and creating immediate embedded value. Because we currently absorb carrying costs on these vacant wings, these projects are expected to be immediately accretive to earnings upon completion with expected returns starting in the mid-teens. Beyond the direct financial returns, these conversions enhance the marketability of the entire community, improving the sales cycle and expected length of stay for residents. We believe these projects represent a compelling and disciplined use of DHC's capital, and we expect these repositionings to begin over the coming quarters. Turning to our medical office and life science portfolio. During the first quarter, we delivered solid results as same-property occupancy increased 60 basis points year-over-year to 95.3%, generating $25.4 million of NOI, a 3.7% increase over last year and a 4.8% increase sequentially. Leasing activity was healthy with 169,000 square feet of new and renewal leasing at rents that were 12% above prior rents with a 9.5-year weighted average lease term. Looking ahead, just over 9% of annualized rental income in our Medical Office and Life Science portfolio is scheduled to expire through 2026, of which 304,000 square feet or approximately 4.9% of annualized rental income is expected to vacate. Subsequent to the quarter, we signed leases totaling 390,000 square feet, which primarily include renewals representing 29% of our 2027 expirations. Turning to our capital markets and balance sheet initiatives. In March, we sold 13 unencumbered non-core SHOP communities for aggregate proceeds of $23 million. And in April, we also exercised land lease purchase options on 2 of our properties for an aggregate purchase price of $14.5 million. By eliminating ground rent on these well-performing communities, we are able to capture the full economics of the assets and expect to generate low to mid-teen returns on this investment. With DHC's large-scale capital recycling program now complete, we have transitioned from portfolio transformation to value creation. Given our current capital structure, including relatively low-cost debt and no maturities until 2028, we believe that one of the best uses of our capital today is reinvesting in our own assets. In conclusion, our strong first quarter results validate our strategy and reinforce our confidence for the remainder of 2026. Demand fundamentals in senior housing remain compelling, supported by favorable demographic trends and limited new supply growth. We believe these actions we have taken to enhance operations, reduce leverage and empower our best-in-class operators have positioned DHC for continued earnings and cash flow growth, and we remain committed to delivering attractive total returns to our shareholders. With that, I will turn the call over to Anthony. Anthony Paula: Thank you, Chris, and good morning, everyone. During the first quarter, our consolidated same-property cash basis NOI was $75.9 million, representing an 8.6% increase year-over-year and a 7.8% increase sequentially. We continue to see upside in our SHOP segment as same-property NOI increased 13.5% year-over-year. When adjusting for insurance proceeds received in Q1 2025, our SHOP same-property NOI would have increased 22% year-over-year. As Chris highlighted earlier, our operators have had early success in managing expenses as evidenced by the following in our SHOP same-property portfolio, a 370 basis point decrease in dietary costs sequentially, a 70 basis point sequential reduction in labor when adjusting for the number of days in the period and a nearly 35% decrease in contract labor year-over-year and that has led to moderation in our same-property expense growth, which was 350 basis points year-over-year and 120 basis points since last quarter. We also continue to see strength in pricing as our same-property average monthly rate increased 590 basis points year-over-year and 320 basis points sequentially. Turning to G&A expense. DHC shares have delivered the highest total shareholder returns across all REITs in the U.S. over the past 1-year and 3-year measurement periods. Year-to-date alone, DHC's stock price has appreciated 60% versus a 5.2% gain in the S&P 500 and a 7.9% gain in the Vanguard REIT ETF. As a result of this, our first quarter G&A expense includes $6.6 million of incentive management fees. Excluding the impact of the incentive fee, G&A expense would have been $7.4 million for the quarter. During the quarter, we invested approximately $21.8 million of capital, including $17.2 million into our SHOP communities and $4.6 million into our Medical Office and Life Science portfolio. As a result of our recently completed disposition program and disciplined capital allocation, we are reaffirming our 2026 recurring CapEx guidance of $100 million to $115 million, representing approximately 18% reduction at the midpoint. Now I'll turn the call over to Matt. Matt Murphy: Thanks, Anthony, and good morning, everyone. Overall, our first quarter results further demonstrate the meaningful progress we have made strengthening our balance sheet, reducing leverage and positioning the company for sustainable earnings and cash flow growth. At quarter end, we had total liquidity of $272 million, including $122 million of cash and cash equivalents and the full $150 million available under our secured revolving credit facility. This strong liquidity position provides us with flexibility to support our operating strategy while maintaining appropriate balance sheet discipline. Net debt to annualized adjusted EBITDAre was 7.8x at quarter end, down from 8.8x a year ago, driven primarily by improved operating performance. Adjusted EBITDAre to interest expense improved meaningfully to 2x from 1.3x at this time last year. We remain confident in reaching our near-term leverage target range of 6.5 to 7.5x with the majority of that improvement expected to be driven by continued growth in SHOP NOI. In April, Moody's upgraded DHC's corporate family rating to B3 from Caa1 and revised the outlook to positive. This upgrade reflects the progress we have made improving operating performance and strengthening the balance sheet over the past several quarters. Following the completion of our debt transactions in 2025, we have a well-laddered debt maturity profile with no maturities until 2028, allowing us to remain primarily focused on operations. Our portfolio includes 197 unencumbered properties, representing nearly 64% of the portfolio's gross book value, which provides meaningful balance sheet flexibility as we look ahead. Turning to guidance. For the full year 2026, we are reaffirming the ranges outlined in our fourth quarter earnings as follows: $175 million to $185 million of SHOP NOI, $94 million to $98 million of Medical Office and Life Science segment NOI, $28 million to $30 million of NOI from our triple net lease senior living communities and wellness centers, adjusted EBITDAre of $290 million to $305 million and normalized FFO of $0.52 to $0.58 per share. We are pleased with our first quarter results, particularly the continued growth in SHOP NOI, which is tracking ahead of our initial expectations. The performance is partly being driven by early success in expense management and margin improvement from our new operators. As we look ahead, the momentum we are seeing in the business gives us increasing confidence in our earnings outlook. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] The first question is from Michael Carroll with RBC Capital Markets. Michael Carroll: Chris, I wanted to touch on some of the recurring CapEx expectations. I know within the guidance, you're assuming $80 million to $90 million of recurring CapEx within the seniors housing operating portfolio. Is that true maintenance CapEx? And is that the correct run rate to think about going forward? Or is there still some additional deferred CapEx in those numbers and the run rate as you kind of look beyond '26 would be lower than that? Christopher Bilotto: Yes. The $90 million includes maintenance capital and some refresh capital. So that's a blended number. But I think more broadly, to answer your question, maintenance capital, we've got that run rate we're expecting to continue to come in a little bit in overall costs. We're spending a lot more time with our operators just dialing into overall needs of the communities. And so we'd like to see some modest pullback in maintenance capital as the years progress. And then on the kind of the -- what we call a redevelopment capital or the ROI capital, that number as it stands today, I think will stay pretty firm for 2026 despite doing some of these incremental ROI projects I discussed, just given the fact that those will really start to kind of commence later on in the year and a lot of that is just soft cost work. And then in 2027, kind of all things considered, that's where we'll start kind of pulling levers on incremental dollars for that bucket depending on how much of these ROI projects we have in the pipeline. Michael Carroll: Okay. And then I think you previously said that the recurring CapEx number would run around 3,500 a unit once kind of you're through some of the deferred stuff that was completed in prior years. Is that still a good number? Or is it going to be lower than that as you kind of progress in '27, '28 with these new operators? Anthony Paula: Yes. So the 3,500, we expect to go down in future periods. We think that's a good run rate for 2026. I think to keep in mind, that's going to exclude refresh capital. So kind of piggybacking on what Chris had mentioned for 2026, we expect $5 million to $10 million of refresh capital, which is embedded within that recurring CapEx number that we're guiding towards. Michael Carroll: Okay. And then on the investment side, should we think about the new investment opportunities really focused on these wing expansions that you kind of discussed in the prepared remarks? I mean, are there potential acquisition opportunities that you would look at pursuing too? Or is it going to be mostly these renovations? Christopher Bilotto: Mostly the renovations, I think our position today is we've got a lot of opportunity within the portfolio. We talked about a lot of things in the prepared remarks and our investor materials have teased out some items, but there's real opportunity dialing in with these operators to kind of pull in expenses in different areas, some of which we've touched on continuing to kind of drive top line performance and occupancy. And then, again, I think kind of from a capital deployment, really kind of putting that money towards improving these communities and then I think equally important on expanding acuity within the communities before we consider acquisitions. Michael Carroll: Okay. And then just last question for me. I guess, within guidance, you reaffirmed the G&A number. I know with the stock performance, I would assume the base management fee is kind of ticking up a little bit. I mean is that the right way to think about it? Or is there something in there that keeps that base management fee lower throughout 2026 that I'm not calculating correctly? Anthony Paula: Go ahead, Anthony. Yes. From a G&A perspective, the most volatility we're going to see is from the business management fee, you're right. Depending on fluctuations in share price, it will adjust that number. Michael Carroll: Okay. And then within guidance, you just assume that SHOP NOI is probably exceeding that. So even if G&A goes up, then your overall guidance range is still pretty accurate and maybe even trending higher? Anthony Paula: That's right. Operator: [Operator Instructions] The next question is from John Massocca with B. Riley. John Massocca: So I appreciate the color and the reminder on the onetime items that were impacting 1Q '25 kind of comps. Is there anything else kind of onetime to be aware of either in how same-property SHOP NOI growth is being calculated or even anywhere else in kind of the financial reports for 1Q '26... Matthew Brown: No, that's the most material item that $2.7 million of business interruption insurance proceeds we received in Q1 '25. There's a little bit of other noise, but nothing of that scale. John Massocca: Okay. And any kind of direct impact from the Aleris or the former Aleris property transition still flowing through 1Q '26 results? And I mean bigger picture, how are those kind of transitions going in your mind? I know you touched on it a bit in the prepared remarks, but anything kind of tangible that's already been achieved or left to be achieved over the remainder of '26? Matthew Brown: Sure. So I can start and then hand it off to Chris on operator performance. So as it relates to the transition and costs associated with that, we capture that in transaction-related costs. So a lot of that is kind of below the line and outside of NOI. Christopher Bilotto: Yes. I think the follow-on, John, to your question, I mean, the AlerisLife, the transitions are going very well. As you're aware, they were completed at the end of the year. The first couple of months in the year, a lot of these operators were just kind of revisiting kind of the overall employment and kind of structure within the communities, retooling kind of their sales teams, et cetera. And again, we touched on other areas where we found pockets of opportunity to reduce costs. And so there's still incremental pieces there that are flowing through. I think we've identified kind of the more material items and those are some of the things that are in progress and underway, and we expect to continue to get incremental benefit each quarter as time progresses, at least through 2026. But I would say, overall, the transitions are going very well. And again, I think we forged some really good relationships with some great operators. John Massocca: Okay. And then maybe specifically on occupancy or same-property occupancy in the shop space. I know it was kind of flat quarter-over-quarter. I mean does that just reflect seasonality in that? Or is that still some maybe friction from operator transitions? I mean is that going according to maybe your expectations versus your initial guidance? Matthew Brown: Yes, it's both. I mean there's some seasonality in there. And then as I just touched on, as these operators have come in predominantly starting in January and kind of reevaluating and retooling kind of the business specific to kind of their outlook, that takes time. And so I think given the fact that we can hold occupancy while we're going through a major transition across our portfolio, I think, is a real win. And I think it kind of reflects well for setting the pace, meaning that we can -- we can run stabilized in Q1 with a lot of disruptions. And then as we get kind of to the more kind of seasonal or higher seasonal period, we can kind of hit the ground running focused on really pushing occupancy now that we have all the pieces in place. John Massocca: And any updates? I mean how is 2Q trending thus far on kind of SHOP performance? Matthew Brown: No. I mean, technically, the April just finished, Numbers are still coming in. So there's nothing kind of specific to speak to. I just think as we referenced, we're reaffirming guidance -- we feel good about our positioning. We're seeing other opportunities as we've referenced. And so I think we feel generally good about the outlook and potentially further improvement, but nothing specifically to touch on just given where we are in the second quarter. John Massocca: Okay. And then if I think about kind of the difference in the SHOP NOI growth kind of implied in guidance versus what we kind of achieved in 1Q, I mean, is that mostly the higher comps in 1Q '25? Or is there something else to be kind of aware of on either what you're expecting for 2H occupancy or kind of even rate growth? Anthony Paula: Yes. I would say that on occupancy, we're continuing to guide to that 300 basis point increase in occupancy year-over-year. We didn't see much progress in Q1, as Chris talked about. As it relates to rate growth, we are expecting 5-plus percent rate growth. And then as we think about just quarterly run rate, we're definitely expecting some NOI increase in Q2. We may see that increase come down a little bit in Q3 with just some seasonal expenses and then ramp back up again in Q4 to come into the overall guide of $175 million to $185... John Massocca: Okay. And then lastly, I know you talked on it a little bit earlier in the call, but just for kind of the impact on bottom line or even on kind of NOI performance, how much kind of the flow-through from previous year CapEx spend are you expecting to kind of be impactful to 2026 NOI? And is there stuff that's maybe more -- even that was completed years ago or a year ago, that is really more of kind of a 2027 event in terms of a tailwind for NOI or even bottom line numbers? Matthew Brown: Yes. I think the best way to kind of think about that is a typical kind of stabilization period following a renovation is kind of 18 to 20 months. So if you think about we had a fair amount between 60 and 70 communities that were renovated kind of in 2023 and '24 those themselves are starting to kind of produce real meaningful results in the form of kind of a more stabilized event. And again, layering on kind of the new operator transition, we'll get other incremental benefits from that, whereas the 2025 refreshes, which was between 20 and 25 communities, we would expect that to show incremental benefit towards the back half of this year and into next year. And then that cadence will continue. Operator: As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto to close the call. Christopher Bilotto: Thank you, everybody, for joining the call. We look forward to seeing many of you at our upcoming industry conferences, including NAREIT conference in New York this June. Please reach out to Investor Relations if you are interested in scheduling a meeting with DHC. That concludes our call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to the Latham Group, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Casey Kotary, Investor Relations representative. Please go ahead. Thank you. This afternoon, we issued our first quarter 2026 earnings press release, which is available on the Investor Relations portion of our website. Casey Kotary: On today's call are Latham Group, Inc.'s President and CEO, Sean Gadd, and CFO, Oliver Gloe. Following their remarks, we will open the call to questions. During this call, Latham Group, Inc. may make certain statements that constitute forward-looking statements, which reflect the company's views with respect to future events and financial performance as of today or the date specified. Actual events and results may differ materially from those contemplated by such forward-looking statements due to risks and other factors that are set forth in the company's Annual Report on Form 10 and subsequent reports filed or furnished with the SEC as well as today's earnings release. Latham Group, Inc. expressly disclaims any obligation to update any forward-looking statements except as required by applicable law. In addition, during today's call, the company will discuss certain non-GAAP financial measures. Reconciliations of the directly comparable GAAP measures to these non-GAAP measures can be found in the slide presentation that is available on our Investor Relations website. I will now turn the call over to Sean Gadd. Sean Gadd: Thank you, Casey, and thank you all for joining us today to review our first quarter results and discuss our business outlook. Our first quarter results represent a good start to 2026. We are especially pleased with our performance given the adverse weather conditions that plagued most of North America. There are several key takeaways from the quarter that are worth noting. First, this was another quarter in which we saw year-on-year sales growth in each of our product lines. Latham Group, Inc.'s category leadership position across our product portfolio and our geographic diversification are key competitive advantages for us. Secondly, we continue to effectively execute our Sand States strategy, showing double-digit sales gains in fiberglass pools in our priority Florida market. We are taking further actions to accelerate our growth in this region. Third, we expanded our margins, benefiting from operating leverage inherent in our business model and from the lean manufacturing and value engineering initiatives that continue to yield very positive results. Oliver will provide additional detail on this later on in the call. And lastly, we are pleased to confirm our 2026 guidance, which anticipates significant sales growth and even stronger growth in adjusted EBITDA within a challenging macro environment, where pool starts will be about flat to last year. Our guidance includes a moderate increase in transportation and commodity costs due to today's high oil prices, which we are mitigating with temporary fuel surcharges. We are closely monitoring the dynamic situation in the Middle East and the potential impacts on costs and consumer demand. Taking a closer look at our first quarter results, in-ground pool sales increased 3.5%, and virtually all of that growth can be attributed to the one-month contribution from the Freedom Pools acquisition. Adverse weather was definitely a factor in our organic performance, keeping organic in-ground pool sales steady year on year. However, April sales trends were in line with our expectations, and we are on track for fiberglass pools to approach 80% of our full-year in-ground pool sales in 2026. The Freedom Pools acquisition we completed on February 26 is integrating as expected. As we have noted, the acquisition expands our presence in Australia and New Zealand, markets where fiberglass pool models have a strong foothold, and broadens our reach into new markets in Western Australia, including Perth, which is the fastest-growing city in the country. We recently spent a week in Australia bringing together the Narellan and Freedom teams. In addition to this transaction being immediately accretive to Latham Group, Inc., giving us a market-leading position in the country, we anticipate achieving considerable revenue synergies from this combination over time, as well as gaining firsthand experience from the direct-to-consumer business model. Cover sales advanced 6% in the first quarter, driven by growth in auto cover demand as consumers increasingly recognize the safety and economic benefits of this excellent product. Our industry-leading auto covers are compatible with all in-ground pool types. In many parts of the U.S., they provide the homeowner with an alternative to fencing while delivering additional cost savings from reduced evaporation and chemical usage. Educational marketing campaigns, including our partnership with Olympic Gold Medalist and pool safety advocate, Bode Miller, and his wife, Morgan, to promote pool safety are surging consumer awareness and increased attachment rates of auto covers to new pool installations. First quarter liner sales were up 9% year on year, reflecting increased demand and buying in advance of the pool season. We continue to gain traction with our Sand States strategy in the first quarter and are moving forward with plans to accelerate our growth in this important region. Many of the investors and analysts who I have met since taking on the CEO role in January have asked me where I see the major growth opportunities ahead for Latham Group, Inc. and what our playbook is for capturing that growth. Let me start by saying that the opportunity is substantial. We do not need to wait for the recovery in the U.S. pool markets to drive growth. There are enough pool starts for us to go and attack the Sand States now, given our relatively low penetration in that region. The key here is that fiberglass is a growing category, and we are the number one player in it in the U.S., and so we are best positioned to gain share. Fiberglass pools are an excellent fit for the Sand States for many of the same reasons that the category is growing nationally: fast and easy installation, lasting durability, low maintenance, and we have an exceptional design range of sizes and options to choose from, many of which are smaller, rectangular-shaped pools with attached spas that are perfect for our target community. Latham Group, Inc. has laid a good foundation for growth in the Sand States. There is definitely increased brand awareness among consumers and dealers in Florida, thanks to several high-profile marketing campaigns paired with local activations. In 2026, we plan to build on that foundation to set the stage for accelerated long-term growth. As you know, I have many years of experience successfully selling against the standard in the building products industry. When I apply that experience to Latham Group, Inc.'s current position in the Sand States, I have identified several actions to capture consumer demand and provide additional value for our dealers. First, we are building out our commercial organization, with the key pillars being sales strategy, sales operations, and sales execution, with responsibilities to design and drive sales plans, product leadership, and sales effectiveness. Our goal is to provide a world-class commercial organization that supports our growth not just in Florida, but across all the Sand States and all of North America. Second, we have introduced a new market development framework and approach at Latham Group, Inc. that I believe will make us even more effective in capturing share. The key element of this framework is segmentation, meaning that we will be very selective with our targeted Sand State markets, determining the specific sections and neighborhoods that offer the greatest opportunity for us. In essence, it is all about neighborhoods. We are looking for neighborhoods with a large number of homes with home values, lot sizes, and household incomes that fall within our parameters. These can be in, adjacent to, or outside of master-planned communities. Third, we will be adding sales resources in the field to make sure we stay close to the consumer throughout the pool-buying process. In this way, we will be able to assist our dealers in converting more leads into sales and gain greater understanding of the consumer journey. We know that consumers are looking for designs that fit their lifestyle. We believe that Latham Group, Inc. has the best range of products to meet those needs. In 2026, we are increasing our investment in branding and marketing in a very targeted way to capture greater consumer awareness. Together with our network of trusted dealers, we are able to fulfill the demand we generate. In support of all this, we are revamping our marketing and advertising campaigns to give homeowners a full understanding of the true benefits of fiberglass, and why it is the right solution for their backyard to enable their dreams of creating wonderful memories to come true. With that, I will turn over the call to Oliver Gloe, our CFO, for a financial review. Oliver Gloe: Thank you, Sean, and good afternoon, everyone. I am pleased to report on what was a solid start to 2026. Please note that all comparisons we discuss today are on a year-over-year basis compared to 2025 unless otherwise noted. Net sales for 2026 Q1 were $117 million, 5% above $111 million in 2025, of which 3% represented organic growth and 2% represented the one-month benefit of the Freedom Pools acquisition we completed in February. Organic growth was led by the continued strength of auto covers and increased demand for our pool liners. By product line, in-ground pool sales were $60 million, up 4% from Q1 2025, with virtually all the year-on-year growth coming from Freedom's fiberglass pool sales. Cover sales were $33 million, up 6%, and liner sales were $24 million, up 9% compared to 2025. We achieved a first quarter gross margin of 32%, reflecting a 220 basis point increase above last year's 30%. This performance is primarily due to volume leverage, along with production efficiencies driven by our lean manufacturing and value engineering initiatives. SG&A expenses increased to $37 million, up 20% from $31 million in 2025. This was largely tied to strategic investments in sales and marketing to accelerate fiberglass adoption, digital transformation initiatives, and acquisition and integration-related costs, which include $2.3 million of performance-based compensatory earnout expenses related to our Coverstar Central acquisition in 2024. Target synergies have been realized for Coverstar Central, and we are pleased with the contribution from the acquisition, which has exceeded our initial expectations. This earnout will total roughly $9 million over the course of the year, with a similar impact in each remaining quarter in 2026. Net loss was $9 million, or $0.07 per diluted share, compared to a net loss of $6 million, or $0.05 per diluted share, for the prior year's first quarter, primarily due to the aforementioned increase in SG&A expenses. First quarter adjusted EBITDA was $12 million, 9% above $11 million in the prior year period, primarily resulting from volume leverage and efficiencies gained through our lean manufacturing and value engineering initiatives. Adjusted EBITDA margin was 10.4%, a 40 basis point expansion compared to last year's first quarter. Turning to the balance sheet, we continue to maintain a strong financial position, ending the first quarter with a cash position of $27 million, in line with our expectations. Net cash used in operating activities was $48 million, reflecting a seasonal increase in working capital needs ahead of peak pool selling season. We ended the quarter with total debt of $311 million and a net debt leverage ratio of 2.8, also in line with our expectations. Capital expenditures were $23 million in Q1 2026, compared to $4 million in the prior year period. The increase is primarily due to the purchase of four key fiberglass manufacturing facilities in Florida, Texas, California, and West Virginia for $18 million, including a $12 million deposit made in 2025 that was settled in Q1 2026. Additionally, we incurred $5 million of CapEx relating to ongoing projects in line with our expectations. As a reminder, we expect CapEx to range between $42 million and $48 million in 2026. This includes $25 million of maintenance CapEx expenditures related to the purchase of the fiberglass manufacturing facilities that I just mentioned, and investments to upgrade our newly acquired Freedom Pools manufacturing facilities. While the beginning of 2026 was affected by adverse weather conditions across North America, we are encouraged that April sales trends have been in line with the historical seasonal ramp. We continue to monitor geopolitical developments and their potential impact on our freight and raw material costs, but we believe we are well positioned to manage effectively through this pool building season. We are pleased by the steady progress we are seeing from our fiberglass awareness and adoption initiatives, highlighted by strong consumer engagement with our branding and marketing campaigns, and continued gains in Florida, our initial Sand State target market. Based on our performance to date and our current visibility into the remaining season, we are pleased to reaffirm our guidance for 2026 revenue growth of 9% and adjusted EBITDA growth of 13% at the midpoint, amid expectations for new U.S. pool starts to be flat with last year. With that, I will turn the call back to Sean for his closing remarks. Sean Gadd: Thanks, Oliver. In summary, we are pleased with our first quarter performance, encouraged by recent order trends, and excited by the growth opportunities we see on the horizon. Latham Group, Inc. is firmly on track to outperform the market for new U.S. pool starts again in 2026, and we intend to take advantage of soft markets to accelerate our Sand States strategy and strengthen our execution. I see tremendous opportunity for Latham Group, Inc. to drive market penetration in the Sand States as well as the rest of North America, Australia, and New Zealand. With that, operator, please open the call to questions. Operator: We will now open the call for questions. If you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ryan James Merkel with William Blair. Please go ahead. Ryan James Merkel: Everyone, appreciate the question. I wanted to start off with the fiberglass backlog and orders as you enter season. How is that looking, and then have you seen trends pick up now that the weather has cleared? Sean Gadd: Yes. Thank you for that question. We are seeing what we would have expected to see coming out of the first quarter. The order file in April looks strong to us, and it looks like it is picking up for the season. We feel good enough that we have reaffirmed guidance. Generally, we are seeing the pickup in orders and feel pretty good about the trend. Ryan James Merkel: Got it. Thanks for that. And then my second question: the fiberglass conversion is key to the story, and you are adding a bunch of resources. What are the biggest tweaks that you are making to the strategy, and then any early results, or is it a little too early? Sean Gadd: We are definitely making some tweaks. It is too early for definitive results. The main thing, as I talked about earlier, is we are segmenting the market a little bit differently than we have in the past. We have criteria now built up where we feel like if a neighborhood fits that criteria, the likelihood of them going to Latham Group, Inc. and then to fiberglass is higher. We like that. We are starting to test that, and if we get those right with the right dealers, we will be able to start building out more and more neighborhoods. We are early, but that is on a good path for us. The second thing we are doing is adding heads, and really I am organizing commercialization into three areas: sales strategy, which is understanding where to play, doing more of the segmentation, becoming a little bit smarter around sales; sales operations, which for me is about converting what we think about the market into real game plans that the sales team can execute and then measuring that team; and then sales execution, to go and execute. We are getting a little bit more organized so that we get the most out of our sales organization across the whole U.S., including the Sand States. Operator: Thank you. Our next question comes from Gregory William Palm with Craig-Hallum Capital Group. Please go ahead. Gregory William Palm: I wanted to piggyback on the first question a little bit since a lot has happened in the last couple of months since we were all on the phone together. It does not sound like the demand environment has changed all that much, relative to what you would have thought a couple months ago. Can you confirm that? And from an input cost side of things, you mentioned freight. I wanted to get your sense on how you are dealing with that and anything else on your radar, whether it be increasing resin prices. Are you seeing any availability shortages of key inputs like that? Anything else that should be on our radar? Sean Gadd: Thanks, Greg. I will start by talking about the market a little bit. We still see the market overall for this year likely to remain flat, so our assumption for that has not changed. But we are seeing some green shoots, and we feel good about that. Our order trend for April looks strong and into May, so we feel good about that. PK data would have indicated some growth starting to occur with cheaper pools. We like that. Pools are getting smaller, so that is good. The volatility is not helping, but I know we have a sound approach, and we will work through that. From a dealer perspective, when we catch up with dealers, they will tell us it is pretty competitive — four or five quotes per job, which is generally up. My take is it is certainly uncertain, but I believe fewer people will be traveling — the price of gas does not help — and so they are staying at home. I think that is the opportunity and what the green shoots are that we are seeing: that people would rather spend time at home and hopefully let us help build a pool. Oliver Gloe: Let me address the second part with regards to the conflict in the Middle East and updates on input costs. We do not see availability to be an issue as of today. Partially that is due to our supply diversification coming out of COVID. We aimed to be multisource and as diversified as possible. But we are seeing headwinds in freight. That comes in two forms. One is transportation — the price at the pump. Especially in the world of fiberglass, we are incurring transportation costs. It is expensive to ship those fiberglass pools across the nation. In terms of mitigation, we have introduced temporary fuel surcharges that we plan to fully mitigate us on transportation costs. I think it is too early to tell what the impact will be on the commodity side. We are exposed to oil derivatives in the world of resins, HDPE, and so forth. It is too early to tell. We are in discussions with suppliers and making the first purchase orders as we speak under slightly higher price levels. We will have to see how the very dynamic situation evolves. But I am confident in the playbook that we have. We applied that playbook during COVID and last year, and we have confidence that the playbook could also work this year as we work through commodities. Gregory William Palm: On some of these initiatives that you talked about — resegmentation, adding sales resources — how do you feel about your current dealer network, and how important of a lever can that be, not just adding new and more dealers, but also leaning into some of your more successful ones? Sean Gadd: Dealers are very important. They are the extension of us as they sit across the kitchen table, and we need them to represent us well. I believe we have the opportunity to get more out of our current network, which is goal number one. In our core markets — Midwest, Northeast, Canada — that is really about account management. We are defining what account management looks like for Latham Group, Inc. and making sure our organization is trained around good account management. I expect to get more out of our current network. Then we will add where we have white space. We will always look for dealers to take on white space if our current dealer network does not get us there. That is part of the strategy. In the Sand States and material conversion, we have a good network of dealers there right now that we will be feeding as we go into these neighborhoods, and they will benefit from referrals and everything else that comes out of those neighborhoods. We feel good about the network in the Sand States, particularly Florida, and our intention will be over time to grow it. Operator: Thanks, Greg. Our next question comes from Timothy Ronald Wojs with Baird. Please go ahead. Timothy Ronald Wojs: Good afternoon. First question on the resegmentation of some of the sales force and things like that. Is the plan that there are incremental investments in terms of dollars going into some of the initiatives, or are you just reallocating what you have? Sean Gadd: A little bit of both. We are definitely going to get ahead a little bit because we need more people on the ground and people thinking about the game plan. That would be additive, but our intention is that SG&A as a percentage of sales should stay the same over the medium and long term. We will continue to fund that as we grow. We will also look at opportunities to trim back on the back side of the business to give us some space to spend on the front side of the business and invest. Timothy Ronald Wojs: And, Oliver, on the price/cost question, is higher resin in the guide, or is it more of a wait-and-see approach? If you do see higher resins, do you have the ability to take cost out or improve efficiencies or pass them on price? Is that the main message? Oliver Gloe: It is probably more the latter. Transportation cost is relatively foreseeable, and that is in the guide. Commodities are too early to tell. Timothy Ronald Wojs: Sounds good. Thank you. Operator: Our next question comes from William Andrew Carter with Stifel. Please go ahead. William Andrew Carter: I wanted to double click to make sure we understand exactly what the pricing is for the year. You are putting in temporary fuel surcharges — can you give a magnitude of how much that is incremental to the old guidance? You are not taking any price increases on products for resins — just want to triple check that. And you said we are well prepared for materials during the season. Is that a comment that everything is good for now and you take a price increase later? Finally, if you have to take a price increase, can you take one mid-season, or does that mess things up? How do those dynamics work around when you have to make a decision on pricing? Oliver Gloe: Perfect. For transportation cost and the temporary surcharge, for the year it is probably worth about 60 basis points. Again, it is very dynamic and volatile, and as the headwinds change, the temporary surcharge can change over time as well — but that is the order of magnitude. For commodities, it is too early to tell. We are just about to start ordering materials that would be subject to a change in pricing. Materials get shipped to our sites, work their way through inventory, and ultimately into the P&L as they are consumed. We have our playbook, and we will react in time if necessary. As a reminder, last year we did a mid-season price increase in June. It is not preferred, but it is not unheard of. Operator: Thanks. Thank you. Scott Stringer: Our next question comes from Scott Stringer with Wolfe Research. Please go ahead. The adverse weather mentioned in Q1 — did that push some sales into the second quarter? The guidance implies some acceleration through the rest of the year, so it would be helpful to know the tailwind from sales being pulled into Q2, if that is the case. Oliver Gloe: I would say the adverse weather really means we had a lot of snow and ice on the ground in January and February. If you think of our annual organic growth of 6%, we certainly did not quite achieve that in Q1 — it was probably half of that — and I would attribute that to weather. If you translate that to shipping days, that equates to about one shipping day in today’s seasonality. I am not reading too much into that. The season is young; Q1 is a comparatively small quarter. Translating our under-proportional organic growth in Q1 vis-à-vis the annual guide into shipping days, it is one day. Another way of saying it: April trends have been as expected. We are seeing the seasonal ramp. Whether we catch up on that one day in Q2 or Q3, nothing we have seen in Q1 and in our ramp in April would make us change our view on 2026 and the guide. Scott Stringer: Got it. And then on visibility into Q2 and Q3 for in-ground pool installs — is that pretty much set, or how much variability is there over the next two quarters? Sean Gadd: For Q2, we are all but set based on our current lead times. We started the quarter really well. For Q3, while we have orders that fall into Q3, it is probably too early to tell, but from what we are hearing in the market and what we are seeing, we remain very confident in what the order file looks like and will continue to hold guidance. Oliver Gloe: If I compare today’s order book versus prior years, there is really nothing that would cause us to think differently about the seasonal pattern vis-à-vis last year — all confirming the guide. Scott Stringer: That is helpful. Thanks for the time, guys. Operator: Our next question comes from Analyst with Barclays. Please go ahead. Analyst: Good afternoon. For my first question, what are the top concerns you are seeing from buyers today? Between rates, economic uncertainty, and the need to step up consumer awareness of fiberglass pools, what is the biggest challenge today? Sean Gadd: The number one thing tied to interest rates is financing — basic financing is difficult to get. Anyone who does not have the cash or a strong FICO score is unable to get financing. We are hearing that a fair bit, similar to last year. Dealers are saying they are having to fight for the sale a little harder than previously. When I mentioned four to five quotes, it is typically two to three quotes, so everyone is fighting for the business. In an environment where things are tough, I actually feel good about fiberglass pools because pools are getting smaller — that fits our trend. Fiberglass pools have low maintenance, so the ongoing cost is lower than alternatives. The expenditure on chemicals and evaporation is lower, especially if you have an auto cover. And the composite pool means there are no ongoing resurfacing expenses. While we see the market as a little tough, we do not see it adversely affecting us relative to last year. Analyst: Got it. In terms of your increased branding and marketing spend, can you walk us through the cadence through the year and its impact on SG&A? And what does this look like — a targeted program for dealers, more salespeople on the ground, or more on ads and marketing? Sean Gadd: It is a bit of both. We are running a national campaign — that lifts all markets, which is great. With the trend of people moving from the Midwest and Northeast into the Sand States, we like that because fiberglass is the standard in those markets, so they know us. The timing for the national campaign is set for the pool season — we started mid-to-late February and are running through July/August. For the neighborhoods, that will be much more tactical — digital marketing, door hangers, localized marketing around homes, and events to inspire the neighborhood. Those are tactical, smaller expenses that we will run city by city, neighborhood by neighborhood. Oliver Gloe: On the increase and cadence, over the foreseeable future, SG&A as a percent of sales will be flat. It was 22.5% last year; we expect a similar amount this year. The majority is spent as-you-go in the sales organization and marketing. There is a little bit of digital transformation and also inflation on core G&A. Additionally, we have about $3 million of SG&A from Freedom. I would like to remind you that in addition, we have the earnout expenses for Coverstar Central — about $9 million — tied to 2026, so it will not recur in 2027; it did not occur in 2025. With regards to cadence, it is roughly the same as usual. Q1 and Q2 are a little bit heavier because we are running our national TV campaign earlier and longer in 2026 versus 2025. Operator: Our next question comes from Charles Perron in for Susan Maklari with Goldman Sachs. Please go ahead. Charles Perron: First, I would like to shift gears and talk about auto covers and the opportunities you see in this market. Considering the changing macro dynamics, is there any impact you are seeing in terms of adoption, and any efforts you can undertake to further expand penetration over the coming years? Sean Gadd: We are not seeing a decrease in adoption. We had a pretty good quarter in auto covers and covers in general. We had very large growth last year; we expect it to grow this year and in the coming years as well. It is really about awareness. The reality is most people still do not know that auto covers are available. Auto covers can fit on every pool, so the market is very large for us. We have our value-added resellers set up to take advantage of that. We are also getting our licensed sales organization focused around that product, and it is still early. We see that as more upside as we go. It is a good product; it does what it needs to do; consumers who have it love it, and we just need to continue to drive awareness. We do not see that trend changing. Charles Perron: And on input costs and inflation, should we see more unfavorable dynamics, can you further lean on lean manufacturing and value engineering initiatives to protect margins? Oliver Gloe: Lean and value engineering continue to be key contributors to our P&L. The contribution is about $2.0–$2.5 million per quarter. In Q1, it was $2.0 million — Q1 is a light quarter and value engineering programs move with volume. As programs mature, you see the tailwind becoming part of our DNA — how we lead our plants and factories — as part of the everyday cadence. You will see a lot more programs, maybe not all of the same magnitude, because the low-hanging fruit in lean manufacturing has been largely addressed. In value engineering, we are in the beginning of the journey; there are still some low-hanging fruits our team is pursuing. Both initiatives are under full steam and in Q1 delivered what we expected, with no change in our thoughts for the rest of the year. Operator: Our next question comes from Sean Callan with Bank of America. Please go ahead. Sean Callan: Hi, thank you for taking my question. First, the double-digit growth in Florida was quite impressive. What do you think has led to the success in Florida versus the other Sand States, and what lessons can you take from Florida to apply to the other Sand States? And then one cleanup question on the surcharges — are you aiming to offset the higher transportation cost on a dollar basis or a margin basis? Sean Gadd: Florida is our largest focus of all the Sand States. We are set up quite well from a sales headcount perspective. We have worked on dealers for the last eighteen months, so we have dealers that are really the right partners to help fulfill the demand we are creating. We have been running a marketing campaign for eighteen months, so we are seeing the flow of that. We have a strong value proposition relative to concrete, and we are getting deeper into the market and communicating it better. We feel that if a homeowner understands the benefits of fiberglass over concrete, there is a high chance they go with fiberglass. We are still early in the adoption curve. Our mission is to drive awareness and connect that awareness to our dealers’ positioning at the kitchen table. While we are pleased with the numbers, we intend to accelerate from here, and we are still working off relatively small numbers in Florida. Oliver Gloe: On the surcharges, we are aiming to offset transportation cost on a dollar basis. The headwind we incur is being passed on with temporary surcharges. Operator: Our next question comes from William Andrew Carter with Stifel. Please go ahead. William Andrew Carter: Hey, thanks. I wanted to double click and make sure on that incentive cost — you are not backing that out. So if you were to put that back in, the incremental here is still $28–$38 million in investment year? I just want to understand that. No — sorry, the earnout around Coverstar. My fault. Oliver Gloe: The earnout is included in SG&A and will be sitting on top of roughly 22.5% of revenue as it is an expense tied to an acquisition. For EBITDA purposes, it is backed out. William Andrew Carter: Okay, so it is not excluded — it is within guidance, that expense. Just double checking. Oliver Gloe: Correct. It is an add-back to EBITDA, and it is in the ceiling. William Andrew Carter: My fault. Sorry about that. Thank you. Operator: This concludes our question and answer session. I would like to turn the call back over to management for closing remarks. Sean Gadd: Thank you very much. I want to thank everybody for joining the call. We felt like we had a strong quarter — mildly impacted by weather — but the momentum is there. April looks strong, and we feel confident about our guide. With that, I want to conclude the call. I look forward to seeing you over the coming weeks and months at different events, and again, thank you for attending. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Aapo Kilpinen: Ladies and gentlemen, dear Remedy investors, welcome to the webcast for Remedy's Q1 Business Review of 2026. My name is Aapo Kilpinen from Remedy's Investor Relations. Joining with me today are Remedy's new CEO, Jean-Charles Gaudechon, also known as JC; and then our CFO, Santtu Kallionpaa. JC will briefly introduce himself and then guide us to the quarter. Santtu will then do a deeper dive on the financials of the quarter. We'll then look at the outlook for the year, and then we'll end with a Q&A session at the end of the webcast. [Operator Instructions] But without further ado, JC, please, the stage is yours. Jean-Charles Gaudechon: All right. Thank you, Aapo, and hello, everyone. Welcome to Remedy Q1 2026 Business Review. I guess I need to start by saying a few words about myself. So let me start with, I think, something that really defines me is my past as a software engineer. I think that's really what shapes how I think about games, how I think about running studios, companies like Remedy, and how we approach game development in general. Over the past 25 years, I've had a chance to work on games across many roles on all platforms really and across North America, Asia and Europe, so quite global. That has given me a good overview of our craft and now I have the immense privilege of bringing that experience to Remedy. One of the boldest, most original studios in gaming with some of the best talents in the industry, which is excellent. You know what Remedy has achieved is rare. Over more than 3 decades, this studio has built a voice unlike any other, supported by a strong and engaged community, which is extremely rare, as I said, and a great asset now and for the future. More broadly, in our industry today, I think the creative craft is under real pressure. Games with a genuine soul, games that take risks, that have a point of view are getting harder to find. And those are exactly the games that Remedy makes. My mission is not to change what Remedy is. My mission is to protect and grow that soul and to help this studio grow without losing what makes it Remedy. All right. Enough of me, let's go through our business performance together. Q1 2026 was a good start to what I believe is going to be a very exciting and pivotal year for Remedy. Revenue increased, driven by game sales and royalties that nearly doubled for the comparison period. EBITDA came in ahead of the same comp period at EUR 2.9 million and EBIT was positive at EUR 1 million. Operating cash flow was on a healthy level. So good signals as we start that year. And a good share of that performance is being driven by our back catalog, which continues to find its audience. That is very encouraging, especially as we are building the self-publishing muscle at Remedy. We have a number of exciting projects in development, but the most immediate focus for Remedy, the one closest to our players' hands with the 2026 launch is CONTROL Resonant, obviously. So let's cover that. Our goal with CONTROL Resonant is to deliver a great melee action in RPG. Again, that honors the Control universe but also expands it, and that players will truly appreciate because in the end, that is what really only matters. So we're doing that for players in our fan base. A lot of interest was captured with our December 2025 announcement, and the leading indicators are on track. Looking ahead, we will ramp up the marketing campaign leading up to release, and we expect the momentum to significantly intensify. We have an ambitious global campaign and a sizable marketing budget for execution. The reception has been incredible so far. We're extremely happy about traction. During Q1, we released 2 new trailers. The first was our gameplay reveal trailer featured in the PlayStation State of Play. As you know, one of the highest profile venues in the industry for a reveal like this one. And putting our gameplay in front of that audience -- in front of you all for the first time was a very important moment for us and for the game at Remedy. The second was produced with our long-term partner, NVIDIA. This partnership shines a spotlight on the technical ambition behind CONTROL Resonant. And of course, on our very own Northlight, our proprietary engine, which is what allows us to push the game's performance and cutting-edge graphics, extremely important for Remedy games, as you know. Beyond the trailers, sorry, we released a developer diary for our community called Beyond the Oldest House. This is the kind of content that really matters, we believe, to our most dedicated fans, direct access to the people making the game, our dev team speaking in their own voices, speaking honestly about what they are building. Remedy's community has always liked authenticity. And I think that's really what we've been doing here and what we want to keep doing. We also hosted an exclusive showcase for media and creators. We had over 70 outlets that attended, generating more than 140 articles and around 2 billion impressions across global media, which we believe are good numbers at this stage of the campaign and more importantly, the coverage was not just broad and just volume, it was also quality and it was positive, which obviously, for us, is very encouraging and kind of how we want to land the product. Outlets like Edge, Polygon, GAMINGbible, IGN, just to name a few, I don't want to hurt anyone in the process, but have all come away from their previews with a clear message, to be clear, this was a hands-off preview, but still very encouraging. And people really said, this is a Remedy game that takes risks and has its own identity. And that's always what we want to make at Remedy. And you'll see that more and more as I talk strategy moving forward, it's very, very important that these games feel Remedy and are more Remedy than ever. There are, of course, fair questions being raised. Action RPG is a new genre for Remedy, and the press, the fans are right to scrutinize how the gameplay holds up. We welcome that scrutiny, but we are also confident that as players and press get their hands on the game, they will see kind of how serious we are about earning our place in the action RPG space. I have the chance to play the game daily, and I can tell you that it's coming very well together. I'm very happy. All right. So beyond the press, the broader signals heading into launch are healthy, sentiment among fans and content creators has held up globally, which is great to see. That audience is sizable. The Control universe has been played by close to 20 million people over its lifetime. We are also making a deliberate push beyond our traditional strongholds, the U.S. and Europe. This time around, Asia and Latin America are real priorities for this launch. And we have invested in localization at a level we have never done before. Our thinking here is simple, Remedy's voice deserves to reach further, and we are giving it the means to do so. All right. So turning over to our games currently in market. Alan Wake 2 became available on Amazon's Luna service during Q1, alongside Alan Wake Remastered, generating a platform deal royalty. The game also continued to perform across other platforms throughout the quarter, and Santtu will explain a bit more how that impacted Q1 positively. Happy to -- I'm very happy to announce that the game has passed a 6 million benchmark in lifetime copies sold. Control retained its solid sales momentum in Q1. In fact, Control actually sold better than the comparison period driven by promotions and added visibility from CONTROL Resonant, obviously. This is a dynamic we plan for at attractive price points. Control is a great vehicle for new players to enter the world of Control ahead of the sequel. All right. FBC: Firebreak. The last major update, Open House was released in March, and the game has moved to maintenance mode after that. The game will remain online and a Friend's Pass feature was introduced to support the player base. It is very important for us at Remedy to let players enjoy the game for as long as they can and as long as they want. The game remains available on PlayStation Plus and Xbox Game Pass, sorry, and can be purchased on PC and console platforms. All right. Our development pipeline has 3 active projects. CONTROL Resonant, obviously, in full production. We already discussed about this one at length. Max Payne 1 and 2 remake is also in full production in partnership with our partner, Rockstar Games. And you know how close to our heart is Max Payne. So something that we're putting a lot of effort on also. And we have a new project currently in proof of concept, which unfortunately, I cannot tell much more about today. So building on what I shared earlier, 3 areas where we are sharpening our focus. One, focus on core strength. Remedy is exceptional at building single player narrative experiences on core platforms. This is what we do best, and we need to double down on that expertise. We cannot take it for granted, not our craft and certainly not our players. This does not mean we stand still. We will innovate and we will explore new ways of reaching players when the case is right. But every step beyond our core has to build on what we already do best. Franchise expansion as the second pillar. Today, we tend to think about our games one after another. I want us to evolve that mindset, managing more franchises. I think our IPs today can really give a lot more than what they already do. We need to think as long-term strategies that let us be bolder to connect the dots further within and between our world. That is something very important to me for the future of Remedy. And three, self-publishing. I think this is a unique opportunity to hone the whole chain. No one can really speak about Remedy games better than Remedy. I want our publishing voice to be as unique and distinctive as our games themselves. It's a chance to be heard like never before. And we are not going to play safe, you will see that with the CONTROL Resonant campaign. With that, I will hand over to Santtu to walk you through the Q1 financial results. Santtu Kallionpaa: All right. Thank you, JC, and good afternoon also on my behalf. Let's start reviewing the financials from the revenue. So in Q1 2026, our revenue was EUR 13.1 million, which is 2 percentage lower than in the comparison period. Game sales and royalties almost doubled from the comparison period being EUR 5 million for the first quarter. This was driven by the royalties from Alan Wake 2, which include also the onetime royalty accrual from the game becoming available in Amazon Luna. Also, Control games has performed well in Q1 and partly drove the game sales and royalties above previous year. Q1 2026 also includes revenue accruals from FBC: Firebreak's subscription service deals, which we didn't have last year Q1. Development fees, they decreased from the comparison period and still made over half of the total revenue for Q1 2026. Development fees were for the projects, Max Payne 1 and 2 remake and CONTROL Resonant. Revenue was impacted negatively by weak USD rate. With the FX-neutral revenue, we would have had a growth of 0.2 percentage. Then looking at the longer perspective, the share of game sales and royalties of the total revenue has started to increase during 2025. Alan Wake 2 started accruing royalties in the end of 2024. And as said, during the first quarter 2026, Control games and sales related to our older game titles were on a higher level than in Q1 2025, and FBC: Firebreak started accruing revenue from Q2 2025 onwards. Development fees have remained roughly on a similar range for the last 4 quarters, but there has been also a variation between the quarters due to the development milestones of CONTROL Resonant and Max Payne 1 and 2 remake. Then moving on to profitability. So the operating profit in Q1 2026 was EUR 1.0 million positive, being EUR 0.3 million less than in the comparison period. This decrease is mainly due to higher depreciation and investments to self-publishing in Q1 2026. EBITDA improved from the comparison period and was EUR 2.9 million positive. Growth from the comparison period is largely due to the decrease of external development expenses. Then let's look at the costs in more detail for transparency. So unnetted external development and personnel expenses in total decreased by 11 percentage from EUR 11.5 million in Q1 2025 to EUR 10.3 million in Q1 2026. External work expenses were EUR 1.9 million in Q1 2026, being 44 percentage lower than in the comparison period. This was driven by lower external development needs in the game projects. The unnetted personnel expenses were EUR 8.4 million in Q1 of 2026, increasing by 3 percentage from the comparison period. This growth matches the growth of average number of personnel during the reporting period, which also increased by 3 percentage. The amount of capitalized development expenses at EUR 3 million was on a similar level than in the previous year. The amount of capitalization is higher than in the previous quarters, mainly due to increased efforts on CONTROL Resonant. In Q1 2026, depreciation expenses in total were EUR 1.9 million, of which EUR 1.2 million were related to game projects. These included Alan Wake 2 and FBC: Firebreak depreciations. Q1 depreciations are on a lower level than in the previous quarter, and this is due to the depreciations following the level of game sales of the games, which we are depreciating. Currently, a major part of Remedy's intangible assets is from capitalized development costs of CONTROL Resonant. Also, the remaining capitalization of Control's publishing and distribution rights has been mainly allocated to CONTROL Resonant. Once the game is launched later this year, the depreciations related to CONTROL Resonant will start, which will impact the quarterly depreciation levels. So at the end of Q1 2026, our total cash level was EUR 34 million, including EUR 14.4 million in cash and EUR 19.6 million in short-term cash management investments. During Q1 2026, the cash flow from operations was EUR 8.3 million positive. Besides the cash flow from operations, our cash position was affected by a EUR 3.2 million negative cash flow related to investments and EUR 0.3 million negative cash flow from financing. Cash flow from investments, that includes payments related to capitalized development costs and machine acquisitions. Cash flow from financing includes IFRS lease liability payments. The cash position improved in relation to both the comparison period, Q1 2025 as well as to what the situation was at the end of year 2025. Then if you look at the cash flow from operations closure, there has been variation in timing of payments from quarter-to-quarter. Q1 2026 cash flow from operations was EUR 14.9 million higher than in the comparison period. Our outflowing operative payments were 23 percentage higher than in the comparison period. Due to timing of sales payments, we, at the same time, received significantly more inflowing sales payments than a year ago. Timing of development fees -- fee payments are agreement based, and there is difference compared to revenue accruals. Royalty and game sales-related payments follow the revenue accruals with delay. So in overall, year 2026 started with a profitable quarter for us with both EBIT and EBITDA being positive. This is, of course, ahead of marketing ramp-up and related spend to support the launch of CONTROL Resonant during 2026. And now, JC will continue with outlook. Jean-Charles Gaudechon: Thank you, Santtu. All right. Our outlook for 2026 is unchanged. We expect our full year revenue and EBITDA to increase from the previous year. And then handing it to Aapo for Q&A. Aapo Kilpinen: Thank you, JC. Thank you, Santtu. Let's move on now to the Q&A. [Operator Instructions] We already have a couple of good questions in the pipeline, so let's begin with those. JC, the first question is related to you. What are the short-term goals from the new CEO? And will those goals affect how Remedy operates? Jean-Charles Gaudechon: Yes. Good question. I mean, so I've been here for a few months, and I spent a lot of that time listening and getting to understand people, the studio where we're at. And honestly, the priorities are very clear. Today, it's to execute on CONTROL Resonant. We can have all the strategies in the world, if we don't make an incredible game, what's the point? So I think to me today, it's really to give the studio the support, the direction, the inspiration to really kind of get CONTROL Resonant across the finish line in the best possible way now. It now is, of course, the biggest one, but we have other great games in the pipeline, which also needs and deserves attention and support. So this is very much the focus right now. The strategy pillars I talked about, we'll surely get into it, get into that vision, but today, let's focus on product execution. Aapo Kilpinen: Excellent. Thank you, JC. The next question is on CONTROL Resonant. Can you give more color on the leading indicators that you're tracking on the game? Jean-Charles Gaudechon: So unfortunately, right now, we cannot yet. Of course, we're still being -- a lot of that is happening behind closed doors, and we apologize. I know both present players are antsy to hear and learn more about the game and trust us, it's going to come. But today, I can't say a lot more. What I can say, as I said in the presentation, we're happy about how it's tracking. We're getting the momentum we want to gain. We're getting the traction. The game is landing the right way. The message, what we're hearing back is very much in line with what was planned. So happy about that. Apologies that I can't go much deeper into details, into numbers, but that's what I can say today. Aapo Kilpinen: Very good. Next question is on China and broader Asia. Is there a local partner model with a distribution arrangement? And how does the economic split compare to core markets? Jean-Charles Gaudechon: So good question. And you know I spend quite a bit of time in Asia myself. So that allows me also to hopefully get a bit better understanding of that region, even though you can't make any generalities and it's a daunting market, but also a very attractive one. We're going to have a local strategy. We're going to have a local partner. I can't announce any of that just yet or have any more details, but there is a strategy around how to approach China specifically. I think for me, what's most important today is how do we position the product to be a success with Chinese gamers. I think action RPG is something that resonates well in China. And I believe Chinese gamers will, I hope, Chinese gamers will appreciate CONTROL Resonant, and we're going to do everything on the way to get there. It's tough to say how much this is going to play in economics of the game. But what I can tell you is we're going to push really harder. Also on the localization front, I touched on it earlier. It's pretty much the biggest localization investment Remedy has ever made. And we're very happy to tell our Chinese gamers that the game and in China, but across the world, Chinese speakers that the game will be both kind of text and audio localized, which I think will be great. Aapo Kilpinen: Super. Next question is to Santtu. With CONTROL Resonant nearing completion, how should we think about the development fee trajectory through the rest of 2026? Santtu Kallionpaa: Yes. So the general rule regarding the development fees is that they follow the agreed milestones of the game development and the contracts. And good assumption regarding, for example, CONTROL Resonant is that the development fees will continue to accrue as long as the development of the game takes. Aapo Kilpinen: Excellent. Continuing with the finance question, Santtu. Are there still some B2B payments accrued for the coming quarters in relation to FBC: Firebreak? Santtu Kallionpaa: Yes. I think we have said earlier that the B2B deal accruals continue as long as the B2B deals regarding the game being in the subscription services continue. So it's based on that. We have also said that the major part of the cash flow impact from these agreed deals for FBC: Firebreak, that's already in our balance sheet. Aapo Kilpinen: Excellent. Then back to JC. I would like to hear more about the social media marketing efforts in China and how big of a share of the CONTROL Resonant sales do you see coming from Asia? Jean-Charles Gaudechon: I think I've kind of already answered this one and the last one. Not much more to say that we're going to be present. We are present and we're going to intensify our presence on the Chinese social media, and in general, kind of try to create our voice, getting a share of voice in China. Aapo Kilpinen: Very good. Next question on CONTROL Resonant's budget, ahead of CONTROL Resonant's launch, does the estimated development budget of approximately EUR 50 million still hold? Jean-Charles Gaudechon: So I'm not going to -- this is Santtu already looking at me and saying, don't say it. It's -- what I can tell on the budget is the team has done and the studio has done excellent work to stay on track, has done excellent work to build a AAA game on a relatively short or small budget. And that's something we've seen from Remedy before. That's something we'll see again from Remedy because honestly, there's something pretty incredible about the way being -- the games are being built at Remedy the way they've been thought through and managed. So it's been -- it's not has always been the case. I know that. We've had some hiccups in the past, but I can tell you that the team has done incredible work on control resonance. Aapo Kilpinen: Very good. Next question then is in relation to Remedy's headcount. Remedy's head count is increasing. This seems to be counter to what is happening in many other game studios. What is the thinking behind the increase? Jean-Charles Gaudechon: I mean good segue from what we just -- the previous question. And let me answer it by telling you again that the studio has made incredible games on relatively small actually team size, a relatively small budget size. And I think that happened because, well, it's a studio that has its own engine that has its own kind of tools and ways of building it, which I've seen for the past 2 months, and I understand why they were able to pull it off that way. I think also one thing you can see about Remedy is Remedy has always been smart of not going too fast, too quickly, which you've seen in other parts of the industry, unfortunately. And when you get to that, then that's when you take the risk of potentially having to downsize. What I can say today from the size of the team, the size of Remedy and the games we're making, I think we're pretty much rightsized for it. Aapo Kilpinen: Excellent. Next question, again, on organizational topics. As you've gotten to know the company, do you see areas in Remedy's operating model or organizational structure where changes may be needed? Jean-Charles Gaudechon: I think you can always make improvements, and we will make improvements. Yes, I've seen parts of Remedy, which I think can be improved at many different levels. Today, what's really important is to keep a balance on what you can improve and when you do some of these improvements. And as I said right now, the studio is in full execution mode. You need to be cautious with that. We need to give the right support. And a lot of this is gradual anyway. So today, it's more about protecting, supporting, making sure that we stay on the right tracks, but not necessarily disrupt any of that. But yes, there will be changes here or there, kind of internal cuisine type of thing, which will help, I think, the studio even perform better in the future. Aapo Kilpinen: Perfect. Next question is about the new projects. Is there any information you can share about it? Will it be under the Remedy connected universe? Or will it be a completely new title, spin-off? Anything that you can communicate at this point? Jean-Charles Gaudechon: It's tough. I keep having to say that I can't say much. But unfortunately, no, I can't reveal anything about this new project, except that it's going to be yet again an incredible Remedy game. Aapo Kilpinen: Very good. The next, Remedy has always been a contender for the Game of the Year in TGA. So is winning Game of the Year with CONTROL Resonant in your playbook? Jean-Charles Gaudechon: It always is. This team, and I've seen it now, we know it from before, right? This team is always going for the highest possible quality. And I think CONTROL Resonant is not different on that front. So we're going to push hard. I heard that this is going to be a pretty hard year, but I'm not sure exactly what's coming out this year, but there's going to be competition. But I think we'll be up there fighting for it. Aapo Kilpinen: Excellent. Then would you consider adding a preorder option for the games you publish? Jean-Charles Gaudechon: So I can't say much once again on CONTROL Resonant specifically. Me personally, I think preorder is a good way to judge traction, to judge success of the game ahead of launch. So I think it's a good thing. Aapo Kilpinen: Yes. Super. Then I think the final question, might there be any collaboration with Epic Games to bring Jesse or Dylan Faden or maybe even Ahti the janitor to Fortnite to promote CONTROL Resonant like what was done with Alan Wake 2? Jean-Charles Gaudechon: I mean we're big fans of crossover. I think we've showed it in the past. I think it helps us expand our universe, our worlds, and that's something that I mentioned in some of the pillars in the presentation just now. And this is something we're going to keep doing because I believe strongly in RPs in our worlds, and they should even get deeper and connect the dots more, as I said before. So I can't, of course, say anything about whether we do something with Epic or Epic is a strong and close partner. So we're always talking to our partners about potential opportunities. And these are, again, a great opportunity to look into. Again, as I said, one filter we will, I think, use more and more is, is it building on our core strength? As I said, as the first filter -- first pillar, sorry, this is going to be something we do a lot. And I think you define the vision of a studio not by just saying yes, but also saying no, which is what we don't go after, what may not really help compound that culture and build on the core strength of Remedy. So this is the filter we'll be using moving forward on the crossover, et cetera. But so far, we've been really happy with it. Aapo Kilpinen: Very good. One final question came through. In what way do you think the rapid development of AI will impact Remedy's operations, perhaps regarding product price or game development costs? Jean-Charles Gaudechon: So you're casually dropping an AI question at the end, excellent. Of course, it's a big topic these days. We've had a clear stance as Remedy with AI. Today, we're not using generative AI to create any user-facing content or in general. I would also say, good luck trying to make Alan Wake with AI. I would love to see that happen, but I think that it's going to be very, very hard. So today, I would say it's a bit of a non-topic. Of course, we need to make sure this is framed. There is adoption here or there happening like in gaming in general, you can never really stop someone to tinker with it. But it's really important that we have a clear frame, and it's very important that this does not replace any parts of the creativity coming up in our games. And that's something that, to me, I'm going to be fearless about. Aapo Kilpinen: Thank you, JC, very clear. Excellent. Thank you so much for the questions. Excellent questions once again. If there are any additional questions you didn't have the chance to present, feel free to send those over to the e-mail address now visible on the screen. We'll be back next time with our half year financial report that will be on August 11. But until then, bye-bye from us.
Operator: Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Astera Labs first quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After management remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I will now turn the call over to Leslie Green, Investor Relations for Astera Labs, Inc. Common Stock. Please go ahead. Leslie Green: Good afternoon, everyone, and welcome to Astera Labs, Inc. Common Stock first quarter 2026 earnings conference call. Joining us on the call today are Jitendra Mohan, Chief Executive Officer and Co‑Founder; Sanjay Gajendra, President and Chief Operating Officer and Co‑Founder; and Desmond Lynch, Chief Financial Officer. Before we get started, I would like to remind everyone that certain comments made in this call today may include forward‑looking statements regarding, among other things, expected future financial results, strategies and plans, future operations, and the markets in which we operate. These forward‑looking statements reflect management's current beliefs, expectations, and assumptions about future events which are inherently subject to risks and uncertainties that are discussed in detail in today's earnings release and in the periodic reports and filings we file from time to time with the SEC, including the risks set forth in our most recent Annual Report on Form 10‑K. It is not possible for the company's management to predict all risks and uncertainties that could have an impact on these forward‑looking statements or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward‑looking statement. In light of these risks, uncertainties, and assumptions, all results, events, or circumstances reflected in the forward‑looking statements discussed during this call may not occur and actual results could differ materially from those anticipated or implied. All of our statements are made based on information available to management as of today and the company undertakes no obligation to update such statements after the date of this call except as required by law. Also during the call, we will refer to certain non‑GAAP financial measures which we consider to be an important measure of the company's performance. For example, the overview of our Q1 financial results and Q2 financial guidance are on a non‑GAAP basis. These non‑GAAP financial measures are provided in addition to, and not as a substitute for, financial results prepared in accordance with U.S. GAAP. A discussion of why we use non‑GAAP financial measures—whose difference is primarily stock compensation, acquisition‑related costs, and related income tax effect—and reconciliations between our GAAP and non‑GAAP financial measures and financial outlook are available in the earnings release we issued today, which can be accessed through the Investor Relations portion of our website. With that, I would like to turn the call over to Jitendra Mohan, CEO of Astera Labs, Inc. Common Stock. Jitendra Mohan: Thank you, Leslie. Good afternoon, everyone, and thanks for joining our first quarter conference call for fiscal year 2026. Today, I will update you on AI infrastructure market trends, our Q1 results, and recent announcements. I will then turn the call over to Sanjay to discuss Astera Labs, Inc. Common Stock’s growth profile. I would also like to welcome Des, our CFO, joining this call for the first time. Des will cover our Q1 financials and Q2 guidance. Since our last earnings call, AI infrastructure spending has clearly accelerated. Hyperscalers, AI labs, and sovereign entities are signaling the industry buildout is still in its early stages, underpinned by strong monetization and ROI. We expect these strong secular trends to be a tailwind for Astera Labs, Inc. Common Stock’s growth over the long term. Astera Labs, Inc. Common Stock delivered strong results in Q1 with revenue and non‑GAAP EPS above our outlook. Revenue for the quarter was $308 million, up 14% from the prior quarter and up 93% versus Q1 of last year. Revenue growth was broad‑based, spanning across our signal conditioning and fabric switch product portfolios as we continue to diversify our business profile with new design wins across multiple customers and product categories. Our PCIe 6 business across both AI fabric and signal conditioning was strong in Q1, with revenue expanding to more than one‑third of our total revenue. We have now shipped millions of PCIe Gen 6 ports to date, demonstrating the robustness and maturity of our PCIe portfolio. Torus smart cable modules for Ethernet AECs continue to perform well as new program designs shift into volume while others ramp to mature levels across GPU, XPU, and general‑purpose systems. On the scale‑out fabric front, our initial design wins with Scorpio X Series in smaller radix configurations shifted from pre‑production shipments to initial volume ramp during the first quarter. Building on this momentum, today we announced the expansion of our Scorpio product line of AI fabric switches for both scale‑up and scale‑out use cases. Scorpio X Series now supports up to 320 lanes for high‑radix scale‑up networking and Scorpio P Series PCIe 6 portfolio now spans 32 to 320 lanes for diverse system topologies, making it the broadest in the industry. Our new flagship Scorpio X Series 320‑lane has been purpose built to maximize AI economics by leveraging hardware‑accelerated hypercast and in‑network compute engines to boost collective operations by up to 2x. In‑network compute offloads critical accelerator‑to‑accelerator communication and computation directly onto the switch, dramatically reducing the networking overhead during large‑scale training and inference. These hardware capabilities are delivered through enhancements to our Cosmos software which can now integrate deeper into our customer software stacks, providing not only diagnostics and telemetry, but also directly improving AI platform performance. Core features’ advanced hardware and software capabilities are a result of Astera Labs, Inc. Common Stock’s deep system‑level understanding of AI architectures and close customer collaborations, creating a durable competitive moat. We are excited to report that we are now shipping initial volumes of our new 320‑lane Scorpio X, with production volumes ramping in 2026. Scorpio X Series also has a widening interest in design activity with hyperscalers, edge AI inference providers, and enterprise infrastructure builders to address high‑bandwidth AI clustering use cases. Scorpio P Series continues to grow through 2026, and we expect initial shipments to at least two additional major hyperscalers towards the end of 2026, with broader deployment in 2027. On the optical front, we made good progress during the quarter as we continue to work through the qualification process at a large AI platform provider with our ultra‑high‑precision optical fiber coupler product, which we expect to ship in volume starting in 2027. We are actively expanding our volume manufacturing capabilities to support the ramp of both scale‑out and scale‑up TPO applications. Beyond the early commercial traction of our merchant connectors, our high‑density fiber coupler technology will be a critical piece of our long‑term optical roadmap for NPO and CPO applications. Finally, our Leo memory controller is on track for an early ramp of CXL‑attached memory with Microsoft Azure M‑series virtual machines, and during the quarter, we captured a new custom design win for a KV cache–oriented application, with shipments expected in 2027. As we look to 2026, robust demand reflects secular AI infrastructure spending, deep customer partnerships, and expansion towards higher‑value solutions within our portfolio. This trend is quickly increasing our silicon dollar content opportunity beyond $1,000 per XPU and positions Astera Labs, Inc. Common Stock to outperform our end‑market growth rates. As a result, we expect strong revenue growth to continue through 2026 and into 2027, driven by the proliferation of AI fabrics and the industry's transition to PCIe 6, 800‑gig, and 1.6T Ethernet connectivity. Based on the momentum we are seeing in 2026, we are strategically investing to drive strong continued growth. Our acquisition of XScale Photonics has created immediate design opportunities and our design center is fully integrated and working with customers on new programs. We have expanded our product portfolio, increased dollar content per accelerator, and diversified our customer base with additional design‑ins. We are making progress within large market opportunities including optical engines and interconnects, UALink fabrics, and custom solutions for NVLink and AI inferencing. Most of all, I am proud of the stellar team we have built through worldwide hiring and thoughtful acquisitions, the progress we have made, and the results we are delivering together. With that, let me turn the call over to our President and COO, Sanjay Gajendra, to outline our vision for growth over the next several years. Sanjay Gajendra: Thanks, Jitendra, and good afternoon, everyone. Today, I will provide an update on our recent execution followed by an overview of the meaningful market opportunities that will fuel Astera Labs, Inc. Common Stock’s growth over the next several years. Astera Labs, Inc. Common Stock’s mission is to deliver a purpose‑built intelligent connectivity platform with a portfolio of standard, custom, and platform‑level solutions across copper and optical interconnects for rack‑scale AI infrastructure deployments. As AI deployments advance to production at scale and operational efficiency, infrastructure teams face a new set of constraints—multitrillion‑parameter models, agentic workflows, multistep reasoning distributed across heterogeneous compute infrastructure, to name a few. The industry needs connectivity and solutions purpose built to address these workloads: higher radix to simplify topologies, intelligent fabric capabilities to reduce communication overhead, open and platform‑specific optimization, and data‑center‑grade diagnostics to maintain uptime when a single fault can cost millions of dollars in idle compute. Let me now walk through our approach to address these evolving needs and our future strategy. Starting with our standard products, we continue to see strong momentum across both AI fabric and signal conditioning portfolios. We strengthened our mission‑critical position with the introduction of our flagship Scorpio X Series 320‑lane scale‑up fabric switch and the overall expansion of our Scorpio switch portfolio. The Scorpio X Series 320‑lane high‑radix AI fabric switch replaces multiple legacy switches to enable large scale‑up cluster sizes in a single hop and reduces overall latency. Several new features such as in‑network compute reduce time‑to‑first‑token and tokens‑per‑watt performance. The newly expanded Scorpio P Series PCIe switch portfolio now spans from 32 lanes to 320 lanes to enable diverse accelerator optionality and system topologies. Our AI fabric portfolio is poised to expand further into 2027 with the introduction of UALink‑based products for AI scale‑up platforms. In early April, the UALink Consortium published a new specification which defines in‑network compute, chiplets, manageability, and 200G performance. UALink 2.0 delivers these advancements with an open, vendor‑neutral approach and confirms that scale‑up switching is not simply hardware, but an AI‑aware fabric actively helping the system compute and drive performance. This evolution plays into Astera Labs, Inc. Common Stock’s strengths, as demonstrated by the industry‑leading feature set that is being deployed through our Scorpio portfolio expansion today. The maturity of the ecosystem is also accelerating, with OEMs and suppliers working tightly to deploy initial programs in 2027. On the signal conditioning portfolio, our Aries products will expand to support PCIe 7 and our Torus portfolio into 1.6T Ethernet, positioning us at the forefront of the next connectivity upgrade cycle. Turning to our optical business, Astera Labs, Inc. Common Stock’s signal connectivity business is driven by the rapid shift of AI systems towards rack‑scale architectures and higher compute capabilities where scaling performance increasingly depends on high‑bandwidth, high‑radix, low‑latency interconnects. These requirements will expand our AI connectivity opportunities across both copper and optical interconnects. Astera Labs, Inc. Common Stock is well positioned to lead this transition by extending its proven value‑chain approach from copper into optics. Over the past couple of years, we have been systematically investing to broaden our internal capabilities across advanced analog and mixed‑signal design, DSP, electronic ICs, photonic ICs, and optical packaging capability, while also deepening our supply‑chain relationships. Together, these capabilities will enable high‑volume deployment of a complete scale‑up optical engine. We are focused on three areas pertaining to scale‑up optics: 1) high‑density detachable, reflowable fiber‑attach solutions using the core technology from our XScale acquisition—we expect to ship these connectors in volume starting in 2027; 2) chipsets in support of NPO that will enable multi‑rack AI clusters starting in 2027; and 3) eventually fully optically enabled Scorpio X fabric switches with CPO supporting larger domains, higher egress densities, and bandwidth. Next, let me talk about our custom solutions business that also continues to make meaningful progress as we work to develop new products and close on new designs. Once again, tight collaboration with hyperscaler customers coupled with a diverse set of foundational technology and operational capabilities have been essential to our initial success. These opportunities represent a new multibillion‑dollar market opportunity for Astera Labs, Inc. Common Stock. First, we are engaging with multiple customers to enable NVIDIA NVLink Fusion’s scale‑up architecture for hybrid racks. Our strong historical execution delivering intelligent connectivity solutions for NVIDIA‑based systems positions us well to develop and design within these new custom programs. Second, we are seeing new custom solution opportunities within the memory space for KV cache applications. We are happy to report that we have won a new design leveraging a customized version of our Leo CXL controller to maximize performance within these AI use cases. Overall, we are pleased with the initial traction we have seen on the custom solutions front and have conviction that this opportunity set will continue to broaden and become a meaningful business for Astera Labs, Inc. Common Stock over the next few years. Finally, we continue to demonstrate solid momentum with our platform business as we ultimately look to expand beyond add‑in cards and smart cable modules to enable broader rack‑scale solutions for customers. As we have grown from an I/O component supplier to an AI fabric solution provider over the past couple of years, customers are looking for Astera Labs, Inc. Common Stock to bring additional value to the AI rack at the system level. In conclusion, Astera Labs, Inc. Common Stock is at a key inflection point in the company's journey as we begin to ship production volumes of our scale‑up AI fabrics. We are also making great strides towards broadening our business across new product categories including optical and custom solutions as our partners look for us to deliver more value in next‑generation systems. Therefore, we will continue to strategically and thoughtfully invest as we position Astera Labs, Inc. Common Stock to deliver growth rates above our end‑market benchmarks over the long term. With that, I will turn the call over to our CFO, Desmond Lynch, who will discuss our Q1 financial results and our Q2 outlook. Desmond Lynch: Thank you, Sanjay, and good afternoon, everyone. I am pleased to be joining you today for my first earnings call as CFO of Astera Labs, Inc. Common Stock. I look forward to partnering with Jitendra, Sanjay, and the rest of the leadership team as we continue to drive long‑term value for our shareholders. Today, I will begin by reviewing our Q1 financial results and will then discuss our Q2 guidance, both presented on a non‑GAAP basis. Revenue in Q1 2026 was $308.4 million, up 14% versus the previous quarter and up 93% year over year. We saw revenue growth across our signal conditioning and switch fabric portfolios, supporting both scale‑up and scale‑out connectivity for AI fabric and reach‑extension applications. Our Scorpio product family performed well in Q1, driven by strong demand for PCIe Gen 6 switching applications and continued expansion of designs across various platforms. During the quarter, Scorpio X Series products began shipping in initial production volumes. Looking ahead, we expect Scorpio X Series shipments to increase in Q2 along with initial shipments of our new Scorpio X 320‑lane and then ramp to full volume production in 2026. Aries revenue grew on strong early adoption of our PCIe 6 solutions for both scale‑out and scale‑up signal conditioning. In total, PCIe Gen 6 revenue across AI fabric and signal conditioning contributed more than one‑third of total company revenue in the quarter. Torus also delivered solid results driven by broad adoption of AEC to extend reach in both AI and general‑purpose compute platforms. Non‑GAAP gross margin for the first quarter was 76.4%, up 70 basis points sequentially, primarily driven by a lower mix of hardware sales across our signal conditioning portfolio. Non‑GAAP operating expenses for the first quarter were $123.9 million, reflecting continued R&D investment to support our expanding product roadmap, including a full quarter of our XScale acquisition and a partial quarter of our newly formed Israel Design Center. Within Q1 non‑GAAP operating expenses, R&D expenses were $96.2 million, sales and marketing expenses were $12 million, and general and administrative expenses were $15.7 million. Non‑GAAP operating margin for the first quarter was 36.2%. We will continue to invest strategically to drive above‑industry revenue growth over the long term while maintaining strong and durable profitability. For the first quarter, interest income was $11.6 million, our non‑GAAP tax rate was 11%, and non‑GAAP fully diluted shares outstanding were 181.2 million shares. Non‑GAAP diluted earnings per share for the quarter were $0.61. We ended the quarter with cash, cash equivalents, and marketable securities totaling $1.18 billion, flat versus Q4, as cash from operations of $74.6 million was offset by cash paid for acquisitions. Now turning to our outlook for the second quarter, we expect revenue to be between $355 million and $365 million, up 15% to 18% sequentially, driven by continued strength across our AI fabric and signal conditioning portfolios. Aries revenue growth is expected to be driven by continued strong adoption of PCIe 6 across AI platforms, supporting both scale‑up and scale‑out connectivity. Torus growth is expected to be driven by increased volumes for AI scale‑out connectivity. And in AI fabric, we expect robust growth driven by the continued early‑stage ramp of our Scorpio X Series products for large‑scale XPU clustering applications as well as continued growth in our PCIe solutions in customized GPU platforms. We expect second‑quarter non‑GAAP gross margin to be approximately 73%. This outlook includes an estimated 200 basis point non‑cash impact related to a recently executed one‑time agreement with one of our customers. We expect second‑quarter non‑GAAP operating expenses to be between $128 million and $131 million. Interest income is expected to be approximately $11 million and we expect a non‑GAAP tax rate to be approximately 12%. We expect our Q2 share count to be 184 million diluted shares outstanding. Overall, we are expecting non‑GAAP fully diluted earnings per share to be between $0.68 and $0.70. This concludes our prepared remarks, and once again, we appreciate everyone joining the call. I will now turn the call back to our operator to begin Q&A. Operator? Operator: Thank you. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We ask that you please limit yourself to one question to allow everyone an opportunity to ask a question. If time permits, we may queue again for follow‑up questions. We will now open the call for questions. We will take our first question from Harlan Sur at JPMorgan. Harlan Sur: Good afternoon. Thanks for taking my questions, and great job on the execution by the team. Now as your customers build compute workload inflection from training to inference in the second half of last year, essentially very focused now on monetization, we saw that as inferencing workflows evolved—one‑shot to reasoning to knowledge and tech—this created new silicon opportunities. It created new storage tiers. It created more demand for high‑performance CPUs. Obviously, storage and CPUs communicate via PCIe, so right in the sweet spot of your technology and product leadership—that is one example. Your CXL solutions targeted at KV cache applications may be another example, but can you help us understand how the transition to more inferencing‑based workloads, especially agentic‑based workloads, has potentially helped to create new opportunities for the team and potentially expand your SAM opportunity? Jitendra Mohan: Harlan, thank you. You point out very correctly that inferencing has created a lot of focus in the industry and a lot of additional opportunities. The good news is that at Astera Labs, Inc. Common Stock, we have been focused on these AI applications from the start. We helped the training workloads when the training workloads were still the mainstream. We are helping the inferencing workloads equally well. The KV cache offload is a great opportunity where we mentioned earlier that we picked up a new design for a custom application for KV cache offload. That is really a key part of AI inferencing. I also want to draw your attention to the newly introduced Scorpio X 320‑lane family that supports in‑network compute and hypercast. Both of these are extremely important technologies to reduce the networking overhead and deliver additional performance for training as well as inferencing. And not only that, we enable these hardware‑accelerated modes through our Cosmos software which now not only gives our customers the ability to do diagnostics and telemetry, but allows them to uniquely improve the performance of their system for their inferencing workload using these unique capabilities that we have worked in tight collaboration with our customers. Operator: We will move to our next question from Blayne Curtis at Jefferies. Blayne Curtis: Hey, guys. Good afternoon, and I will echo the congrats on the nice results. Maybe you can, in terms of the Scorpio ramp—I know last quarter you talked about it being 20% of revenue. It is a big ramp. I am assuming that is the biggest driver into June. I was wondering if you can kind of frame just how big that is. And then I am curious, particularly this 320‑lane product that is ramping—what are the milestones, and what is left to do? You have sampled it, but to get that to production in an AI server, I am just kind of curious what is left there. Desmond Lynch: Hi, Blayne. It is Des. Thanks for your question. We have been very pleased with the performance of our Scorpio product family. It has certainly been a large driver for growth in the first half of the year. We continue to expect to see Scorpio P continuing to ramp driven by scale‑out opportunities. And then Scorpio X—this is really a greenfield opportunity for us associated with scale‑up connectivity. The small solutions are ramping today, and we do expect to see the layering in of the high‑radix configurations in the second half of the year. Given the size of the opportunity and the associated dollar content, we would expect to see that Scorpio will become our largest product line by the end of the year, which is strong performance for the product line that was only a small percent of total company revenue last year. And as we go throughout the year, I would expect to see X Series revenue exceeding P Series. But overall, we are very pleased with the performance of the Scorpio product family and the outlook of the business. Then into your second point about other milestones— Jitendra Mohan: We are already shipping, as Des mentioned, the newly introduced Scorpio X family, and you will be able to see and touch and feel this at Computex where we will be demonstrating this live in our booth. Operator: We will move next to Joe Moore at Morgan Stanley. Joe Moore: Great. Thank you. You talked quite a bit about your optical strategy. Can you talk about the timeframe where you see optical scale‑up becoming more relevant? And do you have the building blocks that you need to progress from copper to optical in that space, or do you need tuck‑in type technologies, and do you need to invest a lot more? Just a general sense of what it is going to take to transition from copper to optical over the next several years. Sanjay Gajendra: Thanks for the question. We have been working for the last couple of years building all the foundational things that are required for optical enablement—all of the mixed signal that is required, all of the electronic ICs, as well as we did the acquisition with XScale that brought in the pluggable connector as well as the PIC technology. In general, I want to say we have made tremendous progress in preparation for the optical opportunities that are coming up on us. For us, in terms of timeline, what we believe is that the NPO‑based opportunities—or the near‑package optics—would be the first one to ramp, and that will start happening in 2027. We will also be ramping our pluggable connector technologies for AEC, mostly for scale‑out, next year, 2027, with more of the main deployments for CPO happening in the 2028 timeframe. So in general, for us, between the components that we are building that go inside the NPO, the detachable connector technology for folks that have their own CPO solutions, as well as our own Scorpio X devices that will come in to support both NPO variants and CPO variants, we believe it is all coming together nicely for us. One key consideration, of course, that we have been working is the supply chain and getting all of the commitments in place so that we can not only provide the technology that is required for NPO and CPO, but also make sure that we are able to ship to revenue. Overall, there is quite a bit of work and progress that we have done enabling us to start ramping in 2027. Operator: We will take our next question from Ross Seymore at Deutsche Bank. Ross Seymore: Congrats on the strong results and guide. I just want to talk about a small part of your business today, but something that sounds like it could grow a little faster than we thought before, and that is specifically your Leo product line. Given the dominance or resurgence of the CPU demand and memory being such a large cost and bottleneck these days, how has the demand trajectory and growth potential changed in your view—your ability to do the pooling and the sharing and the memory side in CXL in general? Jitendra Mohan: We are definitely seeing increased traction for CXL, not only for the general‑purpose compute applications where we started, but also for inferencing as we touched upon earlier. Staying with general‑purpose compute first, we are seeing additional demand from our customers. We are on track for deploying this with Microsoft Azure for their M‑series instances at the data center. That is in private beta now, expected to go into general availability end of the year. We see additional customers also following suit for this particular high‑memory‑type application. In addition, we are also excited by the new KV cache offload or AI inferencing opportunities. Some of our customers have already designed us in. In fact, we picked up our second design win—a custom application for CXL—earlier this quarter. We are working with our customer, which is an additional new hyperscaler, on at‑scale performance tests and expect that one to ship revenue in 2027. Operator: We will go next to Tore Svanberg at Stifel. Tore Svanberg: Yes, thank you. Congrats on the record quarter, and Des, welcome on board. I wanted to follow up on what you said about Scorpio mix as we approach the end of the year, especially in relation to Aries. Because obviously Aries is now ramping in PCIe Gen 6. Next year, obviously, there is going to be a lot of mixed networking topologies. So I understand Scorpio will be the biggest product by the end of the year. How should we think about 2027 between Aries and Scorpio? Because there are significant drivers for both. Desmond Lynch: Hey, Tore. Thanks for the question. Yes, we have been very pleased with the growth rate of our Scorpio product family, as I mentioned earlier—really excited about the continued growth opportunity ahead of us. That said, we still expect to see strong growth within the Aries product line. We expect to continue to grow our leadership position there. We expect to see strong growth given the PCIe 6 portfolio. It is just the fact that Scorpio will continue to be our largest and fastest‑growing business within the company. Operator: Next, we will move to Ananda Baruah at Loop Capital. Ananda Baruah: Yeah, good afternoon, guys. Thanks for taking the questions, and congrats on the great execution here. I guess the question would be, what is a good way—particularly with all the additional context you have given around Scorpio X and Scorpio P lanes progressing through the back half of ’26—as we move forward post ’26, and clusters get bigger, and presumably high‑radix switches have more ports, should we expect Scorpio X and Scorpio P switches to continue to increase the lane count? And if so, is there any useful anecdotal way to think about how that may occur? Should we just think that that can continue in some perpetuity? Jitendra Mohan: Thanks for the question. We can talk for an hour just on that topic, but let me say this. The AI fabric switches have become a very important part of our overall strategy, and we are investing heavily not only in the current generation that we have announced, but also upcoming devices. We are going to continue to focus on PCI Express because that is a large part of the business today, but we are also working on UALink products that will form the basis of the next generation of these devices. In terms of the lane count, we work very closely with our customers to understand what their deployment profile is going to look like because it is really important to target the right lane counts and rate for these devices. If you do not, then the cluster sizes get limited, and if you over‑index, then you come up with a solution that is not competitive. Fortunately, we have very good partnerships with our customers and they are telling us what the deployment looks like. I also want to add that as the cluster sizes increase, it is not only important to have a switch; it is also important to have the right media types for the deployment. So for our family of switches, we will continue to support copper connectivity as we have so far. As Sanjay mentioned earlier, increasingly we will enable optical connectivity as well, starting with NPO with the next generation of switches and then going to CPO. As a switch company, it gives us a perfect opportunity to deploy optical solutions, and that is something that we will completely leverage to make sure that we have end‑to‑end connectivity with our switches, including copper, NPO, and CPO. Operator: Take our next question from Natalia Winkler at UBS. Natalia Winkler: Thank you for taking my question, and congratulations on the results. I was wondering if you can add a little bit more color on the NVLink Fusion opportunity for you guys. Specifically, how do you see it from the standpoint of portfolio—where it would be most interesting for you—and also from the standpoint of the competitive landscape given some of the partnerships that NVIDIA has for NVLink Fusion as well. Sanjay Gajendra: Thanks for the question. In general, if you look at our business, you can broadly divide that into three categories: standard products, custom solutions, and the module/solution business. Clearly, an area that we see tremendous opportunity for us going forward is the custom solutions under which we are developing the NVLink Fusion–type devices. This is proving to be pretty interesting. We have several very deep engagements for an initial design win in collaboration with NVIDIA and a hyperscaler. That project is going well, and we do expect that to start contributing revenue in 2027, as some of the GPUs that are designed for this kind of use case—which is called a hybrid rack situation—come to market. In a hybrid rack, the GPU or the XPU still talks native protocols, which could be protocols like PCIe or UALink and others, but when they need to leverage and cross over and talk to an NVLink‑type ecosystem, then they would need a product that is based on NVLink Fusion that we are developing. In short, we are very deep in engagement from a silicon development standpoint, so we do expect that this will start providing some meaningful revenue in 2027 and then grow from there. On the competitive situation, this is an ecosystem that NVIDIA is creating with NVLink Fusion. There are others, but for us, the main thing is that we have been engaged with real customers and real applications, and to that end, we will continue to focus on that and do what we need to do, and not get distracted by any competitive press releases. Operator: We will go to our next question from Sebastien Cyrus Naji at William Blair. Sebastien Cyrus Naji: Congrats on strong results. My question is on the Scorpio business and maybe a little bit of a follow‑up to one of the prior questions. With your announcement of the new 320‑lane Scorpio switches for both the X and P Series, how should we be thinking about ASPs for the higher‑radix solutions? Is it right to think that your dollar content is correlated directly to the lane count, or is there another way to think about your dollar content? Any details there? Sanjay Gajendra: In general, the bigger the switch, the higher the ASP—that is the way the industry works. But also please keep in mind that these switches are more like AI fabric‑class devices, which are a lot more than just the number of lanes. We talked about in‑network compute, we talked about hypercast, and we talked about several features that we have that are unique and critical for deploying AI clusters—whether for training or, more and more, for inference applications where things like latency become super important. So when it comes to ASPs, it is a combination of what features are enabled and not just based on lane count. We do see our content continue to increase, and to that end we are expecting—and going forward with the design wins we have—over $1,000 worth of content per accelerator, and that is significant and growing rapidly for us. Considering the path that we have taken so far—from offering retimers to now offering complete AI fabric, and with the future products with optically enabled switches and so on—you can imagine that this content would grow from a dollars‑per‑accelerator standpoint. Operator: We will go next to Quinn Bolton at Needham. Quinn Bolton: Hey, guys. Let me offer my congratulations as well. You mentioned the KV cache offload custom design. I am wondering if you might be able to put any sort of numbers around it in terms of dollar content per CPU or dollar content per gigabyte or terabyte of memory that is attached. Is there a way we can think about how to size that opportunity? Sanjay Gajendra: These are going into new inference applications. There are multiple use cases and platforms that we see for this. In that context, this would be a significant opportunity for us to execute and deliver on. In terms of exact dollar association, it is probably a little bit early because some of the platforms and architectures are being finalized. But in general, for us, inference and KV cache is a significant opportunity. We have the IP not just for memory, but for things like KV cache acceleration as part of our portfolio right now. We will increasingly develop products that provide more function and capability to ensure that memory is available for KV cache use cases. I will also say that the ASPs will continue to be pretty meaningful when you think about the cost of the memory. In other words, these controllers will always fade compared to the amount of money that people are paying for the memory itself. So these are not ASP‑challenged, and we will continue to make sure that we extract the most value out of these products. Operator: We will move to our next question from Karl Ackerman at BNP Paribas. Analyst: Hi, this is Sam Feldman on for Karl Ackerman. Thanks for taking my question. You mentioned near‑package optics as a solution to CPO. From Astera Labs, Inc. Common Stock’s point of view, do you believe customers view XPO as a viable option to extending pluggable optics? And does Astera Labs, Inc. Common Stock plan to participate in the XPO MSA? Jitendra Mohan: That is a great question. We work very closely with our customers to understand what solutions they are looking for. XPO is a pluggable technology that has come about recently, and we will certainly participate in that. But not all of our customers at the moment are looking to intercept XPO. The customers that are looking to intercept with NPO, we will certainly support them because it gives you a way to have very high egress density without the limitations of front‑plate density. The customers that want us to work directly on CPO—we absolutely will work with them. As Sanjay mentioned earlier, we are engaged in that opportunity. That should ship in 2027. And for customers that are looking to do XPO, we will engage with them as well. Right now, our focus has been on NPO and CPO so far. Operator: We will take our next question from Suji Desilva at ROTH Capital. Suji Desilva: Hi, Jitendra, Sanjay, and welcome, Des. Just a bigger‑picture question. You mentioned the word “custom” quite a bit on this call—more than in the past. When you first got going, Hopper was there and Aries was fairly standard. Are we past the point, or evolving to the point, where standard products are not as applicable because each platform is different? Should we think all products having some customization, or where is the line there? Sanjay Gajendra: I am glad you asked the question. If you think about infrastructure and AI use cases, they all are unique between platforms and between customers. Having said that, if you look at the software‑defined architecture we have with our products—even our standard products like Aries, Torus, Scorpio, and so on—they provide a ton of customization that customers leverage through the Cosmos interface. Cosmos allows them to not only monitor, but also customize, and now with the new devices we announced today, they can do a lot more from a performance and key offload feature‑enablement standpoint. So customization has been our story through software‑defined architecture and offered through our standard products. But when we talk about our business, the business model is different. We are developing a product for a given customer under a business model that includes NREs and other ways of paying for the development and, of course, the product revenue that comes when the product starts shipping. As we are getting into bigger devices—whether it is for fabric‑class or other connectivity technology that goes beyond what we have done so far—having the custom solution portfolio is important. We are approaching that with our customers by also offering a variety of foundational technology that we have been building for the last couple of years. We see custom being an important growth driver for us. At the same time, please think about our business in a way where the standard products continue to be a very important part of our overall portfolio. We will do custom, but we will be very systematic about it. We will not take any opportunity that comes our way because sometimes the custom business can be so unique to one customer, with a lot of risk and margin implications. We will be systematic and thoughtful about the opportunities that we pursue on the custom side. Operator: We will go next to Mehdi Hosseini at Susquehanna. Analyst: Hi, this is Bashan filling in for Mehdi. Congrats on the quarter, and welcome, Des. I wanted to follow up on UALink. Can you share an update on the adoption process and the timeline for UALink‑based switches? And what do you expect the dollar content to be? How should we think about the difference between PCIe switching pricing and the UALink pricing? Jitendra Mohan: Within the last three months or so, we have had a couple of announcements from our hyperscaler customers on what the intercept is. Both Amazon as well as AMD have said that their ASIC and GPU will launch sometime in 2027, and we will certainly be prepared to intercept that launch with our UALink switch. In terms of the comparison of a UALink switch to PCI Express, a couple of things to state: as we go into this new generation of devices, both the complexity as well as the speed of these devices is going up—sometimes in lane count, other times in radix. The value that we are able to charge for these devices will be substantially higher than what we are able to do for PCI Express switches. The media attach also tends to change. We may go from a majority copper PCIe to a blend of copper and NPO with the next‑generation switches. That also gives us a meaningfully large opportunity in terms of revenue and the TAM that we are able to address, finally leading up to CPO, which is a really rich opportunity with a very large TAM that we are able to address, all because we have the platform in the form of Scorpio X switches. Operator: We will move next to Tore Svanberg at Stifel for a quick follow‑up on capacity. Tore Svanberg: Yes, just a quick follow‑up on capacity. Your inventory days, I think, came in at 75 days— Desmond Lynch: Hi, Tore. It is Des here. Based upon our current view of demand, we do have supply in place through the end of the year, and we are very comfortable with what our inventory holdings are here. Like others within the industry, we continue to see pockets of supply challenges, but what we have done is really a nice job of diversifying our backend supply chain, and we have been able to make sure that we have sufficient supply in place to meet the revenue commitments. So no concerns just now, and we continue to work with our supply chain partners for supply going into 2027. Operator: And that concludes the question and answer session. I will turn the call back over to Leslie Green for closing remarks. Leslie Green: Thank you, Audra, and thank you, everyone, for your participation and questions. Please do refer to our Investor Relations website for information regarding upcoming financial conferences and events. Thanks so much. Operator: And this concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, everyone, and welcome to the Gibson Energy First Quarter 2026 Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Beth Pollock, Vice President, Capital Markets and Corporate Development. Ms. Pollock, please go ahead. Beth Pollock: Thank you, and good morning, everyone. Thank you for joining us to discuss Gibson Energy's First Quarter 2026 results. Joining me on the call today are Curtis Philippon, President and Chief Executive Officer; and Riley Hicks, Senior Vice President and Chief Financial Officer. Additional members of our senior management team are also present to assist with the question-and-answer portion of the call. Listeners are reminded that today's call will reference non-GAAP financial measures and forward-looking information, which are subject to certain assumptions and risks. Descriptions and reconciliations of these measures as well as related disclosures are available in our investor presentation and continuous disclosure documents on SEDAR+ and on our website. I will now turn the call over to Curtis. Curtis Philippon: Thank you, Beth, and good morning, everyone. I'm pleased to be here today to discuss Gibson's first quarter 2026 results. Before getting into the quarter, I want to start with something that we are proud of at Gibson. This quarter, we reached a major milestone at our Gateway Terminal, safely loading our 1 billionth barrel. This achievement speaks volumes about the strength of our operations team, the trust of our customers and most importantly, the commitment of our people to safety and execution excellence every single day. Turning to the quarter. The macro environment was certainly eventful. We've all been reminded of the important role North America plays in supplying the world with reliable energy. Gibson's crown jewel assets are a critical part of this energy supply chain. Geopolitical developments created some headwinds. Unpredictable and chaotic markets make it challenging for customers to make long-term commitments. Shipping availability and market uncertainty temporarily disrupted exports from Gateway customers and negatively impacted Infrastructure results in the first quarter. This export disruption was a temporary trend that we are now seeing reversing in the second quarter. Gateway volumes have increased, and we expect to be setting new volume records, including pushing close to 1 million barrels per day in the back half of the second quarter. In December, we outlined our strategy at the Investor Day. Central to that strategy was a growth plan to achieve an over 7% infrastructure EBITDA per share growth rate through the deployment of capital across 5 different verticals and unlocking capital-free upside through the increased optimization of the business. The team has made impressive progress advancing this strategy. A few of the most meaningful steps we have taken were on people, progressing the Wink-to-Gateway project and closing the Chauvin acquisition. First, on people, we are continuing to build out our U.S. commercial and marketing team, including adding Andrew Morales in our Houston office to lead our U.S. marketing business. This investment expands our capabilities and has been instrumental in sourcing incremental supply and enabling volume for our customers at Gateway. During the quarter, we took an important step forward towards achieving the 2% capital-free upside target we outlined at Investor Day with the completion of an organizational restructuring, which reduced our headcount by 10% and will drive annual gross cost savings of approximately $10 million in 2027. The changes increased the customer focus of our teams, reduced overhead and reinforced our high-performance culture. The leaner organization now has both the customer focus and cost competitiveness necessary to win. Secondly, the Wink-to-Gateway growth capital projects that were sanctioned at Investor Day are tracking well. These projects involve adding additional tank capacity at the Wink Terminal and twinning a pipeline connection at Gateway. The basis for these projects is sourcing additional supply and removing bottlenecks to deliver more volume to Gateway customers. These were strong projects when they were sanctioned. And now in this crude export market, they are even more valuable. And finally, in Hardisty, the successful closing of the $400 million Chauvin acquisition is a milestone moment for Gibson. The acquisition includes a crude oil pipeline and associated infrastructure assets that connect Chauvin to the Hardisty oil hub, increasing our reach into the growing Mannville Stack area, supported by long-term agreements, the assets add stable contracted cash flows and provide a clear runway for additional optimization and growth capital deployments. Concurrent with closing, we sanctioned the Hardisty Connection Project. We have also started engineering work on a pipeline expansion project, which will increase effective capacity from 30,000 to 45,000 barrels per day. We anticipate sanctioning this expansion later this year. We expect to begin realizing the benefits from the acquisition in the second quarter. The integration work has gone smoothly, and we are excited to welcome Chuck Krahn's Chauvin operations team to Gibson. And with that, I'll turn the call over to Riley. Riley Hicks: Thank you, Curtis. I'll begin with a review of our first quarter financial results, followed by an update on our financial position and capital allocation priorities. We remain focused on disciplined financial management, maintaining the strength of our balance sheet and executing in accordance with our financial principles. In the first quarter, Infrastructure delivered approximately $156 million of adjusted EBITDA, a slight increase over the same period in 2025. We benefited from a full quarter of contribution from the Baytex partnership. However, as Curtis noted, this was largely offset by macro conditions and their impacts on crude exports at Gateway. While export volumes were strong in January and February, they declined in March, driven by elevated freight rates and shifting global trade flows, which temporarily reduced competitiveness from the U.S. Gulf Coast. Despite these near-term headwinds, we remain confident in our 7% plus growth strategy through 2030 as well as our 2026 infrastructure outlook of 5% EBITDA per share growth that we outlined at our Investor Day, which is supported in part by our recent acquisition. Turning to Marketing. The business continued to face a challenging operating environment during the quarter. A steeply backwardated futures curve where prompt crude barrels are priced at a premium to future delivery reduced the economic incentive for storage, while the seasonality of our asphalt business limited the performance of our refined products group. As a result, Marketing generated approximately $3 million of adjusted EBITDA, representing a $2.5 million increase compared to the first quarter of last year. Looking ahead, quarterly results in the Marketing segment are expected to be in line with previously communicated guidance given the current volatility of the commodity markets. We continue to remain confident in the fundamentals of the business and focus on delivering long-term consistent performance. On a consolidated basis, Gibson generated adjusted EBITDA of approximately $139 million during the quarter, a slight decrease from the prior year. In addition to the impacts from the Infrastructure and Marketing businesses discussed earlier, consolidated EBITDA was affected by higher G&A, which we expect to normalize over time as projects come online. A significant portion of the increase in G&A relates to targeted investments in technology and people, including upfront spending on automation and AI initiatives that are expected to drive savings over time. For example, we are currently implementing a new system that will automate thousands of marketing transactions per month, improving efficiency and accuracy. In addition to this, we continue to progress the migration of the majority of our IT platforms to cloud-based systems with associated costs now reflected in G&A under the rules of IFRS. From a people perspective, we made targeted additions across our commercial, marketing and finance teams to support the continued growth and execution of the business. And finally, and to a lesser extent, the restructuring resulted in some changes to cost allocations. As an example, we consolidated our corporate and operational accounting groups into a single team, enabling us to do more with fewer resources and at a lower overall cost to the company. While these changes create some near-term noise, the G&A was forecast and considered when we provided our guidance at Investor Day in December. We remain confident in our 5% infrastructure EBITDA per share growth outlook for 2026, and we also expect our consolidated EBITDA per share growth for 2026 to be 5% or greater. Distributable cash flow for the quarter was approximately $74 million, representing a $17 million decrease compared to the first quarter of 2025. This was primarily driven due to lower EBITDA and higher spending on replacement capital, interest and cash taxes as compared to the same period last year. Turning now to our financial position and capital allocation priorities. We continue to remain committed to our financial principles, maintaining a strong balance sheet, ensuring our growth capital is fully funded and supporting a sustainable dividend backed by stable long-term take-or-pay cash flows. We continue to take a disciplined approach to capital allocation, focusing on high-quality infrastructure investments that drive long-term shareholder value as reflected by our strategic acquisition of the Chauvin assets. Importantly, both S&P and DBRS reaffirmed our stable investment-grade credit ratings following the announcement of this transaction. At the end of the first quarter, net debt to adjusted EBITDA was approximately 3.8x, representing a decrease from 3.9x at year-end. And on an infrastructure-only basis, leverage of 3.9x remains below our target of less than 4x. Our dividend payout ratio was approximately 90% on a trailing 12-month basis, primarily driven by lower EBITDA and distributable cash flow mentioned earlier as well as the increased share count following the equity offering ahead of realizing the associated cash flow benefits from our acquisition. We expect the payout ratio to remain elevated until 12 months of trailing cash flow from the acquisition is reflected. Over the long term, we continue to target a sustainable payout range of 70% to 80% of distributable cash flow. On an infrastructure-only basis, the payout ratio was 83%, comfortably below our target of less than 100%. As the Infrastructure segment continues to grow as a proportion of our earnings, we expect consolidated payout ratios to trend back towards our long-term target range. I will now turn the call back to Curtis for his closing remarks. Curtis Philippon: Thank you, Riley. To close, the first quarter reflected both the strength of our underlying business and the impact of a more volatile macro environment, particularly at Gateway. Despite that, our Infrastructure platform continues to perform well, supported by high-quality assets and long-term contracted cash flows. We're making solid progress against our strategic priorities. Safety performance remains best-in-class. We continue to drive increased utilization across our system, and we are advancing key growth initiatives, including the Chauvin acquisition and our Wink-to-Gateway Integration project. At the same time, we are building for the future, advancing our technology and AI capabilities while continuing to strengthen our high-performance customer-focused culture. Looking ahead, we remain confident in our long-term outlook. While the current environment has introduced volatility, it has also reinforced the importance of secure, reliable energy supply, an area where Gibson is well positioned. Our assets, particularly Gateway, play a critical role in connecting North American barrels to global markets, and we have demonstrated our ability to adapt and capture value as conditions evolve. Our teams have responded well in a dynamic environment, leveraging our integrated platform to manage risk and capture opportunities across the value chain. With a strong balance sheet, disciplined capital allocation and a clear strategy, Gibson is well positioned to deliver continued infrastructure-led growth and long-term value for our shareholders. And with that, I'll turn the call back to the operator to open the line for questions. Operator: At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeremy Tonet of JPMorgan. Eli Johnson: This is Eli Johnson on for Jeremy. Just wanted to start on the export trends at Gateway. It looks like U.S. exports are at record highs. So can you just describe some of the upside for Gibson to capitalize beyond contracted levels? Any sensitivities or color on export upside would be helpful. Curtis Philippon: Eli, we're seeing that firsthand. As exports are increasing, Ingleside is exceptionally busy. I was down in Corpus a couple of weeks ago, and you can visually see the increased traffic that's coming to the U.S. right now and the increasing number of VLCCs that you're seeing transiting in the area. So it's quite impressive to see. We're feeling that uptick right now at our facility. As I mentioned, we expect that we'll be pushing 1 million barrels a day of throughput as you get into May and June. So new records for Gateway, quite significant. It's notable for what that means for our customers. The one thing I would temper a little bit on that there is a nice upside as you get some upside on that activity, but there is also a little bit on who's shipping the volume has an impact. And so typically, our customers are paying for an MVC, a guaranteed window of volume. And what you're seeing right now is virtually all customers are fully utilizing their MVCs. And so you're seeing very good volumes. But on some of that incremental volumes, that's just customers using their contracted volumes. And so there's not an incremental revenue associated with it. So we expect you'll see sort of normalization and a slight uptick from what you saw in Q1, but you shouldn't expect a sort of a dramatic uptick in Gateway as you get into Q2. Eli Johnson: Got it. That's helpful. And then maybe switching over to Marketing. I know you provided some color for the outlook to remain consistent with prior guidance. But just thinking about what would need to kind of change to see structural improvement in that business? Is it just the deeply backwardated curves normalizing? Or what else could we see that would lead to improvement in that business? Curtis Philippon: On Marketing, it's -- you're exactly right. It's the backwardated nature of the market is where you see still some limited opportunity. And in Western Canada, you still have a very efficient egress situation. And so some of those apportionment type plays are not there right now. And so we continue to do well in volatile markets, and our marketing teams do a good job of that. And also, as you look at sort of the refining crack spreads, you see some uptick in our Moose Jaw facility. But I would say it's still fairly incremental for us. So we're seeing some upside out of these things, but we still expect that our guidance of sort of 0 to 10 a quarter is still the right way to be thinking about it. Operator: Our next question comes from the line of Robert Hope of Scotiabank. Robert Hope: Maybe turning over to the higher corporate costs that we saw in the quarter. How should we think about these trending through the year and to what magnitude? I do appreciate the commentary that in the prepared remarks that they will normalize. And then also, just want to confirm that the higher corporate costs as well as the $10 million of incremental savings were part of the longer-term guidance presented at the Investor Day? Riley Hicks: Yes. Thanks, Rob. We can confirm that those were part of the presentation at Investor Day and our longer-term guidance. And then in terms of where we sit on corporate costs going forward for 2026, we would expect to be in the $17 million to $18 million range per quarter as we continue to work through some of these projects. We would expect to see the benefit of those projects in 2027 and beyond. But I would note that there's the opportunity for us to continue to evaluate solid IT automation and cyber projects going forward that we might invest capital in as well. Robert Hope: All right. Appreciate that. And then maybe moving back over to Gateway. Just changes in the geopolitical dynamics there, does that have you rethinking longer-term expansion plans at the facility as well as -- can you remind us kind of how you would look to expand that facility? Curtis Philippon: So when we think about Gateway right now, we're pushing 1 million barrels a day. You've got very high utilization of the facility. I would point towards the Wink-to-Gateway Integration project is something that we'll do that will drive some additional volume and help us debottleneck in particular, the Eagle Ford supply coming to that facility. So those are some nice incremental growth that we'll see as those come online in the back half of the year. Some of the larger scale projects we've talked about sort of longer term sort of plus 5 years out on the dock expansion. I think those are still really interesting projects. I think as the world needs U.S. crude, the Permian is a prolific play that will drive additional barrels to export over time. And I believe that Ingleside is the most cost competitive way to go export barrels. And I believe that Gibson has got the most capital-efficient way to add additional export capacity in Ingleside. So I think that still looks very good, but I still put it in the 5-year-plus territory, Rob, because you still fundamentally need to see production uptick a bit more in the -- you need to see production uptick in the Permian. You need to see pipes expanding from the Permian to Corpus or you need to see other supply coming into the Corpus market to drive additional barrels because right now, you still have very good capacity at our terminal and our neighbor's terminal in Ingleside. So we're able to sort of effectively keep up with the current amount of Corpus pipe capacity with the current docks that are in place. Operator: Our next question comes from Aaron MacNeil of TD Cowen. Aaron MacNeil: Maybe big picture, just given that we've got a lot of potential brownfield expansions and even potentially new greenfield crude oil pipeline expansions in Canada. Can you speak to the potential opportunity pipeline at Hardisty and Edmonton? And sort of within that, I'd be most curious about potential timing. Like I'm just giving an example here, but let's say, like a pipeline expansion comes online in 2 years from today, when would we sort of need to see an announcement or a positive FID for a new sort of tank expansion at one of your hubs? Curtis Philippon: Aaron, yes. I think clearly, the sort of overall macro backdrop of the world needs oil, the political environment in Canada getting considerably better than it's been for a decade has a lot of optimism out there right now that you're seeing some very interesting egress projects getting advanced that I think have some good legs to them, and you're seeing all of our customers talking about very good rates of return paths to increasing production in some pretty substantial ways. And so we see the production coming at us from our executing and sanctioning additional capital on our side, some of the very near-term things we're seeing is the Chauvin acquisition provides us runway of additional capital projects that we see that's sort of effectively extending that Hardisty platform. We've talked about adding this Hardisty connection on Chauvin, but also this pipeline expansion for Chauvin. But I think what's really interesting and exciting for us around Chauvin is now that we're through the Competition Bureau, we can actually start talking to customers. And I see us spending -- we're already -- we're sort of 1 week into this, and we can now start talking to customers about, okay, what can we do to tie in more production to the Chauvin pipeline and more production into Hardisty and what does that drive? And so I know I'm diverting a little bit from your question, Aaron, but I think that's some of the near-term sanctioning things that I can see right in front of us that you can see us doing over the next 12 months. As over longer term as some of these big egress projects get sanctioned, I think there's probably some good activity inside the terminals that we're going to see. I think in particular, if I had to see firsthand, I think that the TMX projects are really quite attractive for our customers. Sort of getting volume to the West Coast is the hottest ticket in town here that the people want to get more volume to the West Coast. I expect you're going to see that growth in TMX volume nicely drive some need for additional tankage for us in Edmonton. And you would have heard us talk about before that we've done a lot of work to get ready to add a couple of new tanks in Edmonton. And so all the optimism around expanding TMX nicely leads into needing to do some additional tank expansions in Edmonton over the next year or 2. So those are probably the nearer term. In Hardisty, we're pretty well set up right now. So I think we can supply a good amount of additional expansion on egress with current tank capacity and nicely add, I think, even higher rates of utilization and some competitive tension in Hardisty is a good thing. And so I think you're a little further out on need to sanction new tanks in Hardisty, but I think you see new tanks in Edmonton faster. Aaron MacNeil: Got you. Okay. You referenced it in passing, Curtis. But as we swing into warmer weather, I'm hoping you can just give us a bit more of a status update at Moose Jaw. Like where are sort of the, I don't know, 2-1-1 crack spreads or other relevant benchmarks versus historical in the markets you serve? And is there any sort of -- I don't know what to call it, but like an inventory-based margin pickup that we should expect because you're building inventory earlier in the year and then prices inflected later in the year? Like how should we be thinking about sort of the profitability of that asset over the next 2 quarters? Curtis Philippon: There's a couple of things I think about our Moose Jaw. So one, overall, yes, this is a better environment for the Moose Jaw refinery. I think for all refiners in North America, you're seeing it in the world, you're seeing an uptick. What the big thing that we will watch is, one, what does road construction look like across North America? That's -- we're a significant player in that market. I think what we're seeing right now, early feedback from customers is costs are up and customers are sort of reevaluating what is the scale of their road construction projects for the summer. So Q1, obviously not a big road construction quarter. So we didn't see a lot of activity around that as you get into Q2 and Q3, just how active our customers are going to drive just what the asphalt side of that business is. That's obviously the biggest product line coming out of Moose Jaw. And then the second one that we watch closely on Moose Jaw is our drilling fluid business. And so that typically follows more of a diesel crack spread price. And that -- so obviously, pricing is attractive on that. And what we'd be watching for now is just what does activity look like. And I think everybody is watching what do rig counts do in Canada and the U.S. over the coming quarters. I'm a believer that you're going to see an uptick in activity. These prices are going to be stronger for longer, and that's going to ultimately drive more activity in both Canada and the U.S. on the drilling front, and that will be beneficial to our drilling fluid business. But I would say we haven't seen that yet that we're still seeing a fairly muted response from producers to the increased pricing and some of the rig activity has not significantly upticked and impacted the drilling fluid business yet. Operator: Our next question comes from the line of Robert Catellier of CIBC Capital Markets. Robert Catellier: Yes. I just have one follow-up question here. With the geopolitical events really resurfacing the importance of North American oil exports, you talked about what you're seeing in activity levels. But I'm curious to see -- to learn from you if there's -- the customer interest is leading to longer-dated commitments at Gateway. Is that entering the discussion? Or is it still skewed to a bit shorter duration optionality here? Curtis Philippon: Rob, yes, it's one of the things we've seen is definitely in this amount of market uncertainty, you're seeing people really just focused on the very short term right now. And so initially, you saw just sort of a pullback in the uncertainty in the market caused people to pull back initially for us, our customers anyway. And now we're seeing them rushing to go find supply, but they're still very much living in the prompt here right now and trying to find ways to solve short-term problems and people are having difficulty sort of determining what does the long-term situation look like and make long-term commitments is a challenge for our customers right now. The one -- the one really notable trend, though, I would say for us is we've seen a real uptick in the number of customers at Gateway. And so if you look at Gateway historically, it's been a relatively small group of customers that we've supported and probably over time, there's probably been no more than a dozen different customers that have loaded out of Gateway. Over the second quarter, we will load over 5 or more new customers out of Gateway. So almost a 50% increase in the number of customers that are touching the terminal. And we're going out of our way to try and help people out here right now and find ways to squeeze in additional cargoes. And to be clear, these are, for the most part, sort of relatively short-term sort of spot volumes and things we're doing to help people out in sort of this crisis moment. But I believe there's going to be a long-term payoff from that. You're going to -- I think people have long memories, and we're helping people out in times where they're having some challenges. And these are some really notable customers, including some supermajors that we're going out of our way to help out. And I think it's also given them a chance to get a taste of Gateway. And I think we've got an impressive facility, an impressive team out of Gateway and getting used to working with that group and getting that into the flow of their operation really sets us up nicely to think about longer-term arrangements with these customers in time. But for full transparency, I think right now, people are very focused on meeting their short-term needs and a lot of the activity has been very short-term focused right now. Robert Catellier: Yes, that's helpful context and it makes a lot of sense. And hopefully, that converts to something longer term. Operator: Our next question comes from the line of Sam Burwell of Jefferies. George Burwell: Apologies if I missed this disclosed anywhere, but curious if you could share with us Gateway volumes for February, March and April, if you have them? And if you can't quantify it, just sort of a trajectory over the past few months would be helpful. Riley Hicks: Yes. Thanks, Sam. I think we saw some really nice volumes at Gateway in January and February, touching kind of on average, 800,000 barrels a day or so, which was a nice uptick and kind of what we expected with some of the projects we've done over the last year. And then with the spiking freight rates and some of the other geopolitical events that happened, we saw that drop down to kind of what would have been closer to our prior run rate before all those projects, around kind of 600,000 a day. And so a meaningful drop in March really around kind of those freight rates and some of the tensions politically. But certainly, as Curtis has mentioned, we've seen that recover quickly here in April and see it pushing up closer to the 1 million barrels a day in the back half of this quarter. George Burwell: Okay. Got it. And then shifting over to Chauvin. Would you -- is it fair to say that the Hardisty connection and the pipe expansion would fill the growth CapEx budget for 2027? Just curious if you're able to essentially fill your capital spending needs through just stuff tied to Chauvin or if we need to see additional other projects sanctioned to get CapEx flushed out next year? Curtis Philippon: So on CapEx for 2027, so it will flow into 2027, the CapEx related to those projects. But no, there'll be additional sanctioning over and above those projects. I think those are a nice base load to start and help us, as we've talked about, those 2 projects alone, we expect that brings the acquisition multiple on Chauvin down below 7. So quite attractive projects, but there still will be additional project sanctioning you can expect to see from us over the next year as we go feed into the 7% plus growth rate. Operator: Our next question comes from the line of Maurice Choy of RBC Capital Markets. Maurice Choy: Just apologies if I missed this, but I just wanted to follow up on an earlier comment about how shippers have changed their attitudes since the war began and how the volumes have gone up to 1 million barrels a day. Have you actually seen customers change how they look at contracting, wanting to contract longer and perhaps willing to take higher rates? Or has that not led to that just yet? Curtis Philippon: Maurice, right now, I would say we're just seeing people scrambling to find supply right now. So you're just seeing a mass scramble across the world as people are trying to find supply. And so it's fairly short term in nature right now as they're repositioning their supply chains to point them towards the U.S. They're repositioning their VLCC fleet. They have it come to the U.S. And so we're seeing a fairly significant shift on people trying to find that. There are margin opportunities within some of those, within some of that. But I think it's a lot of very short-term activities right now. Our people are just really just trying to deal with an energy crisis right now and find ways to get supply. Maurice Choy: I suppose if you look beyond the short-term effects, what are the long-term effects -- more durable long-term effects that you're anticipating for Gateway? Curtis Philippon: Well, I think clearly, from our view, and I think you're seeing the impact of the world seeing that you need North American energy supply in a bigger way. So I fully expect you're out of this, you will see people looking for ways to derisk their supply chain on oil. You're going to see an increasing shift on supply coming out of the U.S. And I do expect that will translate into more longer-term arrangements coming out of the U.S. to supply customers. I think no matter what happens in Iran, and there's all kinds of different scenarios that will play out here. But no matter what, there's a lot of work to do in the world here to sort of replenish some of the supply that's been lost over the last number of months. And then on top of that, I expect you're going to see people need to not only refill their strategic reserves, but you're going to need to see -- I think people are going to want to have even more strategic reserves on the other side of this disruption in the world. And so I think you've got a pretty long runway in front of us where there's going to be a big pull on U.S. exports and Gateway is going to be a good beneficiary of that. I think one interesting observation we've seen from our customers is that we've seen some of our Asian customers be a little bit more front foot on this and some of the increase in activity has been focused on supply in Asia. And we actually have seen a little bit less from some of the European customers. I think that's sort of notable interesting trend out of this. But I think in time, I think the entire world has an oil supply problem, and that's going to drive all kinds of demand from all over the world on U.S. supply. So I think that's a trend that is still -- we're still see play out over the next number of months. Maurice Choy: Understood. If I could just finish off keeping this theme about derisking the supply chain. I recognize that you do have some DRUs in your $1 billion 5-year backlog. Given your comments about potential for incremental pipeline egress in the years ahead from Canada, how do you see the outlook for DRUs, especially like would you and your partner ever consider proceeding with these DRUs if they aren't fully long-term contracted competitively? Curtis Philippon: So I think when you look at the sort of the stack of the 5 verticals on where we see capital opportunities, I think the DRU would be on the back end of those opportunities that we see probably more actionable things upfront for as far as new DRU development, I think, is sort of on the back end of the 5-year time frame. But I still think there's a position for additional DRU phases to sort of solve the overall egress solution out of Western Canada that I think you're going to see a number of these pipe projects go forward that's going to drive some good efficient flow of barrels to the U.S. And I'd be a believer that you're going to see some good expansion for producers to be able to get barrels to the U.S. But I think you're going to be limited on what you can get to the West Coast beyond sort of expanding TMX. And I think the play for the DRU for additional phases sort of 2 parts. One, it allows you perhaps to give you a way to expand additional export capacity to the West Coast that there's a way to use a DRU to feed additional export capabilities. Or two, is a bit of a very custom supply option to some refinery that want sort of a neat product that can come out of the DRU and a bit of a custom solution. But I think those are probably a little bit further down the pecking order related to things that are going to get sanctioned over the next few years, though. So I think it's one to watch and one that I think still has legs, but I think you're going to see other pipeline expansion, other tank expansion type projects from us before you see the DRU. Operator: [Operator Instructions] Our next question comes from the line of Patrick Kenny of NBCN. Patrick Kenny: Just maybe back on the Marketing business. You mentioned the headwinds from backwardation, which makes perfect sense. But I guess what I'm not clear on is this dislocation we've seen between the physical spot markets versus the financial prompt markets. And maybe you could just walk us through what's been going on there? And if this unusual dynamic does continue going forward, if that represents any incremental opportunities for your team? Curtis Philippon: Pat, I think we're all seeing the same thing that there is this dislocation and just what is the reality of how these markets will play out. That's something we watch. I think there's -- within there, there's there is volatility opportunities for our Marketing customers. I also think clearly, within that, there's opportunity for our producer customers to realize a higher price for their barrel as you look out further in the curve, I think that's quite healthy for our customers. And I don't believe that's properly priced into the curve yet. So I think that's probably where you see the bigger impact relative -- sure, there's some -- our marketing group does a great job in volatile times. And so I think there'll be some small wins around volatility that the marketing group will take advantage of. But the far bigger impact for us is sort of healthy opportunities for Infrastructure customers that I think you'll see as sort of actual prices start to get realized. Patrick Kenny: Got it. That's helpful. And then I guess just back on the back of the Chauvin acquisition and as your team looks for that next tuck-in opportunity, wondering if you could just help us compare and contrast the Canadian versus U.S. landscape right now, if you might be seeing more attractive acquisition multiples in either jurisdiction, more buyers than sellers in either market? And if labor availability also has any impact on how you're thinking about monetizing any growth potential off of any asset that might be acquired down the road? Curtis Philippon: M&A is a good question. I think the Chauvin acquisition was a great one for us. We're just getting our hands around it a week in. But it -- I think it gets a message to the market that we're very open for these types of things. Like we are a crude-focused business, and we love assets that potentially tie into our current crown jewel assets, both in Canada and the U.S. And so we spent a lot of time with our team looking around at various assets and being proactive, reaching out like we did with Chauvin to see, is there a potential fit that we can find a home for those assets within Gibson. That's -- I think that's something we'll stay active with. I think in general, you probably heard me talk before that I think there's opportunities that come up out there right now where we have some other gas-weighted names that are maybe a little bit more focused on building up their gas portfolio and perhaps we can we can help them with sort of finding a different home for some of their crude assets. And so we look at those sorts of things across Canada and the U.S. to try and find a fit. I think in Canada, just in general on both M&A and on sort of organic growth capital because of just the overall growth that you're seeing right now in Western Canada, I'd say there's probably a little bit more active environment in Canada related to M&A and organic growth capital, just growth drives lots of interesting opportunities that fit in well with Gibson. So we're seeing a bit more of that. So we're staying active on the M&A side, looking around. I think we saw with the Chauvin deal that our shareholders will be very supportive of finding other deals like this, and so we'll be very open to that. But I just caution around that, that it takes 2 to do a deal, and there's only so many great assets out there. And so I think there's nothing imminent that I would be messaging that we're going to go fine. But we're going to stay proactive and look for good fits. Operator: I am showing no further questions at this time. So I would like to turn the conference back to Beth Pollock for closing remarks. Beth Pollock: Thank you. Thanks, everyone, for joining us today. Supplemental materials are available on our website at gibsonenergy.com. If you have any additional questions, please reach out to our Investor Relations team. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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.
Operator: Good day, and welcome to the Willis Lease Finance Corporation First Quarter 2026 Earnings Call. Today's conference is being recorded. We would like to remind you that during this conference call, management will be making forward-looking statements, including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views as of any subsequent date, and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including, without limitation, WLFC's most recent quarterly report on Form 10-Q, annual report on Form 10-K and other periodic reports, which are available on the Investor Relations section of WLFC's website at www.wlfc.global/investor-relations. At this time, I would like to turn the conference over to Mr. Austin Willis, CEO. Please go ahead, sir. Austin Willis: Thank you, operator, and thank you all for joining us today to discuss Willis Lease Finance Corporation's First Quarter 2026 Financial Results. On our call today, I'm joined by Scott Flaherty, our Chief Financial Officer. We have posted an accompanying presentation on our website to give further details supporting our remarks. This morning, I'd like to start by taking a step back and discussing our industry's macro environment. Since the conflict began in Iran, we haven't seen a material impact on pricing or lease rates. Demand remains robust. We have minimal exposure in the Middle East, where the effects are being felt most acutely. Airlines are reacting to higher fuel prices and the prospect of fuel shortages by reducing capacity, in some cases, flying less frequently and in other cases, parking aircraft. Should high fuel prices persist into the fall, we expect the airlines to feel liquidity pressure. Historically, we have been countercyclical in such environments. When airlines are trying to preserve cash, they tend to opt for leasing solutions rather than overhauling engines for $10 million or more, which drives up utilization in our portfolio. We have seen this phenomenon firsthand following prior periods of macro disruption. If fuel prices remain elevated longer than anticipated, some of the parked aircraft will likely be retired, and that could lead to lower lease rates and values for midlife aircraft. We would expect changes in midlife engine values to be more resilient than aircraft as they will continue to support shop visit avoidance, as I described earlier. However, and even in spite of this, we consider ourselves to be well hedged with over 50% of our engine portfolio in modern technology, specifically the LEAP, GTF and GEnx engine types. Another way for airlines to address short-term liquidity concerns is the sale and leaseback transactions for their unencumbered aircraft and engines. Our capital strategy over the past year has positioned us well to capture such opportunities. Turning to the quarter. We ended with $4.1 billion of assets under management, approximately $1.5 billion of capital that is ready to deploy through our discretionary funds and capital through our joint ventures to include a $750 million revolving credit facility. This, combined with undrawn amounts in our recently expanded $1.75 billion revolver and our low net leverage of 2.7x, we are positioned for significant growth. As we have talked about in prior quarters, the aviation market remains increasingly engine-centric, and that dynamic is driving demand across our platform. Engine availability remains a key constraint to both delivering new aircraft and keeping operational aircraft flying. And we continue to see extended maintenance timelines and sustained pressure on spare engine supply. This environment supports strong lease rate dynamics and ongoing demand for our leasing and services offerings. Continued strong demand for our products and services helped us deliver first quarter adjusted EBITDA of $124 million and fully diluted earnings per share of $3.26 as compared to $2.21 during the same period in 2025. We have also seen strong stock price appreciation during the first quarter despite market volatility driven by geopolitical uncertainties. We attribute this primarily to the strength of our underlying business as well as investors' confidence in our growth strategy, both on and off balance sheet. This strategy will deliver synergistic benefits through fees and carried interest, along with additional advantages such as a larger asset base that we can service through our two engine MROs, our airframe MRO, our parts business and our consulting business. Let me take a few minutes to discuss the 3 key areas of our business: leasing, Willis Aviation Capital and services. First, leasing. Leasing utilization for the quarter was up to 86% from 80% year-over-year, and the lease rate factor of our on-lease assets was 1.04%. As mentioned earlier, we continue to modernize the portfolio towards the next generation of assets. And although higher in value, we are experiencing similar lease rate factors as compared to the current generation of assets. These factors led the company to experience an all-time high lease rent revenue during the first quarter of 2026, totaling $77 million, demonstrating the strength of the aviation market, demand for next-generation assets and improved lease rate dynamics. We are able to effectively optimize asset placement across global customer base through our programs such as ConstantThrust. Under ConstantThrust, operators' engines are seamlessly exchanged with fully serviceable replacements from our pool of owned and managed assets as they come off-wing. This program specifically leverages WLFC's global expertise in spare engine provisioning, technical management and maintenance and repair services to ensure uninterrupted operational performance for airlines worldwide. Earlier this year, we expanded our constant thrust program by signing a new purchase and leaseback agreement with Nauru Airlines for CFM56-7B engines. The agreement will provide Nauru with reliable constant thrust support for the airline's entire fleet of CFM56-7B engines, powering Boeing 737-700 and 800 aircraft for 6-plus years. Turning to Willis Aviation Capital, or WAC. Last quarter, we announced Willis Aviation Capital, which is a natural extension of our business and enables us to manage third-party capital alongside our balance sheet and significantly expand our addressable market. This creates a flywheel effect where greater scale drives more opportunities to deploy our services across a larger asset base, enhancing returns and accelerating platform growth. Through our partnerships with Blackstone Credit & Insurance and Liberty Mutual Investments as well as our existing joint ventures, Black now manages more than $2.7 billion of committed or deployed capital. In the first quarter of 2026, we funded approximately $90 million of finance leases through our Liberty Mutual Fund, which do not generate gain on sale as these were par sales to the fund. In April, we began selling operating lease engines from our balance sheet to the Blackstone fund. We are encouraged by the early traction we're seeing with a solid pipeline of opportunities as we move through the year. This platform is designed to generate high-quality recurring earnings through the management fees and carried interest while also driving incremental demand for our services capabilities. And finally, services. Our services businesses remain a core strength for our platform, reducing both off-wing time across our fleet and turnaround times for our own customers' assets as compared to larger MROs. As I've mentioned before, the outlook for engine shop visits remains strong through the mid-2030s and our services businesses remain a key differentiator, playing a critical role as engine maintenance demand grows. Having multiple geographically distinct hospital shops, we are well positioned to capitalize on demand across those markets since we are the low-cost alternative to more costly full overhauls. To meet growing demand for the technical and maintenance expertise of our engine shops, which contributed revenue of $10 million in the first quarter. Exclusive of intercompany sales and to enhance our vertical integration, we continue to invest in deepening our in-house technical capabilities. In February, we announced the successful completion of our first core engine restoration of the CFM56-7B in our U.S.-based Willis Engine repair center. We have branded this new capability as Willis Module Shop, allowing us to complete comprehensive core restorations that reduce maintenance cost, improve turnaround time and strengthen the control over our assets. Over time, we believe this capability will be an important driver of both operational efficiency and portfolio returns. Now to touch briefly on our capital deployment priorities. To support future growth across our platform, we have increased our financial flexibility through an amendment and extension of our revolving credit facility from $1 billion to $1.75 billion. The amended facility positions us with the liquidity and flexibility to further expand our business. Additionally, we closed 2 Japanese operating lease with call option or JOLCO transactions, totaling approximately $50 million. These transactions reflect the strength of our lender relationships and our ongoing focus on maintaining a well-capitalized flexible balance sheet. Scott will speak to the specifics of these transactions momentarily. We have also continued to invest in top talent where we see growth opportunities, particularly in the Asia Pacific region. We welcomed Marilyn Gan as Head of Origination for the region, strengthening our ability to source and execute opportunities in a key growth market. Looking ahead, we remain well positioned to deploy capital across a broad range of opportunities. We see attractive prospects across leasing and services, supported by strong long-term fundamentals in the aviation market. We also remain committed to returning capital to our shareholders as evidenced by the quarterly recurring dividend of $0.40 per share that we declared earlier this quarter. Overall, we are confident in our strategy and the progress we are making as we continue to scale our platform and deliver long-term value for our shareholders. And with that, I'll hand it over to Scott Flaherty, our CFO, to discuss our financial performance in greater depth. Scott Flaherty: Thank you, Austin, and good morning all. Another strong quarter for Willis Lease Finance. Our first quarter experienced record quarterly lease rent revenues of $77.4 million, quarterly adjusted EBITDA of $123.8 million, $36.8 million of quarterly earnings before taxes, or EBT, and $23.7 million of net income attributable to common shareholders or $3.26 of diluted weighted average income per common share. Walking through the P&L, our strong top line performance reflected solid growth in nearly every revenue channel, record lease rent revenues of $77.4 million in the quarter. 14.2% quarter-over-quarter growth in lease rent revenues were driven by a combination of increased portfolio size, utilization and lease rates. Our owned portfolio at the end of the first quarter was $2.86 billion. Our own portfolio is reflected on the balance sheet as equipment held for operating lease, maintenance rights, notes receivable and investment in sales type leases. Average utilization was up from 79.9% in Q1 of 2025 to 85.8% in Q1 of 2026, a nearly 6-point pickup. Additionally, we continue to see a solid average on-lease lease rate factor across the portfolio of 1.04% compared to 1.0% in the first quarter of 2025. Maintenance reserve revenues for the quarter were $55.5 million, up slightly from $54.9 million in the first quarter of 2025. $12.4 million of these maintenance reserve revenues were long-term maintenance reserve revenue associated with engines coming off-lease and the associated elimination of any maintenance reserve liabilities as well as the receipt of end of the lease cash payments. $12.3 million of this related to one engine coming off-lease and included both the release of a maintenance reserve and the receipt of an end-of-lease cash payment. The $12.4 million in long-term maintenance reserve revenue compared to $9.6 million in the first quarter of 2025. $43.1 million of our maintenance reserve revenues were short-term maintenance reserves compared to $45.3 million in the prior comparable period. Spare parts and equipment sales increased by $3.4 million or 18.9% to $21.7 million in the first quarter of 2026 compared to $18.2 million in the first quarter of 2025. Spare parts sales were $10 million and $16 million in Q1 of '26 and 2025, respectively, a decrease of $5.8 million. The decrease in spare parts sales reflects variations in the timing of sales to third parties and were not reflective of $7.5 million of intercompany sales, which was up from the prior comparable period and eliminated in our financial consolidation. These intercompany sales represent the added value of having a vertically integrated parts business. Equipment sales in the first quarter of 2026 were $11.4 million, up $9.2 million from the prior comparable period. These revenues reflect the sale of 3 engines that were not previously leased. The trading profit on sale of these 3 engines was $5.7 million, representing a 50% margin on these sales, validating the significant discount that exists between the book value and the market value of our portfolio. Equipment sales for the 3 months ended March 31, '25, were $2.2 million for the sale of 1 engine. Gain on sale of leased equipment, together with our gain on sale of financial assets, a net revenue metric, aggregated to $18.4 million in the first quarter, up $13.6 million from the $4.8 million in the comparable prior period. The $18 million gain on leased equipment was associated with the sale of 14 engines for $60 million of gross sales. Included in our engine sales were 5 engines sold to our Willis Mitsui joint venture. The gain on sale represents an effective 30% margin on such sales, further validating the significant discount that exists between the book value and the market value of our portfolio. The company recognized $0.4 million of gain on sale of financial assets where we sold 11 notes receivable and investment in sales-type leases for $87.1 million of gross sales, which generally reflects car sales of these financial assets. Maintenance services revenue, which represents fleet management, engine and aircraft storage and repair services and revenues related to management of fixed base operator services was $9.8 million in the first quarter of 2026, up 74.9% from $5.6 million in the comparable period in 2025. The increase reflects growth in engine and aircraft storage and repair services, especially when factoring the lack of comparable period fleet management revenues in the current period due to the sale of our BAML business in late Q2 2025. Gross margins grew to 9.3% from 4.6% in the prior comparable period. Our maintenance service offering enhance our customer program solutions and provide vertical integration to increase the profitability of our owned and managed assets. Management and advisory fees represent the fees generated through our asset management efforts. These fees include those made from our joint ventures and other managed assets as well as through our new fund strategy announced at the end of 2025. Management and advisory fees increased by $5.9 million to $7.9 million for the 3 months ended March 31, 2026, from $2 million for the 3 months ended March 31, 2025. This increase was primarily driven by $4.9 million of fees earned from our LMI or Liberty Mutual Fund in the company's role as general partner. The LMI fund commenced operations in March of '26 and reimbursed formation and other costs to the company, which flowed through both revenue and the G&A lines of our P&L. On the expense side of the equation, depreciation in the first quarter increased by $5.2 million or 20.6% to $30.2 million as compared to $25 million in the prior comparable quarter. The increase is primarily due to an increase in the size of our lease portfolio and the timing of placing acquired engines on lease, which starts their depreciation through the P&L. Write-down of equipment was $1.1 million in the first quarter, reflecting the write-down of 1 engine. There was $2.1 million of write-downs of equipment for the 3 months ended March 31, 2025, reflecting the write-down of 5 engines. G&A expenses increased by $8.9 million or 18.6% to $56.6 million in the first quarter of 2026 compared to $47.7 million for the first quarter of the prior comparable period. The increase primarily reflects a $12.5 million increase in personnel costs, which included an increase of $6.9 million in share-based compensation and an increase of $4.1 million in wages. The increase in share-based compensation reflects appreciation of the market value of the company's equity as well as share awards to new personnel to support the continued growth of the company. In January of '25, the company modified its share-based compensation program due to the significant rise in our stock price. The nearly 300% increase in the company's stock price since mid-2024 had a P&L effect as the company's historical plan was structured with predetermined share grants occurring after the achievement of specified goals or performance metrics. Generally, the share grants had a 3-year vesting, which created a noncash P&L effect over the vesting period. Our new share-based compensation plan will reduce share-based compensation expense savings, but such savings will not be fully realized until prior grants flow through the P&L. The $4.1 million increase in wages was driven by higher headcount to support the company's growth. Also contributing to the higher G&A cost was $4.9 million of costs, which were recharged to the LMI fund, with the associated revenue of $4.9 million included in management and advisory fees. Lastly, G&A also included $2 million increase in acquisition, financing and divestiture-related expenses as compared to the prior period. Partially offsetting these increases was an $11.7 million reduction in project expense due to our decision to cease investment in and pursue strategic alternatives for the sustainable aviation fuels project. Technical expense was $9.7 million in the first quarter, up from $6.2 million in the comparable period of 2025. Technical expense generally relates to unplanned maintenance, whereas engine performance restorations tend to be planned and capitalized events. Net finance costs were up $7.6 million to $39.7 million in the first quarter compared to $32.1 million in the comparable period in 2025. The increase in costs was predominantly related to $7 million in loss on debt extinguishment related to refinancings completed in the quarter. Less than $1 million of the $7 million was a cash expense as the lion's share was related to an acceleration of previously incurred capitalized issuance costs. Total indebtedness remained relatively flat at $2.25 billion as compared to $2.23 billion in the comparable period of 2025. Our weighted average cost of debt capital, inclusive of swap agreements was 5.12%. The company also picked up $3 million in ratable earnings from our investments, which include our joint ventures and fund interests. Income from investments was up 126% and most significantly influenced by our Willis Mitsui joint venture. The company produced $23.7 million of net income attributable to common shareholders, which factors in GAAP taxes and the cost of our preferred equity, which was up 52.9% from the comparable period in 2025. Diluted weighted average income per share was $3.26 per share in the first quarter, up 47.5% from the $2.21 in the first quarter of 2025. Adjusted EBITDA for the quarter of 2026 was $123.8 million, up 19.9% from $103.3 million in the first quarter of 2025. We believe that our adjusted EBITDA reflects the normalized cash flow generation of the Willis enterprise. Our adjusted EBITDA makes adjustments to our net income attributable to common shareholders for income tax expense, interest expense, preferred stock dividends and costs, loss on debt extinguishment, depreciation and amortization expense, stock-based compensation expense, write-down of equipment, acquisition financing and divestiture-related expenses and other discrete gains and expenses. Net cash provided by operating activities was up 38.3% to 56.7% in the first quarter of 2026 as compared to $41 million in the first quarter of 2025. The increase was predominantly related to increased net income, the noncash effects of stock-based compensation, depreciation and the loss on debt extinguishment expenses and a period-over-period $10 million increase in cash flows from changes in other assets. On the financing and capital structure side of the business, the company completed its seventh and eighth JOLCO financings in the first quarter, bringing total JOLCO financings at quarter end to approximately $170 million. In March of 2026, the company amended and extended its existing revolving credit facility, increasing total commitments from $1 billion to $1.75 billion and extending the maturity out to April of 2031. The expansion of our credit facility provides Willis with increased liquidity and flexibility to pursue our growth strategy. Concurrent with the $750 million expansion of our credit facility, we terminated our $500 million warehouse facility. We regularly access the capital markets as we endeavor to source competitively priced capital to help continue to grow our balance sheet and P&L. In February, we paid our seventh consecutive regular quarterly dividend of $0.40 per share. Subsequent to quarter end, our Board of Directors declared our eighth consecutive recurring quarterly dividend of $0.40 per share, payable to holders at May 11, 2026, on May 22, 2026. Our recurring dividend provides shareholders with a moderate current cash yield on their investment while not degrading the strong cash flow of our business. With respect to leverage, as defined as total debt obligations, net of cash and restricted cash to equity, inclusive of preferred stock, our leverage ticked lower to 2.68x at the end of the first quarter of 2026. We have made significant strides over the last several years to reduce leverage to position Willis to be able to access market opportunities when they become available. With that, I will hand the call back to Austin. Austin Willis: Thank you, Scott. Q1 set in motion great momentum for the year ahead as we track towards our long-term strategy. growing our portfolio on balance sheet and managed assets through Willis Aviation Capital while bringing exciting opportunities to the entire Willis platform. Thank you for joining us on our call today. And with that, I will let the operator open up to Q&A. Operator: [Operator Instructions]. We'll go to Will Waller with M3F. William Waller: Excellent looking quarter. I was wondering if you could comment a bit more on the asset management business, like the Blackstone funds and so on. What the management fee and incentive fee will look like, if there's kind of any general parameters that you could give out as it relates to that? Austin Willis: Will, thanks for the question. So in terms of the funds, we're not disclosing what the specific management fees are. But I can tell you that they're roughly in line with what's standard for discretionary funds, a percentage of the value of the assets managed and then a percentage of the profitability via carried interest. We started deploying capital into Liberty Mutual in the first quarter, and you're really going to start to see the fees from that come in when we deploy more capital over time. And with respect to Blackstone, I think you'll start to see fees kicking in here in the next quarter. And as I mentioned earlier on my prepared remarks, we started to deploy capital there in April, so just subsequent to the quarter. I think we're probably going to see about $200 million from our balance sheet into the Blackstone portfolio. So that's a good starting point and then hopefully get the remainder deployed in relatively short order. William Waller: Great. That's super useful to hear, and we think it's a very wise strategy and that you're using all your knowledge to the fullest. So we really think highly of that strategy. So thanks for that additional information. Operator: With no other questions holding, I'll turn the conference back for any additional or closing remarks. Austin Willis: Thank you very much. We appreciate everybody giving us their time today. And I guess we answered all the questions in our lengthy prepared remarks. So thank you very much. Take care. Operator: Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.
Operator: Hello, and welcome to Bowhead Specialty Q1 2026 Earnings Call. [Operator Instructions] Also, as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Shirley Yap, Head of Investor Relations. Shirley, you may begin. Shek Yap: Thanks, Mariana. Good morning, and welcome to Bowhead's First Quarter 2026 Earnings Conference Call. I'm Shirley Yap, Bowhead's Chief Accounting Officer and Head of Investor Relations. Joining me today are Stephen Sills, our Chief Executive Officer; and Brad Mulcahey, our Chief Financial Officer. And as we have done in previous quarters, we have invited a key member of our management team to our earnings calls to share insights from their area of expertise. Today, we are joined by Brandon Mezick, our Head of Digital, who will walk us through Bowhead's Digital Underwriting initiatives, which cover Baleen Specialty and Bowhead Express. Turning to our performance. Earlier this morning, we released our financial results for the first quarter of 2026. You can find our earnings release in the Investor Relations section of our website. And later this evening, you'll also be able to find our Form 10-Q on our website. I'd like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors should not place undue reliance on any forward-looking statement. These statements are made only as of the date of this call and are based on management's current expectations and beliefs. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. You should review the risks and uncertainties fully described in our SEC filings. We expressly disclaim any duty to update any forward-looking statement, except as required by law. Additionally, we will be referencing certain non-GAAP financial measures on this call. Reconciliations of these non-GAAP financial measures to their respective most directly comparable GAAP measure can be found in the earnings release we issued this morning and in the Investor Relations section of our website. With that, it's my pleasure to turn the call over to Stephen Sills. Stephen Sills: Thank you, Shirley. Good morning, everyone, and thank you for taking the time to join us today. Bowhead delivered a strong start to 2026 with gross written premiums increasing 24% year-over-year to approximately $217 million. Once again, we delivered disciplined premium growth across all divisions, with casualty driving the largest growth complemented by strong execution in Baleen. Starting with Casualty, GWP increased more than 20% to $147 million in the quarter. We continue to grow in areas where terms and pricing were favorable, while contracting in areas where we saw downward pricing pressure due to an overabundance of supply. This quarter, growth in casualty was driven by our excess portfolio. The major contributors included strong rate on our real estate book, new construction projects and an increase in manufacturing and hospitality business. Though we see some downward pressure from admitted carriers, nonrisk-bearing MGAs and broker sidecars, overall, while there are certainly exceptions, we still see the market exercising discipline in limit deployment and coverage expansion. That said, we continue to believe excess casualty remains the most favorable segment in our marketplace today. Turning to professional liability, GWP increased 6% to approximately $28 million in the quarter. Our growth was primarily driven by our Cyber liability Express portfolio, which targets small and midsized accounts through our digital underwriting platform. Partially offsetting this growth was a reduction in our commercial public D&O portfolio, driven by lost renewals to markets who we believe have overaggressive appetites and little to no discipline. In our Healthcare Liability division, GWP increased 28% to more than $30 million in the quarter. Growth was driven by our hospitals, senior care and miscellaneous medical facilities portfolios. While we remain disciplined in expanding the book and reducing average limits deployed, the market remains challenging, particularly in connection with coverage associated with sexual abuse and molestation. Finally, we're pleased to report that Baleen generated over $11 million in premiums during the quarter, an encouraging start to the year that reinforces the confidence we have in our digital underwriting platform. As a reminder, we built Bowhead to deliver sustainable and profitable growth across market cycles, and we do so by delivering our products through two complementary underwriting platforms. The first is our craft underwriting platform, which is our foundation, led by experienced underwriters who specialize in complex, nonstandard, high-severity risks and who deliver tailored solutions for our brokers and insurers. The second is our digital underwriting platform comprised of Baleen and Express, which represents our cutting-edge approach to specialty flow business. As Shirley mentioned, we have Brandon Mezick, our Head of Digital, here with us today. Having launched our digital underwriting platform and is leading the expansion of our digital initiative, I'm pleased to pass the call over to Brandon to walk you through the details. Brandon? Brandon Mezick: Thanks, Stephen. I'll take a few minutes to describe our digital underwriting businesses, Baleen Specialty and Bowhead Express and why we believe they represent a long-term structural advantage for Bowhead. The core thesis is straightforward. Craft underwriting by its nature, is hyper cycle sensitive. As market conditions shift, the risk-adjusted opportunity set in large account E&S narrows. Digital underwriting gives us a durable complementary channel, one that is specifically designed to access the SME E&S market efficiently and we believe more profitably with less volatility. The SME E&S market represents a massive opportunity, one that has historically required more underwriting effort than the returns justified because the right technology wasn't available. Our digital platforms change that equation, bringing technology-enabled efficiencies without sacrificing the underwriting discipline that defines Bowhead. Starting with Baleen, we focus exclusively on the E&S market. We target customers who are not eligible for admitted products, and we work through binding and light brokerage teams at our wholesale partners. Our current product offering is targeted at SME E&S customers in construction and real estate, where we provide primary general liability coverage for hard-to-place risks with minimum premiums below $1,000. The process is nearly fully automated from the moment a submission arrives via e-mail and not a proprietary portal through quote generation and policy delivery, the workflow is straight through. We meet brokers where they are, and that simplicity is a competitive advantage. In the SME E&S market, being first to quote matters enormously, and our brokers often tell us we are the first. In the first quarter, more than 75% of our new business submissions received a response within 15 minutes and 100% of submissions received a response within 1 business day. Those responses are overwhelmingly bindable quotes. Our new business quote ratio was above 75% in the first quarter. And if a customer decides to purchase, we deliver a complete policy in under 5 minutes. The market has long wrestled with a fundamental tension, how to deliver speed without sacrificing underwriting quality. Various approaches have emerged in an attempt to resolve it. Some have leaned on large teams of low-cost labor to process volume. Others have relied on legacy systems that while familiar, were never built for the demands of today's market. Still others have simply asked their people to work harder and faster, substituting effort for infrastructure. Each of these approaches trades something essential away. Baleen was built on a different premise. Our platform combines modern, modular technology with experienced underwriting judgment at every critical decision point. The result is a process that is both disciplined and scalable, rigorous and repeatable, deliberate and fast. What separates Baleen from our competitors is not just the workflow. It's the underwriting rigor embedded within it. Behind the automation is a highly codified set of business rules governing eligibility, pricing and coverage built by experienced underwriters with direct input from our actuarial and claims teams. Third-party data is integrated at the point of submission to validate risk characteristics before any quote is generated and underwriters are engaged where judgment is required, but discretion, particularly on coverage, is intentionally constrained. This isn't a black box. It's a disciplined rules-based framework with experienced people behind it, underpinned by regular performance monitoring led by our actuarial and analytics teams. The results reflect that. In the first quarter, Baleen generated over $11 million in premium, more than 3x the same period last year. New business submissions were up over 140%. New business quotes were up over 110% and new business bus were up over 260%. We're also seeing strong repeat engagement from broker partners, which tells us this is about consistency and ease of doing business, not just speed. Looking ahead, we see two clear avenues for continued growth. The first is broker expansion, both deepening relationships with our existing wholesale partners who have significant volumes of the business we want and extending into digitally native programmatic platforms where very few markets with our appetite and product set currently exist. Those platforms experience real leakage when risks fall outside the standard appetite, and we are well positioned to fill that gap. The second is product development, guided by our wholesale partners who actively bring us opportunities. We have a disciplined internal process to evaluate each opportunity on its merits and a team that can move from concept to launch quickly. Last week, we launched a supported access offering for construction risks that is nearly frictionless for our wholesale partners. Both paths, broker expansion and product development expand our addressable market without requiring us to compromise on limits, coverage or what's made Baleen work. Turning now to BOHA! Express. This is a distinct model from Baleen, but relies on the same underlying technology. Bowhead Express is being built to serve smaller versions of the risks our craft business already underwrites. Express is generally low touch. Nearly every risk is reviewed by an underwriter, but that review is structured to take less than 15 minutes per risk. We aggregate internal and third-party data upfront, so an underwriter sees everything they need at the outset. There are no additional data requests and practically no back and forth with our broker partners. This frees our underwriters from repetitive, low-value work and allows them to focus their judgment where it matters most. The result is significant operating leverage. A key objective with Express is radical simplification, streamlining our process to the point where we can introduce no-touch capabilities while maintaining underwriting integrity. Our offering in Cyber Express is a good example, where we've evolved into a no-touch model for the smallest, simplest risks. The products offered through Express use the same core policy framework as Craft, the same forms and the same endorsement philosophy, but with much less customization. That means we're not introducing new underwriting exposure. We're simply applying a more efficient delivery model to a segment that was previously uneconomic for us to serve while driving more submissions to Craft as we deepen our relevance with brokers. In the first quarter, Express generated over $3 million in premium with a quote ratio of approximately 65%. The growth opportunity ahead for Express follows a similar pattern to Baleen. On the broker side, our existing wholesale partners have significant volumes of the business Express is designed to serve. To earn more of that flow, we are focused on being visible and delivering a great experience. On the product side, our road map is informed by two sources: our wholesale partners who actively tell us what they want us to build and our own craft underwriters who surface risks that Express could solve for. We have a disciplined process to evaluate each opportunity and a team that can move quickly. Later this month, we expect to be launching a primary casualty offering for middle market construction risks, which is a segment where we've received considerable submission flow but have been unable to serve economically until Express. Each new product and each expanded appetite expands our addressable market, and we are well supplied with opportunities to pursue. Stepping back, I want to offer a clear framework for how we think about digital underwriting within Bowhead. First, growth. Digital underwriting represents just under 7% of total Bowhead GWP in the first quarter, and we expect that contribution to grow as both of our Baleen and Express platforms scale throughout the year, driven by strong broker engagement and a product pipeline that continues to expand our addressable market. Second, economics. Our digital underwriting businesses are structurally designed for attractive unit economics, shorter limit profiles and smaller average risks mean lower expected severity. And because technology replaces manual steps, the expense ratio for digital should be lower than Craft as these platforms scale. Third, discipline. Digital underwriting at scale only works if the underwriting works. We believe our approach, codified rules designed by experienced underwriters, data enhancement and validation and actuarial oversight is the right framework. We monitor performance daily and early results are consistent with our long-term expectations. And finally, differentiation. We built and launched both businesses in a matter of months with strong alignment across the organization. Our technology is modular and not legacy bound. That combination, the speed of execution, underwriting expertise and operational flexibility is difficult to replicate, particularly in large or more complex organizations. We're still early, but the first quarter results give us real confidence in both the model and the opportunity ahead. With that, I'll turn the call over to Brad to discuss our financial results. Brad Mulcahey: Thanks, Brandon. Bowhead generated adjusted net income of $16 million in the first quarter of 2026, up approximately 40% year-over-year. Diluted adjusted earnings per share was $0.48 for the quarter and adjusted return on average equity was 14.1%. Our strong results were driven by top and bottom line growth. Gross written premiums increased 24% to approximately $217 million for the quarter. As Stephen mentioned, we achieved growth in each of our divisions with casualty continuing to be the largest driver and Baleen generating $11.4 million of premiums during the quarter. Our loss ratio for the quarter was 66.9%, unchanged from the same period in 2025. Our current accident year loss ratio was flat as the impact of the loss picks we made in the fourth quarter of 2025 were offset by changes in our business mix. As I've mentioned in past earnings calls, the continuation of approximately $600,000 of prior accident year reserves is simply due to IBNR booked on additional premiums that were billed and fully earned in the current quarter, but relating to policies from prior accident years. This is not based on actual losses settling for more than reserved and does not represent an increase in estimated reserves on unresolved claims. We are simply putting IBNR into the appropriate accident year regardless of when the premiums are billed and earned. As a reminder, since we're writing long-tail lines and have relatively short history of losses, when setting our loss reserves, we're heavily reliant on industry observed loss information over our own internal data. This reliance is evident in our high ratio of IBNR as a percentage of total reserves, which was 91% at the end of the quarter. Our expense ratio for the quarter was 28.4%, a decrease of 2 points compared to 30.4% year-over-year. The reduction was primarily driven by a 2.9 point decrease in our operating expense ratio, which is partially offset by a 1.2 point increase in our net acquisition ratio. The decrease in our operating expense ratio was due to the continued scaling of our business as well as the prudent management of our expenses, including new estimates of deferrable costs. The increase in our net acquisition ratio was driven by the increase in broker commissions due to mix changes in our portfolio, especially as more premiums are sourced from wholesalers and the ceding fee we pay to American Family. These increases were partially offset by an increase in earned ceding commissions from our outward reinsurance treaties. Overall, the effect of our loss ratio and expense ratio contributed to a combined ratio of 95.3% for the quarter. Turning to our investment portfolio, pre-tax net investment income increased approximately 44% year-over-year to $18 million for the quarter, primarily due to a larger investment portfolio resulting from increased free cash flow and our $150 million debt raise in late 2025. The investment portfolio had a book yield of 4.6% and a new money rate of 4.7% at the end of the quarter. The average credit quality of the investment portfolio was AA- at the end of the quarter, and the average duration increased from 3 years at the end of 2025 to 3.2 years at the end of the quarter. As we mentioned during last quarter's earnings call, we expect to extend our duration slightly over the course of the year from 3 to 4 years to closer match the duration of our investments to the duration of our liabilities. Our effective tax rate for the quarter was 22.2%. As a note, our effective tax rate may vary due to items such as state taxes, stock-based compensation and nondeductible excess officer compensation. Total equity at the end of the quarter was $459 million. This resulted in a diluted book value per share of $13.80 at the end of the quarter. I also wanted to provide an update on our May 1 ceded reinsurance renewals, which apply to all of our departments, except for our cyber liability products. Overall, we increased our quota share treaty from 26% in 2025 to 33.5%, while increasing our ceding commissions. We also had a decrease in our excess of loss treaty from 65% in 2025 to 57.5%. Our renewals continue to be placed with reinsurers with an AM Best financial strength rating of A or better. Finally, we expanded our agreement with American Family to support the around 20% GWP growth we're expecting this year. This update raises the $1 billion annual premium cap, which we are projected to exceed this year if we grow around 20%. For more details, please refer to the Form 8-K we filed earlier today. With that, we'll turn the call over for questions. Operator: Thankyou. [Operator Instructions] Our first question comes from Rowland Mayor at RBC Capital Markets. Rowland Mayor: I wanted to quickly ask Brandon, the stats you cited on Baleen imply a pretty sharp increase in the bind rate year-over-year. Could you maybe elaborate on that change and how Baleen has iterated? Brandon Mezick: Sure. I think the major contributors to our buying rate include just simply the time we've spent in market. We are more well known to the brokers that we are working with. The process is more familiar. We're giving them a great experience. We've also invested a lot in distribution. We have a great head of distribution in Baleen that has us way more active and visible in the marketplace. And I think those two relevance and being top of mind are the biggest contributors for the buying rate increase year-over-year. Rowland Mayor: Okay. Perfect. And then I was wondering if we could go through the growth in the underwriting expenses and how we should think about it for the full year. It looks like in the first quarter, they were up about 8%. And should the remainder of 2026 be higher than that? Or is there any major investment down the road that we need to have? Brad Mulcahey: Rowland, this is Brad. Just to be clear, are you talking in overall Bowhead or just in Baleen? Rowland Mayor: Overall Bowhead, I think it was up 7.8% year-over-year on the other underwriting expenses. Brad Mulcahey: Yes. A couple of things going on there. Obviously, I think don't pay too much attention to one individual quarter. It's more the trend, but we are seeing the trend increase in our underwriting expenses. We've got investments, obviously, still hiring people. We -- on the acquisition side, we've got ceding expenses kind of, I think, offsetting some of that, some of our ceding commission coming from reinsurers. We are getting continued commission increases though from the book as we pivot to more of a wholesale source book, so kind of going the opposite direction there. And then obviously, the American Family ceding fee going up as we've talked about in the past. So I don't think there's anything in particular on the underwriting expenses, though to call out necessarily. Operator: Our next question comes from Meyer Shields at Keefe, Bruyette & Woods. Meyer Shields: Am I coming through? Brad Mulcahey: We can hear you. Meyer Shields: Sorry. Brad, you mentioned a reevaluation of deferrable costs. Was that an offset to operating expenses? Or is this just like a newer run rate going forward? Brad Mulcahey: Thanks for the question, Meyer. On the overall expense ratio, we mentioned we updated an estimate on some of our deferrable internal costs that relate to acquisitions or acquisition costs. So that's a sort of, I would call it, a favorable timing item in Q1 that's going to normalize eventually in future quarters. So I think that's maybe the one item in Q1 I would highlight. But again, like I said, the expense ratio trend, we're comfortable with being under 30%. I don't want to read too much into one quarter. Obviously, it can be volatile. Meyer Shields: Okay. That's helpful. And when we look at the changes that you went through on the 5/1 renewals, is the bottom line impact of that higher or lower net to gross written premium? Brad Mulcahey: Yes, the headline on that is it's basically neutral to net income. There will be some puts and takes, obviously, as we see more premium, net earned premium will go down. But obviously, our losses will go down and our ceding commission should come up. There will also be maybe a little bit of pressure on investment income as we pay more to our reinsurers upfront. But otherwise, I think overall, it should be pretty much neutral to the bottom line. Operator: Our next question comes from Cave Montazeri at Deutsche Bank. Cave Montazeri: First question is on the health care liability, which is a line we don't really talk about or spend much time on. There was some pretty strong growth this quarter. So -- could you maybe tell us, I guess, where are we in the underwriting cycle for health care liability? And if you can unpack some of the growth drivers in the sector and how we should think about growth going forward this year? Stephen Sills: Sure. I think it's a marketplace in flux. There's -- the last several years have experienced an increase in sexual abuse and molestation claims. And part of that was driven by the creation of these reviver statutes that suddenly brought claims to light that then got reported. I think the marketplace is bifurcating some in that some people are just saying, well, it's behind us, and they're prepared to give full coverage for that. We think it's very situational in terms of attachment points and retentions. So I think overall, we're going to continue to see growth in that space driven mostly by hospitals themselves. I think senior care also, some areas though, are still -- this goes back to different pockets again, that there are some areas where people just get really aggressive. And so it's difficult to say. I don't know how satisfying that answer was because it really goes on a risk-by-risk basis. People -- sometimes they get confronted, we believe, with having to make budgets for the month of the quarter and suddenly get a lot more aggressive. But we think our positioning, our reputation where we -- where people like capping us on their business, I think, holds us in good stead for increasing that -- our volume in that space. Cave Montazeri: Okay. And then my follow-up is on cyber. I'm just wondering how you protect yourself against tail risk as we see like new AI technologies like Anthropic because -- just wondering how you're thinking about the risk that some of those new technology could bring into the world of cyber insurance if, I guess, if cyber attacks become more frequent or more destructive. Stephen Sills: Sure. We obviously think about it a lot. It is a concern on one level. But on the other hand, the type of business we're going after and the way we underwrite the business, we think, makes a big difference. Keep in mind that our large Fortune 500 type cyber risk is business that we have become less and less competitive on. And we've definitely lost ground in that space. We have picked up ground in the space that Brandon was talking about in the express area. And there, once again, the underwriting is key. that we believe things like having a multifactor authentication makes a big difference, making that an important screen of what it is we're looking at, whether they're -- whether they operate in the cloud or not. Those are -- so I think our underwriting, I think, will provide a lot of protection for us. And also, I think there's -- the general conversation goes that the -- all these new cyber hacking tools are only available to the bad guys, but the good guys have them also. And so I'm sure there's going to be a battle going forward as fast as people evolve to try and hack systems, the good guys are finding ways to close systems. So for the time being, we're very comfortable with what we see, the way we do it. in the type of business we're writing. Operator: Our next question comes from Pablo Singzon at JPMorgan. Pablo Singzon: Can you hear me? Stephen Sills: Yes. Pablo Singzon: All right. Perfect. One first question for Brad. I just wanted to follow up on the deferable cost, right? Were these costs that you previously reported as OpEx will now amortize way back over time? And if yes, are you able to size how much the impact was in the first quarter? Brad Mulcahey: Yes and yes. Yes. So they will amortize into the acquisition costs. And when we submit the Q later today, you'll see the full disclosure on how much that is. Happy to point that out to you later if you want. Pablo Singzon: And then second one for Brandon. So some insurers and brokers have said they're seeing more small case E&S moving back to admitted on the margin. It probably doesn't matter as much to you just given your growth rate of where you are. But I wonder, as you're looking out to the broader market, small case market, if you're seeing any of that trend? Brandon Mezick: We are -- especially as the property market continues to experience declines, we see admitteds playing more in the -- what is traditionally E&S segment. We're comfortable with the experience we're delivering to brokers. We're comfortable with the relationships we have with them. And we don't expect the emergence or reemergence of admitted markets to have any effect on the growth rate for digital. Stephen Sills: And as a reminder, we do not write property insurance. Operator: Our next question comes from Daniel Lee at Morgan Stanley. Daniel Lee: My first one is just on the expense ratio. I know you guys are scaling and longer term, maybe I just wanted to think -- what's a good way to think about the expense ratio for -- as you guys continue to grow the business and maintain momentum with your tech investments and with Express. Is lower teams operating expense ratio possible in the long term for Bowhead? Brad Mulcahey: Hey Dan, this is Brad. Thanks for the question. Yes, I think -- you're right. Look at it longer term, like I said, there can be volatility each quarter for the expense ratio. Below 30s in total is where we are comfortable at. Not really -- we haven't really talked about the split between acquisition and operating. But I think if you're below 30s for the remaining quarters of this year, I think that's probably pretty good. Daniel Lee: My second question is also on the Casualty segment. I know construction projects has been a driver in the past, but with the market kind of softening now, how should we think about the business opportunities going forward for construction? Or how should we think about construction in 2026? Stephen Sills: Sure. We're still seeing opportunities in that space. It's still an important driver of ours. Obviously, we can't predict what's going to be in the news, whether that starts to slow down construction projects or if interest rates were to spike. But at the current time, we're seeing a steady as she goes in the construction opportunities for our book. Operator: Our next question comes from Paul Newsome at Piper Sandler. Jon Paul Newsome: A couple of broad questions. One is we focus a lot on pricing. I wanted to ask if you're seeing any changes in terms and conditions. I tend to think of that as a pretty important determinant of rational or irrational behavior in the market. Anything out there of notable with terms and conditions in the businesses that you're running? Stephen Sills: I would say it's mostly in the pricing world that we're seeing changes like particularly in publicly traded D&O, we're seeing people doing risks at rate per million that we think are not wise. And that's caused a decrease in that business for us. We're -- I mentioned earlier about the SAM coverage, sexual abuse and moestation with health care. Different markets are somewhat sporadic on that in terms of when they give it and how they give it. But I would say the biggest driver to the extent that there's a driver of the market going south would be price. People maybe having good few years and thinking that they can still drive things lower. We don't see that in the casualty space. We're seeing -- still, we're seeing rate increases in that space. But we have not seen that much, I would say, in the broadening of coverage area. There's -- we've still seen a good market for our Baleen product that Brandon talked about that offers somewhat restricted coverage. But that hasn't -- the need or the desire for that product has not diminished. Jon Paul Newsome: That's great. Second question, just any updates? It doesn't sound like you are, but I just want to make sure any updates on capital management from philosophy here. Brad Mulcahey: Yes, no updates other than maybe the reinsurance changes will help us. So that was something we plan to do. Anyway, the increase in our ceding quota share was more of a capital play than it was an appetite or anything like that. So I think the debt raise we did in Q4 of last year should be enough to last us at least through this year. Reinsurance changes help. We also have a credit facility available for $35 million with an accordion of $15 million. So I think we're good this year, absent anything growth much higher than we expected or something that would hopefully be good news. So I think we're set on capital. Operator: That concludes the question-and-answer portion of today's call. I will now hand the call back to Stephen Sills, CEO, for closing remarks. Stephen Sills: Thank you. Bowhead delivered another strong quarter to start the year. Thank you to our Bowhead team members for your continued dedication and hard work. To everyone else joining us on the call today, we appreciate your support, and we'll speak to you along the way. Thank you. Operator: This concludes today's call. Thank you, everyone, for joining. You may now disconnect.
Operator: Welcome to the Fiserv First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded. At this time, I will turn the call over to Walter Pritchard, Senior Vice President and Head of Investor Relations at Fiserv. Walter Pritchard: Thank you, and good morning. With me on the call today are Mike Lyons, our Chief Executive Officer, and Paul Todd, our Chief Financial Officer. Our earnings release and supplemental materials for the quarter are available on the Investor Relations section of fiserv.com. Please refer to these materials for an explanation of the non-GAAP financial measures discussed in this call, along with the reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise noted, performance references are year-over-year comparisons. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. And now I'll turn the call over to Mike. Michael Lyons: Thank you, Walter, and good morning, everyone. As we began the year, we were firmly in execution mode, and our first quarter results were in line with the expectations we shared with you in February. Our teams continued to be laser-focused on executing against the One Fiserv action plan, and while there is still significant work to do, we are taking the right actions, with the right sense of urgency and feel really good about the progress to date. We are confident in our strategy and the unprecedented pace of change in banking and payments is creating an extraordinary opportunity for us. As our clients and prospects want a trusted partner to deliver sophisticated technology and value-added solutions. We are uniquely positioned to do exactly that. To drive these efforts, we continue to add outstanding talent across the organization, including new heads of operations for both Merchant Solutions and Financial Solutions, new Chief Revenue Officers for Clover and Enterprise Merchant and a new Head of Product for Financial Solutions. With respect to business performance, I'll start with Merchant Solutions, where we saw solid growth in Clover GPV supported by good execution against our strategic initiatives and a stable macro. Clover VAS revenue represented 27% of Clover revenue in Q1, growing 18% from a year ago, driven by software in Clover Capital. We also saw steady growth in enterprise transactions. While anticipation lending volumes in Argentina remain strong, lower inflation and interest rates in Argentina were a revenue headwind to Merchant in Q1. I would note that this revenue softness was largely offset by lower interest expense below the line. Our preliminary April merchant volume growth, including Clover GPV remained solid around Q1 levels. Going forward in Merchant, we're watching the impact of various environmental factors, including higher gas prices from the conflict in the Middle East, which, if sustained, can impact the mix of consumer spending. We saw some of this dynamic in the most recent Fiserv Small Business Index data. In Q1, we signed 27 new banks as Merchant Referral Partners. We also announced our largest agent bank partnership in our history with Western Alliance Bank, which has more than $90 billion in assets and expands our reach with merchants across the Western U.S. We also hit important milestones in the quarter, going live with CommerceHub omnichannel capability across a number of our largest petro customers. We also went live on CommerceHub with built rewards in neighborhood hospitality and via Americas in cross-border remittance. Our broadening global releases and customer go lives are driving CommerceHub transaction growth, which was up nearly 200% in Q1. Other key enterprise merchant wins in Q1 included a retail energy provider, Blue Shield of California, a leading tax compliance platform and a large telecom provider who added on fraud capabilities. In Financial Solutions, we saw solid underlying business volume growth, particularly in Finxact and our Payments businesses, excluding BillPay. New business sales showed continued momentum. We hit important product delivery milestones, and we saw an improvement in key client service metrics. While core bank account and revenue attrition remain above our long-term trend, we've seen early signs that our client service initiatives have been well received. We're also getting positive client feedback on our decision to continue supporting all of our cores, and we are signing and renewing customers across all core. Also contributing to an enhanced client experience is the value we are delivering from our recent acquisitions of StoneCastle and Smith Consulting, where both our strategic and financial results are in line with our business cases. Key new business wins in Financial Solutions included OceanFirst Bank, which is a $14.5 billion Northeast regional bank that is growing rapidly through its announced acquisition of Flushing Bank. It extended its premier core and surrounds agreement with us, adding Digital Payments and committing to deploy CoreAdvance. Nicolet National Bank, a $16 billion Wisconsin-based bank, is adopting our Premier Core with its Midwest One acquisition. Truliant Federal Credit Union, a $5 billion-plus North Carolina-based institution chose to move to our debit processing platform. We expanded our long-standing digital money movement relationship with PNC Bank to include cash flow central AR/AP Services for their small businesses. And we had embedded Finance Wins with a large payroll provider and a large retailer to bring new capabilities to their payroll members and customers. In these wins, we will leverage new integrated capabilities across Fiserv, including Finxact for ledger, PayFair for banking applications and program management and VisionNext as a cardholder platform. Finxact was named Best SaaS for FinTech at the 2026 FinTech Awards, recognizing the combination of its market-leading innovation and scaled customer deployments. Finxact continued to grow strongly in Q1 with accounts and positions up over 70% as clients find value and its ability to provide financial infrastructure to enable any asset class in any domain at scale under a common platform and business model. So our execution is improving across both businesses, but as expected, that progress is not yet visible in our reported financial results as we are still lapping a higher mix of nonrecurring revenue, fueling the lingering impacts from prior client service challenges and absorbing the incremental expense from investments that will drive long-term client-focused growth, all necessary and important elements of our transition year in 2026. We look forward to the second half of the year and 2027 and when we expect our operating performance will be more fully visible in our financial results. I'll now provide an update on our execution against the One Fiserv Action Plan. Of course, we will cover all aspects of the plan in greater detail at the May 14 Investor Day. Under our client-first pillar, we continue to make targeted investments to raise the bar for client coverage, relationship management, service delivery and product resilience. The number of client-facing personnel we have is up significantly, meeting a key demand from clients, and importantly, we are seeing better day-to-day execution. Our time to resolve client inquiries is down 27% year-on-year. While we still have significant work to do, high-impact client incidents are down nearly 60% year-on-year, and we launched important AI initiatives to enhance the performance of our primary client portal and call centers in Financial Solutions. Turning to Clover. Our second pillar, we continue to make progress towards establishing it as the preeminent small business operating platform. We launched 2 new verticals in March with PracticePay in the health care space and our Professional Services offering. We are seeing promising early results with annualized GPV per health care outlet running at double-digit levels above our existing Clover Health care merchants, and a 20% plus increase in new Professional Services outlets that attached our paid SaaS offering in the month. Internationally, our momentum continued with Brazil Clover outlets up over 30% sequentially, and we had another strong Clover quarter in Canada, where we remain on track to enable TD Merchant Solutions to provide Clover's product offering, processing and servicing to its clients in second half of the year. After launching in Q4, we continued to expand our Digital Merchant Activation capability, and now have 22 of our top bank partners signed. We will also add this capability to our clover.com online Merchant Referral Partners. Through integration with StoneCastle, we remain on track to launch Clover Savings, our merchant cash management program before the end of Q2. Through a number of important partnerships, we continue to build agentic capabilities for our Clover merchants and we'll showcase some of these at Investor Day. And finally, we are excited to share that Clover is slated to support 30 World Cup games this summer in the U.S. and Mexico. Next, on the innovation front, we continue to hit critical milestones on key strategic products including Experience Digital, CashFlow Central, Vision Next, Optis and CommerceHub, as I mentioned earlier. In our Enterprise Merchant business, we delivered a new developer portal supporting agentic commerce. Our teams have further ramped up their usage of AI tooling in the software development process with early results showing a significant reduction across key steps in new feature development and delivery time with mainframe modernization. And finally, we are on track to launch our previously announced stablecoin pilot this summer to facilitate interbank money movement. Fourth, we are in full swing with Project Elevate. With AI at the center of this program, we are very encouraged by the early results. The teams have identified hundreds of opportunities to drive revenue uplift, reduce expenses, increase simplicity and improved productivity, and we're moving with urgency to operationalize them. Paul will outline our financial targets for Elevate at Investor Day. Beyond Elevate, we took several important actions in Q1 to drive efficiency, including closing 2 subscale offices, exiting underperforming Merchant businesses in India, reducing management layers, and implementing more aggressive performance management. And just last week, we completed the migration of all customer activities from a significant data center as we continue our modernization activity. Last, but certainly not least on One Fiserv is our commitment to highly disciplined capital allocation. We continue to sharpen our focus on the businesses and assets that best align to our go-forward strategy, including evaluating potential dispositions. I'll conclude by saying we look forward to seeing you at Investor Day where among other topics, we will further highlight our strategic priorities describe how our businesses are converging further to unlock more synergies and share how we're using AI to transform systems of record into systems of collaboration, create new TAMs and increase efficiency. Together, these actions will support the mid-single-digit adjusted revenue and double-digit EPS growth that we've discussed since last fall. This will position Fiserv to return to its roots and create significant shareholder value as a constant compounder. I want to thank our employees for their hard work and dedication and our clients for their continued trust. With that, I'll turn it over to Paul to cover the details of Q1 and our guidance. Paul Todd: Thank you, Mike, and good morning, everyone. I will cover details on total company and segment performance in the first quarter and reiterate our guidance for 2026. Beginning on Slide 6, total company Q1 adjusted revenue was $4.68 billion, a decrease of 2.4% compared to the prior year period and was in line with our guidance as we lapped higher nonrecurring revenue from a year ago. Q1 adjusted operating income was $1.4 billion, resulting in adjusted operating margin of 29.7% also in line with the just below 30% view, I provided on our last call. Total company organic revenue was down 3.6% in Q1 and with a differential in organic-to-adjusted revenue of just over 1%, in line with the approximately 1% delta we communicated in February. First quarter adjusted earnings per share was $1.79. Our Q1 results reflect an adjusted effective tax rate of 11% driven by the release of a tax valuation allowance in the first quarter. Relative to our expected annual adjusted tax rate of between 19% and 19.5%, this lower tax rate resulted in a $0.17 positive impact to adjusted earnings per share in Q1. This 11% rate in Q1 is strictly a timing-related impact. Our full year adjusted tax rate guidance of 19% to 19.5% remains unchanged, and we expect higher quarterly effective tax rates through the balance of the year as an offset. Free cash flow for the quarter was $259 million and in line with our expectations we noted in February, and reflects typical seasonality where Q1 is our lowest free cash flow quarter of the year. Now I will turn to the performance by segment for Q1. Starting on Slide 7 for Merchant Solutions. Merchant Solutions organic revenue declined 1% for the quarter, while adjusted revenue was flat, which is largely in line with our expectations as we fully anniversary the CCV transaction. As Mike mentioned, lower inflation and interest rates in Argentina did have a negative impact on adjusted revenue in our Merchant business. Small Business revenue declined 1% on an organic basis in Q1 and grew 1% on an adjusted basis. Small Business volume grew 7% in the quarter. Clover revenue grew 6% in Q1. However, excluding higher nonrecurring revenue from the first quarter of 2025, Clover revenue growth would have been in the mid-teens. Clover revenue from Payment Processing grew 10%, more in line with volume trends. As we noted in February, we expect similar trends for Clover in Q2 with this period representing the peak in nonrecurring impacts and also expect that Clover processing revenue will grow in line with Clover GPV. Clover volume grew over 9% on a reported basis and was in line with our expectations as we saw stable growth, both in the U.S. and in key international markets. Clover volume, excluding the previously discussed gateway conversion, grew 12%. As the previously discussed gateway conversion continues to run off, the delta between Clover reported and ex Gateway growth will converge. We continue to expect Clover revenue growth in the low double-digits for 2026 and and GPV growth of 10% to 15% ex the Gateway conversion. The lower end represents the core growth rate, while the higher end assumes more significant conversion of non-Clover merchants. Value-added Services revenue contributed 27% of Clover revenue in Q1, growing 18% from a year ago, driven by software attach and lending, including Clover Capital. Moving on to Enterprise. Our revenue grew 3% on an organic basis in Q1 and grew 2% on an adjusted basis. Enterprise transactions grew 8%, and finally, in Processing, organic revenue declined 14%, while adjusted revenue declined 9%. First quarter adjusted operating income for Merchant Solutions segment was $626 million, down 23% with adjusted operating margin of 26.4%. Now I will cover Financial Solutions starting on Slide 8. For the quarter, organic revenue declined by 6% in Financial Solutions, while adjusted revenue declined by 5% relative to our expectations of adjusted revenue decline at the high end of mid-single digits that I mentioned on our last call. In Digital Payments, both organic and adjusted revenue declined by 5%. Our underlying account and volume growth in Financial Solutions was in line with what we expected and our recent history. This included low single-digit growth in debit processing and low double-digit debit network volume growth. Zelle transactions grew 18% in the quarter in line with recent trends we have seen while we saw BillPay transactions down high single digits. Also, we saw a further ramp in CashFlow Central revenue in the quarter. In Issuing, revenue declined by 6% on an organic basis and 5% on an adjusted basis. While global accounts on file grew in the low single digits, revenue comparables were impacted by nonrecurring revenue in Q1 last year, a trend we expect to be more pronounced in Q2. Finally, in Banking, revenue decreased 6% on an organic basis and was down 4% on an adjusted basis as we continue to be impacted by certain actions taken over the last several years as well as higher nonrecurring revenue in the year ago period as well as attrition that remains above our long-term target. We saw core counts declined 2% year-over-year while overall accounts and positions, including Finxact grew 6%. First quarter adjusted operating income for the Financial Solutions segment declined 24% to $877 million and adjusted operating margin was 38.1% versus 47.5% in the prior year period. From a leverage standpoint, we finished the quarter with a debt to adjusted EBITDA ratio below 3.2x measured on a gross basis. We expect to finish the year at approximately 3x. Turning to Slide 9. We repurchased 3.3 million shares during the quarter for approximately $200 million. As we noted in February, we are focused on managing our leverage ratio and remain committed to returning capital to shareholders. Now with Slide 10, I'll move on to our 2026 guidance. First, on revenue, we continue to expect 2026 organic revenue growth in the range of 1% to 3% with Merchant Solutions revenue growth in the mid-single digits and Financial Solutions flat to slightly down. Consistent with February, we expect adjusted revenue growth in the range of 1% to 3%. All of this continues to assume a stable macro environment. As we told you in February, we expect the second quarter to be the trough in terms of our year-on-year revenue decline and we expect our Financial Solutions business to decline at the high end of mid-single digits in Q2. We expect our weighted average share count to be approximately 530 million resulting in adjusted EPS of $8 to $8.30, consistent with our prior guidance. We continue to expect adjusted operating margin of approximately 34% for the year. In line with our commentary in February, we expect first half adjusted operating margin of approximately 31% to 32%. In the second half of the year, we continue to expect adjusted operating margin of 35% to 36%, with Q4 representing the high point in the year. We continue to expect capital expenditures to remain approximately flat with 2025 levels. We continue to expect free cash flow conversion of approximately 90% of adjusted net income for the year, in line with historical levels and our February guidance. And with that, I will turn the call back to the operator to start the Q&A session. Operator: [Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: I wanted to ask just on maybe visibility on the Banking side and retention given some of the bank conversions that you're doing. Just any surprise there? I know the trough comments were made, but I'd love to hear a little bit more detail on attrition and retention, that kind of thing. Michael Lyons: I think broadly on Banking, we continue to be, obviously, very proud of the leading market share position we have in the business and all the support across almost 3,000 banks and credit unions on the core side. As we've said and we said again today, core attrition [ has been above ] where we want it to be and getting that back to normal is a significant focus for us. That attrition, as you know, is the result of actions taken over the last several years and especially around the client service front. And we're confident we have the right fixes and addresses, and the way we're addressing it is the right thing to do. And while there's significant work to do as I said today, we feel like we're bending that curve in a positive way. And contributing to that is we've significantly increased our client coverage efforts, which was an ask of our -- they came directly from the clients. But from that has come better service, and we're seeing that show up in both our surveys and anecdotal evidence. And then we've really leveraged a number of different forms of AI to help in call centers, enhancing our client portal experience, accelerating our tech modernization and reducing the books [ of what we ] have then obviously, the decision to support all of our cores was an important one for our clients and has taken a significant amount of pressure -- perceived pressure that they had on themselves to switch and obviously, pressure on us. So little things or less highlighted things. The StoneCastle acquisition has been a great value-added positive, supporting our clients, depository clients and one one of their biggest needs, which is continue to -- continued deposit growth. And then our approach to embracing the consultant community and even acquiring Smith Consulting to really drive value-added services to our depository partners, again, is another piece. Finally, we've taken an advanced approach again using AI to measure our -- what we call a Client Health Index across all their experiences with us in terms of pace of change, resolution inquiries, client touch and the like, and it's given us a much better view and perspective of where these clients stand, which allows us to play much more on the offensive side to getting to them. So a lot of self listed, but it's a complete package of behavioral changes, technology changes, service changes, alignment changes, enhancements. We talked about continued enhancement in the quality of our leadership team bringing in new executives to combine new executives here. So I wish it was more visible in the results, but when you go through the underlying KPIs that we have, we feel really good about the progress we're making and our ability to get core revenue-related attrition back down to more normal levels. Ideally would like to have none, but of course, you've got M&A and stuff. And we've had some over history, but getting it back to those historical levels, we feel like we're doing all the right stuff and are on the path to do it, just takes time and work. Operator: Next, we'll go to the line of Andrew Schmidt from KeyBanc Capital Markets. Andrew Schmidt: I wanted to ask just on SME back book. If you talk about the performance there ex Clover. And then I know there's a swing factor in terms of the conversion of non-Clover merchants. If you did any testing there? It'd be interesting to just understand how that testing is performed and how that might influence just the go-forward emphasis on converting those non-Clover merchants to Clover? Paul Todd: Yes Andrew, thanks for the question. And yes, first of all, I wouldn't call out anything unique as it relates to the back book conversion in the first quarter. And certainly, for the year, we don't have any different expectations around what that back book conversion looks like. We've commented for some time now, we're being very mindful about how we approach any of the non-Clover to Clover transition to make sure that we're doing it in a very mindful customer-centric way. And we've had some good tests around that, around the receptivity of those moves when there's a good product fit. But there [ is a ] peaking incremental. We've talked about and the overall Clover GPV guide for the year, the low side of the guide assumes very minimal back-book conversion. And the higher side assumes a more meaningful back-book conversion. But right now, everything is on plan as it relates to how we're looking at that. And we're going to talk a lot about this at Investor Day, [indiscernible] is going to be going through just the overall Clover strategy, the overall merchant strategy, you'll see all the pieces kind of fit together related to this topic at Investor Day. But right now, nothing has changed. Mike, do you have anything to add? Michael Lyons: I'd just add that we've said in the past that our ability and willingness to pursue conversions of Fiserv customers from one platform onto Clover. We obviously very much like to do that given the robust set of VAS we have on the Clover side, but that depends on us doing certain actions, and we're proud this quarter to launch 2 new verticals, as I mentioned in the prepared comments, in health care and professional services. And each time we build unique capabilities to address a certain vertical that allows us a greater opportunity to go in and address the back-book with compelling offers. We don't want to just go in and try to move that to Clover without a strong rationale and mutual benefit for the customer. And as Paul said, our efforts to date have been very modest. [indiscernible] will talk you through that study learn, test and then when we have the right capabilities and the right understanding of it, if you could pick up the pace of it. Operator: Next, we'll go to Dan Dolev from Mizhuo. Dan Dolev: Guys, great progress here. Quick question on AI. I think your competitor made an announcement yesterday on AI with regards to bank processing. Can you maybe, Mike, elaborate on some of the initiatives and how you add value with AI to your banking plans? Michael Lyons: Yes. Thanks for the question. And as we keep progressing with it for our businesses, we get more and more excited about what AI is allowing us to do, and we've seen incredible results to date, recognizing it's still early in the development of it. But we're really intensely focused on four areas, which is taking those great systems of record we have into systems of greater value and systems of collaboration, generating new revenue sources and TAMs, which goes a little bit to your question, enhancing client service where I just mentioned and then increasing our own productivity and efficiency across the company. With respect specifically to leveraging AI on the revenue side and for the benefit of our clients, agentic is clearly the next important phase on both the Merchant side and the Banking side and we have a number of extremely exciting developments going on there, including new agentic commerce capabilities, which we've been talking about in Merchant and rolling out through important partnerships and Takis will go through that in detail next week, but we see a great opportunity, especially with the Clover customer base and enabling them to access an agentic world without building all the back-end systems needed. And on the Banking side at IR Day, Divya will introduce a new governed AI operating layer that will importantly allow FIs to access and fully capture the power and benefit of all agents across many functions, including front, middle and back office and using any LLM, so we're already live with pilot agents with 2 financial institutions around this today and then have a number of others lined up with different use cases, think about loan originations, compliance in call centers. So not to steal too much thunder for next week, but Divya will formally introduce the product and you'll be able to actually see some demos of it. So again, whether it's internally or externally, Merchant or Financial, we're seeing great opportunities both to drive value for ourselves and help our clients access the agentic capabilities available to them. Operator: Next, we'll go to Vasu Govil from KBW. Vasundhara Govil: I just had a couple of quick ones on Clover. I guess the first one just on the nonrecurring revenue that you called out, Paul, from last year. Was that mostly hardware revenue or something else? And then more broadly, Mike, on Clover Capital, you've highlighted in prior calls how the penetration is still relatively low in your installed base. So maybe if you could just talk a little bit about what has constrained adoption so far? And as you look to scale that business, how should we think about the long-term penetration potential and sort of the mix between on-balance sheet, off-balance sheet to support that growth? Paul Todd: Yes. So Vasu, maybe I'll take two parts of those, and then, Mike, if you want to add anything. As it relates to the nonrecurring revenue on the Clover side, yes, hardware is a big piece of that. There are some other things from a nonrecurring standpoint in that comparative. We highlighted that up, that's why the Clover revenue grows in the mid-teens, a reported growth of 6%. But if you take the the comparative dynamics of the nonrecurring, not repeating in the first quarter of this year, that puts you to the mid-teens to roughly 15% in hardware is the biggest or one of the biggest pieces there. On the Clover Capital side, we will talk more about this at Investor Day and just our strategy around Clover Capital, you're right, we are under-penetrated relative to the opportunity set and we're going to kind of lay out a much broader strategy around how we're going to be approaching the marketplace both from a balance sheet standpoint as well as just an overall growth standpoint at Investor Day. So I'd rather kind of give a more wholesome view of that on a go-forward basis. But we did see good Clover Capital growth in the quarter. So I'm very pleased with the underlying volume growth that we saw. And we don't see any change in that growth trajectory as we look at the forecast for the remaining part of the year, but we'll give you more color at Investor Day. Mike, anything else? Michael Lyons: No. I think you highlighted perfectly that the opportunity is significant in front of us we're a couple of quarters into building our -- enhancing what we had core capabilities and going after that, and it's domestic and international opportunity. Operator: Next, we'll go to Bryan Bergin from TD Cowen. Bryan Bergin: I wanted to ask on Financial Solutions. Can you just give us a sense on the nonrecurring revenue headwinds where relevant across the subsegments. And I'm thinking particularly in Issuing and Banking. And then the relative potential size of those headwinds in 2Q? Just so we could unpack the recurring performance within overall performance. Paul Todd: Yes. So specifically, in the issuing area, the biggest single driver I'd point out to is the output solution there, where we had some significantly sized output solutions business that is not recurring this year, that is in the first half. And specifically in the second quarter, you'll -- how we had that team's growth rate on the Issuing business in the first half -- or in the second quarter of last year. And so that's providing a meaningful comparative headwind on the Issuing side. There are other nonrecurring across the digital channel as well as in Banking. But as it relates to general sizing, we kind of gave you when we talked about the high mid-single digit and the second quarter being the trough, relative sizing of what we expect the impact to be. I would say we are pleased with the fundamental growth in the -- across the Financial Solutions segment of each of the underlying growth across Digital, our Issuing business, Mike commented on the Banking. So we're seeing consistent. So the volume picture that we see in the first quarter and the second quarter and really for the back half of the year is very stable. It's just these comparative dynamics that we have in the first half and more acutely in the second quarter of the first half is what we're needing to grow through, and then we're going into be to a much more visible normalized growth picture in the back half of the year. We do have some natural tailwinds in the back half of the year as it relates to growth. We have a comparative tailwind in the back half on Financial Solutions due to some of the strategic things we did in the Digital space in the third quarter of last year. So that's a natural tailwind. And then we have some contracted revenue from some of the client wins that we've talked about that also will be additive in the back half of the year. Mike, anything else to add? Michael Lyons: No, I think it's the same comments we made last quarter. It's hard to go through every single recurring revenue item. And broadly, we think, and we'll talk at Investor Day that we're a mid-single-digit growth company with FS being a low single-digit growth company probably operating flattish today on a clean basis and Merchant being a mid- to high single-digit company today operating in mid-single-digit basis. And our plan is to obviously make -- we're anxious to get it so it's more visible in the financial results. But to Paul's point, you look at the underlying volumes, they track very much against what we're talking about from a high level and maintaining and growing that volume step, the revenue will come behind it and start to match. Operator: Next, we'll go to Will Nance from Goldman Sachs. William Nance: Mike, if I could just follow up on the comment you made. I think you've been pretty clear in sort of telegraphing what you think the right growth rate is for business and the message you expect to deliver at the Investor Day coming up. I'm wondering, to the comment that maybe the underlying growth in FS is more or less flat right now, and obviously, the investments that you're making that are weighing on margins right now. As you look out into next year, you've talked about seeing the benefits of some of the improved execution coming through the numbers. Is it your expectation that the company can actually get to that level of performance sort of exiting the year and into 2027? Or are there lingering kind of performance and attrition issues in FS or investments you want to make on the margin front that could delay that? Michael Lyons: I'd say that go back to the One Fiserv comments, we are confident we're taking the right actions. We obviously have to execute against those and complete them. And we are -- the team has rallied around those. We're laser focused on them. We know the fundamentals that we have to get in the right place to be a mid-single-digit grower. And those -- the efforts we need to get there are fully funded and fully resourced. And I believe that we've brought in some great talent to complement the talent we have here. So I feel good about all the execution. We have to go do it. And we've said, as you exit '26, you start to look -- they're still comparables, obviously, with some of the actions we did across the business in Q3 and Q4, some going the other way, being beneficial comps to us as you get into Q4. And then '27, we sort of see is the first full year where you can see really clear visible growth. But again, we're trying to give you and we'll give you more at Investor Day the underlying volume drivers that we're seeing that support our belief that we've got a great business. We've got two great TAMs in Merchant and Banking both in a very strong position today, both in an investment mode, probably the best meetings we've had in a long time here where whether it's an enterprise merchant or an FI, you leave with a lot of stuff to work on. So the environmental support is there, the fundamentals underlying our volumes are there, and we got to put ourselves in a position where the execution resilience and service is much crisper than it's been, and that's the path we're on. But I'm very confident we're taking the right actions to get to where we need to get to, to put the business in a position to do it. We have to execute. Operator: Next, we'll go to the line of Jason Kupferberg from Wells Fargo. Melissa Chen: This is Melissa Chen on for Jason. I wanted to ask about the launch of Clover PracticePay, it sounds like the initial reception there has been good. But can you talk a little bit about how big the addressable market is in health care POS and who you're mainly competing with in that space? Michael Lyons: Yes. The -- we were thrilled. This has been in -- we've been previewing this for some time now. We're thrilled to get it launched this quarter, very optimistic about our growth in that area, its a massive TAM. And the -- it was -- this was the #1 area from our bank partners, which is a major distribution channel for us where they need help, and we heard it loudly from our ISO partners, also the specific TAM, as you know, is massive. We're going -- think about more of the local doctor practice and our penetration there is low, and our growth rate relative to the FSBI over time, if you measure us against index using the FSBI as a proxy for the industry, we've been below that. So this is the key component that we're missing, and is a key component that will allow us to go after some of the back book conversion. Got a great partner in developing with Rectangle, and we're pleased. We launched this month, so it's still early, but we're very pleased with the progress we're making, and we'll continue to remain very focused on execution here. Operator: Next, we'll go to Jamie Friedman from Susquehanna. James Friedman: I was wondering at a high level, if you could share your perspective on the competitive dynamic of Financial Solutions, specifically in Issuing and Banking because it does seem like landscape is changing somewhat, investors are potentially anxious about it. Michael Lyons: Yes. I think Mike (sic) [ James ], I made a lot of comments on core banking earlier specifically. Obviously, we've got great competitors across Banking, Digital and Issuing. I think -- and all of them are -- we enjoy continuing against every day in innovation and competition fuels growth for the industry. As I said, the backdrop of the industry is very, very supportive of solutions from all of us. And we're focused -- all the stuff we're doing in One Fiserv is to put us in a position to compete very, very effectively against any of the competitors. I think a lot of the questions we hear is around the modern core space, change in competitive dynamics. We are thrilled, as we said in the prepared comments with Finxact, which is are on the way, the largest -- with the most accounts being served on the modern core platform, cloud agnostic, asset-agnostic, true modern core -- truly modern digital ledger. So we're thrilled with our competitive position there. We continue to -- that continues to be the hallmark and both Divya and Takis will address that at Investor Day around our embedded -- the growing embedded finance space. So I think no major changes in the competitive landscape as we see it. We've got great competitors they're innovating, competing as always. And our focus is to make sure that our underlying fundamentals around service, product delivery, value-added solutions and speed to market are at the highest level to allow us to compete and maintain all the leadership positions we have across the FI businesses. Operator: Next, we'll go to the line of Timothy Chiodo from UBS. Vasundhara Govil: I was hoping we could spend a few minutes on non-Clover SMB. So it's roughly 20% of total company revenue, roughly 40% of the Merchant segment. I know there's a lot of moving parts there in terms of some of the the Argentina changes, some of the Clover migration. But I was hoping you could talk about the organic growth on an adjusted basis for that business this past quarter, but also over the past few and then what is implied in the guidance? And maybe a little bit bigger picture. I understand this might be more of an Investor Day topic. But to the extent that you could decompose some of the portions that are U.S. that are international, how large the ISB your partner business might be in there. et cetera. Any additional color. And again, I appreciate that last part might be more suited for the Investor Day. Paul Todd: Yes, Tim. So yes, that's exactly what I'd say on that last piece is we are going to go over this in good detail at Investor Day. So you'll get a lot of that clarity around some of the componentry there. We're going to provide additive disclosure of Clover just in general of the components of Clover as well as then non-Clover and you'll also understand maybe some of the strategic things around the non-Clover side, particularly in [ ISP ] and some of the international expansion there. As it relates to the organic growth, we do have comparative dynamics here. We have the Argentinian kind of noise. But as I said on our last call, we're expecting our non-Clover SMB business to have slight growth this year. We were down low single digits in the first quarter. So organically, we were down in the low-single-digits for the first quarter. And we would expect similar kind of performance if everything kind of holds in the second quarter. As it relates to the back half, kind of what changes there is we do have incremental ISV growth that's coming in there. And specifically, some of the international growth is we're seeing good ramping, particularly in Brazil. And so there's a few international dynamics that are playing through throughout the year that helped that. But generally speaking, we've talked about that non-SMB, non-Clover SMB, not being a growth business for us. But relative to the overall picture, we're managing it in a more systemic way than we have in the past. We've been very mindful about how we approach that of moving over that business to Clover over time in the right sort of way. That's the end goal is to move as much of that business to Clover where the product and the feature functionality of Clover fits with those merchants and Takis and team will cover that in more detail. Mike, anything to add? Michael Lyons: No, I think all great topics for next week and all in our materials to be addressed. Operator: Next, we'll go to James Faucette from Morgan Stanley. James Faucette: I appreciate all the commentary and apologies if I missed something because I've been bouncing between calls. But I would like to ask quickly, when you talk about like moving volumes and taking advantage of Clover's strength. How are you thinking about kind of the moving targets and competitive environment, especially as we see more companies looking to add incremental functionality for omnichannel, et cetera, even for SMB? And how do we think about that and its implications versus product road map? . Michael Lyons: Yes. Again, we'll do a deep dive next week on Clover, but high level. We think we've got the best small business operating system in the business. We're continuing to invest heavily across horizontal features vertical features we talked about PracticePay and Professional Services coming in this quarter, seeing great growth and opportunities on the international side. Takis and his team are digging deep on the experience piece of Clover, where as well as we've done, we have room for improvement there. And then we think we've got the best distribution channel by a significant margin combining not only a direct sales force, but 1,000-plus banking partners, thousand devices as Paul mentioned and was in the previous question, an unbelievable ISV business is growing at a very attractive rate and then other great partners, whether it's an ADP or some of the big food distribution businesses. So the opportunities there, the focus, the investment around the product is strong. And when you look across retail and restaurant, which we are characterized, even that, we have small market share, and then you go into some of these other verticals and Clover market share is still single digits. So we see a ton of room for growth. There's always a great competitive landscape. As I said to the earlier question on the Banking side. That's part of a natural part of any business with great growth opportunities. But we think we've got a great platform here and it's -- everything is about investing, focusing and driving Clover growth here and abroad. Operator: Next, we'll go to Ramsey El-Assal from Cantor Fitzgerald. Unknown Analyst: You called out some senior hires in Merchant Solutions. Could you comment more broadly... Paul Todd: We're having a hard time hearing you. Yes. We picked up that there were maybe some senior hires. But could you maybe repeat the question, maybe we'll be able to hear it clear. Rayna Kumar: Can you hear me now? Paul Todd: Yes, much better. Unknown Analyst: Sorry about that. This is Ryan on for Ramsey. You called out some senior hires on Merchant Solutions. So I was hoping you could comment more broadly on the org chart in terms of whether you have all the pieces in place to execute on the plan? And also if there's more opportunities to streamline head count by way of AI? Michael Lyons: Yes. First part of the question, were mentioned in the prepared comments that we've been thrilled actually blown away by the interest of seeing talented senior people from outside of Fiserv wanting to come join Fiserv, and we've added a number of incredibly talented people on both the Merchant side and the FS side, who are additive to an already strong team here. So we feel very, very good about where we are in terms of critical hires remaining to have the go-forward team. It's down to a very few. So yes, we've got the right team in place, an outstanding team. I look forward to -- we'll have a series of demos at the IR day next week. So in addition to give you all and Takis, you'll have a chance to meet a lot of these leaders and see some of the products they're working on. But we love the team, and we love the combination of some external talent we brought in along with the great institutional knowledge that's been built here at Fiserv. On AI, allowing for efficiencies, a couple of thoughts there. First of all, we're going pillar 4 of the One Fiserv plan, Project Elevate. We are deep into the process of Project Elevate, we're very pleased with the portions we've gone through so far, which is really the origination of ideas and sourcing of ideas. As part of that, there are no sacred cows, everything's on the table. All people from around the company are involved. There's a couple of hundred people very focused, almost fully dedicated to this. We put all of them around Paul, on the CFO floor, is very formal and dedicated effort, and we think there's great opportunities that are going to come out of that. I think, if you look at our head count over the last 4 or 5 years, we're down double digits in headcounts. We've already largely by leveraging early stages of automation. We've already taken significant gains there. So maybe we're a little bit different from where other peers have come from over the last several years. But from here, we continue to see whether in Project Elevate or outside of Project Elevate, significant opportunity to become more productive and more efficient through AI and it's even incremental generations of AI. For example, we've streamlined our call center services over the last 4 or 5 years, using sort of "old AI" and now modern solutions show a significant opportunity to make that experience even better for the customers and more efficient for us. So yes, we see great opportunities, especially in and around the areas we expect in operations and call center services, app development and the like. So as I said earlier, very excited about the potential for AI across all aspects of the business, and we're leaning in hard to it. Operator: Our final question comes from Dave Koning from Baird. David Koning: In the Acceptance segment, it seems like you're implying high single-digit growth in the back half. And it seems like the first half is probably close to mid-single digits. And I'm just wondering, source of acceleration. You answered Tim's question, there's going to be some SMB non-Clover but will Clover accelerate from the normalized 15%? And will Enterprise accelerate to the high single digits? And maybe how will those things happen? Paul Todd: Yes, Dave. So we do obviously expect that Clover on a certainly reported basis will accelerate from the 6% because we're expecting low double-digit revenue growth for Clover for the year. So if you just kind of do the math, you're going to see acceleration there. I would point to two kind of favorable dynamics in the back half of the year for the Clover acceleration. One is, you'll recall in the fourth quarter, we had some pricing roll backs on over specifically that provide a nice tailwind in the fourth quarter from a comparative standpoint that fuels just some of the additional growth on a reported basis from the fundamental growth that you would otherwise expect just relative to static volume growth. And then the other nice comparative tailwind that we get on the Clover side, is in the fourth quarter, we did have some weakness, particularly in November on the volume side. So we actually have a volume positive compare as well, in addition to all the other things of Clover Capital and all the other growth that you would otherwise see as we progress along the year. So from a Clover standpoint, if you look right now, fundamentally, we're in a mid-teens growth rate from the Clover side and would expect to see a fundamental growth rate in line with being able to deliver the low double-digit Clover revenue growth. On the non-Clover side, you heard me comment earlier, we are right now at a decline of low single digit overall, and there's competitive dynamics in there as well. But given some of the growth that I talked about on the ISV side, given some of the international expansion that will come through there. As I said, we expect that to improve and largely expect that to be a very small contributor to growth, but net positive for the overall year. So that's the way the shaping, nothing's changed in our volume assumptions. We are very pleased with the volume growth we saw in first quarter. The shaping of the year, we still expect to be intact. And so that gives you kind of from a Clover standpoint, the more moving parts. But overall, we're still expecting the same kind of growth rates for Clover and non-Clover that we did at the start of the year. Michael Lyons: Thanks, everyone, for joining today. We look forward to seeing you next week at the IR Day. Operator: Thank you all for participating in the Fiserv First Quarter 2026 Earnings Conference Call. That concludes today's call. Please disconnect at this time, and have a great rest of your day.
Operator: Good day, and thank you for standing by. Welcome to the InnovAge 2026 Fiscal Third Quarter Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded. I would like to hand the conference over to your speaker today, Ryan Kubota. Please go ahead. Ryan Kubota: Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2026 Fiscal Third Quarter Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal third quarter results. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 5, 2026, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, the effects of recent legislation and federal budget cuts, including Medicare and Medicaid rate pressures, seasonality of cost trends, the status of current and future legal proceedings and regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick? Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'd like to begin by thanking our InnovAge colleagues, our participants and their families, our government partners and our investor community for your continued trust and support. The work our teams do every day to care for a very complex and vulnerable population is what drives our performance, and I'm proud of the progress we're making and the consistency we're beginning to demonstrate as an organization. We delivered a solid third quarter and continue to see steady momentum across the business. These results reflect stronger operating execution and the benefits of the investments we've made over the past few years to strengthen the platform. For the quarter, we reported approximately $252 million in total revenue, center-level contribution margin of $61 million and adjusted EBITDA of $30 million. We ended the quarter serving approximately 8,050 participants in 6 states across 20 centers. Based on our year-to-date operating trends and financial performance, we are once again raising our fiscal year 2026 guidance for revenue and adjusted EBITDA. We now expect revenue in the range of $950 million to $975 million and adjusted EBITDA in the range of $85 million to $90 million. Overall, our performance continues to show steady year-over-year improvement across key operational and clinical metrics. Our performance this year has been supported by several in-year factors that came in more favorably than we expected, including better-than-expected Medicaid rates and favorable Medicare risk scores and continued discipline across medical management. So as we think about our momentum, we believe it is real and increasingly durable, but we are also being thoughtful about our assumptions as we look ahead to fiscal 2027. Just as importantly, we view our improving financial performance as an enabler, not an endpoint. The progress we're making is allowing us to reinvest in the business in ways that we believe directly benefit participants and strengthen the model over the long term. That includes continued investment in our clinical teams and interdisciplinary model, advancing our technology platform, including early and closely monitored applications of AI to improve care coordination and participant experience and strengthening how we measure and manage quality. We are also investing in growth, including our new centers in Florida, which are still maturing from an operations and financial perspective. Given the complexity of the PACE population we serve, these long-term investments are essential. Our goal is to deliver strong, sustainable performance while continuing to invest in the model and be a responsible partner to states and the federal government. In the PACE model, financial performance and quality are not separate. They are directly linked. When we improve quality, we see better participant outcomes, more consistent engagement, lower unnecessary utilization and ultimately better fiscal management for our state and federal partners. We track a wide range of required quality and utilization metrics, and these remain an important part of how we manage the business day-to-day. But we also recognize that many of these measures, while necessary, don't fully capture what matters most to our participants or to the full value of the model. At its core, our focus is helping participants maintain their independence, remain in the community for as long as possible and receive care that is individualized and aligned with their goals. This includes supporting caregivers, coordinating care across the continuum and intervening early before issues escalate. Over the past several years, we have made meaningful investments in our clinical teams, our care model and our operational infrastructure to strengthen our ability to deliver on those outcomes. More recently, we have begun to invest more intentionally in how we measure them. We are in the early stages of developing a more comprehensive set of outcome-oriented measures focused on areas like functional trajectory, the ability of participants to remain in the community and further aligning care with participant goals. These are areas where we believe the PACE model delivers meaningful value. Our initial focus is on building the data, processes and operational consistency required to measure these outcomes reliably. As the capabilities mature, we expect to incorporate them more formally into how we manage the business. We believe this is an important step, not only in demonstrating the full value of the PACE model, but also in ensuring that our continued financial progress is clearly aligned with better outcomes for the participants we serve and the partners we support. AI is another area in which we are investing more heavily. When we think about the objectives we share with our regulators, improving participant experience, enhancing outcomes for a complex population and doing so in a cost-effective way, we believe AI with the appropriate oversight has the potential to be a meaningful enabler. While still early, the work we've done over the past several months increases our confidence that these capabilities can have a real impact on both the quality and efficiency of our model. Much of our clinical AI work is being led by Dr. Paul Taheri. Although Paul has only been with us a short time, he has quickly stepped in to help shape our approach, bring a strong focus on practical application, clinical rigor and ensuring these tools are designed to support, not replace clinical judgment. We're piloting a range of use cases designed to support our clinicians and to streamline operations. In our clinical workflows, we're piloting AI tools to help synthesize information across the participant record to support care planning and to identify potential risks such as medication interactions or avoidable acute events. The goal is to increase the quality of the care we provide for our participants and enable our teams to operate more effectively at the top of their license. We are also applying these capabilities to operational areas such as scheduling, transportation and care coordination, where we see meaningful opportunity to reduce friction, improve the participant experience and better utilize our existing capacity. One area we are particularly focused on is how we schedule and deliver services across our centers. Today, there are structural inefficiencies that can lead to cancellations, unused capacity and administrative burden. We believe AI-enabled scheduling and coordination can help address these challenges, allowing us to improve the experience, to serve more participants within our existing footprint and to increase capacity over time. Importantly, we're approaching this work with discipline. We're testing, learning and measuring impact before scaling. And we're focused on use cases where we see clear alignment between improved outcomes, better participant experience and more efficient operations. Over time, we believe these investments will further strengthen our platform and expand our ability to deliver high-quality coordinated care at scale. Stepping back, one of the things these results and the progress we've made over the past several years now allow us to do is to take a more forward-looking view on growth. Over the last 4 years, our focus has been on stabilizing and strengthening the platform. And as a result of that work, we're now beginning to generate more consistent earnings and cash flow, which gives us greater strategic flexibility as we look ahead. That flexibility allows us to take a more proactive and thoughtful approach to growth. First, we continue to see meaningful opportunity within our existing footprint by filling our current centers, strengthening our sales capabilities and expanding our reach through new channels and partnerships. At the same time, we're beginning to evaluate a broader set of potential growth alternatives that could allow us to expand our model to more seniors over time. These may include acquisitions, joint ventures, partnerships or participation in new programs and demonstration models that align with our capabilities. Overall, we're entering the next phase as an organization, one that positions us well to expand access to our model and to serve more seniors who can benefit from it. Before I conclude, I'd like to spend a few minutes on the rate environment. As we know, this is an important area of focus for everyone. Ben will provide more detailed visibility into our fiscal 2027 outlook, including rates on our fourth quarter and fiscal year earnings call in early September. But given where we sit today, we thought it would be helpful to share some early perspective on how we're thinking about the environment, recognizing that our visibility is still evolving. Starting with Medicare. The final 2027 rate notice came in more favorable than initially proposed, particularly for Medicare Advantage plans. That improvement was driven in part by deferred changes to the V28 risk model transition, which had a more meaningful impact on MA than on PACE. For PACE, our rate setting framework and transition time line are different. And given the complexity of the population we serve, the benefit from the deferred changes to V28 is more limited. The net result is that we expect Medicare rates to increase approximately 1.5% to 2% in fiscal year 2027, which is more modest and increase than what will likely be experienced by MA plans. On the Medicaid side, we're beginning to see early indications from our state partners that budget pressures are increasing. That said, it's important to step back and view Medicaid rates in PACE over a longer horizon. This has always been a program with some degree of year-to-year variability. There are periods where rates run ahead of cost trend and margins expand and periods like the one we're planning for where cost trends may outpace rate growth and margins can tighten without other offsetting improvements. Over time, these dynamics tend to balance out. Rates have kept pace with the underlying cost of caring for this population and have supported appropriate and sustainable margins for operators who execute well at scale. We believe we're seeing normal cycle variability, not a change in the underlying economics of the model. Importantly, this is where the strength of our model matters because we are fully accountable for both the clinical and cost side of the equation, we can manage through periods like this and protect performance over time. So while we have benefited from a more favorable rate environment in fiscal 2026 and are planning for a more tempered environment in fiscal 2027, we remain confident in the durability of the model and our ability to execute through the cycle. As we approach the end of the fiscal year, we believe InnovAge is operating from a position of strength. The work we've done over the past several years is translating into more consistent performance and a more disciplined integrated operating model. We're focused on continuing to deliver strong, sustainable performance while investing in the model, supporting our participants and being a responsible partner to the states and the federal government. With that, I'll turn it over to Ben to walk through our financial performance in more detail. Benjamin Adams: Thank you, Patrick. Today, I will provide some highlights from our third quarter fiscal year 2026 financial performance and insight into some of the trends we saw during the fiscal third quarter. Starting with census. We served approximately 8,050 participants across 20 centers as of March 31, 2026, which represents growth of 6.9% compared to the third quarter of fiscal year 2025 and sequential quarter growth of 0.5%. We reported 24,060 member months in the third quarter, an increase of approximately 6.7% compared to the third quarter of fiscal year 2025 and an increase of approximately 0.4% over the second quarter of fiscal year 2026. Our third quarter census increase reflects normal seasonal growth resulting from the Medicare Advantage open enrollment period. Total revenues of $251.9 million increased 15.5% compared to $218.1 million in the third quarter of fiscal year 2025, driven by higher capitation rates and growth in member months. The capitation rate increase reflects annual Medicaid and Medicare rate increases and a lower revenue reserve, while member month growth was driven by enrollment expansion across our California, Colorado and Florida centers. Compared to the second quarter of fiscal year 2026, total revenues increased 5.1%, primarily due to higher capitation rates driven by annual rate increases in California and Medicare, both effective January 1, 2026. We incurred $113.2 million of external provider costs in the third quarter of fiscal year 2026, representing an increase of 5% compared to the third quarter of fiscal year 2025. The year-over-year increase was driven by growth in member months, partially offset by a reduction in cost per participant. Lower cost per participant was primarily attributable to reduced permanent nursing facility utilization and lower pharmacy expense following the transition to in-house pharmacy services. These improvements were partially offset by annual rate increases for assisted living and permanent nursing facility services as well as higher assisted living utilization. Compared to the second quarter of fiscal year 2026, external provider costs increased 1.1%, driven by modest growth in member months and a slight increase in cost per participant related to seasonal growth in the volume and cost of inpatient admissions. Cost of care, excluding depreciation and amortization, was $77.7 million in the third quarter, an increase of 11.8% compared to the third quarter of fiscal year 2025. The year-over-year increase reflects growth in member months and higher cost per participant. The increase was primarily driven by a net increase in salaries, wages and benefits due to higher wage rates, partially offset by reduced headcount, higher third-party fees and shipping costs associated with in-house pharmacy services and higher contract services and fleet costs, inclusive of contract transportation. Cost of care, excluding depreciation and amortization, increased 3.7% compared to the second quarter of fiscal year 2026, driven by higher salaries, wages and benefits associated with the annual reset of employee benefits and payroll taxes as well as an increase in consulting expense, partially offset by lower contract transportation. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $61 million for the quarter compared to $40.7 million for the third quarter of fiscal year 2025. As a percentage of revenue, center level contribution margin of 24.2% increased by approximately 550 basis points in the quarter compared to 18.7% in the third quarter of fiscal year 2025. Compared to the second quarter of fiscal year 2026, center level contribution margin increased 15.5% from $52.8 million and as a percentage of revenue increased 220 basis points compared to 22% over the same period. Sales and marketing expenses of approximately $8.7 million increased 26.3% compared to the third quarter of fiscal year 2025, primarily driven by higher wage rates and increased marketing spend to support growth. Sales and marketing expenses increased by approximately 8.2% compared to the second quarter of fiscal year 2026, driven by sales compensation and marketing spend timing. Corporate general and administrative expenses of $76.5 million increased 98.3% compared to the third quarter of fiscal year 2025, primarily driven by an increase in litigation liability. Corporate general and administrative expenses increased 187.6% compared to the second quarter of fiscal year 2026, primarily due to the litigation liability. Net loss was $29.9 million for the quarter compared to net loss of $11.1 million in the third quarter of fiscal year 2025. We reported a net loss of $0.22 per share, and our weighted average share count was approximately 135.7 million shares for the quarter on a fully diluted basis. Adjusted EBITDA was $30.5 million for the quarter compared to $10.8 million in the third quarter of fiscal year 2025 and $22.2 million in the second quarter of 2026. Our adjusted EBITDA margin was 12.1% for the quarter compared to 4.9% in the third quarter of fiscal year 2025 and 9.2% in the second quarter of fiscal year 2026. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. Accordingly, this quarter's de novo losses do not include our Tampa and Crenshaw centers as both have progressed beyond the initial 24-month de novo period. For the third quarter, de novo losses were $1.8 million, primarily related to our Orlando, Florida center. This compares to $3.5 million of de novo losses in the third quarter of fiscal year 2025 and $4.7 million of de novo losses in the second quarter of fiscal year 2026. Turning to our balance sheet. We ended the quarter with $95.5 million in cash and cash equivalents, plus $43.1 million in short-term investments. We had $69.4 million in total debt on the balance sheet, representing debt under our senior secured term loan, revolving credit facility and finance leases. For the third quarter, we recorded positive cash flow from operations of $18.1 million and had $3.6 million of capital expenditures. Building on the strong performance we delivered through the first 9 months of fiscal 2026 and based on information available today, we are updating our full year revenue and adjusted EBITDA outlook. All other guidance metrics remained unchanged. We expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants and member months to be in the range of 92,900 to 95,700. We are now projecting total revenue for fiscal 2026 in the range of $950 million to $975 million. Adjusted EBITDA is now projected to be in the range of $85 million to $90 million, and we anticipate that de novo losses for fiscal year 2026 will be in the $11.5 million to $13.5 million range. As we enter the final quarter of fiscal 2026 and begin planning for fiscal 2027, I'd like to share a few observations on where we stand today and how we're thinking about the year ahead. First, the business is performing well overall. Our sustained focus on quality, compliance and operational discipline has created a stronger and more resilient foundation. Over the past several years, we have meaningfully improved the consistency and predictability of the business, and we now have better data and insight to inform care delivery and operational decision-making. Second, as Patrick mentioned, we are beginning to see rate pressures emerge as we engage with our state Medicaid partners. While it remains early in the rate setting process, initial indications suggest rate increases in fiscal 2027 may be lower than what we have experienced historically. If this persists and when combined with a more modest Medicare rate environment, it could create top line pressure in fiscal 2027. That said, we view this as a near-term dynamic rather than as a structural shift. Currently, we do not believe these conditions represent a new long-term run rate, and we expect the rate environment to normalize over time. Importantly, our improved cost discipline, operating visibility and focus on execution position us to manage through this period. In closing, we are pleased with the strong performance we delivered this quarter and year-to-date. The business is operating from a position of strength, and our updated guidance reflects both our execution to date and our current assessment of the operating environment. As we continue to refine our operations, we are placing greater emphasis on the full participant experience and evaluating opportunities to enhance care, delivery, efficiency and outcomes over time. We remain committed to disciplined execution as we close out fiscal 2026, and we believe we are positioned to manage near-term headwinds and to build long-term value. Operator, that concludes our prepared remarks. Please open the line for questions. Operator: [Operator Instructions] Our first question comes from Matthew Gillmor with KeyBanc. Matthew Gillmor: I guess I wanted to first follow up on the comments around 2027. Could you maybe first help frame up sort of the change in the Medicaid rate increases that you've seen on a go-forward basis versus maybe the rearview just so we get a sense for the change in that dynamic? And then as a follow-up to that, one of the things we've been particularly encouraged by has been your ability to keep cost growth sort of almost flat for the last 2 years. So as you're thinking about the go forward, I was just curious about your confidence in able to maintain your cost growth at those levels, which presumably would help the dynamic for 2027 and maybe what you're doing to prepare the organization for what you think may be a more challenging rate environment next year? Patrick Blair: Matt, it's Patrick. Thanks for the question. Overall, I'd say we don't have rates for fiscal year '27 yet. We're just, I think, navigating along with the states what is a pretty complex fiscal backdrop. I mean, states are seeing a combination of factors with sort of post-pandemic funding and broader budget pressures and they're having to rebalance across various health care priorities. So I think what we're doing is just trying to be transparent that it's going to be a different environment for rates than we have seen in the past. I mean this is pretty typical of operating in a state partnered model. It's not new or unexpected. I think our approach has been and is currently as we sort of head into the '27 rate setting is just to stay very closely aligned with our state partners and continue to focus on delivering high-quality care and outcomes and operate as efficiently as we can. One of the things we do hear consistently with every state is just the belief in the PACE value proposition and how well aligned it is to what the states are trying to achieve and caring for this really high needs population is something they take very seriously. So we're -- I think just overall, we still know very little about '27. So I wanted to just make sure I shared that. But I think that's sort of how we view it. So in summary, we're kind of mindful of the broader environment, but we think we have the ability to navigate it just like we have in the past. Now that kind of probably takes me to your second point about our ability to manage sort of cost trends in an inflationary environment. We're still feeling very confident about that. And as I shared in my remarks, we have a lot of work underway right now that's AI supported. So I mentioned in some of the opening remarks, some of the clinical work we're doing. But we believe there is a lot of opportunity across our care model to really empower our providers to better information to help them avoid unnecessary specialist referrals, avoid ER visits, unnecessary services, in some ways, providing as much care as possible in our centers. I mentioned, I think, scheduling. It's another area where we're using AI to really understand the throughput of our centers and understand something as straightforward as the impact the cancellations have on our transportation, on our staffing. And we're learning a lot about our business and the drivers and AI is really supporting that. And we think there's a lot of prep capacity. We think there's manual workflows that we can work around. We think there's augmentations to our staffing models that we can pursue that will make us more efficient and deliver a better participant experience. So that's a long way of sort of saying that the rate environment is one where we're used to navigating it. We'll do that successfully, and we're working hard to define next year's OVIs, operational value initiatives like the scheduling example and clinical value initiatives that we're doing to take clinical variation out of the system, we think there's real opportunity to operate more efficiency, improve the patient experience, deliver better clinical outcomes and do all of that in a very complex sort of fiscal backdrop for states. Ben, anything to add? Benjamin Adams: I actually don't have anything to add. I think that was exactly where we think of it. Matthew Gillmor: Okay. Great. That was really helpful. I appreciate it. And then as a follow-up, I did want to ask about revenue performance on the quarter. It's obviously a very strong quarter overall. But on the top line, you had mentioned better Medicaid rates and also some favorability with RAF. I was hoping you could discuss the details of that a little bit better. And one point I wanted to get at or one thing I wanted to ask about was just the sustainability of the revenue upside you saw in the quarter. I guess I normally would think of RAF and Medicaid rates as sustainable in future quarters, but I just wanted to get your perspective on that dynamic. Benjamin Adams: Yes. I guess, well, you're right, we did start seeing in the back half of the year, a step-up in rates on the Medicaid side and a step-up in risk scores, right? So both of those things were positive starting in January, and they rolled through the second half of the year. If you think about sort of which states sort of kick in with their rates on January 1, California is an important one for us. And we had a pretty good rate environment in California this year following on some difficult years in California. So that benefited us in the second half of the year. If you think about the risk scores, you're right, I think of those, assuming we don't have a mix -- a change in the mix of enrollment or some other mix in our population, that improvement in risk scores ought to be durable going forward in the future. But obviously, you kind of got to watch it every -- as you go into the future because they might -- they do change a little bit, but we're hoping for some durability there. And I think Patrick commented on the rate outlook a moment ago as it relates to Medicaid. So you can sort of factor some of those comments into how we're thinking about California for next year, which would be the next time it would renew in January. Operator: Our next question comes from Jared Haase with William Blair. Jared Haase: I appreciate all the color thus far. Patrick, I think you talked a little bit about sort of emphasizing the flexibility that you have now just based on the stable profile that you've reached here with the model in terms of the go-forward growth strategy, and I think you outlined a couple of different levers, whether that's M&A, joint ventures, partnerships. And then I think you even alluded to potentially some new programs or demonstrations. And so I was wondering if we could just dig into your thinking there a little bit further, maybe force rank some of those different options that are -- that you have available to you as to what might be more realistic over the next handful of quarters. And I'd also love to press on the new programs or demonstration models, how you guys are thinking about that and what programs seem interesting to you? Patrick Blair: Well, thanks for the question. I would start by just reminding folks that in many ways, we think of ourselves as having kind of come out of the turnaround at the beginning of the calendar year. And now we're in a place where we're feeling and seeing a lot stronger operational, financial and sort of compliance positioning and performance. And so we're beginning to devote more time to evaluating a range of options that we could pursue. M&A is clearly one of them. There are a lot of PACE programs across the country. Many of them are very successful. Some are not. And we've learned from an acquisition we did in California about 18 months ago that we have the ability to bolt on and smaller PACE programs that were maybe struggling to grow, putting them on our platform, on our staffing model in sort of our sales model. It really, in some ways, allows us to pursue a derisked de novo without the longer return on capital that a pure de novo can take. So understanding where those opportunities exist is something that we're spending a little time on. It's hard to handicap this early in the process where that exists. Obviously, some states are -- have more attractive environments than others. And so that's also a layer that we put on that. Partnerships, you've seen some of the partnerships we've done in Florida and in California. We think there's -- those are hospital partnerships. We are seeing kind of the proof of concept play out in a positive way. There's still calibration that has to be done so that both entities are sort of -- and participants are all sort of benefiting in the appropriate ways, but we do see more opportunities to do hospital joint ventures that really help us extend our place in the community. When it comes to PACE in general, I wouldn't want to overlook the opportunity from just basic policy modernization. There are opportunities that are not radical changes to sort of the regulatory contours of the program, more like practical evolutions of the program that would allow us to expand faster, something like simplifying enrollment, making it easier for seniors and families to choose PACE. We're working closely with our industry peers and our industry association to articulate those policy modernization opportunities that we see that could help the PACE program serve more seniors over time. And we're really pleased, I think, with the level of interest and curiosity that we see from CMS and CMMI and their openness to listen to what are the things that could change to really help PACE serve more seniors. So that's sort of the policy horizon. Then I think maybe the last element to your question was the notion of sort of these PACE-inspired adjacencies. We are a big believer that the PACE model can be adapted to serve seniors who are not eligible for PACE today, but could be eligible in the future. These are -- there are opportunities that we see there some via demonstration, some just kind of de novo adjacent new product development that we could pursue. Our focus still is very much on growing our core PACE business. But as we are able to experience better operating performance and a more consistent model, we really believe strongly that PACE can serve a broader segment of the population. And we're kind of doing everything sort of in our power and working with our industry peers to make that case. And so over time, we're hopeful that opportunities that are inspired by our core business and very close to our core business could present themselves, and we'd love to pursue it. Jared Haase: Okay. That's really helpful. And then as a follow-up, I really appreciate all the details you guys provided just regarding rate development and your current view for 2027. If I take a step back from a strategic perspective, if we do find ourselves in an environment where rates are lagging medical cost trend, do you have a bias as it relates to striking the balance between maintaining your current growth levels versus maintaining profitability? I realize from your comments, there are a number of initiatives in place that can sort of drive efficiencies. So maybe there isn't really a trade-off in that way. But I guess I'd just be curious if you do a year like this with a more muted rate environment, how you think about that in one direction or the other? Patrick Blair: I'll ask Ben to maybe share some initial thoughts and then I'll follow. Benjamin Adams: Yes, I'm sorry, I missed some of the question coming through. I couldn't figure it. What exactly is the question? Are you talking about -- are we talking about mitigants in a challenging rate environment? Jared Haase: Exactly. Yes. My thought was just as we think about potentially moving into this more challenging rate environment for 2027, obviously, you outlined a number of initiatives in place. But just kind of philosophically, do you approach your strategy with the mindset of pursuing growth as a priority or maintaining profitability? Benjamin Adams: Yes. Yes. Well, it's really interesting. Patrick talked a lot about quality in his prepared remarks. And I think where we are right now is we've gotten to a point where we're -- we've got some nice margins. We're generating cash flow. And we think one of the best things that we can do in a market that begins to slow down is not aside from looking at strategic things that Patrick talked about, is invest very heavily in quality in our business, in our centers. And I think we all feel really strongly that the better experience we give to our participants, the more likely it is going to drive growth and good financial outcomes for us. So I think what you'll see going into this year is we'll spend a lot of time on improving the patient experience on efficiencies in our center in ways that we can be more intentional in our strategies going forward. So aside from the growth metrics that Patrick talked about before, this sort of reinvest into the business and the quality business, I think, is going to be very important for the coming year. I don't know if that really answered your question. There are other specific areas we'll look at in terms of operational value initiatives and clinical value initiatives like Patrick talked about, but it's sort of a mindset. It's very much driven towards quality as one of the drivers of growth. Patrick Blair: Ben, I might just add that I do feel that we still have opportunity to enhance our sort of sales and marketing model. We made great strides in the last couple of years. But under Matt Huray, our leader of the sales and marketing function, we're really continuing to test and learn and try new things. We are adding new members to the team. We're exploring new channel partnerships. And so setting aside sort of rate, we really are focused on as much new census gross enrollment as we can attract. And there's a lot of great work that's going on in that area. Ben mentioned the participant experience. we are now at a place where we're spending a lot of time to really understand when people leave us, why do they leave us? Did they have a particular encounter that was frustrating. Was there some friction or abrasion in their time with us? Were we slow to recover on a service issue? We're really digging into why people choose to leave. And that's another opportunity to drive growth is to reduce the number of people that decide to leave us. Some of the people, it's voluntary and they're making a conscious decision, but there's also involuntary disenrollment. So we are very focused on sort of the sales and enrollment side of the growth equation as well as the participant experience, keeping people with us longer, basically increasing tenure. I think that's a real bias of ours. And on the margin side, in some ways, we've pulled forward into 2 years what we thought was going to take 3 years from a margin perspective. And now that we're at a place where we're achieving what we set out to and communicated in our Investor Day a few years ago, I think investing in growth while maintaining a consistent margin is probably more of a priority than expanding margins at this point, if that's helpful. Operator: Our next question comes from Benjamin Rossi with JPMorgan. Benjamin Rossi: So following up on your 2027 commentary, I appreciate that you're planning to provide more details next quarter. But as you think about initial enrollment growth, what are your initial thoughts on your aggregate patient risk scores and new member acuity mix? It sounds as though based on your Medicare rate assumptions, you're assuming acuity decline somewhat year-over-year. Is that a fair read? Patrick Blair: No, I don't -- I wouldn't read too much into it. I think we're going through the budgeting process right now. And our fiscal year ends June 30, so we're really getting into the meat of the budgeting process. I don't think we expect a material change in mix shift, either in terms of our population, independent assisted living or folks in nursing facilities or a significant change in risk score mix. But we're sort of getting into that process right now. We'll have more to talk about it when we get through the budget process and we issue guidance in September. Benjamin Rossi: Okay. Understood on that. And just as a follow-up on your updated outlook implies 4Q top line growth will decelerate a bit sequentially, while EBIT growth will remain elevated. What do you assume gets better quarter-over-quarter as we go into the next quarter, either across PMPM trend or cost design? And is there anything discrete across revenue or cost that you'd call out within your progression during fiscal 4Q? Patrick Blair: No, I don't think so. I think that we've generally benefited, as we said before, from better rates in the back half of the year and also better risk scores. And I would expect those trends would kind of continue going into Q4. If you think about how sort of the pattern of gross enrollment works and you can go back and look over the last couple of years, we usually have a pretty good, pretty steady Q4 in terms of gross enrollment growth. And I would think that we probably experienced something not too different from what we've seen in prior years. Operator: And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.